CHAPTER 6 NATURAL GAS GATHERING, TRANSPORTATION, AND STORAGE AGREEMENTS

• Jurisdiction: United States

Oil and Gas Agreements: The Production and Marketing Phase
(May 2005)
CHAPTER 6
NATURAL GAS GATHERING, TRANSPORTATION, AND STORAGE AGREEMENTS
Judith M. Matlock
Davis Graham & Stubbs LLP
Denver, Colorado
JUDITH M. MATLOCK

Judith M. Matlock is a Partner with Davis Graham & Stubbs in Denver, Colorado. She represents a diversity of clients in the oil and gas and electric industries including producers, gatherers, processors, marketers and end users. Judy practices before the Federal Energy Regulatory Commission and state public utilities commissions in gas and electric industry restructuring proceedings and other types of proceedings. She is also active in matters involving federal and state royalty and mineral tax payment issues and in electric deregulation issues on both the federal and state levels.

Judy was admitted to practice in Colorado, 1982 and United States District Court for the District of Colorado, 1984.

She earned her J.D. from the University of Colorado School of Law (1982), Order of the Coif, and her B.A. in Philosophy, magna cum laude, with distinction, from the University of Colorado (1979), Phi Beta Kappa.

Recent (1995 or later) Industry Memberships/Activities: Rocky Mountain Mineral Law Foundation -- trustee at large and member of the executive committee (1997-98 and 1998-99), co-chair special institutes committee, member of the Joe Rudd scholarship committee, member of the scholarship committee. Recent (1995 or later) Legal Memberships/Activities: American Bar Association; Colorado Bar Association; Federal Energy Bar Association. Listed in: The Best Lawyers in America 2003-2004.

Selected articles: Restructuring the Electric Industry -- What Does It Mean to Coal and Natural Gas Producers?; Payment of Gas Royalties in Affiliate Transactions; Section 29 Credits Under a Cloud: Tax Court Renders Rev. Rul. 93-54 Meaningless; Section 29 Credits: The Case Against Requiring NGPA Well Category Determination.

I. INTRODUCTION

The scope of this paper is agreements for the movement of natural gas from the wellhead to a processing plant or downstream market center and any storage along the way. This includes gathering and transportation agreements, operational balancing agreements, and storage agreements as well as precedent agreements entered into for transportation or storage not yet built. The term gathering, as used in this paper, refers solely to the movement of natural gas through pipeline systems which are not regulated by either the Federal Energy Regulatory Commission under the Natural Gas Act of 1938 ("NGA") ¹ FN1 or a state public utility or public service commission. ² FN2 Because these gathering systems are not regulated, the rates, terms and conditions of service must be negotiated. In contrast, the rates, terms and conditions of service on regulated pipelines are contained in tariffs which are on file with the regulatory body. The ability to negotiate agreements with regulated pipelines is therefore limited.

There is no A.A.P.L., NAESB or other standardized form of gathering. transportation or storage agreement. However, forms of agreements or information regarding the terms of such agreements are available. For example, The Council of Petroleum Accountants Societies has published "Joint Task Force Guidelines On Natural Gas Administrative Issues" (item AG-8, formerly COPAS Bulletin 28) which contains proposed standard administrative provisions covering point of sale, term of agreement, measurement basis and conditions, operating provisions (nominations), allocation procedures, reporting requirements and imbalance resolution, billing terms, out of period adjustment treatment, and confidentiality releases to permit imbalance resolution. ³ FN3 Additionally, Thompson Publishing Group publishes a loose leaf service entitled "Natural Gas Transportation" which includes a discussion of interstate pipeline transportation provisions. NAESB publishes a natural gas model operational balancing agreement (NAESB Standard 6.5.2). Interstate pipeline tariffs which include forms of transportation and storage agreements and general terms and conditions can be obtained on line. Finally, precedent agreements for both transportation and storage can be found over the internet.

Additionally, the Rocky Mountain Mineral Law Foundation has had several special institutes and short courses on natural gas marketing and transportation and the materials from these programs have included papers on all of the topics within the scope of this paper. The special institutes include Natural Gas Marketing (May 1987), Natural Gas Marketing II (April 1988), Natural Gas Marketing and Transportation (Sept. 1991), Negotiating Natural Gas Contracts in the Order 636 Environment (Nov. 1993), and Natural Gas Transportation and Marketing (2001). Additionally, two short courses entitled Practical Natural Gas Marketing were held in 1993 and 1994 to educate attendees regarding how to obtain transportation service in the post FERC Order No. 636 environment.

