Appendix — Federal Energy Regulatory Commission v. Shell Oil Co.

APPENDIX

Iu the Syren Court nf the yirtteh ae

OCTOBER TERM, 1978

No. 77-1652

FEDERAL ENERGY REGULATORY COMMISSION,

Petitioner,

—<

SHELL OIL COMPANY, et al.,

Respondents.

No. 77-1654

CONSUMER FEDERATION OF AMERICA,

ENERGY PoLicy TASK FORCE,

Petitioner,

=

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

i

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

PETITIONS FOR A WRIT OF CERTIORARI FILED MAY 19

AND 20, 1978

CERTIORARI GRANTED OCTOBER 2, 1978

GAD iii

ee ”

OO es oe OS

Iu the Supreme Court of the United States

OCTOBER TERM, 1978

No. 77-1652

FEDERAL ENERGY REGULATORY COMMISSION,

Petitioner,

—vV Peel

SHELL OIL COMPANY, et al.,

Respondents.

No. 77-1654

CONSUMER FEDERATION OF AMERICA,

ENERGY POLICY TASK FORCE,

Petitioner,

—

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

TABLE OF CONTENTS

Record Appendix

Item Pagination Pagination

Relevant docket entries ................................ 1

Order No. 539, Promulgating

Statement of Policy, issued

i 147-158 2-14

Record Appendix Record Appendix

Item Pagination Pagination Item Pagination Pagination

Application For Rehearing Motion Of Consumer Federation

And Motion For Reconsideration Of America For Leave To Inter-

filed by Shell Oil Company, vene, filed April 19, 1976 ...............-.-..-..-0--.+- 410-412 284-286

et al., November 12, 1975 ................... 170-267 15-124 ty

Joint Petition For Stay _—. et al., filed April 19, 1976 ........................... 413-425 287-303

by Tenneco Oil Company, et al.,

embe Comments Of Interstate Natural

on Nov BS Oe 310-325 125-143 Gon Aanestetten of Aanetten to

Joint Petition For Clarifi- Response To Commission Order

cation, Rehearing And Recon- No. 539-A, filed April 19,

sideration filed by Tenneco iE RSE A E Cae 477-486 304-317

Oil Company, et al., on “—"

. Letter of Natural Gas Pipeline

November 13, 1976 .20.......6....2-.0:cc-e000+ 326-337 144-157 Dempany of America To Mr. Kenneth

Motion For Oral Argument filed F. Plumb Secretary, filed April

by Shell Oil Company, et al., RE eta ea 489-496 318-325

on December 30, 19765 ........................... 355-390 159-202 Comments Of Pennsoil Company,

Order issued January 26, 1976, a CD citicticetttncncecssencreen 501-511 326-338

of America, Docket Nos, CP76-14 Comments OS Tennese OS Com-

et al., Liotaigiieai ies ae 203-235 pany, filed April 19, 1976 _............................ 565-581 339-358

: Joint Comments Of Indicated

Coder tenuse Pneuaty 58, S508, Producers filed by Shell Oil

Natural Gas Pipeline Company -

of America, Docket Nos. CP76-14, Company, et al., on April 19, re 645-673 359-390

Be sececzscescecncasseesecsresnscsasensssvenseuvececeneeoces 236-258 Transcript Of Oral Argument

Orders issued February 23, 1976, held May 4, 1976 ..............----e-eesoseseeecesseeeneen “— a

Natural Gas Pipeline Company 43-45 418-421

of America, Docket Nos. CP76-14, 50 421

i iddianiatiiiintsiniinanienetn 259-260

55-101 422-468

Order issued March 19, 1976, 121-129 468-477

Shell Oil Company, Docket No. 141-145 477-481

ST da cinrcistccd catitiaihichicnideiatidildaettiniedneindaditecieantonenien 261-262 Reference To Order No. 539-B,

Order No. 539-A, Order Granting In Order Clarifying Prior Orders

- And Amending Section 157 Of The

Part And Denying In Part Re- Commission’s Regulation Under

consideration, Clarifying The Natural Gas Act, issued

Order No. 539, Denying Stay, July 30, 1976 482

Noticing Of Proposed Rulemaking, 2) ot 2 ee el

Noticing of Oral Argument And Order issued September 13,

Granting Intervention, issued 1976, Declaring Petition For

TITEL THIEEED Gicinesheinchenichintnineniienmnmeniatitiics 394-409 263-283 See 483-486

Item

Record Appendix

Pagination Pagination

Letter from Allan Abbot

Tuttle, Solicitor of the

Commission to Mr. Gilbert

Ganucheau, Deputy Clerk,

U.S. Court of Appeals for

the Fifth Circuit, dated

September 28, 1976 ............................

Order issued November 21,

1976, Natural Gas Pipeline

Company of America, Docket

Nos. CP76-14, et al. ..000000.......eeeeeeeee eee

Reference to the opinion

of the Court of Appeals for

the Fifth Circuit dated

CO

Reference to the judgment

of the Court of Appeals for

the Fifth Circuit dated

Order granting petition for

a writ of certiorari dated October 2, 1978....

Order granting petition for

a writ of certiorari dated October 2, 1978....

487-488

489-523

524

525

526

527

- ee oe se

ae. tet ~

a |

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

(Title omitted in printing)

RELEVANT DOCKET ENTRIES

ee ree T OO Pye S January 20, 1978

BURT ME wet ..... January 20, 1978

2

[147]

UNITED STATES OF AMERICA

FEDERAL POWER COMMISSION

(18 CFR 2.83)

Natural Gas Company — (Certificate)

Before Commissioners: John N. Nassikas, Chairman;

Don S. Smith, and John H.

Holloman, ILI.

Policy With Respect To Enforcement )

Of Deliverability And Rendition Of ) Docket No.

Natural Gas Services Under Certifi- ) RM76-8

cated Arrangements )

ORDER NO. 539

PROMULGATING STATEMENT OF POLICY

(Issued October 14, 1975)

The Commission has concluded that it should formally

reiterate its policies with respect to the enforcement of

requirements of the Natural Gas Act, 15 U.S.C. 717(a)

et seq., as they relate to deliverability and the rendition

of natural gas service under certificated arrangements

pursuant to that Act.

Events relative to natural gas supplies and demands

for natural gas service currently, and over recent past

periods, warrant our doing so at this time. Questions con-

cerning deliverability and supply obligations of natural

gas producers and natural gas pipelines have arisen in

THRO FRR

3

connection with numerous Congressional hearings in-

volving the Natural Gas Act’, as well as in the day-to-

[148]

day administration of the provisions of the Natural Gas

Act by this agency.

It is the policy of this Commission to enforce all de-

livery and supply obligations of jurisdictional natural gas

producers and jurisdictional natural gas pipelines, as they

may be occasioned by applicable regulations of the Com-

mission and the statutory standards of the Natural Gas

Act, which govern — and, therefore, which are incor-

porated within — the certificates for all certificated ar-

rangements authorized pursuant to the Act. In addition

to these standards, there are numerous delivery and sup-

ply obligations arising from contractual obligations extant

among natural gas producers, pipelines or distributors.

1. See, for example: Preliminary Staff Report of the Subcommittee

on Oversight and Investigations, House Committee on Interstate and

Foreign Commerce, 94th Congress, Ist Session, July 18, 1975;

Hearings on Natural Gas Supplies Before the Subcommittee on

Oversight and Investigations, House Committee on Interstate and

Foreign Commerce, 94th Congress, Ist Session, June 9, 13, 26 and

27, July 14 and 21, 1975, Serial Nos. 94-23 and 94-24; Federal

Preparedness to Deal With the Natural Gas Shortage Emergency

This Coming Winter: Third Report by the House Committee on

Government Operations, 94th Congress, Ist Session, July 25, 1975,

pp. 24 and 35; Federal Preparedness to Deal With the United States

Natural Gas Shortage; Hearings Before the Subcommittee on Con-

servation, Energy and Natural Resources, House Committee on

Government Operations, 94th Congress, Ist Session, June 12 and 26,

1975; Federal Power Commission Oversight Hearings, Committee

on Commerce, United States Senate, 93d Congress, 2nd Session,

August 20 and 22, 1974, Part 2, pp. 331-336; and Hearings on

Natural Gas and Oil Regulatory Bills Before the Committee on

Commerce, United States Senate, October 10, 11 and 24, 1973,

Part I, pp. 209-211.

.

