Assuming that the joint venture will have limited facilities for the reinjection or storage of natural gas, the ability of the parties to take their natural gas entitlement directly affects the ability of the operator to maintain expected levels of upstream natural gas, and (in the case of associated gas) crude oil production. Most likely, the operator will also manage the joint venture’s interface with the operator of the regional downstream natural gas distribution system and will need to coordinate upstream production with the availability of downstream transmission capacity on an hour by hour basis.
This provision is apparently uncontroversial but should be treated with care. In the case of crude oil, the underlying expectation of the disposition of crude oil is that the parties will dispose of crude oil by marine tanker, each making their own individual and confidential arrangements for its marketing. The operator needs to know a little more than the arrival dates of the relevant tanker and sufficient information to be satisfied that the tanker will be safe and clean for loading.
In the case of natural gas, unless the parties have elected to sell the natural gas jointly as envisaged by the disposition of natural gas, they lift their entitlements to natural gas as competitors.
Furthermore, natural gas delivered into regional pipeline distribution networks must necessarily be marketed on a regional basis, at prices fixed by that regional market. That regionality means that any coordination between the parties in terms of their gas sales strategy, even inadvertent sharing of pricing information, may be treated as evidence of unlawful anti-competitive behaviour by the local regulatory authorities.
Sharing such information with the operator, albeit innocently for the purpose of allowing the operator to manage deliveries of natural gas at the delivery point, may be interpreted as indicative of further marketing collaboration between the parties. If the parties are not minded to sell jointly as contemplated by these provisions, they must be seen to compete; for this reason, the balancing agreement should clarify precisely what information the operator needs, and what information should not be provided for this reason.
In practice, the information the operator requires may be limited to the information it needs to nominate capacity in the downstream natural gas transmission system on behalf of the parties. It will be easier to justify the provision of information to the operator in the context of the rules and practices of that transmission system.
Natural Gas Nominations
Particularly where each party is responsible for selling or disposing of its natural gas entitlement, there will also need to be a flow of information between each such party and the operator, so that the party can nominate its or its buyer’s requested natural gas volumes, and the operator can communicate its estimates of available natural gas production in response. Since each party may sell its natural gas entitlement on its own terms, it is reasonable that each party must also take the risk that the operator’s estimates may be significantly different from actual production.
As discussed previously, the provisions of disposition of natural gas have immediate parallels with the provision of disposition of crude oil in relation to crude oil; each article requires the parties to make regular periodic nominations to the operator of the amount of crude oil or natural gas they wish to lift. However, with crude oil disposition, each party is expected to lift its entire entitlement of crude oil, with the result that the nomination may not be an accurate reflection of its ability to lift. Nonetheless, there can be conditions that do not require the parties to lift their entire entitlement of natural gas. This is surprising in the context of associated gas where any failure to lift or reduce lifting will have an immediate impact on the operator’s ability to maintain production levels, potentially reducing the production of crude oil and other hydrocarbons (Fowler 2018).
Furthermore, the agreement will suggest that the nomination procedure begins with the parties’ nomination of their shares of total available production of natural gas and is followed by the operator’s estimate as to the quantity of natural gas actually available from the reservoir.
If production is to be maximized, particularly in the case where crude oil production depends on reliable offtake of associated natural gas, the sequence should start with the operator’s estimate of natural gas available for taking and should be followed by the parties’ nominations of the natural gas quantities they reasonably expect to lift, without prejudice to their obligations to lift their full entitlement.
As is to be drafted, there should be conditions that are more appropriate for a non-associated gas reservoir where the parties’ disposition arrangements may drive the upstream production strategy, and not the other way round. it is for that reason that the article will reinforce the position that the operator is not liable for the consequences of relying on its estimates when planning and negotiating those disposition arrangements.
Gas Sales Terms
This will set out the terms on which the parties agree to sell natural gas jointly, though nothing prevents them from adjusting and expanding those terms in the agreement governing multi-party gas sales, or in the specific gas sales agreements, which will require their unanimous consent. In one sense, this clause is unnecessary because the parties are unlikely to enter into any multiparty gas sales agreement without each party’s full consent. Indeed, it may be better for the parties not to address gas sales terms in their multiparty agreement so that the multiparty agreement does not have to be amended in order to remain consistent with the gas sales terms as they emerge in negotiation with the buyer or buyers.
However, it is likely that the multiparty agreement will necessarily bind the parties to negotiate together in good faith, and not to try to negotiate individual arrangements in the market simultaneously. If so, some of the Parties may wish to limit the mandate for the multiparty negotiations so that they are free to walk away from the multiparty negotiations and secure their individual terms if the negotiation mandate set out in the multiparty agreement is not met. Again, competition law advice should be sought before agreeing on such conditions to multiparty negotiations.