Legal Definitions - makeup gas

Makeup gas refers to natural gas that a buyer has already paid for, typically under a long-term supply agreement, but has not yet physically received. The delivery of this gas is deferred to a later date, often in subsequent years.

This situation commonly arises in "take-or-pay" contracts, where a buyer commits to purchasing a minimum volume of gas over a specific period. If the buyer doesn't take the full contracted volume during that period, they still have to pay for it. The gas they paid for but didn't take then becomes "makeup gas," which they are entitled to receive later without additional payment.

Here are some examples illustrating makeup gas:

• Example 1: Utility Company Demand Fluctuation

  A regional power utility signs a five-year "take-or-pay" contract with a natural gas producer, agreeing to purchase a minimum of 100 million cubic feet (MMcf) of gas per year. In the first year, due to an unusually mild winter and increased efficiency in their power plants, the utility only needs and takes 80 MMcf of gas. However, under the contract, they still pay for the full 100 MMcf. The remaining 20 MMcf that was paid for but not delivered becomes makeup gas. The utility can then request delivery of this 20 MMcf in the following years, perhaps during a colder winter or when demand for electricity increases, without incurring new charges for that specific volume.

• Example 2: Industrial Plant Expansion

  An industrial manufacturing plant enters a contract to secure a steady supply of natural gas for its operations, committing to a minimum annual purchase. In the initial year, the plant is undergoing an expansion and doesn't utilize the full contracted amount of gas, taking only 70% of the agreed volume. Despite this, they fulfill their contractual obligation by paying for the entire minimum volume. The 30% of gas they paid for but didn't consume immediately is now considered makeup gas. They plan to take delivery of this banked gas in the next year once their expansion is complete and their energy needs significantly increase, ensuring they don't lose the value of their initial payment.

• Example 3: Seasonal Agricultural Processing

  A large food processing company that operates seasonally, primarily in the fall, signs a long-term contract for natural gas to fuel its operations. The contract stipulates a minimum annual volume that must be paid for. In a particular year, due to a smaller harvest, the processing plant operates for fewer weeks than anticipated and thus consumes less gas than the minimum volume it committed to. The company still pays for the full contracted amount. The difference between the gas paid for and the gas actually consumed during the processing season becomes makeup gas. The company can then schedule to receive this excess volume during its next operational season or for other energy needs, leveraging its prior payment.