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These changes in how gas can be purchased have brought changes in how contracts are written between the supplier and the consumer. If the buyer is responsible for its own transportation, it would mean having to contract for this transportation as well as contracting for the gas supply. It also opens up new considerations. The buyer wants to make sure they are well protected in getting the gas they pay for from the vendor and if the case is such, the transporter as well. In addition, the buyer must be concerned he is protected from any liability that might occur because of damage caused by the gas in the sale and delivery to the user. Contracts are legal documents covering these elements and need to be clear and accurate. After something happens—such as being charged for gas not received or for someone hurt in an accident involving the gas in question—is not the time to start looking at the contract. Who is responsible, or what limits there are for the difference between paying for a volume of gas and receiving a smaller amount, and any other conditions and situations differing from what was expected should be stated in the contract. Recourse and responsibilities should be spelled out in the contract.

With contracts being legal documents, the expense and time to insure proper legal resources are used in negotiating and drawing up the contracts for buying and delivering natural gas are well worth the effort. Even in very short times of delivery or for very small quantities of gas to be purchased and delivered, contracts must accurately and legally cover protection of all parties involved in the transaction. This is where an "ounce of prevention is worth a pound of cure!"

A contract or contracts between the two or more parties will spell out the details of the transactions needed to purchase and deliver the gas from the source to the consumer. Many of today's gas deals are done over the telephone based upon agreed-to basic terms. Some are being done through computer and cyberspace. Whenever there is an on going relationship of supplying natural gas over a period of time regardless of the length of the time of delivery, there will be a contract or contracts covering buying and selling conditions including transportation, delivery, metering, payment, ownership, etc. There might be a contract to supply natural gas for as little as an hour or as long as a year or two and up to as long as 10 to 20 years. The long-term contracts of the controlled period when the transporting company marketed gas are no longer in use. Typically today, regard less of the term of the contract, provisions are included for price adjustments and for security of supply. Also, typically today, contracts longer than six months or a year are considered long-term contracts. Contracts up to three to four years can be for a fixed price or a market based price depending on the whims of the buyer and seller. Most fixed priced contracts today will be based on the financial market for futures contracts to protect the buyer and seller from catastrophe due to sudden market peaks where the seller would be obligated to supply gas at a fixed price when prices are rising for the commodity. Further, the contract will protect the seller from the buyer ending the contract prematurely. Likewise, the buyer will want protection should prices drop significantly to reopen the pricing provisions.

A contract is an allocation of risks between the buyer and seller. It is the same between the party buying the transportation and the transporter. Every business deal involves risks and the contract sets the responsibilities of the parties so that there should be little argument if something does not go according to plan. The seller is taking the risk of supplying gas and the risk of getting its payment for the gas and services supplied. The buyer is taking the risk of having a reliable, secure source of gas for its business needs. These are the major risks each party is taking and the contract is a written document to insure both are protected as much as possible. Contracts are written documents to help in allocating these risks. But, even the best contract, written by the best lawyers and negotiators, is really, no better than the people offering the commodity and services and the people buying the services and commodity. No contract will help if the party involved is not honorable, trustworthy and capable of doing what it claims it can do in the contract. Further, signing a contract and then planning on going to court to enforce it is a waste of good time and assets of either party. Contracts are like locks on doors—they are for the benefit of good people to insure no one gets confused or forgets the details of the arrangement. Contracts do little to protect from dishonest or untrustworthy business associates. Of course, even with good contracts and good intentions of the parties, things go wrong and contract disputes arise. These disputes can involve large loses of management time and company assets. Well-written and negotiated contracts can keep the disputes to a minimum in happening and to minimum losses when the unexpected does occur.