4

It is the policy of the Commission that each affected pro-

ducer, pipeline or distributor shall take all appropriate

actions to enforce those obligations, in the appropriate

administrative or judicial forum at Federal, state or local

levels. The constraints of private contracts operate in

conjunction with and subject to public regulatory power.

[149]

We believe our action will be helpful to provide cer-

tainty of legal obligations and regulatory enforcement

policy, and to provide reliable gas service to the natural

gas industry, natural gas consumers, Federal, state and

local governmental authorities and members of the gen-

eral public which may be concerned with the adequacy

and reliability of natural gas supplies and services through-

out the Nation.

The Natural Gas Act — Legal authority for the ren-

dition of a jurisdictional sale or service of natural gas in

interstate commerce under the Natural Gas Act, 15 U.S.C.

717, is evidenced by appropriately issued certificates of

this Commission pursuant to Section 7 of that Act, 15

U.S.C. 717f, and appropriately effective rate schedules

pursuant to Sections 4 and 5 of that Act, 15 U.S.C. 717c

and d. Without Commission authorization “no natural-

gas company upon completion of any proposed construc-

tion or extension shall engage in the transportation or

sale of natural gas, subject to the jurisdiction of the Com-

mission * * * unless there is in force with respect to such

natural gas company a certificate of public convenience

and necessity issued by the Commission authorizing such

acts or operations * * *.”, 15 U.S.C. 717f(c). Abandon-

ment of jurisdictional facilities or services is prohibited

- Well bse OTST ErS -

5

Contractuai Arrangements—Contractual relations be-

tween jurisdictional suppliers of natural gas, jurisdictional

pipeline or non-jurisdictional distributors of natural gas

are circumscribed by, and are themselves subject to, the

statutory standards of the Natural Gas Act. As the Su-

preme Court stated in Sunray Mid-Continent Oil Co. v.

FPC, 364 U.S. 137, 153, 155-6 (1960):

* * * The Power Commission has from an early

date taken the view that there is a continuing obli-

gation to perform “service” imposed by the Act

which outlasts the terms of a seller’s original con-

tract of sale (at p. 153).

[151]

* * * Mobile recognized that there were two

sources of price and supply stability inherent in the

regulatory system established by the Natural Gas

Act—the provisions of private contracts and the

public regulatory power * * * An initial applica-

tion of an independent producer, to make move-

ments of natural gas in interstate commerce, leads

to a certificate of public convenience and necessity

under which the Commission controls the basis on

which “gas may be initially dedicated to interstate

use. Moreover, once so dedicated there can be no

withdrawal of that supply from continued interstate

movement without Commission approval. The gas

operator, although to this extent a captive subject

to the jurisdiction of the Commission, is not without

remedy to protect himself.” 360 U.S., at 389. That

remedy he has, as the Court there said, in the

“change” power under §4 (d) when his contract

)

unless the Commission has found “* * * that the avail-

able supply of natural gas is depleted to the extent that

the continuance of service is unwarranted, or that the

present or future public convenience or necessity permit

such abandonment.” 15 U.S.C. 717f(b).

Among the conditions of every Section 7 certification

are the requirements of subsection 7(e) that the applicant

is able and willing properly inter alia:

[150]

—to do the acts and to perform the service proposed;

—to conform to the provisions of the Act and the

requirements, rules, and regulations of the Com-

mission; and

—that the proposed service, sale, operation, construc-

tion, extension or acquisition, to the extent

authorized by the certificate, is or will be required

by the present or future public convenience and

necessity.

Sections 4 and 5 of the Natural Gas Act obligate each

natural gas company to render jurisdictional sales or

services which are just and reasonable and without undue

discrimination or preference: all in accordance with rates,

charges, classifications, rules, regulations, practices or con-

tracts which are just, reasonable and not unduly discrimi-

natory or preferential. See FPC v. Louisiana Power &

Light Co., 406 U.S. 621 (1972), and cases therein cited;

and Pennsylvania Power Co. v. FPC, 343 US. 414

(1952), interpreting the comparable rate and service pro-

visions of the Federal Power Act, 16 U.S.C. 824d and e.

—

° Rk Se RO ue oe. ee

7

has expired or where his contract permits its use

during its term. Under a similar Act, this Court

has held to the same effect as we hold today. Penn-

sylvania Water & Power Co. v. Federal Power

Comm'n, 343 U.S. 414, 423-424 (at pp. 155-6).

Within the referenced cited holding of the Supreme Court

in the Pennsylvania case, the Supreme Court held, 343

U.S. 422:

* * * To the extent that Penn Water is being con-

trolled, it is by the Commission acting under statu-

tory authority, not by Consolidated acting under

the authority of private contract terms “legalized by

the Commission. The duty of Penn Water to con-

tinue its coordinated operations with Consolidated

springs from the Commission’s authority, not from

the law of private contracts.

Enforceability of Certificated Arrangemenis—Upon

[152]

commencement of jurisdictional sales or services,’ this

Commission has full authority to enforce the rendition

2. The exclusion of the production and gathering functions from

the jurisdictional coverage of the Natural Gas Act, 15 U.S.C. 717(b),

does not defeat the Commission’s plenary regulatory authority over

“* * * (1) the transportation of natural gas in interstate commerce;

(2) its sale in interstate commerce for resale; and (3) natural gas

companies engaged in such transportation or sale * * *”. FPC v.

Louisiana Power & Light supra @ p. 636; or preclude the Com-

mission from considering production and gathering when relevant to

the exercise of the Commission’s authority to regulate such trans-

portation, sales or companies. FPC v. Transcontinental Gas Corp.,

365 US. 1, 26 (1961).

of, inter alia, natural gas services, sales or operations, as

certificated by the Commission, including as a part there-

of, necessary deliverability or production of natural gas

to meet, inter alia, certificated operations, services, de-

velopments, quantities, volumes or sales.

As certificated, such factors may or may not accord

with the terms of sales or other contractual arrangements

among natural gas producers, pipelines or distributors in

seeking Commission authority to engage in jurisdictional

sales or services. To the extent that contractual obliga-

tions coincide with the certification authority, these fac-

tors are thus also enforceable as a matter of private con-

tract law. However, it is the statutory standards of the

Natural Gas Act which ultimately control the terms un-

der which natural gas companies may operate jurisdiction-

al facilities and engage in jurisdictional transactions. Cer-

tificated obligations are enforceable by pipelines as a mat-

ter of the private law of contracts as well as by this Com-

mission as a matter of public regulatory law.

Subsection 7(e) of that Act, 15 U.S.C. 717f(e), pro-

vides “* * * The Commission shall lave the power to

attach to the issuance of the certificate and to the exercise

of the rights granted thereunder such reasonable terms

and conditions as the public convenience and necessity

may require. * * *” This conditioning authority is a broad

authorization, as pointed out by the Supreme Court in

[153]

Atlantic Ref. Co. v. Pub. Serv. Comm'n, 360 U.S. 378,

389 (1959):

* * * Section 7(e) vests in the Commission control

wee ee

SR att eA.

een eemrtewerer oe oR. 7s) ©) mee eee

9

over the conditions under which gas may be initially

dedicated to interstate use. Moreover, once so dedi-

cated there can be no withdrawal of that supply from

continued interstate movement without Commis-

sion approval. * * **

In addition to Commission initiated proceedings. cer-

tificate, rate schedule or contractual obligations of any

natural gas company producer or natural gas company

pipeline may be made the subject of appropriate com-

plaint proceedings before the Commission. Section 1.6 of

the Commission’s Rules of Practice and Procedure pro-

vides in part, 18 CFR 1.6(a):

Any person, including any State ‘or local commis-

sion, complaining of anything done or omitted to

be done by any * * * natural gas company in con-

travention of an act, rule, regulation or order ad-

ministered or issued by the Commission, may file

complaint with the Commission.

[154]

Section 16 of the Natural Gas Act, 15 U.S.C. 7170,

confers upon the Commission “* * * power to perform

any and all acts, and to prescribe, issue, make, amend,

and rescind such orders, rules and regulations as it may

find necessary or appropriate to carry out the provisions

of this act. * * *” This is a most broad authority. FPC v.

3. See also, Mitchell Energy Corporation, Opinion No. 733, is-

sued June 11, 1975, F.P.C. , (appeal pending, Mitchell

Energy Corporation v. FPPC, CA 5, No. 75-3110, and El Paso Natural

Gas Company, et al., Opinion No. 737, issued July 11, 1975,

FPC , (appeal pending sub nom., Southland Royalty Co., et al.

v. FPC, CA S, No. 75-2851.

