This article will focus on the significance of producer contracts (other than gas sales contracts and gas transportation contracts) to the producer's gas marketing success. Most of these traditional exploration and production contracts contain provisions that affect the price and supply of the producer's gas and therefore, may present gas marketing problems and opportunities.
OIL AND GAS LEASE Marketing-related pro visions
An oil and gas lease may contain a provision allowing the lessor to take its royalty in kind, or the lease may provide an option for the lessor either to accept the royalty based on the proceeds received by the lessee or to take its royalty in kind. Although lease clauses providing for inkind royalty are more common on crude oil, in-kind gas royalty provisions are not uncommon. Also, the lease may give the lessor a call on the production, a right of first refusal on the production, or an option to purchase the production. All of these types of provisions frequently appear in leases where an oil and gas company is the lessor. Clearly, these provisions have a direct bearing on the supply that is available to be marketed by the producerlessee. Thus, the marketing contracts must be drafted to allow the exclusion of lessor's gas if the lessor exercises its rights under any of these lease clauses.
Moreover, the call and option-to-purchase provisions can directly impact the priceof the gas, and the right of first refusal can indirectly determine the price. Price issues rather than supply issues are of concern under the customary gas royalty provision, which requires payment of funds to the lessor. Usually payment is based on the actual proceeds received from the sale of the gas or on the market value of the gas.
Although the "proceeds** gas royalty usually is not Becky McGce b senior nltorney for Sun Exploration and Production of Dallas. Thisarticle was partially presentedatthc Rocky Mountain Mineralhw Foundation's 1988 Special Institute on Gas Marketing.