Since one or more contracts may be needed to purchase and deliver natural gas, the buyer should be careful in his actions. Contracts for the purchase of natural gas will usually have the following major areas of consideration as listed below. Many of these will apply to the transportation contracts as well unless the purchase of the gas includes the transportation. Since today, sellers and buyers will vary considerably in their position in the respective industries, the contract needs to be tailored specifically between the two or more parties involved in the transactions. A contract for buying natural gas from a local distribution company will be different in many aspects from the contract between a marketing company and the buyer. The local distribution company is a regulated entity and many elements that will be in a contract are part of the regulatory aspect. Most of the specific items the utility will have to abide by are given in its tariffs, which are filed with local or state regulatory agencies. Some of the major elements of the gas purchase contracts are outlined in the following:

1. Purpose & Scope of the Agreement—What is to be accomplished by the contract. Who will be supplying gas, how will it be transported, and who will receive the gas. Additional comments as to the potential use, whether a sole supplier, etc. might also be included in this section.

2. Definitions—Lists the standard and special terms used in the contract. Especially important in natural gas contracts because of the uniqueness of the commodity, the industry ways of doing business, and the specific parameters of the operations the gas is being purchased for by this contract.

3. Term of the Agreement—A statement giving how long the agreement will be in force and what conditions will terminate the agreement. Some contracts will include information on methods and options of extending the contract past the initial terms of the agreement.

4. Quantity—Here, the details of the total quantity of natural gas to be sold and delivered by the seller and received by the buyer will be stated. Information on the daily contract quantity (DCQ) or even hourly contract quantity will be stated. Any specific deviations from the regular amount such as swing quantities needed during high production or other causes are listed here. Penalties the seller is willing to accept for the buyer's failure to take the quantity of gas set in the contract will be listed in this section. Also, the converse, penalties the buyer is willing to accept for the seller's nonperformance according to the contract will be stated in this section. If there is any take-or-pay language, this is the section for it. Take-or-pay is an agreement for the buyer to pay for gas if contracted but not taken. The Buyer usually has a period to make up the deficiency. The section will also state whether the gas is being sold on a firm basis with the buyer and seller obligated as stated to perform or if the gas is being made available or will be taken on a "best efforts" basis. Very important in this section could be the ways the buyer "nominates" takes for certain periods. The section will include means for balancing the account and give additional penalties for under- or over-quantities of gas taken by the Buyer. Other subjects that play a role in the quantity of gas to be supplied such as well or reserve measurements if buying directly from a producer or other supply considerations if buying from a marketer can be in this section.

5. Price—Price to be paid for the natural gas to be delivered by this contract as well as any statements regarding price escalators and/or means to renegotiate the price will be stated in this section. Omissions of statements to this effect can be construed as a statement of the contract so care must be exercised on what is said and what is left out. Any language needed for agreement on price indexing or other means of adjusting the price to current market conditions will be included. The writing should include provisions for both price increases as well as decreases if this is the desired purpose of the statements regarding changes for market or other conditions. The Price Section will cover any additional expenses or costs the buyer is willing to undertake in addition to the direct cost of the gas. If the contract is with the producer or an interest owner in a gas well, the section will state who is responsible for any gathering, treating, or processing costs. Again, for a contract with the seller being a producer, provisions will be in this section for who has responsibility for severance and other taxes, royalties or other charges the producer might be liable for payment. Pricing units most commonly used today will be energy units such as British thermal units (Btu). The dollar value per thousand Btu is typical such as gas at $0.003/MBtu. Since a typical volume measurement of natural gas is a thousand cubic feet (Mcf) and typical pipeline quality gas of this volume would have about a million Btu in energy units, the typical unit for gas sales is a million Btu or MMBtu. The above example would be $ 3.00/ MMBtu. The Pricing Section will also include language in today's contracts protecting both the buyer and the seller from the vagaries of the natural gas markets today. While these in effect reduce the coverage of the contract and change some of the allocations of risks set by the contract, often both parties are willing to have a contract with legal means of changing the pricing conditions of the contract. The long-term, fixed price contracts went out with decontrol. There are still fixed price contracts but, the seller will protect its position by going to the financial market and buying futures to protect his position of supplying long-term, fixed price natural gas. Since the seller is taking steps to insure supplying the gas at a fixed price by buying futures, the seller will protect his actions by putting clauses in the contract to protect this position should the buyer fail to take the gas as contracted.

