GAS BALANCING C. WILLIAM SMALLING; (713) THE LAW OFFICE OF C. WILLIAM SMALLING, PC

Transcription

1 GAS BALANCING C. WILLIAM SMALLING; (713)

2 GAS BALANCING INTRODUCTION There are a number f issues invlved with gas balancing, which takes place at bth prductin ends. Gas balancing is an issue amng prducers at the well and when the gas gets t the pipeline carrier, because the pipeline/purchaser wants t keep the sellers frm using up all f the line capacity. Since the mid-1990s, the shale plays in Pennsylvania (Marcellus), Nrth Texas (Barnett) and Suth Texas (Eagle Frd) have becme increasingly mre imprtant, and the issues f gas balancing becme even mre critical. Sme prducers frmerly tk the attitude that they wuld nt wrry abut gas balancing. Nw prducers withut a gas balancing agreement may lse a lt f mney unnecessarily. Attached in the wrkbk is the gas balancing frm that is presently fund with the AAPL 1989 frm 610E. 2

3 INTRODUCTION Owners f interest in wells prducing natural gas have fund themselves ut f balance with ther interest wners. This means that sme interest wners may have prduced mre than their respective shares f the ttal well stream and thus are "verbalanced ; thers have prduced less than their respective shares f the ttal well stream and are thus "underbalanced. Prductin imbalances amng wrking interest wners in gas wells have led t disruptins in cash flw, risk that each interest wner will nt recver its rightful share f the reservir, and higher administrative prblems and expenses. 3

4 HISTORY OF GAS IMBALANCES Imbalances arise amng prducers f gas because f the physical limitatins f gas, multiple wnership f gas wells, and multiple markets fr gas. Because f the deregulatin f the natural gas industry, marked by the passage f the Natural Gas Plicy Act f 1978 (the NGPA), the cmpsitin f these elements has shifted t prduce the mre pervasive imbalances cnfrnting the gas industry tday. The Physical Limitatins f Natural Gas Cmpared t il, gas is difficult t stre, transprt, and measure. The mst ecnmical means f string gas is t leave it in the reservir. Transprtatin f gas is generally limited t pipeline systems, which must be cnstructed, maintained, and perated at relatively high cst. Measurement f gas requires relatively expensive metering devices. Gas must be prduced, gathered, and transprted under pressure that in many instances requires steel cntainment. The inflammable and explsive characteristics f gas are well knwn. Because gas is relatively difficult t handle, pipelines and prducers prefer t leave it in the reservir until it is sld. 4

5 HISTORY OF GAS IMBALANCES Multiple Ownership in Gas Wells N balancing prblems arise if gas well wnership is unified because there are n different interests t becme imbalanced. Oil and gas prductin rights have cmmnly been subdivided because f the high csts f financing drilling peratins, desire t spread the risks assciated with drilling, and tax incentives that attract a substantial number f drilling participants frm utside the il and gas industry. Wrking interest wners in a successful gas well wn their share f the gas cntained in the reservir made accessible by the well. Each wrking interest wner in a gas well has the right t prduce its share f the gas in the reservir and take it in kind. The timing f when the varius wners chse t exercise their respective rights t dispse f their respective shares f gas may lead t an imbalance. As lng as all f the wners f the well prduce their respective shares f the gas cntempraneusly n imbalance arises. Each wner's share f the prductin stream cincides with its share f the well and f gas in the reservir. When ne r mre f the well's wners refuses t prduce its respective share f the gas that an imbalance arises. 5

