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

Heading: Producer-Pipeline Contract

Text: 14 The typical producer-pipeline contract 14 provides that the pipeline will generally pay for natural gas at the maximum lawful price permitted by the Natural Gas Policy Act for the month in which the gas is produced. Gas purchases are invoiced monthly, partially in order to reflect fluctuations in price. Natural gas sales contracts usually contain a standard take-or-pay clause. This clause requires the pipeline-purchaser either to take (and pay for at the maximum lawful price) a specified quantity of natural gas during each contract year or to make a single annual payment to the producer to the extent that the volumes of gas taken during any contract year fall short of the minimum annual contract quantity. During a contract year, the producer receives monthly payments only for the gas actually taken. 15 At the end of the contract year, volumes of natural gas production actually taken are compared with the minimum contract volume. In the event the pipeline has actually taken less than the contract volume, the pipeline must then make an annual lump-sum payment, the take-or-pay payment, representing the difference between the minimum contract volume for that year and the actual volume taken. Because natural gas is almost always transported by pipeline and cannot be stored at the lease site, if a pipeline cannot accept delivery of gas, the producer must shut in his wells or restrict production. There can be no gas produced at the time a take-or-pay payment is made because the producer has to leave in the ground reserves sufficient to meet make-up demands over the make-up period, generally five to seven years. 15 The committed volume under the gas sales contract must remain in the reservoir for the remainder of the make-up period.
16 Over the next seven years, the pipeline has the right to credit excess gas taken against a previous take-or-pay payment. Whenever the pipeline purchases gas in excess of the contract volume for a subsequent year, that excess gas purchase is credited against the earlier deficiency. This excess gas is referred to as make-up gas. At the end of a year in which make-up gas is taken, the pipeline will receive a single lump-sum refund, or credit, of prior take-or-pay payments made for the earlier deficiency to the extent to which the deficiency has now been made up. The refund is calculated on the basis of the price of gas during the month in which the make-up gas was actually taken. 17 Although the price paid for these make-up gas deliveries is the price in effect at the time the make-up gas is produced and taken, the payment is made by applying the purchaser's prior take-or-pay payments as a credit towards the purchase price of the make-up gas. While some contracts allow the producer to retain take-or-pay payments that have not been recouped by the expiration of the make-up period, others require the producer to refund any unrecouped payments to the purchaser.