Unlike the principles for the crude oil lifting agreement that could be in the disposition of crude oil, the disposition of natural gas must go to the trouble of clarifying that any amount of natural gas actually taken by a party will be transferred into its ownership and will be saleable by it, even if some or all of that amount is in excess of its participating interest share of production. This is a useful clarification because it serves to eliminate the argument that any party lifting in excess of its participating interest takes the excess amount on behalf of the relevant undertaking party, under some form of constructive trust or bailment. If that were true, both overtaking and undertaking parties could be exposed to several legal complications, such as:
- Would the overtaking party have the right to ship the undertaking party’s gas and to sell it?
- How would the overtaking party account for the proceeds of sale?
- And what tax rules would govern such transaction?
In the natural gas balancing agreement, this provision will have to be spelt out in more detail, recording the consent of every party to the postponement of its participating interest share in production whenever such party fails to take. Unfortunately, this provision alone is unlikely to convince tax authorities that no taxable transaction has arisen by reason of the overtaking party’s acquiring a greater share in natural gas production than its participating interest.
As mentioned previously, the reference in the disposition of natural gas to each party’s participating interest share of production is not correct; it would be more accurate to refer to ‘entitlement’, since a party’s ‘overproduction’ or ‘overtaking’ is defined in relation to the adjusted amount it is entitled and obliged to take at any one time, and not simply its percentage interest in overall natural gas production. If the expression ‘entitlement’ is used, there is no need to refer to ‘make-up for past underproduction’ because any make-up will be included in the party’s entitlement.
No Agency or Trust
This should reconfirm the point addressed in the event that a party takes more natural gas than its entitlement, it does not do so on behalf of any other undertaking party. It does not lift an excess on behalf of any other party as its agent or trustee and owes it no fiduciary duty in respect of such natural gas. This is consistent with the notion that each party takes and disposes of its entitlement in natural gas individually and independently. The purpose of this provision would be to prevent an undertaking party from pursuing an overtaking party in contract or in the tort of conversion in order to recover its undertaken natural gas; the undertaking party’s remedies would be limited to compelling the operator to make available the appropriate volume of make-up gas in accordance with the terms of the natural gas balancing agreement.
Natural Gas Delivery Point
The likelihood is that the relevant hydrocarbon reservoir is capable of producing economic streams of crude oil or condensate as well as natural gas. the parties will have the choice of either:
- Separating and processing each such stream as part of production operations upstream of the point at which those streams are lifted by the parties (‘the delivery point(s)’); or
- Lifting such hydrocarbons in a commingled stream, leaving it to the lifting parties to process the stream to marketable specifications or sell it in its raw form.
If the first option is chosen, each such distinct grade and/or type of hydrocarbons must have its own dedicated delivery point. Natural gas is no exception; save in some cases, particularly small reservoirs, where the parties may elect to sell unprocessed raw natural gas, often containing condensates in the gas phase.
As mentioned above in relation to the disposition of crude oil, the contract is likely to define the delivery point, because the Guyanese government will want to understand how its share of production or royalty oil is to be measured and delivered into its custody and ownership. The allocation of profit hydrocarbons to the Guyanese government must take place at the same delivery point as the allocation to the oil companies, and logically the Guyana government and oil companies should rely upon the same procedures for measuring quality and quantity of production.
That said, for good safety and operational reasons, natural gas measurement facilities are rarely sited precisely at the natural gas delivery point. Often, natural gas will be delivered into a gas transmission network owned by the state or private operator, and the delivery point is likely to be located at the battery limit between the joint venture’s facilities and the transmission system to which they tie in. The measurement facilities will necessarily be located either inside the joint venture facilities or downstream of the delivery point and within the transmission system, and all interested parties, the state, the joint venture parties, any natural gas purchaser and the operator of the transmission system will need to agree to deem the measurement results obtained by the measurement facilities to apply at the delivery point at some distance away. For this technical reason, the parties ‘may otherwise agree’ not to measure the natural gas precisely at the delivery point (Fowler 2018).
Balancing by Gross Calorific Value
The parties have the option of measuring their entitlements and the actual taking of natural gas by volume (provided this is adjusted to standard units of pressure and temperature) or by gross calorific value, being a measure of its energy potential. Natural gas quality may change during the life of the reservoir, and the parties may be concerned that any undertaking in one period may be compensated with natural gas of a lower calorific value in a later period. Since calorific value drives price, the undertaking party may incur an economic loss as a result. The parties need to decide whether this precaution is necessary; their natural gas sales agreements may measure deliveries by volume. Further, the natural gas balancing agreement may provide that any undertaking is compensated within a short period of time with the corresponding overtaking, with the result that any change in gross calorific value is likely to be insignificant. Lastly, it may be the case that the parties are required by local gas market regulations to process natural gas to a tight specification for gas sales yielding a fairly narrow range of potential calorific values, in which case using calorific value may be unnecessary.
The parties should calculate ‘overproduction’ or ‘underproduction’ by comparing the gross calorific value of their actual take with their participating interest share of production for a particular period. Logically, this is not correct. Its ‘overproduction’ or ‘underproduction’ should be assessed against its entitlement in that period because entitlement takes into account that party’s history of natural gas taking, as well as the other parties’ history of natural gas taking, both of which affect the amount of natural gas that party should take in the relevant period in order to reach, or stay in, balance.