10

Louisiana Power & Light Co., supra, @ p 642. Judicial

“enforcement authority obtains for Commission use pur-

suant to Section 20 of the Natural Gas Act, 15 U.S.C.

717s; criminal penalty provisions are set forth in Sec-

tion 21 of the Act, 15 U.S.C. 717t.

In addition to the foregoing provisions, affected parties

may well have numerous judicial remedies available to

enforce certificate rate schedule or contractual obliga-

tions of any natural gas company producer, natural gas

company pipeline or natural gas distributor.

The Commission further finds:

(1) Prior notice and opportunity for public partici-

pation in this proceeding promulgating this Statement

of Policy is not required either pursuant to the provision:

of the Natural Gas Act, 15 U.S.C. 717(a) et seq., or the

provisions of the Administrative Procedure Act, 5 U.S.C

Subchapter II, 553. Moreover, compliance with the effec-

tive date requirements of 5 U.S.C. 553(d), is not re-

quired since this Statement of Policy does not prescribe

an added duty or restriction.

(2) It is necessary and appropriate for purposes of

administration of the provisions of the Natural Gas Act,

15 U.S.C. 717(a) et seq., to amend Part 2, General Poli-

cy and Interpretations, Subchapter A, General Rules,

Chapter I, Title 18, Code of Federal Regulations, by the

inclusion therein of Section 2.83, Policy With Respect To

Enforcement Of Deliverability And Rendition Of Natural

Gas Services Under Certificated Arrangements, all in the

manner hereinafter directed. '

—

— on — ee

— AT I ee 6.8 a enn HS -

11

[155]

The Commission, acting pursuant to the provisions of the

Natural Gas Act, particularly Sections 4, 5, 7, 16, 20

and 21 thereof (52 Stat. 822, 823, 824, 825, 830, 832

833; 56 Stat. 83, 84; 61 Stat. 459; 76 Stat. 72; and 15

U.S.C. 717c, d, f, 0, s and t, orders:

(A) Part 2, General Policy and Interpretations, Sub-

chapter A, General Rules, Chapter I, Title 18, Code of

Federal Regulations, is hereby amended by adding a new

Section 2.83 to read as follows:

2.83 Policy With Respect To Enforcement Of De-

liverability And Rendition Of Natural Gas Ah

Under Certificated Arrangemer .

(a) Natural gas companies within the meaning of

Section 2(6) of the Natural Gas Act (whether to.

ducers or pipelines) shall comply with all deliver-

ability or production of natural gas requirements to

meet, inter alia, certificated operations, services, de-

velopments, quantities, volumes or sales. The Stand-

ards of compliance shall be the controlling statutory

standards of the Natural Gas Act, chiefly those of

Sections 4, 5 and 7 thereof. The certificate of the

Commission authorizing jurisdictional transactions

under the Natural Gas Act shall be deemed evidence

of those requirements, whether or not specifically

reproduced within the certificate document or or-

rad) der. Natural gas pipeline companies and natural gas

producers have obligations arising from the Natural

Gas Act with respect to, inter alia, deliverability and

receipt of certificated volumes of natural gas sup-

plies, violation of which obligations will subject

either to the sanction and/or penalty provisions of

that Act. While this Commission is charged with

responsibility for the administration of the Natural

12

Gas Act, regulated pipelines and producers have af-

firmative obligatious to enforce delivery of certifi-

cated volumes of natural gas supplies by reason of

the requirements of that Act.

[156]

(b) The Commission, acting upon its own motion,

will undertake appropriate enforcement proceedings

either before the Commission or the Courts to en-

sure compliance with all delivery or production of

natural gas requirements to meet certificated opera-

tions, services, developments, quantities, volumes or

sales as referred to in paragraph (a) supra.

(c) The Commission invites, and will entertain,

complaints pursuant to Section 1.6 of the Commis-

sion’s Rules of Practice and Procedure seeking en-

forcement of certificate, rate schedule or contractual

obligations of any natural gas company producer or

natural gas company pipeline with reference to mat-

ters set forth in paragraph (a) supra.

(d) The Commission shall include, subsequent to

the date of Order No. 539, the following general

language within the Commission’s Order Issuing

Such Certificate Temporary Or Permanent:

Applicant natural gas company’s attention is di-

nr to Commission Order No. 539, issued Oc-

tober 14, 1975, F.R. , and to the pro-

visions of Section 2.83 General Policy and Inter-

pretations, 18 CFR 2.83. Moreover, issuance of

this certificate authorization is conditioned to re-

quire Applicant, within 30 days of the initial re-

“serve determination or any subsequent redeter-

mination thereof, to report the results of each

such initial or redetermination study to the Com-

mission. The certificated minimum daily delivery

ttt dal Daa AOR Bb PE ADR aE

13

obligation of the seller (1) shall be determined in

accordance with applicable provisions specifically

[157]

set forth in seller's contract unless otherwise

changed by the certificate authorization, (2) shall

be without regard to any contractual reservations

contrary to the certificate authorization, (3) and

shall remain in full force and effect unless and

until changed by appropriate certificate authoriza-

tion amendment based upon Applicant's full docu-

mentation of, inter alia, the reasons for any

such proposed amendment, the sales production

history, the amount of remaining connected re-

serves of Applicant dedicated under the contract

and the status of Applicant’s nondeveloped re-

serves dedicated under the contract. The certifi-

cate authorization is further conditioned to re-

quire that Applicant, if it has not secured an

appropriate certificate amendment and there are

circumstances resulting in the delivery of a lesser

quantity of natural gas than any certificated de-

livery obligation, Applicant shall file for each

contract year quarter, a verified report setting out

the circumstances of such lesser deliveries and

the corrective actions which Applicant proposes

to undertake in order to meet any experienced

delivery deficiency, such verified reports to be

filed within 10 calendar days after expiration of

each contract year quarter.

(e) Nothing herein contained shall be deemed to

preclude the exercise of any other administrative

1 APRN L EN

14 . 15

or judicial remedies which might otherwise obtain | [170]

to any person. UNITED STATES OF AMERICA

[158] : FEDERAL POWER COMMISSION

(f) Nothing herein amends, modifies or changes any

existing authorization for jurisdictional transactions

as now certified or authorized by the Commission

pursuant to the provisions of the Natural Gas Act,

Sections 4, 5 or 7 thereof.

Policy With Respect To Enforcement )

Of Deliverability And Rendition Of ) Docket No.

Natural Gas Services Under Certifi- ) RM76-8

cated Arrangements )

(B) The amendment provided for herein shall be ef-

fective as of the date of issuance of this order.

(C) The Secretary of the Commission shall cause APPLICATION FOR REHEARING

prompt publication of this order to be made in the Federal AND

Register. MOTION FOR RECONSIDERATION

By the Commission.

(SEAL) |

Thomas G. Johnson

Kenneth F. Plumb, 2 William G. Riddoch

Secretary. | Attorneys for

! SHELL OIL COMPANY

a * * One Shell Plaza

| P. O. Box 2463

Houston, Texas 77001

November 11, 1975

[Additional Applicants Listed

on the Following Pages]

a ee eee Se) et a ee

ee Pe

Mine

16

171]

UNITED STATES OF AMERICA

FEDERAL POWER COMMISSION

Policy With Respect To Enforcement )

Of Deliverability And Rendition Of ) Docket No.

Natural Gas Services Under Certifi- ) RM76-8

cated Arrangements )

APPLICATION FOR REHEARING

AND

MOTION FOR RECONSIDERATION

Thomas G. Johnson

William G. Riddoch

Attorneys for

SHELL OIL COMPANY

One Shell Plaza

P. O. Box 2463

Houston, Texas 77001

November 11, 1975

{ Additional Applicants Listed

on the Following Pages]

er ae

i aha et esa bets Dalat Sole ce BOCAS VO. we war 6

17

[172]

ADA RESOURCES, INC.

Neal Powers, Jr.

Butler, Binion, Rice, Cook & Knapp

1100 Esperson Building

Houston, Texas 77002

AMERADA HESS CORPORATION

David G. Stevenson

Randolph C. Bruton, Jr.

P. O. Box 2040

Tulsa, Oklahoma 74102

AMOCO PRODUCTION COMPANY

William H. Emerson

T. C. McCorkle

P. O. Box 5910-A

Chicago, Illinois 60680

ASHLAND OIL, INC.

