Gas Marketing In Transition
Authors: Park J. Jay 
Published: March 2010

New Circumstances, New Philosophy

The business of marketing natural gas has changed a great deal in the past few years, and promises to continue to evolve at a rapid pace in upcoming years. Yesterday's regulated environment fostered an oil and gas industry that focussed on exploring and developing oil and gas reserves without the need to expend efforts on marketing them. Today's situation is very different, and marketing has become a critical part of managing an oil and gas company.

Gas purchase contracts in the 1960s and 1970s were usually for terms of 15 years or more in order to justify the investment in gathering, transportation and processing facilities. Gas purchasers would buy all of the gas from all of the producers in a field, and producers were not involved in any dealings with the gas consumer. Rates of take were typically based on the underlying reserves thatwere dedicated to the contract, and supplementary sales were prohibited. Prices, while not always regulated were relatively uniform throughout the industry. Moreover the philosophy underlying operating agreement was that the operator, typically a major company, was responsible for disposing of production from the field.

Today's environment differs markedly from that which existed during the previous decade. Short-term gas purchase contracts are becoming more common. Gas producers and consumers can and do enter into direct sales contracts. Gas purchasers no longer acquire all of the gas from a particular field; they are prepared to enter into a contract with one producer, frequently without dedication of specified reserves. The contracts are often deliverability or best efforts contracts. Today s current oversupply situation has led to considerable differentiation in the prices available to producers. There is more than a 100% difference between the lowest prices and highest prices at which gas is currently being sold in Canada.

These new business circumstances are complemented by a change in the philosophy of many gas producers, particularly those with marketing expertise. Producers who have a gas contract now consider that contract to be a corporate asset which they are not prepared to share with other producers. Producers no longer consider it to be their obligation to market production of their partners, or if they are prepared to do so, they would prefer to sell their partners' gas under low price contracts.

New circumstances new philosophy – it is easy to see how problems can arise with transition in the gas marketing business.

Upstream Issues

This article will first examine new developments in gas marketing arrangements in the upstream sector of the industry.

The Problem

Most oil and gas properties are jointly owned by a number of companies. Operations on those properties are governed by operating agreements, usually one of the Canadian Association of Petroleum Landmen (CAPL) Operating Procedures, or in the case of unitized lands, by the standard unit agreement. All such operating agreements contain provisions dealing with the disposition of production. However, these agreements were written under different prevailing circumstances and philosophy, and frequently lead to disagreement and dissatisfaction.