ii.

..

.,

.
.:.,.=
.

Paperforthe Gas Technolc@SympOsiuJR

Sponsored

\%

S&es Contracts
and AlliedProblems

,.
#~H@;

JohnG, ih,Orp

!.

soMinutes
.?,

.=:

,.

/-

coqtraotsM

about

natural
,,

/
:2

g~,

shies

how theyeonstob6-inth4 hopsthatw listeners

yin be abieto under- -~
.,

stand

.,,

,.

TION: Thispa~rs purposeis to presenta few fads

/

..

~,

,,-

betterthe problemsinvolved(, in seULng gas,

,,

. .

,.
.

The typeof transadtion~obe consideredis

the saleof alarge reserveof high

pressure
(over1,000pourid)
gas wellgas to tiinte~state
market, Delive~ywill be
.
to a transmission
linefor transportation
andresale
out.side
of the state.Such
.1
.
)
saleserenow tiderthe jurisdiction
of the FederalPower Coamissiont
,,
,.
1
.,
MY wesen~ati:ri,.~%
jhop~ be sli@&d~fere,+t fromthe
be~ome
,. tm.th~t~
showing
customxy,
of +ateYOsrsa I donltintqnd.
.to lE&downa barrageof statistics
,,,1.
howinterstate,naturalg&
saleshave~ncreased
fromone Iirillidncubio
feetin 194,4
:.
tO 6;5trillion
iti1959,ar
how 16billiondollsrshavebeenspsntdur@g this 15
r
..
*.
.,
--QOWmeasurimg
nesrly.9OO,OO0
miles--you
are(* ,asfamiliar
,~ars to buildpip61ines
withthesefiguresas 1..

.. .,

,,

..~,

..
,.
,
There is, hqwQver$one statistic
whioh,
is of tremetious
irnportanae
to:us all in the
.,
,.. indust~y,
as wellasto the 32kU1.ion
consumers
of naturalgas &the UnitedStates.
,,
...
,.
Thisis thatdtiingthisperiodthe a~rage fieldpriceof gas has inqieased
fro,m
,.
SrOUd
~fao$,,a+%u~tiyneg
oti+ti~
..
. 60$@@ ~#/MGF:. &oducersare,p.,a~atte~,o
.,
. ,-.
!
,,
salesn6w at~ound
2.4@?MC~$
.imludihg tax reimb~seukmt$in
SouthLouisiana,While
,..
.
,,,
,,.
..
..
,.. ..,
italsoc
auses
this,
incxeaspcausesconcern
on the partofIk@ributof.s
,.._
,,&d Consumers,
i
..
,.

..

.
,

-2-

..

,.
./.
rae,m a $3sOOO~O0,0
difference
in -isco~t?d ine~~ overthe ~?e.of the reserves~
or a
.,
!
)
,.,
-$300d~ffersnoe
in d,ailyincome,ase~~ alfoz? 10 takebasis.
,.
,,
>
,,.
f
Ican,think
of,o~,inet@ce%nwMhadiffeknce
Lnoontract Provisiom,on W t~pe
,.
/
of separation
@lowed re&iltedin an un&oes&tiyduplication
of fac~~,ti~s
at & in.. .
.
., . .
vestmentpostof $40s000ov two gas wells~..-aad
thisis but.one of m~ requirements
.

thatmsyvary withdifferentpiroiieers.
My methodof pr~s:nting
this subjectwill ~ to followa gas salethroughfromthe
,tbrou~h

discoveryof the reservesand releasefor saleby~

Manegem?n#* ne~otiationsj

discussions-execution
+d: certificationw
iththe FPC, usingprocedures
commonly
followedby the Industry.

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PRESENTATION ~

,,

,,

,.

1.

WorkDoneBy RegionalOffioe

.,
,,

,!

.,

welland.,.offs@s
(if any)completed
a@ tested.
Gas analyzed.
a) Discovery

b) Reserve~~ysis mad~ (gas;oomdepsate

ad oil)..
-,,

withLa&dDe&bne@
c) Leaaing
,. p$,,oturtiohecked

(t~s,~probably
doneprior

and conourrently~tha)and b).

,,
.,.
,.
any special
situation
madeto deter~ne whether
d) Analysis~tproduction
on gas production,(For
p?oblemsexist,
whichwouldimpose
anyrestrictions

,
,,

thatnoneexistandthatthisis notgas=
discussion}
,, we willassume
.!
-,
..
oap gas.)
,.

this

,
..

by Nat~al .GaeSales.
0) The gas reserveis releasedfor sale,
~e?~%ly

bymeans~

of a requestfor marketmemo.
givingdate of completion
of well,daterele~~ed
.,
,.