W. O. Strong, III

P. O. Box 1503

Houston, Texas 77001

Richard F. Generelly

Shannon and Morley

1700 K Street, N.W.

Washington, D.C. 20006

ATLANTIC RICHFIELD COMPANY

Edward J. Kremer

David Aston

P. O. Box 2819

Dallas, Texas 75221

BURMAH OIL AND GAS COMPANY

BURMAH OIL DEVELOPMENT,

INC.

SIGNAL PETROLEUM

David M. Whitney

2800 North Loop West

P. O. Box 94193

Houston, Texas 77018

THE CALIFORNIA COMPANY,

A DIVISION OF CHEVRON

OIL COMPANY

G. Howard Dearing

1111 Tulane Avenue

New Orleans, Louisiana 70112

Justin R. Wolf

1625 K Street, N.W.

Washington, D.C. 20006

CITIES SERVICE OIL COMPANY

Sam Riggs, Jr.

Robert S. Wheeler

P. O. Box 300

Tulsa, Oklahoma 74102

ESTATE OF E. COCKRELL, JR.

DECEASED

ECEE, INC.

PINTO, INC.

TEXAS PRODUCTION COMPANY

Neal Powers, Jr.

Butler, Binion, Rice, Cook & Knapp

1100 Esperson Building

Houston, Texas 77002

EXXON CORPORATION

Martin N. Erck

Paul W. Wright

Charles W. Wexler

P. O. Box 2180

Houston, Texas 77001

GENERAL AMERICAN OIL

COMPANY OF TEXAS

Robert C. Murray

Meadows Building

Dallas, Texas 75206

Richard F. Generelly

Shannon and Morley

1700 K Street, N.W.

Washington, D.C. 20006

[173] 12

[173]

GETTY OIL COMPANY SKELLY OIL COMPANY

Cloy D. Monzingo Ronald E. Jarrett

P. O. Box 1404 David C. Henri

Houston, Texas 77001 Ronald J. Jacobs

P. O. Box 1650

GULF OIL COMPANY — US. Tulsa, Oklahoma 74102

Warren M. Sparks

goa Ae wea UNION OIL COMPANY OF

P. O. Box 1589 CALIFORNIA

, Oklahoma 74102 George C. Bond

—_ Kenneth L. Riedman, Jr.

INEXCO OIL COMPANY Richard F. Wornson

Arthur S. Berner Union Oil Center

1100 Milam Building P. O. Box 7600

Suite 1900 Los Angeles, California 90051

Houston, Texas 77002

Neal Powers, Jr.

Butler, Binion, Rice, Cook & Knapp

1100 Esperson Building

Houston, Texas 77002

KERR-McGEE CORPORATION

Derrill Cody

Kerr-McGee Center

Oklahoma City, Oklahoma 73125

MARATHON OIL COMPANY

William A. Sackmann

539 South Main Street

Findlay, Ohio 45840

<n ——

iene terrence A TE, CAEL En NE A 9 lw ee me

19

[174]

UNITED STATES OF AMERICA

FEDERAL POWER COMMISSION

Policy With Respect To Enforcement )

Of Deliverability And Rendition Of ) Docket No.

Natural Gas Services Under Certifi- ) RM76-8

cated Arrangements )

APPLICATION FOR REHEARING

AND

MOTION FOR RECONSIDERATION

The undersigned producers (Shell Oil Company, et at.,

hereinafter designated “Producers”) in accordance with

Section 19(a) of the Natural Gas Act and Section 1.34

of the Commission’s Rules of Practice and Procedure,

apply for rehearing of Commission’s Order No. 539, Pro-

mulgating Statement of Policy issued October 14, 1975,

or in the alternative move the Commission for recon-

sideration of that Order. In support of this Application,

Producers allege and state the following:

I

Order No. 539 is apparently responsive to inquiries by

Congressional Committees and others to determine

whether or not producers are in some way failing to meet

their contract obligations to deliver gas supplies to their

pipeline purchasers, and whether this Commission or the

pipeline purchasers have been unable or unwilling to en-

20

force these contractual obligations. The undersigned Pro-

ducers wish to state that any assumption that producers

are failing to perform their contract obligations is ab-

solutely and compietely contrary to fact. Producers are

in compliance with their contracts to deliver gas to their

pipeline purchasers. There have been no lawsuits by pipe-

lines seeking to enforce the delivery requirements in pro-

ducer contracts because there have been no violations by

the producers of those requirements. We believe, how-

ever, that the Commission’s Order improperly character-

izes the obligation of producers either under their con-

tracts or

[175]

conditions contained in a certificate authorizing sale.

There have been obvious misconstruction of the Natural

Gas Act, and misunderstandings of the contractual com-

mitments of the parties, the physical properties of oil

and gas reservoirs, the legal effect of certificate conditions

by some persons unfamiliar with the industry, or the de-

livery provisions of the contracts. We have therefore at-

tached hereto as Appendix A certain representative con-

tracts which we believe are typical of contracts executed

at various time periods over the last fifteen (15) years.

These typical contracts do not guarantee delivery of

specific quantities of gas or rates of delivery. This is be-

cause all gas wells will deplete at varying rates, depen-

dent on reservoir characteristics, and specific levels of

production cannot possibly be guaranteed. Contracts

similar to those attached have been customarily utilized

by the industry for many years. They conform to the

realities of nature in the production and depletion of a

natural resource.

ee eee et tere ee 0) ne ent So

21

It is the belief of Producers that Section 2.83 of Order

No. 539 could be construed as requiring producers to

deliver, under typical contracts, fixed quantities of gas,

on a daily, monthly and/or annual basis. This is an in-

correct interpretation of these contracts and would effec-

tively convert such contracts into a form of warranty

obligation. The quantities stated in the typical producer

gas sales contracts are inserted for the protection of buyers

(usually pipeline companies) as a maximum limitation

on their initial take-or-pay obligation under the contracts.

These typical producer gas sales contracts do not ob-

ligate the producer to deliver this or any specific quan-

tity of gas. The producer’s contract may provide for the

delivery of a percentage of the gas currently capable of

being produced, sometimes called the deliverability or

deliverable capacity or productive capacity, see Appendix

A. However, failure to produce this percentage of gas

can have the consequence only of reduction of buyer's

take-or-pay obligation. This is the penalty the producer

incurs. However, the producer’s obligation to produce

is implicit in his legal obligations to act as a prudent

operator under his oil or gas lease.

[176]

The contract quantity for a field is determined either

by the deliverability capacity taken by actual measure-

ment of the wells, or by proportion of the total reserves

contained in the field, as that figure ftuctuates and varies

throughout the life of the field. Attached hereto as Ap-

pendix B is a graph of a typical field showing actual

deliveries and the decline over time in deliverability as

determined by semi-annual tests. Thus, while the sample

22

billing statement filed with the initial rate schedule con-

tains a rough estimate of deliveries to be made during

the first month, it is an estimate only for that time period,

and has no bearing whatsoever on contract obligations.

The only purpose of the sample billing statement is to in-

dicate the estimated impact of the applicable ceiling price.

When the field is initially produced, its productive ca-

pacity is normally determined in order that there can

be a determination of a minimum daily contract quantity

the buyer is obligated to pay for if he does not accept

its delivery. For example, paragraph 4.2 of the Gas Pur-

chase and Sale Contract executed August 21, 1975 at-

tached as Appendix A, Schedule 3 requires the buyer to

purchase and take from seller, and if available and not

iaken, buyer shall pay seller for a daily contract quan-

tity of gas equal to ninety (90) percent of Delivery

Capacity. The Contract defines “Delivery Capacity” as

the maximum daily quantity of Gas Well Gas which,

in the course of prudent operation, as determined by

seller in good faith, can be delivered to buyer from sel-

ler’s interest in the properties. Thus, it is necessary to

test the field by letting the gas wells flow at their maxi-

mum capacity, under prudent operating conditions, to

determine the maximum daily quantity of gas that can

be delivered to the buyer. Under the circumstances set

forth in this example, the buyer would be obligated to

take or pay for a daily contract quantity representing a

percentage of the maximum daily quantity as shown by

such test. As the gas field matures in its development,

State or Federal Regulations normally require further

tests to determine the maximum daily quantity of gas

that can be produced and the results of such tests may

increase or reduce the daily contract quantity the buyer

MA De OR Some edo

ae ee ee

23

is obligated to take or pay for if the i i

ete y gas is available and

[177]

At some time, depending on the buyer’s requirements, a

point is reached where the gas wells produce at their

maximum capacity and thus, productive capacity coin-

cides with actual production and would normally con-

tinue to do so until the field is depleted.

