Gas balancing agreements

The issue of gas imbalances involves laws dealing with rights in real property,
personal property rights and contract law. Under the laws of many states in the United
States, if there are multiple lessees under a lease, each of the lessees is typically classified
as a co-tenant, with each co-tenant owning and having the right to take and dispose of
its percentage share of the natural gas as it is produced from the lease. But co-tenancy
law alone provides an unsatisfactory basis upon which to proceed without taking into
account oil and gas industry requirements. As a result, the industry developed forms of
joint operating agreements which, together with industry experience, have further
defined how each producer shares in the common production stream and, if necessary,
accounts to its co-producers for any takes it may make in excess of its share.2
While the producers of a lease, unit or well share in a cost project when they
agree to operate under a joint operating agreement, at least in the United States they
do not often elect to share in a revenue project through, for example, the joint
marketing of the full natural gas stream as a group. Instead, each producer is entitled
to receive in kind its share of production when produced, as its percentage share is
recorded on Exhibit A to the typical joint operating agreement. As explained later in
this chapter, in addition to the benefits each producer receives from being able to
market its share of gas for its own account, under United States law joint marketing
has historically triggered undesirable federal tax impacts which further encouraged
individual, rather than joint, marketing of production. It also implicates antitrust
concerns if not properly structured. The result is that, with exceptions, industry
practice has been for each producer to own its share of gas production as and when
produced and exercise the individual right to market as it sees fit. Rather than jointly
market at the producer level, a more common practice has been for a larger producer,
through its marketing affiliate, to purchase production from other co-producers.
Such an arrangement may or may not mitigate wellhead imbalances, depending
upon the terms and provisions of the gas purchase arrangement, how long that
arrangement remains in place, and how many co-producers from the common
source are selling to the marketer under the same or similar terms.
Professor Pat Martin has observed that the production imbalance problem arises
from the fact that most state laws (and especially those for pooling or unitising
multiple leases into one tract for drilling purposes), coupled with the provisions of
the joint operating agreements developed over time by the industry, do not follow
either a true co-tenancy or capture philosophy.3 In fact, they establish a hybrid
approach. In a true co-tenancy, each co-tenant has an undivided ownership right in

2 The producers share of production depends upon the facts, but ultimately is expressed as a fractional or
percentage share as shown on an exhibit to the joint operating agreement. For example, the 1989 AAPL
Form 610 Model Form Operating Agreement records that information for all parties on Exhibit A and
Article III.B declares that:
B. Interests of Parties in Costs and Production:
Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be
borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by
the parties as their interests are set forth in Exhibit A. In the same manner, the parties shall also own all
production of Oil and Gas from the Contract Area subject, however, to the payment of royalties and other burdens
on production as described hereafter.
3 Patrick H Martin, The Gas Balancing Agreement: What, When, Why, and How, 36 Rocky Mtn. Min. L. Inst.
13-7 to 13-10 (1990).

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