Opinion ID: 510046
Heading Depth: 2
Heading Rank: 3

Heading: Characterizing the Take-or-Pay Obligation

Text: 32 While the take-or-pay obligation is intended to compensate the producer for the exclusive commitment of reserves to a gas sales contract, this does not automatically mean that the take-or-pay obligation is part of the value of the gas. 32 A take-or-pay payment which comes before gas is actually produced and taken simply cannot be a payment for a sale of gas. The purpose of take-or-pay clauses is 33 to apportion the risks of natural gas production and sales between the buyer and seller. The seller bears the risk of production. To compensate seller for that risk, buyer agrees to take, or pay for if not taken, a minimum quantity of gas. The buyer bears the risk of market demand. The take-or-pay clause insures that if the demand for gas goes down, seller will still receive the price for the contract quantity delivered each year. 33 34 Take-or-pay payments are not, therefore, payments for the sale of gas. Far from being payments for the purchase of gas, take-or-pay payments are payment for the pipeline-purchaser's failure to purchase (take) gas. 34 35 The DOI asserts, and Judge Sear accepted this assertion, that a take-or-pay payment is a benefit attributable, at least in part, to the government's interest. We cannot agree. Take-or-pay payments are intended to compensate primarily the producer, not the owner of the minerals, for the risks associated with development production. In fact, this is the precise reason for entering into a lease agreement. The government leases oil producing lands in order to, among other things, reap the benefits, through royalty payments, without having to shoulder the associated risks of exploration, production and development. As we have long held, the take-or-pay obligation ensures to the producer a continuous source of revenue to cover investment, operations, and maintenance. 35 Most of these costs have either been or will continue to be incurred, regardless of whether the purchaser takes any gas. The lessee is the exclusive bearer of these risks. 36 The position taken by the Secretary also runs into conflict with certain regulations promulgated by the Federal Power Commission and its successor, the Federal Energy Regulatory Commission. FERC regulations and decisions attribute take-or-pay payments to make-up gas only when the gas is actually taken. For rate-making purposes, FERC treats take-or-pay payments as pre-payments for gas not taken. Consequently, a pipeline does not recover take-or-pay payments from its customers until the pipeline takes, and thereafter sells, the make-up gas. Until the time make-up gas is taken, the take-or-pay payment is accounted for as a pre-paid asset and may not be recovered by the pipeline from its customers as a purchased gas cost. 36 The most recent Commission Order, in ANR Pipeline Co. v. Wagner & Brown, et al., 37 reiterates this position: 37 In the context of the gas purchase contract and industry practice, the take-or-pay payment is not intended to be a payment for gas and is not a part of the price of gas until it is applied at the time of sale. The value to the producer of take-or-pay payments forfeited by the purchaser is therefore not treated as part of the price of gas purchased currently. If the gas is made up, there has of course been a first sale and the applicable ceiling price is that in the month of delivery. 38 We find no basis whatever to conclude that earnings which producers may realize on take-or-pay payments, whether measured by interest actually earned or by value, are part of the price paid for gas. 38