Current Gas Marketing Royalty Issues—Industry Perspective

The last half of the 1980's and the first two years of the 1990's have brought about profound changes in the way producers market their gas. All of the changes, in one way or another, result from sagging demand and shrinking markets coupled with changes made to the regulatory apparatus. Falling demand led to the creation of huge take-or-pay obligations on the part of many pipeline companies, triggered the exercising of numerous market-out clauses and, in some cases, outright abrogation of contracts. At the same time that some gas was locked into contractual rates that were considerably above market, other gas was locked into below market pricing by virtue of regulations stemming from the Natural Gas Policy Act and predecessor decisions and rulings.

FERC Order 436, issued in 1985, permitted interstate pipelines to become open access transporters of gas. This meant producers could ship gas to distant customers, and their market was no longer confined to a few pipeline purchasers. In 1986, FERC issued Order 451 which permitted producers and pipeline purchasers to enter into “good faith negotiations” to increase the price received for certain old low priced gas. Typically an attempt was made by the pipeline purchaser to seek agreement from the producer to simultaneously drop the price of high priced gas. If the two parties could not agree on a price, the gas could be “aban