During gas gathering and transporting activities, producers, midstream operators and their attorneys seek contractual agreements to define the best outcomes for all parties. Typically, producers seek optimal transportation systems, at a reasonable cost, for their increasingly high levels of gas production that result from the surge in unconventional hydrocarbon-play developments and the new technologies that make them work.

Meanwhile, midstream operators seek to increase their systems, and profits, by serving the producer's growing needs. In fact, during this decade, billions of dollars will be spent on midstream infrastructure, and operators must ensure that they are compensated for building, maintaining and managing the systems.

Upfront careful and efficient planning by both producers and midstream operators is crucial. For executives, gathering and transportation agreements are the cornerstone of the whole process, because they ensure that the producer and midstream operator are both aware of the risks and interests at stake. Also, the agreements detail the composition of the gas that producers send to be processed, and will determine what kind of profit they can expect.

Gathering agreements

Gathering and transportation agreements are the critical link between the dramatically different upstream and downstream segments, says Anne Weber, senior partner at the Weber Law Firm LLC based in Denver, Colorado. Weber works with a multitude of clients to formulate well-planned midstream contracts.

"For a gatherer to be successful, it must correctly identify all the commercial risks and liabilities posed both by its upstream connections and downstream connections and contracts, and either not get stuck with issues and risks, or make sure it's adequately compensated. In every contract you will encounter, people are trying to shift the risk," says Weber.

"The midstream sector is a bit like musical chairs, in that you don't want to be stuck with the risk. This is sometimes easier said than done. Gathering is a margin business. Often the profit margin is tight and there's no room for error," she says.

Gatherer's revenues, typically derived from fee-for-service contracts, tend to be "literally, cents on the dollar," she says, describing the aspect as both a strength and weakness. The weakness is that there aren't big price differentials from fee-for-service contracts. The strength is less commodity risk, which is why gathering agreements have been so attractive to pipeline master limited partnerships (MLPs).

"The producer should assume that it and other producers in the same gathering area are paying for all of the gatherer's facilities and operating costs over some period of time. Even though the producer is paying, the gatherer is going to own and operate these facilities," explains Weber. "Often, I find that gatherers are fairly transparent with sharing their costs and their profit information with producers."

According to the type of contract, a producer might pay in various ways, including paying everything up front or a significant part up front as a cash payment or as a contribution to the gatherer's construction costs.

"I find the most common agreements today are structured as throughput agreements and indemnity agreements. Basically, that's where the producer is committing to deliver a certain volume of gas over a certain period of time. If they don't make those volumes, and those volumes are set to cover the gatherer's cost of putting in the infrastructure, then they have to settle up or there's a penalty," says Weber. Settling up can be on a yearly basis or over a longer period, such as three to five years, depending on the contract.

These agreements are relevant from the wellhead to the point of processing or interconnection with the downstream pipeline.

The first key element of a contract is the producer's type of commitment. It can vary from actual dedication, such as real property, or a land covenant, or a volume commitment. The dedication approach is the most traditional approach, but it's being used less often, notes Weber. "I personally discourage this type of approach, except in certain situations where one party or the other absolutely has to have a long-term commitment in order to make the economics work."

A major problem with the dedication approach is because, over time, producers might be obliged to over pay for service based on outdated pricing provisions. In such case, the producer understandably wants to exit the contract.

Another dedication-contract problem can arise during corporate acquisition-and-divestiture activity, where "dueling areas of interests or dueling dedications" might subject a producer to two different types of dedication allocations, she says.

Today, more commonly, energy lawyers are seeing quantity commitments, meaning a contract for all of a specific producer's gas. In this type of contract, there is no statement of specific quantity. Unless the contract specifies a quantity, the contract is interpreted that the gatherer reasonably uses commercial efforts to gather and move all the gas. Common volume-commitment agreements include throughput commitments or minimum-daily-quantity types.

Gas composition

Gas composition and quality vary dramatically, sometimes throughout a single production area. "In one small area, you can have thermally generated gas and biogenetically generated gas. They are really quite different in terms of composition," says Weber.

Yet, the gathering company has to be on top of the gas quality. Gas components such as hydrogen sulfide, water and bacteria can be corrosive or otherwise destructive to the gatherer's equipment. For example, many gathering contracts contain a provision for bactericide to kill bacteria before produced hydrocarbons enter a gathering line. Contracts are written to ensure that the gatherers are protected from that risk.

"Chiefly, the gatherer wants to avoid penalties associated with downstream pipelines if there's no processing route between two segments. Downstream interstate pipeline operators may impose penalties and will push them back upstream," says Weber.

"The gatherer will always want to maximize profit, so their agreements depend on gas quality specs. They will charge fees to monitor any given issue, because they see it as an opportunity to perform another field service to improve the gas quality before it gets to the processing stage."

Each process depends on the quality of the production from a particular well and each gathering and transportation agreement should acknowledge the risks and considerations involved so service fees can be calculated correctly.

Standardized measurements

Measurement is a key gathering function, and most gathering companies have a large and very sophisticated measurement staff on board, she says. "Measurement of the product which traverses the pipeline is one of the principle activities that must be agreed upon by all parties involved. When measuring transportation allotments, one must consider metering in the process."

As result of measurement technology improvements and experiences with measurement litigation, the measurement standards have improved vastly. Says Weber, "A few years ago, I was surprised to find cases where there was no standardized measurement for key concepts like how to measure water in gas. That can lead to some different interpretations and operational issues."

Today, the gas industry has spent time and effort to move toward better measurement and measurement standardization to be used in contracts. Such efforts have been led by led by various organizations, such as the American Petroleum Institute and the Gas Processor's Association.