Regionmight
for saletlocationplat,.-,test
data,as well as anyir$ormation
,, ,~.---haveas to available
markets.
)
,
..
2. WorkDonePy Natuial
Gas Sales,Section

,
(Mv beginpri$rto releasefor saleafgas resks)
,.,

.-

.,

rnerlie,t
situation
in &6a of gas r~ser~e:
. Locationof -~
a) l%eliminar~istudyof
,
transmission
linesof ~ospectivepurchasers,
priceszanyrequirements
~ to

,,
.

,.

Liaison
who may be workingin,. withotherProducers
t
,,
teqestownersto determinewhet~r th~y
havqany priordedications..
- c

quality,

pressures

e~c.

from Production,
Department
all avxlable
b) Determins
,

information
on,field:

locationand numberof wells;appro~maka

extentof,reservoir;,
completion
da-ta~ ,
,,,
testsand.an@yses;plansfor possible.
devqlop.uent;
estimateof reserve.s~ (These--

la t two are-not
ordinerilyreleased
to &s&ible purchasers
or othercompanies.
) :
P
,--P c) Contactall potential
g~, p~chag@s (~ woce8sois,
where,
applicable),
within .;,
.,
>
(J
..
a..
ys*gg@@s ..&@,@y+..
gf..~*@e&l@,,.
T@-.m@@@=Y.. e~d.u~tion~.
;@.ch-Is
-m@e.~1
..l,..;
..
:.

allpg&ib~tZes
&&tljr,
willprobablyruls out someof thesbpros>ats,but
.
;,
.
,,
.
.,.. -

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to Wevent pobsiblerepercussions ,,
&e eX@or6d~ for severalreasons. We tlothis,
.
fromroy&ltyowners,to insurethatal bargaining
o
nth?
saleisat
arms$etigth
-,
,!.
end to ineurethatin the eventof a breakdownin negotiations
withone comps+y ,
,.
.
.,
,-{
wewill haveen ideaof the alternatives
avatlable--other
etringsto our bow,
Itmaybe mentioned,
at thispointthatxoysltty
owner?
havebecome
~
1
muchmoresophisticated
of recentyears,

as~t

were.,

L~d Dep&tmentto
d) (Coz,murrently
withb)tiand
c]. Discusssitjuatiohwith
.,\
determine,
whetheror not any speoialproblemswiththeroyaltyownersexist
t
or can be expected,
De&rtmentto determine
whetherwe will have*O mike
e) CheckwithProduetiion

..
ans-

etcc)
(separators,
de&drators,lines,meterstations~
specialinstallations
and, if

so,

the costsof $uchinstallations,

purchasers
comein? a preevaluation.As offersfromprospective
f) Preliminary
;.
liminaryevaluation
is madeof each.
offer$so t+t the number of offersto be

. . .

,,

>

consideredmay
be but downto two VY three. ... \
!.

,.

ev~uation$th?ivariousProspective
.pw-,.
g) on the stpe&th of thispreliiinsry.
.
7
~.
ohasers-whose
o;fers aie to be seriously
@s&dered are askedto sendproposed ,.
,.
\
,
theirProposalsindetail.
.,
~.c&tractsoutlining
*
.
and LandDe,psrtments
continues.
Earlyin
the
negoti~
h) LiaisonwithProduction
*,
1.

atio~ a listof leasestobe

dedi~ated
is compiledandtirkbegu~ok the
witliFrodudion
exhibitto be attiached
to the contract.Herecloseeooperaiion
,,

and Landsre necessary~

sincequiteoftencertainarbitrarylim$tssre placed
uponthe extent~o whichwe m~dedicate(iwsrea
,.

..s

. .

as wellas depthand reserves).

who
Afterfirm offerstie received
fromall ~ksible purchasers
Negotiation:
...
..
/.
~
1,.
shouldbe seri+ously
ionsidered~meetingsare &ranged withthern
(individually,.$.~
.
.1
-..-=-2
.~f.
&owse)...~n@gotiateadst~~st~~
-og--tk..cGnir
a~ts*,..,.Que..to
,.the-.doupZexity-of-..--..,..
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-5-=
the gasdeliveries(different
conditions
of,pressures
quality,BTU r.eqtdre=
nents,deliverypoint,dist~o~.toaiain
line,etc.)a flatpricecouldnot

.,
,~beset to coverall gas prod,uoed
and soldfroma certainareaor evenfrom .