In every contract that we are familiar with, the con-

tract clearly reserves to the producer all of the rights

to maintain full control over the development and opera-

tion of the field. The rate of development of the field and

the rate of decline of production, as the field depletes, are

determined by the following factors:

(a) The producible reserves in the field and the

physical ability of the gas sands to deliver the

gas to the well bore.

(b) The Tate of development of the field and the

density at which the wells are drilled.

(c) Spacing laws and other orders of the state and

federal regulatory bodies enacted to prevent

waste of gas in the producing fields.

(d) Contractual obligations between lessor and

lessee, which require the lessee to develop the

fields as an “ordinary prudent operator” and

to diligently market the gas which he has de-

veloped.

Under the Mobdile-Memphis doctrine, the producers

24

have retained the right to contract for the sale of their

gas to the pipeline companies, subject only to the ap-

proval authority of the Federal Power Commission. Pro-

ducers have no objection to certificate conditions or other

Commission orders which require them to comply with

their contractual provisions. In fact, no such orders are

necessary, as the pipeline purchasers and other parties

have full rights to enforce their contracts in court. The

Commission, in its first finding, (p. 8) stated that its

present “statement of policy does not prescribe any

added duty or restriction.” This statement

[178]

conflicts with Section 2.83 of the Commission’s proposed

Regulation. If Section 2.83 of the Commission’s proposed

Regulations is intended to do nothing more than to re-

quire producers to comply with their contracts, the under-

signed Producers have no objection to such provision, but

believe that the Commission’s Order should be clarified.

If, however, this Section is intended to impose certifi-

cate conditions requiring producers to deliver specific

quantities of gas in return for receiving certificates, then

the Commission has exceeded its authority under the

Natural Gas Act, and is contemplating drastic chang-2s

in the structure of the industry which are not in the

national interest. A contract to sell gas over a long term

must be contingent upon the ability of the reservoir to

supply the gas being sold. The producer cannot “guaran-

tee” that a gas reservoir will continue to produce at any

given rate. This is not to say that the producer is not

willing to perform as an ordinary prudent operator and

to fully develop the reservoirs. But the Commission can-

25

not and should not attempt to force a producer to “guaran-

tee to produce gas from the wells which are physically

incapable of producing. The analogy of the ability to ob-

tain blood from a turnip is apropos here.

Py ev —_ + age mamagl nor the Federal Power

mmission is given, by either the gas sales contrac

the Natural Gas Act, the power : control Saneiien

operations in the field, see Section I(b) of the Natural

Gas Act; Phillips Petroleum Co. v. Wisconsin, 347 US

672 (1954); Deep South Oil Company v. F.P.C., 247

F.2d 882, 889 (Sth Cir. 1957); F.P.C. v. Panhandle

Eastern Pipeline Co., 337 U.S. 498 (1949).

If the Commission does intend to change its

policy regarding certificate applications a aii

to be applied thereto, as a minimum and Commission

is required to give Notice and receive Comments in which

the Parties are given an oportunity to state their positions

see Mobil Oil Corporation v. F.P.C., 483 F.2d 1238

(D.C. Cir. 1973), before issuing a major Statement of

_ Policy. The Commission should rescind Order ‘No. 539

and afford the parties due process of law.

[179]

I

WHEREFORE, the undersigned Produce

. rsig rs respect-

fully request that the Commission reconsider its Order

No. 539, and clarify that Order to eliminate the require-

ment that the seller's delivery obligations cannot be

changed without certificate authorization, and to remove

any implication that the certificate will require some de-

livery obligation other than those required by contract.

NEAL POWERS, JR.

Attorney for

Ada Resources, Inc.

DAVID G. STEVENSON

26

Respectfully submitted,

Thomas G. Johnson

* illiam G. Riddoch

Attorneys for

SHELL OIL COMPANY

By THOMAS G. JOHNSON

Thomas G. Johnson

RANDOLPH C. BRUTON, JR.

Attorneys for

Amerada Hess Corporation

WILLIAM H. EMERSON

T. C. McCORKLE

Attorneys for

Amoco Production Company

W. O. STRONG, ITI

RICHARD F. GENERELLY

Attorneys for

Ashland Oil, Inc.

EDWARD J. KREMER

DAVID ASTON

Attorneys for

Atlantic Richfield Company

DAVID M. WHITNEY

Attorney for

Burmah Oil and Gas Company

Burmah Oil Development, Inc.

Signal Petroleum

G. HOWARD DEARING

JUSTIN R. WOLF

Attorneys for

The California Company,

A Division of Chevron Oil

Company

SAM RIGGS, JR.

ROBERT S. WHEELER

Attorneys for

Cities Service Oil Company

NEAL POWERS, JR.

Attorney for

Estate of E. Cockrell, Jr.,

Deceased

27

[180]

ROBERT C. MURRAY

RICHARD F. GENERELLY

Attorneys for

General American Oil

Company of Texas

CLOY D. MONZINGO

Attorney for

Getty Oil Company

WARREN M. SPARKS

B. JAMES McGRAW

Attorneys for

Gulf Oil Company — US.

ARTHUR S. BERNER

NEAL POWERS, JR.

Attorneys for

Inexco Oil Company

DERRILL CODY

Attorney for

Kerr-McGee Corporation

WILLIAM A. SACKMANN

Attorney for

Marathon Oil Company

RONALD E. JARRETT

DAVID C. HENRI

GEORGE C. BOND

KENNETH L. RIEDMAN, JR.

RICHARD F. WORNSON

Attorneys for

Union Oil Company of California

28

[181]

VERIFICATION

THE STATE OF TEXAS

COUNTY OF HARRIS

THOMAS G. JOHNSON, being duly sworn, deposes

and says that he is an attorney for Shell Oil Company;

that he is authorized to verify and file this document; that

he has examined the statements contained therein, and

that all such statements are true and correct to the best

of his knowledge, information and belief, and that he has

been duly empowered and authorized to subscribe said

instrument and to execute this verification on behalf of

Shell Oil Company and each of the Producer Applicants

joining in said Application for Rehearing and Motion for

Reconsideration.

THOMAS G. JOHNSON

Thomas G. Johnson

Subscribed and sworn to before me, this 11th day of

November, 1975.

DELIA GONZALEZ

Delia Gonzalez

Notary Public in and for

Harris County, Texas

My Commission Expires June 1, 1977.

SS Ole SM ee re Cite as

29

[182]

CERTIFICATE OF SERVICE

I hereby certify that I was advised on this date by the

Office of the Secretary of the Commission that no service

was required on any person other than the Commission,

and that filing with the Secretary would constitute com-

pliance with the requirement of Section 1.17 of the Rules

of Practice and Procedure. |

wa in Houston, Texas, this 11th day of November,

THOMAS G. JOHNSON

Thomas G. Johnson

Of Counsel for

Shell Oil Company

30

[183]

APPENDIX A

SCHEDULE 1

FPC GAS RATE SCHEDULE

OF

SHELL OIL COMPANY

FILED WITH

FEDERAL POWER COMMISSION

WEST WAHA FIELD

REEVES COUNTY, TEXAS

NO. 318

31

[184]

SHELL OIL COMPANY

GAS STATEMENT

El Paso Natural Gas Company

P.O. Box 1492

El Paso, Texas 79999

West Waha Field

Reeves County,

Texas

Estimated sales and billings for first month of service:

Tax

MCF Base Price Reimbursement Rate Total

14.65 PSIA Per MCF Per MCF Per MCF Value

1,095,850 16.5¢ (1) 16.5¢ $180,815.25

(1) Currently not applicable.

ARTICLE I

ARTICLE U

ARTICLE Ill

ARTICLE IV

ARTICLE V

ARTICLE VI

ARTICLE Vil

ARTICLE VII

ARTICLE X

ARTICLE Xll

ARTICLE Xlll

ARTICLE XIV

ARTICLE XV

ARTICLE XVI

ARTICLE XVI

ARTICLE XVIII

ARTICLE XIX

ARTICLE XX

ARTICLE XXI

ARTICLE XXII

ARTICLE XXIII

ARTICLE XXIV

ARTICLE XXV

ARTICLE XXVI

[185]

TABLE OF CONTENTS

Pranmmble . 0. cece cece sceecesseses 1

Definitions... 6.5 sce cece esceesssess 1

Preliminary Requirements ........-++>> 2

Minimum Purchase Obligations ......... ?

