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INTERNET OIL & GAS PRIMER

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GAS IMBALANCE AND GAS BALANCING AGREEMENTS

Copyright  1999 by Lewis G. Mosburg, Jr. All Rights Reserved.

PART SEVEN:  DISPOSITION OF GAS BY THE OPERATOR: "MARKETING LETTER" SALES

Introduction. In Part Six of this Primer, we discussed avoiding imbalance conditions through Operator Sales, e.g., having the Operator dispose of gas for those parties who lack a market.  And we saw that sales by the Operator could correct or avoid imbalances and are authorized by the terms of all four versions the AAPL Model Form Operating Agreement.   But we also saw that there are disadvantages to an Operator's relying upon the sales authorization contained in the AAPL Model Form.

What to do?  There can be advantages to the Operator in disposing of another party's gas,1 but selling under the provisions of the Model Form is not a satisfactory way of realizing those benefits. The answer:  enter into a separate agreement a "Marketing (Agency) Letter" under which Operator and non-taking party can agree as to the basis upon which the gas will be marketed.2

Most Gas Marketing Letters are short and relatively inadequate.  Here are points that should be covered in a properly drafted agreement:

  • The basis upon which the gas will be marketed, to include:
  • Calculation of price at which the marketing party must account to the non-marketing party, including authorized deductions.
  • Whether or not the marketing party must split its own markets.
  • Whether or not the marketing party is to receive a fee for the marketing and how any such fee is to be calculated.
  • The length of time the non-marketing party's gas may be dedicated.
  • Whether or not the marketing party is also to undertake various administrative burdens, such as:
  • Payment of royalties.
  • Payment of production taxes.
  • Accounting by the marketing party to the non-marketer and payment.
  • Right to Terminate.
  • Indemnification of the marketing party.

Sample Gas Marketing Letter. A sample Gas Marketing Letter follows. The letter is rather more involved than those generally used in the industry, to illustrate points that should be (but frequently are not) be included in a properly thought-out agreement (and in the negotiations of that agreement). The letter is also very Operator oriented (see above).  Provisions appearing in brackets are either alternates or provisions which you may or may not wish to use in a given deal.

 

YOUR COMPANY

One Energy Plaza

Some City, Any State XXXXX

(XXX) XXXXXXX

March XX, 19XX

XX OIL COMPANY, INC.

Two Resource Row

Another City, Any State XXXXX

Re: Dynamic Area

 State of Confusion

Gentlemen:

This agreement sets forth the basis upon which YOUR COMPANY ("YOUR") and XX OIL COMPANY, INC. ("XX") agree that Gas (as hereinafter defined) may be marketed by YOUR, as Limited Agent, on behalf of XX.

    1. Definitions: As used in this agreement:

      a. "Commercially Reasonable Terms" shall mean the marketing of gas at a price, and upon terms and conditions, which YOUR, in its sole discretion, considers to be commercially reasonable under the circumstances, it being understood that YOUR shall have no duty to share any existing market or transportation arrangement or to obtain a price or transportation fee for XX equal to that received by YOUR under any existing marketing or transportation arrangement of YOUR's and that XX's sole remedy in the event it is dissatisfied with such marketing terms shall be the subsequent termination of this agreement as elsewhere provided in this agreement.

      b. "Gas" shall mean all vaporous substances produced from the Subject Wells, and shall also include residue gas[, condensate and natural gas liquids) produced from or attributable to such wells.

      c. "Joint Operating Agreement" shall mean that joint operating agreement entered into between YOUR, XX [and others] dated

      April x, 19XX.

      d. "Netback Value" shall mean the price received at the point of first sale for XX's Gas, less any deductions for transportation, gathering, treating, dehydration, compression and all other costs, expenses or charges of any type necessary or incident to the marketing of XX's Gas, and less all other deductions authorized under this agreement.

      e. "Subject Wells" shall mean those wells described on Exhibit A to this agreement.

    2. Terms of Marketing:

      a. YOUR will market XX's Gas [at the same price and upon the same terms and conditions as YOUR markets its own Gas from the Subject Wells] [on Commercially Reasonable Terms]. In the event Gas is marketed on XX's behalf to an affiliate of YOUR, it is understood and agreed that the price paid by such affiliate for such Gas shall be deemed to be the price at which such Gas has been marketed. In the event that YOUR elects at any time, and from time to time, to deliver and/or market XX's Gas under the terms of any existing contract of YOUR, it is further understood and agreed that this shall not give XX any interest in, or make XX a party to, such contract.

      b. YOUR will not dedicate XX's Gas to a contract whose term is longer than one (1) year from the first day of the next calendar month following initial delivery. YOUR will reasonably notify XX of the price and other terms and conditions upon which XX's Gas is being marketed and of any changes therein.

      c. YOUR makes no representation as to any particular volume of production, or any particular market or price, for XX's Gas. At any time, and for any reason, YOUR may elect not to market XX's Gas during any given period even though YOUR is marketing its own Gas, but shall promptly notify XX of this decision.

      d. Either party shall have the right to terminate this agreement upon thirty (30) days prior written notice to the other; provided that such notice of termination shall be effective only upon the expiration of any nonterminable dedication of XX's Gas to the contract under which such Gas is being marketed. Upon such termination, XX shall make its own arrangements for the disposition of its Gas, as provided in the Joint Operating Agreement.