6 HISTORY OF GAS IMBALANCES Multiple Markets fr Gas When there is nly ne purchaser fr the well's gas, all f the wrking interest wners chse t sell their respective shares f gas. The single purchaser f gas at the wellhead is indifferent as t which wner's gas is purchased, and thus all wners shuld receive the same price. The prducers in such a case have little ecnmic incentive t withhld their respective shares f gas frm the purchaser unless they believe the price will rise. In the past sme pipelines chse t discriminate amng wners in a well r ther cmmn surce f supply by chsing t buy the gas f sme wners while rejecting that f thers. This arse in situatins in which the pipeline had n market fr additinal gas, there was cmmn wnership between the pipeline and the wells invlved, r ther business factrs unrelated t the ecnmics f a single pipeline purchaser cnnected t a well were present. Several f the prducing states enacted "cmmn purchaser" legislatin t prevent this practice. Such legislatin requires that the pipeline purchase gas frm all wners in a well r ther cmmn surce f supply ratably and withut discriminatin. 6

7 SPLIT STREAM PRODUCTION SPLIT STREAM PRODUCTION The varius wners in a well have little incentive t withhld their gas frm a purchaser that is required by law t purchase it at the same price and n the same terms frm every wner in the well. This situatin changes when tw r mre pipelines are available t gather gas frm any particular well, r ther cmmn surce f supply. The different pipelines can pay different prices and purchase gas n different terms withut vilating cmmn purchaser requirements. The prducers will cntract t sell their gas t different pipeline purchasers and a "split-stream" cnnectin results. Sme f the well stream is prduced by sme wners t their pipeline purchaser and the remainder is prduced by the remaining wners t their pipeline purchaser. Split-stream cnnectins invlve ecnmic waste because an additinal gathering line is laid t accmmdate mre than ne pipeline. They als increase administrative difficulties in perating the well and accunting fr prductin and sales. Split-stream cnnectins are generally limited t high gas prducing areas that exhibit sufficient reserves t justify the added gathering/administrative expense. 7

8 DEREGULATION Multiple Markets and Imbalances Befre enactment f the Natural Gas Plicy Act f 1978 (NGPA), the price that interstate pipelines culd pay fr gas at the wellhead was set by federal regulatin. The Federal Energy Regulatry Cmmissin (FERC) determined the price that shuld be paid a prducer based upn its cst f making that gas available t the interstate system. T the custmer all f a pipeline's csts incurred in delivering "gas service" were rlled int ne price. This changed with the advent f the NGPA. The NGPA ended the distinctin between the interstate and intrastate gas markets. It deregulated the price that culd be paid fr gas, limited nly by ceilings that phased ut ver the years. The NGPA was enacted during a perid f supply shrtage. Pipelines, freed f restraints, quickly bid the price f new gas (drilled after the NGPA) up t the new ceilings. The increasingly free market began t perate. With gas prices skyrcketing, industrial users and ther custmers switched t alternative fuels The demand fr gas drpped as supplies increased, because f higher wellhead prices. When these prblems were nticed, FERC began trying marketing prgrams that allwed certain custmers t purchase gas at market- cmpetitive prices. The gal was t allw gas t be sld at a market price. FERC's rdered pipeline wellhead, gathering, transprting, strage, and delivery services t be "unbundled." The pipelines wuld charge fr each cmpnent service separately. 8

9 DEREGULATION Multiple Markets and Imbalances The mtive fr regulatry changes was that pipelines had stpped buying gas when their weighted average cst f gas (WACOG) exceeded the heating fuel market cst. A number f prducers were left withut cntracts t sell their gas. They had been selling their gas withut written cntracts but n the same terms as the peratr in the well. With versupply, the pipelines hnred nly written cntracts, leaving the uncntracted prducers withut a market. Then FERC allwed nn-pipeline purchasers t fill the vid left by the large interstate pipelines. Gas brkers and marketers filled this vid. These gas marketing cmpanies purchased gas, then transprted it in a pipeline, fr delivery t the custmers. As a result f this new marketing structure the prducer is cnfrnted with multiple market pprtunities. A prducer may be able t chse frm a variety f purchase cntracts with terms ranging anywhere frm ne mnth t several years. Prices vary depending upn the term t which the prducer cmmits its gas. Fr prducers whse gas is under a cntract lnger than five years, alternative pprtunities are available if the prducer has btained the pipeline's release frm bligatin. 9

