Legal Definitions - gas-balancing agreement

A gas-balancing agreement is a contractual arrangement entered into by multiple parties who jointly own the rights to extract natural gas from a shared well or field. Its primary purpose is to manage and rectify situations where one owner has taken or sold more than their proportional share of the gas production compared to the other owners. Because co-owners often have separate agreements with different buyers, or even if they sell to the same buyer, their individual contracts might have varying terms regarding pricing, delivery schedules, or minimum purchase requirements, it's common for imbalances in gas extraction to occur. This agreement ensures that, over time, each owner receives their equitable portion of the gas production or its monetary equivalent.

• Example 1: Varying Market Demands and Contract Schedules

  Imagine three energy companies, Alpha, Beta, and Gamma, jointly own a natural gas well. Alpha has a long-term contract with a local power plant that requires a steady, high volume of gas immediately. Beta has a contract with an industrial manufacturer that needs gas, but its demand fluctuates seasonally, with lower needs in the current quarter. Gamma, anticipating higher prices in the future, decides to sell less of its share now and store the gas for later. Due to these differing demands and strategies, Alpha ends up taking significantly more gas from the well in the initial months than Beta or Gamma. The gas-balancing agreement among them would outline how Alpha will either allow Beta and Gamma to take a larger share of gas later, or compensate them financially, to ensure that each company ultimately receives its fair share of the well's total production over the life of the agreement.

• Example 2: Pipeline Capacity Limitations

  Consider two independent producers, Northside Energy and Southridge Gas, who co-own a gas well. Northside Energy has access to a pipeline with ample capacity to transport its full share of gas to its buyer. However, the pipeline connected to Southridge Gas's buyer is undergoing maintenance and has reduced capacity for several months. As a result, Northside Energy is able to sell and transport its full proportional share of gas, while Southridge Gas can only take a fraction of its share. The gas-balancing agreement would come into play here. It would specify how Southridge Gas will be allowed to "make up" its underproduction once the pipeline capacity is restored, or how Northside Energy might compensate Southridge Gas for the imbalance, ensuring that both parties ultimately receive their agreed-upon percentage of the well's output.

• Example 3: Strategic Price Hedging

  A partnership between a large investment fund, "Global Energy Partners," and a smaller exploration company, "Frontier Drilling," owns a productive gas well. Global Energy Partners believes natural gas prices are currently low and will rise significantly in the next year, so they decide to "under-lift" (take less than their share) for a period, hoping to sell more when prices are higher. Frontier Drilling, needing immediate cash flow, decides to "over-lift" (take more than their share) and sell as much gas as possible at current market rates. This creates an imbalance where Frontier Drilling has sold more gas than its ownership percentage. The gas-balancing agreement between them would detail the mechanism for resolving this. It might allow Global Energy Partners to take an equivalent excess amount of gas in the future, or it could require Frontier Drilling to make a monetary payment to Global Energy Partners based on the value of the gas over-lifted, thereby ensuring that the economic value of the well's production is fairly distributed according to their ownership stakes.