CHAPTER 9 GAS GATHERING AND TRANSPORTATION AGREEMENTS
| Jurisdiction | United States |
(Feb 2011)
GAS GATHERING AND TRANSPORTATION AGREEMENTS
Weber Law Firm
Denver, Colorado
ANNE D. WEBER has more than 30 years experience supporting natural resources development including the oil and gas, uranium, metals mining and emerging energy technology sectors. She focuses on acquisitions and divestitures, exploration and operations, industry contracts, natural gas and crude oil including pipeline matters, environmental clean-up and defense of enforcement matters, and facility siting and construction. In addition to supporting natural resource projects within the Rocky Mountain region and other U.S. states, her geographic experience covers a wide spectrum of western hemisphere projects including cross-border transactions and international projects from the Arctic Circle to the southernmost tip of South America. Her business positions have included oil shale geochemist for the U.S. Department of Energy, field engineer for Dresser Industries, petroleum geophysicist for Amoco Production Company, and chief geophysicist for Britoil's U.S. operations. Prior to establishing her law firm, Ms. Weber practiced law with a natural resources boutique law firm and served as assistant general counsel for an international gold company and subsequently a major U.S. pipeline/utility company. Anne has served as Chair of the Natural Resources and Energy Law Section of the Colorado Bar Association (CBA) and as a Trustee of the Rocky Mountain Mineral Law Foundation (RMMLF). In 2009, she served as Program Chair for several CBA natural resources legal conferences including Oil and Gas Basics by the Experts, as well as Oil & Gas Program Co-Chair for the RMMLF's Annual Institute. She has served two terms on Colorado's Minerals, Energy, and Geology Advisory Board, was an original member of the Lowry Air Force Base Environmental Restoration Advisory Board, and was National Chair of the Ethics Committee of the American Bar Association's Section of Natural Resources, Energy, and Environmental Law. She is a Leadership Denver alumna and has served on the Board of Directors for the Denver Petroleum Club. Anne earned a B.S. degree in geology from the University of Wyoming and a law degree from Vanderbilt University. She continues to maintain national professional geologist certification with the American Institute of Professional Geologists (CPG 8653).
MIDSTREAM GAS GATHERING AND TRANSPORTATION AGREEMENTS1 FROM A 2011 PERSPECTIVE2
I. Fundamental Principles of Gas Gathering/Field Services Agreements3 from a 2011 Perspective
A. "Gathering" is "Unregulated"
1. Free market approach
2. Negotiated
3. Confidential
4. No industry standardized approach equivalent to NAESB/GISB - every Gatherer has its preferred format
a. Economic terms upfront followed by ST&C; or
b. Base contract is largely ST&C with economic and contract-specific terms in attachments
B. Unique industry niche/segment
1. Scope of Gathering & other Midstream pipeline agreements extends from the Wellhead/CDP to a Processing Plant or Interconnect with Downstream Transmission Pipeline.
2. In the absence of a stand-alone gas gathering or field services agreement, gathering services, costs, and related issues are contained in Gathering and Processing combo Agreements or Gas Purchase Agreements.
3. Gathering terms of art and concepts different from upstream and downstream businesses. For example, avoid downstream terms of art such as "interruptible" and "firm" service.
C. Consider the Maturity of the Producing Area and Gathering Facilities - Different Dynamics
1. New Build-Out
a. Producer 4 may have input
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b. Major investment by Gatherer 5 usually requires significant commitment or dedication and financial backstops from Producer
2. Historic Infrastructure in area of new gas from recompletions, new producing horizons, and new play concepts
a. Producers may have opportunity to deliver their gas to another Gatherer
b. Capacity issues may suddenly emerge
3. Historic Infrastructure and historic production - status quo
a. Producers may have some success in negotiating better rates if facilities have been paid for and/or insisting on equipment that is more accurate or more efficient
4. Consolidation - declining reserves result in consolidation of, and fewer total, gas gathering facilities; roll-ups
D. Midstream Pipeline Agreements are the critical link between dramatically different upstream and downstream industries
1. Physical connection to upstream and downstream facilities owned/operated by others
2. Gatherer must correctly identify all commercial risks and liabilities posed by upstream and downstream contracts and either not get stuck with them or make sure it is adequately compensated for assuming them
E. Margin Business
1. Gatherer's profits often expressed as cents on a dollar
2. Gatherer must intimately know and understand its costs and facilities - not an area to "dabble in"; little room for error
3. Producer pays, one way or another, for all Gatherer's facilities and operating costs; however Gatherer owns and operates facilities paid by Producer
a. upfront contribution to construction in return for "reduced" fees
b. over some period of time via throughput commitments and/or "indemnity" agreements
c. embedded in higher fees that cover facility and operating costs
4. 24/7 business
5. Gatherer must satisfy its Producer customers while still trying to eke out a profit and maintain its own facilities and access to downstream facilities.