Dedication and Determination of Reserves 10

Quality... ccc ccc ceeceeeeesseeeeees: 12

Delivery Pressure ......-5sssseeeeee 1s

Meters ........5> er 18

Units of Volume ...... <<. sss5 eee 20

Gas Measurement 300400000" 21

Pelee ccc ccccccessessessssseesssses 22

Billing and Payment ......---sssss55" 23

TMS onc cccccccccccsessessssssssess Pa

WTR .cccccccccccscsessssssssssssees 26

Connection of Wells ........-- 0000555 26

Regulation of Flow .........sssssss5% 26

Rights-of-Way .....<.ssssseeeeeeeeee 27

TMS ccc ccccccccccccccccccssscsecess 27

Force Majeure ..... <<... ssss00eeeeee 28

Rights of Seller .... <<... 5500 seeeeeees 29

Rules and Regulations ..........+s+5*> 3

NEGREOES . ccc ccc cccccecesssesesssssess 3s

Successors and Assigns .........<sss555 32

33

[186]

GAS PURCHASE AGREEMENT

THIS AGREEMENT, made and entered into on this

the 3rd day of February, 1966, by and between EL PASO

NATURAL GAS COMPANY, a Delaware corporation,

hereinafter called “Buyer”, and SHELL OIL COMPANY,

a Delaware corporation, hereinafter called “Seller”,

WITNESSETH:

gas leases or oil, gas and mineral leases and the lands

covered thereby described in Exhibit “A”, hereto attached

and hereby made a part hereof.

gas under this agreement and markei the same.

ens ee eee ee

> repues mean any well completion located

on Seller's properties classified as a gas well by the Rail-

road Commission of Texas or other governmental authori-

ty having jurisdiction.

34

[187]

Section 4. oun Se or the term “natural gas”

Section 5. The term “day” tly pati a ta

shall mean a period of twenty-four (24) consecutr

beginning at seven (7:00) o'clock A.M.

Section 6. The term “month” as used in this agree-

ment shall mean the period beginning at seven (7:00)

o'clock A.M. on the first day of a calendar month and

ending at seven (7:00) o'clock A.M. on the first day of

the next succeeding calendar month.

Section 7. The term “year” as used in this agreement

shall mean the period beginning at seven (7:00) o'clock

A.M. on the first day of a calendar year and ending at

seven (7:00) o'clock A.M. on the first day of the next

succeeding calendar year; provided, however, that the

from the date of first deliveries of gas hereunder

shall be deemed to be a year, and the period from seven

(7:00) o'clock A.M. on the first day of the last calendar

ee on at cae

ARTICLE Il

Preliminary Requirements

Section 1. Buyer represents that it holds a Certificate

35

[188]

of Public Convenience and Necessity tesnsd by the Federal

on the part of Seller in order to procure such Ttificat

as may be necessary in order for Seller to effect delivery

of gas under the provisions of this agreement or to other-

wise perform its obligations hereunder. Seller further

es 4 ae Aen ee

ission with respect to the

36

[189]

pursuant to the provisions of this section neither Buyer

nor Seller shall thereafter have any further liability under

this agreement to the other, except as to obligations

therefore accrued hereunder.

Section 3. If Seller shall receive and accept the Cer-

tificate of Public Convenience and Necessity referred to in

Section 1 of this article prior to any termination of this

greement pursuant to the provisions of Section 2 of this

article, Buyer shall promptly thereafter proceed, at its sole

cost and expense, to obtain the necessary rights-of-way and

tant and to Gesign, ecquie materiel Ser ant comme

tificate of Public Convenience and Necessity referred to in

Section 1 of this article; whichever date is earlier.

ARTICLE Ill

Quantities

in as of the date of the firm do

hereof, Geller shell eal and deliver to Buyer from Selles’s

properties, and Buyer shall

[190]

purchase and receive from Seller from said properties and

37

pay for, or pay for whether or not received, during each

year, subject to the further provisions of this Article III,

>a ee ee Ceo

vided in Article IV of this agreement. Such n

the provisions of Section | of this /

during the year

39

[192]

ARTICLE IV

Minimum Purchase Obligations

Section 1. For the period commencing on the date of

first delivery of gas hereunder and continuing until Jan-

wary 1, 1970, the minimum daily quantity of gas aver-

aged over each year to be purchased by Buyer from

Seller hereunder shall be Seller’s interest in fifty million

(50,000,000) cubic feet of gas per day from wells located

on the lands described in Exhibit “A” hereto.

Section 2. Commencing on January 1, 1970 and con-

tinuing for the remainder of the term hereof, the minimum

daily quantity of gas averaged over each year to be

to the formula set out in Section 3 of Article V hereof.

Section 3. During any year when the production of

gas from Seller’s properties is subject to allocation under

the laws, orders, rules and regulations of governmental

authority based on nominations made by pipeline pur-

chasers and Buyer has nominated to such authority a

volume of gas averaged over such year equal to or greater

than the minimum daily quantities as determined pursuant

to Section 1 and/or Section 2 of this article for such year,

then the minimum daily quantities of gas Buyer is ob-

ligated to take and pay for, or pay for though not received

for such year, shall be the lesser of (1) the volumes of

gas so allocated to Seller's properties by governmental

authority, or (2) said minimum daily quantities of gas

determined pursuant to Section 1 and/or Section 2 of

this article.

40

In the event Buyer’s nominations averaged over such

year are less than the minimum daily quantities of gas

as determined

[193]

pursuant to Section 1 and/or Section 2 of this article,

Buyer’s minimum obligation to take and pay for, or pay

for though not received for such year, shall be that volume

of gas which would have represented Buyer's obligation if

Buyer’s nominations had been equal to the minimum daily

quantity of gas as determined pursuant to Section |

and/or Section 2 of this article.

Section 4. Anything herein contained to the contrary

notwithstanding, but subject to the provisions of Article

XXI hereof, Buyer agrees to accept delivery (during

each month following the month during which first de-

liveries of gas occur) from Seller’s properties quantities

of gas from each and every one of the wells located on

said properties and connected to Buyer’s gathering sys-

tem having a value of not less than five hundred dollars

($500.00) (such amount to be reduced proportionately

if Seller owns less than one hundred per cent (100%) of

the working interest in said properties); provided, how-

ever, that such quantities meet the pressure and quality

requirements of this agreement and are available and

tendered to Buyer by Seller at the delivery point or points

hereunder.

Section 5. Buyer agrees that its takes of gas from

Seller’s wells will be at least ratable with the production

of gas from wells belonging to others and completed in

the same reservoir in which Seller’s wells are completed,

whether such other wells be connected to Buyer's gather-

fois 2 ies ——

41

ing system or to the system of another purchaser. Deter-

mination of whether or not production is ratable shall be

in accordance with the applicable rules and regulations

[194]

established by duly constituted governmental authorities

having jurisdiction thereof.

Section 6. Commencing (1) on the first day of the

month following the month in which Seller shall have

received and accepted the Certificate of Public Con-

venience and Necessity referred to in Section 1 of

Article II hereof, or (2) July 1, 1966, whichever date is

earlier, and continuing as to each subsequent month

@ payment on or before the tenth (10) day of the follow-

ing month shall be made to Seller at the rate set forth in

Article XIII hereof for such month for a volume of gas

determined as follows: A minimum daily quantity of gas

as determined in accordance with the provisions of Sec-

tions 1 and/or 2 of this Article IV; subject to such quan-

tities being available from Seller’s well or wells, in accord-

ance with applicable rules and regulations of the Rail-

road Commission of Texas. Such quantities shall be then

multiplied by the applicable number of calendar days to

determine the minimum monthly quantities of gas for

which payment shall be made to Seller pursuant to this

section. The provisions of Article XXI shall not be ap-

plicable to excuse the payments required under this Sec-

tion 6. Monthly payments made Seller pursuant to this

Section 6 shall terminate on the date of actual deliveries

of gas hereunder. At such time as actual deliveries of gas

commence hereunder, all such payments shall be consid-

ered as payments for gas not taken, within the meaning

42

of Section 2 of Article III hereof, and Buyer's rights of

make-up as respect to such quantities of gas shall be

available pursuant to said Section 2.

