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NATURAL GAS TRANSPORTATION COMMITMENTS

NATURAL GAS TRANSPORTATION COMMITMENTS. September 20-21, 2007 (Houston) September 27-28, 2007 (Dallas) November 1-2, 2007 (Austin) James E. Goddard Locke Liddell & Sapp PLLC 600 Travis Street, Suite 3400 Houston, Texas 77002-3095 713.226.1184 jgoddard@lockeliddell.com.

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NATURAL GAS TRANSPORTATION COMMITMENTS

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  1. NATURAL GAS TRANSPORTATION COMMITMENTS September 20-21, 2007 (Houston) September 27-28, 2007 (Dallas) November 1-2, 2007 (Austin) James E. Goddard Locke Liddell & Sapp PLLC 600 Travis Street, Suite 3400 Houston, Texas 77002-3095 713.226.1184 jgoddard@lockeliddell.com

  2. Available Options for Transportation • Gathering Systems • Usually connected to multiple wells • Operate at low pressures (typically less than 300 psi) • Generally do not transport over long distances • Usually deliver gas to processing plants Source: www.texasenvironmentalenergygroup.com

  3. Available Options for Transportation • Transmission Pipelines • Larger diameter and higher pressures • Typically transport longer distances • Interstate or intrastate pipelines Source: www.vnf.com

  4. Available Options for Transportation • Alternatives to pipeline transportation • U.S – Compressed gas truck transportation • Asia - LNG truck transportation Source: www.tuckergas.com Source: www.awpe.co.jp Source: www.aceconservator.com

  5. Available Options for Transportation • Alternatives to pipeline transportation (cont.) Source: news.nationalgeographic.com

  6. Types of Transportation Service • Interstate Pipelines • There are over 213,000 miles of interstate pipelines in the lower 48 states (enough to circle the globe 8 times) • As of September 13, 2007, there were 205 interstate pipelines registered with FERC • Over 40 trillion cubic feet of gas was transported through interstate pipelines in 2005

  7. Interstate Pipelines Source: www.eia.doe.gov

  8. Types of Transportation Service • Texas Intrastate Pipelines • Texas has more intrastate pipeline miles (over 43,000 miles) than any other state • As of the end of 2005, there were 102 intrastate pipelines in Texas • During 2005, more than 9.2 trillion cubic feet of gas was transported on Texas intrastate pipelines

  9. Texas Intrastate Pipelines Source: www.eia.doe.gov

  10. Locating Nearby Pipelines • Pipeline Markers Source: www.epplp.com Source: www.pngts.com

  11. Locating Nearby Pipelines • Railroad Commission GIS Map Viewer (http://gis2.rrc.state.tx.us/public/)

  12. RRC GIS Map Viewer

  13. RRC GIS Map Viewer

  14. RRC GIS Map Viewer • Right-click on the “Map Tools” box for a drop-down menu • Select “Identify Pipelines” in the drop-down menu • Place cursor over a pipeline and right-click

  15. RRC GIS Map Viewer

  16. Types of Transportation Service • Firm Service • High Priority of Service – No Interruptions unless: • Force Majeure • Other Contractually-Agreed Reasons • Required by Governmental Regulations • Fees • Reservation Fee for Capacity Reservation • Volumetric Fee • Interstate Capacity May be Released

  17. Types of Transportation Service • Interruptible Service • Lowest Priority of Service, with No Guarantee of Delivery • No Reservation Fees on Interstate Pipelines or Intrastate Pipelines Transporting Pursuant to Section 311 of the Natural Gas Act • Interruptible Shippers Generally Have Back-Up Gas Sources

  18. Types of Transportation Service • No-Notice Service • Highest Premium Service • Firm Service on Steroids • Gas Deliveries Made on Demand, up to the Contractual Maximums • Combination of Firm Service and Storage Service • Shippers are Generally Local Distribution Companies

  19. Types of Transportation Service • Park and Loan Service • Essentially Short-Term Storage Service • Parking = Short-Term Loan of Gas to the Pipeline • Loan = Short-Term Loan of Gasfromthe Pipeline • Often Used to Mitigate Imbalances on the Pipeline

  20. Transportation Agreements • Interstate Pipelines • Terms and Conditions of Service Governed by Tariff • Tariffs Thoroughly Analyzed by FERC Prior to Commencement of Service • Interested Parties Can Protest Specific Provisions prior to Acceptance by FERC • Terms and Conditions Generally Non-Negotiable

  21. Transportation Agreements • Texas Intrastate Pipelines • Agreements Independently Negotiated • RRC Does Not Approve General Terms and Conditions • RRC Tariffs Include Very Limited Information • Company Name • RRC Company ID • Tariff Code • RRC Tariff No. • Status • Customer Name • Initial Service Date • Contract Date • Inactive Date • Received Date • Amendment Date • Term of Contract Date • Contract Comment • Service Description • New? • RRC Docket No. • Amendment (Explain) • Other (Explain)

