CHAPTER 8 SETTLEMENTS OF GAS CONTRACT DISPUTES

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Vol. 1
(Jan 1992)
CHAPTER 8
SETTLEMENTS OF GAS CONTRACT DISPUTES
Milton K. Dial
Minerals Management Service
Denver, Colorado

TOPICS

• BACKGROUND AND ORIGIN OF NATURAL GAS CONTRACT DISPUTES AND SETTLEMENTS

• FORM OF SETTLEMENT AGREEMENTS

• ELEMENTS ADDRESSED BY SETTLEMENT AGREEMENTS

• EXAMPLES OF SETTLEMENT AGREEMENTS

• MMS REPORTING REQUIREMENTS

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• FEDERAL PRICE REGULATION OF NATURAL GAS

• THE NATURAL GAS POLICY ACT OF 1978

• GAS PURCHASE CONTRACTS OF THE 1970'S

- High degree of conformity of provisions throughout the industry

- Heavy reliance on a regulated pricing structure

- Consistent inclusion of take-or-pay provisions in contracts

• GAS SUPPLIES OF THE LATE 1970'S AND EARLY 1980'S INCREASED IN THE FACE OF DEMAND DECLINE

• REDUCTION IN PURCHASER TAKES WITH AN INCREASE IN MARKET-OUT PRICING PRACTICES LED TO PRODUCER/PURCHASER LITIGATION PARTICULARLY FOR TAKE-OR-PAY

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Various Graphs

Omitted From Electronic Version

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OVERVIEW OF REPORTED TAKE-OR-PAY

1983-1986

DATA SOURCE: FERC STAFF SUMMARY REPORT OF RESPONSES TO THE COMMISSION'S AUGUST 26, 1987 DATA REQUEST (DOCKET NO. RM 87-34)

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• SPECIAL MARKETING PROGRAMS AND FERC ORDERS 436 AND 500 EMERGED TO CHANGE THE MECHANICS OF THE GAS MARKET

• THE NEED EXISTED FOR PRODUCER/PURCHASER SETTLEMENT OF PAST CONTRACT DISPUTES AND ESTABLISHMENT OF FUTURE CONTRACTUAL ARRANGEMENTS

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COMPANY REPORTED RELIEF FROM ORDER NO. 500 SETTLEMENT PAYMENTS

• COMPANIES INVOLVED	22
• COMPANY REPORTED SETTLEMENT COSTS	$8,227,568,126
• ACCRUED TAKE-OR-PAY RESOLVED	$16,676,362,032
• AVOIDED FUTURE TAKE-OR-PAY	$12,228,467,877
• BENEFITS OF CONTRACT REFORMATION	$15,304,464,167
• OTHER REPORTED RELIEF	$128,507,577
• TOTAL FUTURE-ORIENTED RELIEF	$27,661,439,621
• TOTAL RELIEF	$44,337,801,653
• COST AS A PERCENT OF TOTAL RELIEF	18.6%

DATA SOURCE: FERC ORDER 500-H (DOCKET NO. RM 87-34)

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POTENTIAL SETTLEMENT ELEMENTS

• TAKE-OR-PAY

• DEFICIENT PRICE ADJUSTMENTS

• FERC ORDER 94 AND OTHER REIMBURSEMENTS INCLUDING EXCESS ROYALTY

• PRODUCER DAMAGES

• ALTERED TAKE COMMITMENTS

• PREMIUM PAYMENTS

• CONTRACT BUYDOWN

• CONTRACT BUYOUT

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EXAMPLE 1

• PRODUCER AND PURCHASER ENTERED INTO A SETTLEMENT AGREEMENT ON MARCH 26, 1986.

• THE EFFECTIVE DATE OF THE AGREEMENT WAS MARCH 31, 1986.

• THE AGREEMENT INVOLVED FEDERAL OCS LEASES.

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