    3. Payment of Burdens on Production: [XX shall be responsible for paying all royalties, taxes and other burdens on production or other payments which may be due as a result of the sale of its Gas. If YOUR is required by law, rule or regulation to make any such payments, YOUR shall make or cause to be made such payments and] [YOUR shall use reasonable efforts to make or cause to be made all disbursements of royalties and other burdens on XX's share of production in the manner provided in the Joint Operating Agreement, which shall include productionrelated taxes if permitted by law, and) shall make any remittances required to XX hereunder net of such payments. YOUR's right to deduct such payments made on XX's behalf before remitting to XX shall be in addition to, and not in lieu of, its other rights to collect such payments.

    XX agrees promptly to provide YOUR all information necessary or useful for making any payments required or permitted to be made by YOUR hereunder and of any changes in such information and to reimburse YOUR for all thirdparty costs and expenses incurred by YOUR in calculating such payments.

    Nothing herein is intended to make YOUR responsible for any obligations under XX's leases or as to XX's share of production, which obligations shall remain the sole responsibility of XX.

    4. Accounting: Within thirty (30) days after the receipt by YOUR of proceeds attributable to XX's Gas, YOUR shall make any disbursements and deductions authorized under this agreement and shall then distribute the remaining Netback Value to XX.

    5. Administrative Fee: For its services hereunder, YOUR shall receive an Administrative Fee equal to (an initial setup fee of $XXX, due upon the execution of this agreement by XX, plus] [$XX per month for each Subject Well from which Gas is marketed during such month] [XX cents per MMBTU for all Gas marketed for XX during such month) [XX% of the Netback Value received for the sale of XX's Gas during such month]. YOUR shall be entitled to deduct such fee before determining the amounts distributable to XX hereunder; provided that YOUR's right to deduct such Administrative Fee payable to it before remitting to XX shall be in addition to, and not in lieu of, its other rights to collect such Administrative Fee.

    6. Relationship of the Parties; Representations by XX; Exoneration and Indemnification of YOUR and Affiliates. XX represents and warrants that XX has good title to the Gas covered hereby; that such Gas is free and clear of any and all liens, encumbrances, or claims; and that XX's Gas is not dedicated under any existing contract or otherwise restricted as to sale, by governmental law, rule or regulation or otherwise. XX further agrees to hold YOUR and its affiliates harmless from any discrepancies or disagreements as to price, value, volume, or governmental reporting and other regulatory matters, and agrees that disputes involving the foregoing shall be resolved by YOUR or such affiliate as it sees fit with the applicable third party and shall be binding on XX. XX agrees to indemnify, defend and hold YOUR and its affiliates harmless against any third party claims and any costs expenses or other amounts, including court costs and attorneys fees, incurred by YOUR or such affiliates in connection therewith or otherwise arising out of the marketing of XX's Gas by YOUR or the payment of taxes or other burdens on production hereunder, except those arising out of YOUR or such affiliate's gross negligence or willful misconduct.

    Except as expressly modified hereby, the Joint Operating Agreement shall remain in full force and effect.

    YOUR has agreed to serve only as a Limited Agent for XX and only upon the basis set forth in this agreement. XX recognizes that YOUR is providing such services as an accommodation only and that the Administrative Fee provided herein is merely to reimburse YOUR for the costs incurred in so accommodating XX. XX hereby waives and releases YOUR and all of its affiliates from any losses, claims, costs or expenses suffered by XX arising from any act or omission of YOUR or its affiliates arising hereunder except those involving gross negligence or willful misconduct on the part of YOUR or such affiliate. It is agreed by the parties that no fiduciary relationship exists between YOUR and/or its affiliates and XX and that YOUR and its affiliates will be dealing, and shall be free to deal, with marketing of Gas for their own accounts or the purchase of Gas from or the transportation or gathering of gas for others, which may be on terms far more favorable than the terms upon which XX's Gas is marketed hereunder and will be in direct competition with XX therein, nor shall YOUR or such affiliates be under any duty to XX to disclose to XX the terms upon which YOUR or such affiliates' Gas is being marketed or the terms upon which Gas is being purchased, transported or gathered by YOUR or such affiliates from or for any third parties. If at any time XX becomes dissatisfied with the price and other terms and conditions upon which its Gas is being marketed hereunder, XX's sole remedy shall be to terminate this agreement as elsewhere provided herein.

    7. Effective Date. This agreement shall be effective as of the first day of XXXX, l9XX.

If you agree that this letter properly sets forth our  agreement, please execute and return one copy of this letter to us within days from the date hereof. Otherwise, this agreement shall be null and void.

                Sincerely,

                YOUR COMPANY

                By

                (Title)

ACCEPTED AND AGREED TO this ____ day of ___________, 19XX:

XX OIL COMPANY, INC.

By

(Title)

Coming Next: "Equitable Balancing"

 

1Some of these advantages are discussed in Part Six.  A non-taking party is most apt to seek such an arrangement when it lacks the ability to market, or where its interest in the well(s) are so small that the benefits of self-marketing are outweighed by its burdens.

2Expect the Marketing Letter to be skewed in favor of the Operator: the Operator is doing the non-taking party a "favor" in marketing its gas (if it was to the non-taking party's advantage to market, now or later, it would be doing so rather than requesting that the Operator market on the non-taking party's behalf); if the terms are favorable for the Operator, it simply won't agree to market.

Copyright © 1996 - 2007
 by Lewis G. Mosburg, Jr.

"Lewis Mosburg's OIL & GAS NEWSLETTER"™ and "Lewis Mosburg's OIL & GAS PRIMERS"™  are trademarks of Lewis G. Mosburg, Jr.