Unfortunately, notwithstanding the availability of sample documents and papers discussing these agreements, there is no "one size fits all" type of gathering, transportation or storage agreement. The closest we come to "one size fits all" are pipeline tariff agreements but, even then, material deviations from the tariff form of agreement can be submitted to FERC with a request for approval. ⁴ FN4 Outside tariffs, agreements are a matter of negotiation and many factors will influence that negotiation including the existence of competitive options, the amount of existing infrastructure, the extent to which the existing infrastructure is near capacity, the timing required by the producer or shipper, the willingness of the producer or shipper to bear some or all of the interconnection or other construction costs, the creditworthiness of the parties, projected volumes and decline curves, and many other factors. Therefore, a proposed agreement must be drafted or reviewed in the context of the factual situation involved. This paper will attempt to highlight some of the major considerations in drafting these type of agreements and will suggest some options by way of illustration but the actual approach to those items that can be negotiated is limited only by the creativity and willingness of the parties to reach a mutually satisfactory agreement.

II. AUTHORITY TO EXECUTE POST-PRODUCTION AGREEMENTS

As a preliminary matter, it is important to consider who can execute these agreements. The A.A.P.L. Model Form Joint Operating Agreement does not give the operator either the right or the obligation to enter into gathering, transportation, storage or other agreements on behalf of non-operators who fail to take in kind. If the operator is to have such authority, it must be granted in an additional provision inserted in the joint operating agreement. Because the take in kind provision of the Model Form give each party the right to take its share of production in kind and prohibits an operator from disposing of a non-taking parties share of production for any significant length of time, ⁵ FN5 an operator who executes a long-term gathering or transportation agreement with the expectation that the share of production of non-taking non-operators will be available to help fill minimum volume commitments, is taking a risk. The only safe course for an operator is to require each non-operator to either ratify the agreement or obtain its own agreement. The agreement should provide that the agreement will be deemed to be a separate contract as to each working interest owner and a default by one shall not constitute a default by any other working interest owner. ⁶ FN6

III. GATHERING AGREEMENTS

The term "gathering" as used in this paper refers to agreements covering the movement of natural gas through those pipelines that are not regulated as interstate pipelines by the Federal Energy Regulatory Commission under the NGA or as intrastate pipelines or local distribution companies by State regulatory commissions. That is the context in which the owners of gathering lines use the term. It puts users on notice that the rates, terms and conditions of service are not established by any governmental entity and, therefore, are subject to negotiation. Over the years, several tests have been developed to determine what facilities are exempt gathering facilities under the NGA. These tests have been modified from time to time to reflect changes in FERC's regulatory objectives and the nature and structure of the natural gas industry. See, Amerada Hess Corporation, et al., 52 FERC ¶61,268 at p. 61,987 (1990) citing Gulf Oil Corp. v. FERC, 1 FERC ¶61,089, at p. 61,188, aff'd mem, 723 F.2d 97 (D.C. Cir. 1983). As the tests have been modified, the jurisdictional status of pipelines have also changed. Compare Western Transmission Corporation, 80 F.E.R.C. ¶61,194 (Aug. 5, 1997) (reclassification of a system from interstate pipeline to gathering system 31 years after it was originally certificated) and Colorado Interstate Gas Company, 75 F.E.R.C. 61,325 (June 26, 1996) (refunctionalization of certain facilities from gathering to transmission).

Unfortunately, there is a tendency to believe that in every context in which the term "gathering" is used, it has the same meaning. That is simply not the case. For example, the federal gas valuation regulations provide that gathering is a cost of putting gas in marketable condition and, therefore, may not be deducted as part of the transportation allowance. See 30 C.F.R. § 206.152(i) and III Oil & Gas Payor Handbook §6.1.5. Accordingly, it is argued from time to time that the costs charged for service on pipelines which are called gathering lines are not deductible. This is not accurate. The most obvious situation in which this is not accurate is in the case of gathering lines that transport gas to gas processing plants. These lines have consistently been...