10 Imbalances have arisen fr several reasns. DEREGULATION IMBALANCES Prducers with abve-market price cntracts like t deliver their share f gas under cntract. Therefre, pipelines smetimes refuse t take high-price gas r have reduced the amunt f their takes. The remaining well stream is available fr sale by ther prducers in the well, wh may chse t sell it under a lwer-price cntract. Creating an imbalance between the high-price prducer and the lw-price prducer. Many smaller prducers with small staffs have been slw t adjust t the new marketing envirnment They have nt made sales arrangements as quickly as sme larger prducers. Therefre sme prducers have sld mre than their reservir share f the well stream and an imbalance arises. Sme prducers have chsen t curtail delivery f their gas based upn the belief that the current market price f gas is lw. They can maximize their share value f gas reserves by selling a greater share f the well stream in the future. 10

11 THE GAS BALANCING AGREEMENT GAS BALANCING AGREEMENTs purpse is t permit all parties in the jint peratins f wells t realize the benefit f their share f prductin; each party may nt realize such benefit it at the same time if a split stream cnnectin shuld exist. Essential Clauses - The gas balancing agreement cntains the fllwing elements: An express agreement where selling parties take up t 100% f anther party s prductin when the nn-taking party is unable t take its full share f prductin. An agreement that liquid hydrcarbns recvered frm the gas is allcated in prprtin t the interest f each party. The peratr maintains current accunts and recrds f the parties wh are underprduced and verprduced. Each party pays ryalties n a current basis each mnth upn its allcated share f prductin and pay its wn severance/ther taxes. Underprduced parties can give ntice and begin taking their full share f prductin and the right t take a percentage f each verprduced party s share f gas until the underprductin is balanced. Overprduced parties bligated t accunt in cash upn depletin f any well. A prvisin specifying that the agreement shall apply separately t each well within the cntract area cvered by the perating agreement. Prevents prblems f recupment between wells with different cntract r NGPA pricing categries Prevents an indefinite time fr cash accunting if subsequent wells are drilled befre unbalanced wells are balanced. The gas balancing agreement shuld be entered int simultaneusly with the perating agreement and r befre any gas cntract. Each gas cntract shuld be made subject t r at least refer t the existence f the gas balancing agreement. This frces the cperatin f purchasers in times when imbalances are being brught int balance and the share f prductin purchasers receive is altered. 11

12 THE GAS BALANCING AGREEMENT (CONTINUED) THE GAS BALANCING AGREEMENT Frequent Prblem Areas Regarding the Gas Balancing Agreement Ryalty Payment Questins Mst agreements prvide that the underprduced party is respnsible fr paying the ryalty n such party s full share f prductin. Gas Price fr Cash Balancing The sample gas balancing agreement prvides that cash balancing will ccur fr a well ut f balance at depletin, based upn the price actually received by the verprduced party. 12

13 Case Law in Texas Case Law Texas - The Texas Cmpulsry Pling Statute des nt cntain the language fund in the Oklahma statute and appears t cntemplate a tract allcatin methd. Virtually all pling in Texas is accmplished n a vluntary basis. Puckett v. First City Natinal Bank invlved the issue f the cmputatin f ryalties in a splitstream sale situatin. The ryalty wners land had been pled and the gas prduced frm the unit was being sld by different lessees at different prices. The curt adpted a tract allcatin methd under which the calculatin f each ryalty wner s ryalty wuld be based n the price received by his lessee. The curt separated the Luisiana TXO Prductin Crp. v. Prickette case, which arguably culd have called fr a weighted average price methd, based n the different language fund in the pling clauses cntained in the respective leases. In Texas, a tract allcatin methd f ryalty valuatin is als the prper apprach in a splitstream sale situatin. 13

14 CONCLUSION Include a gas balancing agreement, especially in cases f il and gas wells/gas wells which are jintly perated. If a gas balancing agreement is nt required r nt applicable, dcument the ratinale t the client. 14

15 C. William Smalling; (713)