,.

a cdrt~n fieldw4thoutglaringinequities.Example-A pro~u& who dedi- )

,
,, ,.
cates,S* 200 BCFof gas may be;&leto commqnd.apriceilrom
one to two
~.

-,

centshtghertha,a producerwho dedicates50 BCF.

3*

Analysis

of,GasSalesGontrmt
,,

-.

,
.

.
.

a) When,contract
is Workedupintosemifinal
written.form$
it is checkedwith
l%oductions
Legal$TaxandLand~epsrtments
for theirwmaents. On occasi.dnt
.
epartinente
woheck withEn&eering and Con&tiruction
andVal.uations
t At thistime,
.,
/Dep*tment
we alsocheck~thAccounting
to advisethemOf& spmialarrangements
that
,
r, may be necessary..
.(Sometimes
theyadviseus;)
,
,~,

.,

it is--butwe havefoundthatit pays

.
This pra@ic6 soundstimeconsuming--and
,(
the betterthe
analysis,ofits
.~ 1
off9 The morepeoplewho studj,acontracts
,,
/
..
goodand bad points, Thisis a simplematter of mat#matics.
~~
1
b) Aftergettingoommehtsfromeveryone,we
returnto ~he,negotiation
withthe

.s,

,Purchaser
and trade
for morechanges.in
the terrns$~.conditions
hnd formof
the ccntract.Throughout
all theseoperations
-w{~rnust
keep in WLri&
what oqr
Mariagementls
pali.cy
is in regardto p&ttnentde~~ls, and we tuu~t,know
how
,,
;
...
far we can go in makingconcessions,
!.
.
u) Economic St!~dyeConsidertotalannualincomef%om gas?condensate
andgwhere
.
applicable,
plantproductbover the termof the coqtract.Priceescalation
.,
.,.
,,
,.
?is t,aken
intqconsiderationqs
wellas favored~pation~imd
priceredetermine-

.
>,J
.,
tion. (Thismkn&.that$tc gmke a really cornpl&estudy,we &s$ run all 6onw,
..
i,>-.
traotsof all Purohasers
in the pricingAreakhrps~ri~
giving.
consideration~to

i
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,

.... ...._.., ... .. .,- . .-.=. , .- .... _...... ........-~

.... ... . ... . ... ;.

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.i ----_-........=--. . .. --,. . ..,}-.. .... ... ,:.-= .... ...+..-..-... ..<---... ........ ,.-=.. ~- ,.-.:2--:- =...=..

thei~escalati@2price redetermination
and favorpd.nations
,olauses,
.pince/..
,
.,
,
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-,7,___

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one,oontrhct

will

aot

Qallsfor a reallyoornplete
and
upQnthe other.,
,This

reportingservioeon gas saleioontrauts Anotherfaator in con-

upto+ate

daige in
firaat
analysis.
is the changingGOR of,the gas and any predictid

; , , ,,
.,!
recoverable
G*? s,. Na&a@@lylin keepingwithpractices
ih the Industry~
:
.
.
,,,
. .
!.
the .,
inaomeflgure~foryearstocomeare discou@edby somewrcenhge factor.
~,~ ;,:
,,
:1
westudy
theFPC,
d) FFC Situaiion~
~ Afteranaly@ngthe offerseconomically,
.~
sale+ Thisinvolvesexte~ive
sit-iation
as it appliestO thisparticular
. -.
,,
reseerchin the Foster,Lockwoodor similarreports;
,.
,
,,
I
As an exahpl~,we fou@ in one
Thisqay differ@th differpntpurchastirs.
. .
:1
fieldthat
of our ~cwpsotivepurchasers
one W8S buyinggas in the samefield 1
wider sope 12 or !13interstate
eontractej
nopeof whichwe?econtested--and

., :,
. .
thispurchaser
was payingthe Wghest p?icefor gas, All or partofthe
,,
pripespaidby each of the otherthree.
was beingcollected
undercorpo~ate,

,.
.,

.
undertaking,
~ The reasonfor
the phenomenon-was
thatthis
..
,.supjectto refund.
(.,
Pg.rchase~
wassellinggas in ar-areawherethereM beenAo iiltervention.
.{
,
.
.1
a non-jurisdictional~ ~
There h a .theopy
whichhasgro,yii in redentyearsthat,
,.
or intrastate
-s~e at ..&
lowerpriceis moreto bedesired
thana@risdi6-.
.
doubt$
tionalsaleat something
moree-Thatmsy be true,but I veryqeriously
.+
.. whenal otherfaotors&e eqtials
that
maw l?rpd
uc&s makesuchcontracts
,.
.,
-.]
.withoutcarefulstudy. Usuallythe lowerpricedcontraothas someother
.!