  22. Can Pipelines Discriminate Against Shippers? • FERC Order No. 497 • Pipelines Must Treat All Shippers on a Non-Discriminatory Basis • Pipelines May Not Give Preferential Treatment to Affiliates

  23. Can Pipelines Discriminate Against Shippers? • To Implement Non-Discrimination Policies, FERC Requires Pipelines to: • Strictly Enforce Tariff Provisions that Do Not Permit the Use of Discretion • Apply Uniformly All Tariff Provisions that Permit the Use of Discretion • Log Detailing Exercise of Discretion Is Required • Log Must Be Posted on the Pipeline’s Website • Process All Similar Requests for Service in the Same Manner • Not Give Preference on Price or Services to Marketing or Energy Affiliates

  24. Can Pipelines Discriminate Against Shippers? • RRC Standards of Conduct • Require Intrastate Pipelines to: • Treat Similarly-Situated Shippers the Same • Not Give Preference over Similarly-Situated Shippers • Process Requests for Transportation from all Similarly-Situated Shippers in the Same Manner • Maintain Separate Entries in Its Books and Records for Transportation Services Provided to Affiliates

  25. Can Pipelines Discriminate Against Shippers? • What Are “Similarly-Situated” Shippers? • RRC’s Laundry-List: • Service Requirements • Facility Locations • Receipt and Delivery Points • Length of Haul • Quality of Service • Quantity • Swing Requirements • Creditworthiness • Gas Quality • Pressures • Service Duration • Connection Issues • Other Conditions at the Time of Agreement or Negotiation

  26. Can Pipelines Discriminate Against Shippers? • RRC Curtailment Rules • Typically Apply to Sales Transactions • Also Apply to Transportation • Default Priorities (In Descending Order) • Human-Use Needs Customers • Small Industrial Customers, Commercial Customers, and Plant Protection Volumes • Large Industrial Customers with No Alternate Fuel Capability • Large Users of Gas with Alternate Fuel Capability • Interruptible Sales

  27. Can Pipelines Discriminate Against Shippers? • Curtailment Priorities of Interstate Pipelines • Established in Individual Tariffs • Examples: • First-Come/First-Served • Pro-Rata Curtailment • Highest Rate Curtailed Last • Highest Net-Present Value to Pipeline Curtailed Last

  28. When Can a Pipeline Refuse To Transport? • Force Majeure • Force Majeure Events Will Excuse a Pipeline’s Transportation Obligations • Under Texas Law: • Force Majeure Events Must Be Specified in the Contract • Impossibility Is Not Required • No Duty To Mitigate, unless Expressly Stated Source: www.fnnc.org

  29. When Can a Pipeline Refuse To Transport? • Contractual Default by Shipper • Failure to Deliver Gas • If Gas Is Not Delivered to the Pipeline, the Pipeline Will Have No Obligation To Transport • Not Just Belts and Suspenders • Protects the Pipeline From Gaming

  30. When Can a Pipeline Refuse To Transport? • Contractual Default by Shipper • Delivery of Non-Conforming Gas • Pipelines Are Not Required To Transport Gas that Does Not Meet Quality Specifications • Protects Integrity of the Pipeline System • Assures Uniformity of Quality of Gas Delivered from Pipelines • Pipelines May Waive Quality Specifications (but Waivers Must Comply with Pipeline Standards of Conduct)

  31. When Can a Pipeline Refuse To Transport? • Contractual Default by Shipper • Bankruptcy • If a Shipper Files for Bankruptcy, or otherwise Becomes Insolvent, Many Times a Pipeline’s Obligation to Transport Will be Extinguished • Subject to Applicable Bankruptcy Laws

  32. When Can a Pipeline Refuse To Transport? • Contractual Default by Shipper • Failure to Meet Credit Requirements • Of Particular Importance after Enron • If the Shipper Cannot Meet Credit Requirements, Adequate Assurance of Performance May Be Required • Pre-Payment (FERC generally will allow a maximum prepayment of reservation fees for three months) • Letter of Credit • Parent Guarantee

  33. Confidentiality Provisions • On or after September 1, 2007, no confidentiality provisions can be required in sales, transportation, or gathering contracts with producers. • Any such confidentiality provisions are unenforceable. Texas Natural Resources Code Section 81.060.

  34. Conclusion • A Firm Transportation Agreement Does Not Guarantee Deliveries of Gas under All Circumstances • Thoroughly Read the Agreement and Any Tariff Provisions that Apply Source: www.energyseer.com

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