[195]

In the event this agreement is terminated pursuant to the

provisions of Section 2 of Article il hereof, payments

made by Buyer to Seller under this Section 6 shall be

refunded by Seller to Buyer without interest.

ARiICLE V

Dedication and Determination of Reserves

Section 1. Seller hereby dedicates to the performance

of this agreement Seller's interest in all recoverable gas

reserves underlying Seller’s properties.

Section 2. Not less than thirty (30) nor more than

sixty (60) days prior to January |, 1970, and thereafter

not less than thirty (30) nor more than sixty (60) days

prior to each biennial anniversary of such date, Buyer

shall furnish Seller its estimate of the reserves of re-

coverable gas then remaining which can thereafter be pro-

duced from then existing wells on Seller's properties in

satisfaction of the delivery obligations of Seller under this

agreement. If Seller shall fail during the thirty (30)

day period following receipt of such estimates to give

written notice to Buyer taking exception to the quantities

shown therein, Buyer’s estimates shall prevail for all

purposes of this agreement. If Seller shall give Buyer

written notice within such thirty (30) day period taking

exception to the quantities estimated by Buyer, represent-

atives of the parties shall promptly meet for the purpose

43

of reconciling their respective estimates, but if no agree-

ment with respect thereto is reached within thirty (30)

days after Seller’s notice to Buyer, then

[196]

such quantities shall be determined independently in the

manner set forth in Section 4 of this Article V.

To the quantity of reserves of recoverable gas deter-

mined as to Seller's properties by the last such study there

Shall be added the quantity of gas theretofore delivered

to Buyer from said properties under this agreement. Such

quantity of gas is hereinafter in this article called the

“contract reserves”.

Section 3. The number of billions of cubic feet of gas

found by the last reserve study to constitute the contract

reserves as to Seller's properties shall be divided by eight

(8) and the quotient so obtained shall be multiplied by

one million (1,000,000). The product of such multipli-

cation shall be the number of cubic feet of gas as to Sel-

ler’s properties which represents the daily quantity of gas

referred to in Section 2 of Article IV hereof.

Section 4. If any of the reserve determinations re-

quired to be made under the provisions of Section 2 of

this Article V shall result in disagreement between Buyer

and Seller, they shall select a competent geologist or

reservoir engineer to determine such quantity of reserves

by his independent calculation, and the results of his find-

ings shall be binding upon both parties. The appointment

shall be made in the following manner: Either party may,

within thirty (30) days after completion of a joint study,

notify the other of its disagreement with the conclusions

44

of such other party and nominate the independent geolo-

gist or reservoir engineer. Within ten (10) days after the

notice is given, the other party shall accept such nomina-

tion or make its own nomination.

[197]

If within ten (10) days of the date of such reply the

parties are unable to agree on a nomination, the appoint-

ment of the independent geologist or reservoir engineer

may be made upon written request of either party by

the Judge of the United States District Court, senior in

service, in the district in which the gas is being sold. All

expenses in connection with such determination, includ-

ing reasonable compensation to such geologist or reser-

voir engineer, shall be divided equally between the parties

hereto, with the exception of the expenses of counsel, wit-

nesses and employees of the parties hereto, which will

be borne by the party incurring them.

Section 5. Seller shall, from time to time, at Buyer's re-

quest, make available to Buyer such geological, engineer-

ing and production data, not considered as confidential

by Seller, as may be reasonably obtained by Seller and

which are needed by Buyer for a study of the gas re-

serves covered hereby and the deliverability thereof, in-

cluding, but not limited to, shut-in pressure data in the

event such pressure data are not otherwise available to

Buyer.

ARTICLE VI

Quality

Section 1. The gas to be delivered by Seller to Buyer

under the terms of this agreement shall be natural gas as

45

produced in its natural state from Seller's wells and shall

conform to the following specifications (determination

as to conformity of the gas with these specifications shall

be made in accordance with the generally accepted pro-

cedures of the industry):

(a) Liquids: The gas shall be free from hydrocarbons

[198]

and water in their liquid state at the temperature and

pressure at which delivered. Seller shall install, at its

sole cost and expense, all separators and/or other devices

which may be found necessary to prevent hydrocarbons

and water in their liquid state from entering Buyer's

gathering line at the points of delivery hereunder.

(b) Diluent Content: The gas shall not contain more

than twenty per cent (20%) by volume diluent (herein

defined as carbon dioxide and total sulphur). In the event

all of the gas being delivered to Buyer from Seller's prop-

erties, taken in the aggregate and considered as a com-

mingled stream, shall contain in excess of five per cent

(5%) by volume diluent, the price shall be adjusted as

specified in Article XIII hereof.

(c) Oxygen: The gas shall not at any time have an

oxygen content in excess of two-tenths (0.2) of one per

cent (1%) by volume, and Seller shall make every rea-

sonable effort to keep the gas free of oxygen.

(d) Dust, Gums, etc.: The gas shall be commercially

free of dust, gums and other solid matter.

(e) Temperature: The temperature of the gas shall

not exceed one hundred twenty degrees (120°) Faren-

heit.

(f) Heating Value: The total gross heatin:

thousand (1,000) British thermal per =

Section 2. If the gas from any well located on Seller's

properties shall at any time fail to meet the quality speci-

fications set forth in Section 1 of this article, and if at

ies option, refuse t0 accept deliveries of gas from each

well; provided, however, that Seller shall have the right,

yo te cage eee eet

trek -pheonatig b—~dhpeair-ordgaenadh mr

be culensed teem the provisions of Gils agpecment if Soller

shall give Buyer written notice of Seller's desire to obtain

ii

Hiei HAH an

47

such release and Buyer shall not within sixty (60) days

Sos Sore cette i tat Ge a el

Ee 8 ee ee

(a) of

The point of delivery for all gas to be sold and delivered

or wells or at the outlet of Seller's T

of delivery.

ARTICLE VIll

Delivery Pressure

seuno tech guess. Gap Gall te euendieaaete>

coming the natural decline in reservoir pressure and shall

(subject to the further provisions of this Article VIII) at

minimum quantities of gas which Buyer is obligated to

purchase from time to time hereunder as determined in

accordance with Article IV hereof.

Section 2. Buyer shall have the right to refuse to ac-

cept delivery of gas from any well producing at a natural

wellhead flowing pressure at the point of delivery for such

soe Go da bn egden, at ep

[201]

hin ninety (90) days after Buyer refuses to ac-

paca tenafcorepie va nennadindiral

construction of compression facilities necessary to deliver

such gas at a pressure of at least two hundred fifty pounds

(250%) per square inch gauge, in which event Buyer

right granted Buyer pursuant to Article XVIII hereof)

from such weil hereunder so long as such pressure is main-

tuned and the gus otherwise mects the requirements of

deliveries from any such well and Seller shall not elect

to install compression facilities as above provided, the gas

thereafter produced from such well from the reservoir in

which it 1s then completed and the gas reserves contained

in said reservoir underlying the acreage attributable to

said well as determined pursuant to Article V hereof shall

be released from the provisions of this agreement if Seller

shall give Buyer written notice of Seller's desire to obtain

such release and Buyer shall not within sixty (60) days

thereafter agree to accept delivery of such gas at pressures

49

fifty pounds (2502) per square inch

gauge.

Section 3. Dane a coe ee

therin system which is incapable of pro-

per day at a aateral well Sowing pressure at the point of

Gelivery of twelve hundred pounds (1200%) per square

ana cunans Goes eae a Seller shall have

the right, at its option, at any time within ninety (90)

days after Buyer refuses to connect any such well, to pro-

ceed to

necting line from such well to a

7 cxining guibaring eyiem, i whic

vech well is then completed undetiying the aceeage st

tributabie to such well, as determined pursuant to Article

V hereof, shall be released from the provisions of this

agreement.

ARTICLE IX

Buyer shall not be responsible for the gas prior to its

has been delivered to Buyer at the delivery point or points

specified in Article VII hereof, after which delivery Buyer

shall be deemed in exclusive control and possession there-

of and responsible for said gas and

{203}

caused thereby. eanel Oo ante tak me n

htt tha thes Gansiians agities any dine tor demas

arising out of its respective operations and/or facilities

installed hereunder.

