Gas Balancing

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Gas Balancing

 

For large acreage leases in a gas play where the lessor may take its gas in kind, the lessor may need gas balancing clauses in the lease.  One gas balancing clause that oil companies have accepted in Alabama is:

 

Balancing; Storage and Balancing Agreement. If Lessor elects to take its royalty gas in kind and to dispose of such gas separately, Lessee agrees to cooperate in an effort to maintain, as nearly as possible, a balance between Lessor’s share of gas produced and the gas delivered to Lessor. If (i) Lessor does not have a market for its royalty gas at the time Lessee commences production of gas, or (ii) after both Lessor and Lessee are taking gas their respective market demands differ from their respective ownership, Lessee agrees to enter into a Storage and Balancing Agreement which will provide that deliveries of gas in excess of or less than Lessor’s and Lessee’s proportionate ownership of gas production shall be adjusted out of future production, taking into consideration the needs of Lessor and Lessee and the terms and provisions of the sales contracts involved.

 

The storage and Balancing Agreement will further provide that the party which has taken excess gas will be required to reduce the volume of gas it is entitled to take in order to permit the other party to get in balance as promptly as may reasonably be accomplished; provided, that the party which has taken excess gas shall not be required to reduce its take to less than fifty percent (50%) of that party’s interest in current production. If an imbalance exists at the time production ceases, such imbalance shall be adjusted in cash based on the amount received by the party which has taken gas in excess of its proportionate share of production. In the event the party taking gas in excess of its proportionate share of production consumes the gas in its own operations or facilities, the imbalance shall be adjusted in cash based on the fair market value of the gas as determined by Section 4.2.2(b)  [gas royalty clause].

Copyright 2011 by Edward G, Hawkins. All rights reserved.