..-,<--- .. . .. -.

advsntsgea
suchas lowdrdeliverypressureOr highertakeprovisions.
. .
. .
factiorss
suchas,drainage
by-:,
otherProduc&s2obligations
.In viewofcert~tin.
;
.. -)
k@nobk9
I don~,,t
imag~nethattnany%oduaers
, toleaseowkrs &3~$@~pla@
,.
..
.,
>, .,.
.,-----,
,,
Ieiye+mwohgas
shut-in
f~orn
sell~~ to j&isdiction&m&rkets~
,...?.
.>?..
...sirnp~y,t,o~keep
.?.:
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-...>-..* . ..=~.~.>
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-s-.

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AS regardsthe reoentchangein wlicy b$ the FFCfrom theoost-of-service

., .,
conceptto the.areapri~ing
conoeptjit ib too earlyto mske
any assessment

. .

,,

df its effeet. I dp hot Zntendto dQso now lx?at &tinle. : IX

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,.

probablybi
enoughto,ssythatgas,was#old
underthe oldpolicy-a@ will.
(.
,.
,
,
..$
.,
,..
soldunder
th6 new.
1,
,
,..
,,
. .

tNnk,
-,
:

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Mostcoppanies
=-andpineian~kxaeption--rely
uwntheirbgal
Dsp=tm?nts
.
onstantly
ch~ging
.
to interpret
thJ leg@.a@eots of th?FFC situatio~ ~
~
.,
\,

..

Thisseemsto.beas goodatimeas ~,to

,*
f ..

..

pointout anotherfad,

L-

I am not

an exp&t onoperations
underFFC contro~~and I am notpreparkdto answer
Q &l-lI igtef itosdy.
any questiti?s
regardingit. .WhatI-havesaidso far
,-

Afterianalysib,
we then!mustpresentthecontract~tseU
for execu-. to llanag~mefit

.
1.

I &ve heard,handle.
thi~
procedure
by meansof an informal
tion. Some Cornpenies,
. .
,..
oftheoo.ntra&and salepresentedorfilyiIn ot~ersj
interview,
-&thdetails
.
however;thisis handledby

~morandum&i formal,
&ndas uaref
ullypreparedas ~

,.

age.
Thismethodhas,Xthink,a very greatadvent
an internatio,fiai
tradeagrOernenta
re~ into,
a uontraetwhattheywantit td
\
ssy~whenthe terms&d, conditio~s
of the agreement&e summarized
in a memo,it
.
,
is quit~easy
to detectany discre~iese
..
,
4,
,

&ometimes
two,or ewnt~ee,

Certification
,-,

Ij
,.
.+

. .. ... .

m~ople m~

i.

,.

.-.

,;

,
,..

-,

.After
the coatrac~is,exequ~edwe.~~efaced with
anotherchore--we_
must accumulate ~
.,
./:L,
\;~
and
assemblethe d:$ta
neaeps~yfor;:ur Le@l.Departrneit
tO M* application
for
.,,
,..
,..
,.
-,
1
/,

CerW?ioate
,ofPubj$ic @nveniencek?~ Neoessit
y withthe FP@ Th& application ..>
,.
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+ ~..
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-=..
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.-,
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--:-----.;--~
:-T---:
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---a--
muqt
frequently
befsuppafted.
by testimony
in-aformalhcw+ring
be~ore.
.. the.Commissionc

* ..... t.,..

,..
,,

.,

.)

. . .

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As a rul?,

te$timoqy. is k

this

,1

P partiientsometimes

,.

~a@ presented
by Nat&1

Gas. Othys

invol,yed =e acc&mtants and ec6n&ists frouk withi~ the company and, on Oocasioug
..
..
.,
.
exp6rts in various f.$dds from outsid~ the
Q~~PW*

,..
.1

fJoriolu8i9n
,
.,, .:
In, suimary; X wouldj~ke

<,, ,

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,;,

(,
...

r,~.
.
the kaot that thiswooedurehasbeen
.t
,

to ro-emphadze
:!
,.
briefly.,1id~ine that someProducers ,msb & even inore $e-

tOtided upon on~

,beapptiht thata saleof =tural@

tailedstudyof offer8, But ituuzs~
,,
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.
not a simple

};l 8

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