6. Transportation—Transportation details as to who has responsibility, the transporter, costs, etc. to deliver the gas to the buyer must be included in the contract. Crucial items are who is responsible for arranging the transportation, who will pay for the transportation, and whether the transportation will be on a firm or interruptible basis. The transportation must cover the full course of bringing the natural gas from the source to the buyer's location including bringing it to the accepted delivery point(s) as stated in the next paragraph. The buyer must insure they are covered in case transportation is unobtainable or ceases after delivery has started. The contract will include any special conditions on either the buyer's or seller's part to take into account any special situations either party could have to interfere with transporting the gas from the source to the delivery point(s). Further, any regulatory matters pertaining to the gas transportation should be referred to in this section and in more detail in the regulatory section discussed further in this chapter. This section should cover who has responsibility for overages and balancing of the account, measurement, disagreements on quantities, and payments of transportation and associated charges.

7. Delivery Point(s)—Since the delivery point or points are different in each situation, the contract needs to state delivery or alternate delivery points in very specific language. This clause can become a very crucial one in times where there is a dispute over quantities of gas sold or received. There is also a slightly different interpretation of this clause in light of the new sales methods where there is a separate contract for the sale of the natural gas and one for the transportation. To the gas buyer, the only real delivery point is when the natural gas crosses the meter and valve where the gas comes directly into the buyer's system. The buyer wants to be responsible only for the gas received in his system. What gas is presumed sold or dispatched at some other location such as where the gas might come off of an interstate pipeline into the pipe of the local pipeline delivering the gas to the consumer is really not the concern of the buyer. This is an argument between the two pipelines or between the pipeline and the seller depending on the contract for transportation between the significant parties. Delivery point is also crucial in assessing responsibility for problems that might arise from the gas in question. An explosion or fire resulting from the improper handling of the gas and the ensuing legal action by one or more party could be influenced by the delivery point as to who had responsibility for the gas at the time and location of the accident. At times, delivery points may need to be changed to meet requirements of either parties and the need to change should be included in this section to insure that changing the locations according to the contract do not in any way negate the contract or the terms in the contract.

8. Measurement & Quality—Methods, conditions, timing, and authority for the measurement of the gas volume and quality are given in this section. Usually, a trade association or other organization's methods and requirements for measurement are called for in this section to insure the proper measurement of the quantity of gas sold or bought and the quality of the gas under the contract. Remedies or alternatives should be included in this section for those cases where the gas fails to meet the quality requirements of the contract whether on a short-time, unexpected rare or single occurrence or a continuing failure to meet the specifications.

9. Billing—Terms for the billing, who is responsible for payment, manner and methods of payment, etc. are included in this section.

10. Force Majeure—This the clause in the contract to protect both parties affected by a totally unforeseeable occurrence which is beyond the control of the party seeking protection from the responsibilities of the contract. Many times, this is referred to as an "act of God" and includes severe weather, acts of war or insurrection, strikes, etc.

11. Warranty of Title—The clause guarantees the seller has title to the gas and can sell it. Included are allowances for the buyer to recover damages if there is a failure of title should another party make claim to ownership of the gas.

12. Regulatory—All necessary permits, licenses, etc. must be obtained according to FERC regulations and any state or local authorities having jurisdiction over the selling and transportation of the natural gas. The party or parties having the responsibility for obtaining these and payments required should be fully covered.

13. Assignments—Specifications for the transfer of rights under the contract are covered in this section. This could be an important item in light of the various changes occurring in the gas industry today. The buyer should insure coverage includes changes that might impact gas transportation as well as the commodity if the seller was responsible for transportation as well as for the natural gas.

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