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F. Dominated by the "Midstream Industry"
1. Although Producers would like to control their destiny and access to downstream markets, trend has been for producers to exit midstream niche and re-deploy funds into acquiring and drilling acreage (late 1990s examples)
2. The "Integrated energy chain" of affiliates covering every market segment is also outdated (early 2000s examples)
3. Every Gatherer has its own preferred contract format - no standardization
II. Key Elements of Gathering/Field Services Agreement
A. Commitment; Term
1. Dedication: An area, lands, or leases, or wells
a. A covenant running with the land
b. "Now or later owned or acquired" language encompasses new leases & wells if located within the dedication area
c. Older approach: life of lease
d. Conflicting dedication issues may arise in A&D scenarios
2. Quantity Commitments: Contractual commitment
a. All Producer's Gas
i. No specific quantity
ii. Without further description, this generally means that Buyer will use commercially reasonable efforts to operate and market to take all available gas
b. Throughput Commitment
c. Minimum Daily Quantity
3. Length of Term should be related to scope/degree of commitment
a. Trend toward shorter term contracts continues especially in mature areas with extensive and competitive gathering infrastructure
b. Longer term and stronger commitments needed to justify substantial construction
c. Month-to-month and similar short term arrangements require less scrutiny
B. Gathering Infrastructure - Gatherer maintains total control over its own facilities
1. Metered Individual Receipt Points (beginning of Gathering)
a. Point of custody transfer to Gatherer; Gatherer typically controls
2. Gathering Lines
3. Compression
4. Metered Delivery Points (end of Gathering)
a. Point of custody transfer back to Producer or Producer's designee;
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downstream facility owner may control delivery point meter
5. Additional build-outs; connections usually at discretion of Gatherer and at a price
C. Gatherer Services
1. Performance Standard or lack of performance standard
a. Reasonable efforts is typical standard
b. Reasons Gatherer might not accept all or part of Producer's Gas
i Gatherer's obligation to take gas ratably
ii. Inadequate capacity
iii. Force Majeure
iv. Threat to system integrity
v. Maintenance, construction, or other operational reasons
vi. Late payment by Producer
vii. "Any reason" at Gatherer's sole discretion
2. Gathering
a. Line Pressure - MAOP
3. Compression
4. Services to Improve Gas Quality
a. Dehydration - if needed and not performed by Producer prior to delivery at Receipt Points
b. Treating - CO2
c. Blending
d. Conditioning
5. Measurement - Not an Exact Science but Improving
a. Measurement Standards: API, AGA, and GPA have worked hard over the past decade to update gas measurement standards and establish new standards to enable industry to apply measurement technologies more uniformly
b. Meters are being improved. For example, orifice meters have existed for more than 100 years but are still being improved
c. Each additional custody transfer point increases the importance of standardized measurement
d. Volume (mcf) to MMBtu conversion: Natural gas is typically bought and sold based on the amount of energy delivered, its Btu content, rather than volume of gas and the conversion from mcf to thermal equivalent is usually done in the gathering segment
6. Redelivery of Thermal Equivalent at a specific Delivery Point - multiple Delivery Points are common and may have different terms
a. No credit given for Btu in non-hydrocarbon components of gas
7. Determination of Gas Quality
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a. Typical method to assess heating value is gas chromatography
8. Nominations and Scheduling in Coordination with Downstream Pipeline
D. Gas Composition/Quality
...1. Quality Specifications - Generally Gatherer will require Producer's gas to conform to the most restrictive downstream pipeline
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