ARTICLE X

Meters

Section 1. Buyer, at its sole cost and expense, shall

install, maintain and operate at each delivery point a

neue Gee ise tie ae ate Se Ge aanentng

shall be installed and operated in accordance with the

Report No. 3, dated April, 1955, of the Netural Ges

Department of the American Gas Association, as sup-

51

cause the chests on euch esters to be changed cach eight

(8) days and at the end of cach month, or at such other

times as may be agreed upon by the parties hereto. The

cessible at all reasonable times to inspection and examir

tion by Seller.

Section 2. From time to time and at least once im each

ur sah dail be called tex anti as Gh Gtnnian a6 Se

an tt colar coil os ame Gio Gael ook Uo ie Se

it desires a special test of any meter, the other party shall

curacy of such meter and joint observation of any adjust-

ments. If any such test shall be requested by Seller and

upon such test, the measuring equipment shall be found

charged to

[204]

Seller, otherwise the cost of all such tests shall be borne by

Buyer. Buyer shall give notice to Seller of the time of all

Oe ee

j ment of Buyers mete and changing of chars

nin k Geen Gee

acy shall be two per cent (2%) or more, the registration

of such meter shall be corrected at the rate of such inac-

curacy for any period which is definitely known or agreed

upon, but in case the period is not definitely known or

agreed upon, then for a period extending back one-half

52

(2) of the time elapsed since the date of the last calibra-

a2 puis © 0 aaaesal a If, for any reason,

any meter is out of service or out of repair so that the

amount of gas delivered cannot be estimated or computed

from the reading thereof, the amount of gas delivered

through the period such meter is out of service or out of

hereto upon the basis of the best data available, using the

first of the following methods which is feasible:

a. By using the registration of Seller's check meter if

installed and accurately registering.

& SS eS eee

and operate check meters to check Buyer's meters, but

reasurem cei gu i © pS Se

seule t the cuamel Sach chock metens ond eu

a ee eS eee

eration of the meters to be installed and maintained by

Buyer at or near the points of delivery.

53

ARTICLE Xl

Units of Volume

Section 1. The unit of volume for all purposes here-

under (except as otherwise specified in Sections 2 and 3

of this Article XI) shall be one thousand (1,000) cubic

feet at an absolute pressure of fourteen and sixty-five hun-

dredths pounds (14.654) per square inch at a tempera-

ture of sixty (60) degrees Fahrenheit.

Section 2. The unit of volume for the determination of

the gross heating value under subparagraph (f) of Section

1 of Article VI hereof shall be the amount of gas, on a dry

basis, which would occupy a volume of one (1) cubic

foot at a temperature of sixty (60) degrees Fahrenheit

and under a pressure equivalent to thirty (30) inches of

mercury at thirty-two (32) degrees Fahrenheit.

Section 3. The unit of volume for determination of qual-

ity values under subparagraphs (b) and (c) of Article VI

hereof shall be one (1) cubic foot at a temperature of

sixty (60) degrees Fahrenheit and under a pressure equiv-

alent to thirty (30) inches of mercury at thirty-two (32)

degrees Fahrenheit.

[206]

ARTICLE XII

Gas Measurement

Section 1. The volumes of gas delivered hereunder

shall be computed in accordance with the specifications

in Gas Measurement Committee Report No. 3,

dated April, 1955, of the Natural Gas Department of the

American Gas Association, as supplemented and modified

54

from time to time, applied in a practical and appropriate

manner, and appropriate correction shall be made for de-

viation of the gas from Boyle’s Law in accordance with

said Gas Measurement Committee Report No. 3.

Section 2. For the purpose of measurement, the aver-

age absolute atmospheric (barometric) pressure shall be

assumed to be thirteen and twotenths pounds (13.24)

to the square inch, regardless of the actual elevation or

location of the delivery point above sea level or of varia-

tions in such barometric pressure from time to time. For

meters of the orifice type, the following factors shall be

given due consideration:

a. The temperature of the gas flowing through Buyer's

meters shall be obtained by the use of a recording ther-

mometer so installed by Buyer that it may properly re-

cord the temperature of such gas. The arithmetical aver-

age of the hourly temperature during the period gas passed

shall be used to make proper computations of volume

hereunder.

b. The specific gravity of the natural gas shall be de-

termined by Buyer each six (6) months on or as near

the first of each six (6) months’ period as practicable, by

means of an

[207]

Edwards Balance or by such other method as may be

agreed upon by the parties hereto. Such test shall determ-

ine the specific gravity to be used in computations for the

measurement of gas delivered during such six (6) months’

period.

— oreo

55

Section 3. Buyer shall give notice to Seller of the time

of all tests of gas delivered hereunder or of any equip-

ment used in measuring or determining the nature or qual-

ity of such gas, in order that Seller may conveniently have

its representative present. Should Seller not be satisfied

with any such tests, it shall so notify Buyer and Buyer

shall perform such retests as may be necessary to assure

an accurate test.

Section 4. Determination of the gross heating value of

the gas delivered hereunder shall be made upon the basis

of tests of the metered stream corrected to eliminate the

diluent content thereof.

ARTICLE XIll

Price

Section 1. Buyer shall pay Seller for gas purchased

hereunder in accordance with the following schedule:

(1) For the period commencing on the date of first

delivery of gas hereunder and continuing until January

1, 1968, sixteen and one-half cents (164%2¢) per one thou-

sand (1.000) cubic feet.

(2) For the five (5) year period commencing January

1, 1968, seventeen and one-half cents (174%2¢) per one

thousand (1,000) cubic feet.

(3) For the next five (5) year period and for each

succeeding five (5) year period thereafter, the price to be

paid by Buyer to Seller for all gas delivered hereunder

shall be increased one cent (1¢) per one thousand

(1,000) cubic feet over the price in effect during the pre-

ceding five (5) year period.

56

For gas with diluent content in excess of five per cent

(5%) by volume, taken in the aggregate and considered

as a commingled stream, the above specified prices shall

be reduced by an amount

[208]

calculated by multiplying such price by the decimal equiv-

alent of the difference between the actual per cent diluent

content of such gas and five per cent (5%).

Section 2. If the Federal Power Commission, or any

successor governmental authority having jurisdiction in

the premises, shall at any time hereafter prescribe, for

the area in which Seller’s properties are situated, a higher

just and reasonable area rate for the purchase of gas than

the price herein provided to be paid, then the price to

be paid by Buyer to Seller for gas delivered under the

provisions of this agreement shall be increased, effective

as of the date such higher price is prescribed, to equal

such higher rate; provided, however, that Buyer shall have

the right, at its option, to intervene in any area rate pro-

ceeding held to give consideration to any area rate higher

than those provided for herein, to oppose any such higher

area rate, and in the case of any such higher area rate,

to seek relief from any regulatory agency or any court

having jurisdiction, but such relief, if obtained, shall not

result in a price hereunder which is less than the price

set out in this Article XIII.

The provisions of this Section 2 shall be null and void

and of no force or effect unless and until the same shall

be held to be a “permissive” contract provision under

Section 154.93, Subchapter E, Chapter I, Title 18 of the

ieee "-*

PER CM ne

57

Code of Federal Regulations, by action of the Federal

Power Commission in its proposed rule making in Docket

R-298, notice of which was issued on January 26, 1966,

or in other appropriate proceeding.

ARTICLE XIV

Billing and Payment

Section 1. On or before the tenth (10th) day of each

calendar month, Buyer shall render to Seller a statement

showing the amount of gas purchased by Buyer hereunder

during the preceding calendar month, and payment for

such gas less all applicable taxes paid by Buyer for

Seller's account (no taxes shall be paid by Buyer

[209]

for Seller's account except by agreement between the

parties, unless such payment shall be required by law)

shall be made by Buyer to Seller on or before the twenty-

fifth (25th) day of the calendar month in which such

Statement is rendered.

Section 2. Upon request, Buyer shall furnish Seller

the measurement charts applicable to any monthly state-

ment. Seller shall return to Buyer all charts after a thirty

(30) day period.

Section 3. Any error or discrepancy in charts or state-

ments furnished pursuant to the above shall be promptly

reported to Buyer and Buyer shall make proper adjust-

ment thereof within thirty (30) days after final determina-

tion of the correct volumes or values involved; provided,

however, that if no such errors or discrepancies are re-

ported to Buyer within two (2) years from the date of

58

such chart or statement the same shall be conclusively

deemed to be correct.

Section 4. Seller shall have access to Buyer's records

and books at all reasonable hours so far as they affect

measurement and settlement for gas sold hereunder.

ARTICLE XV

Taxes

Section 1. Subject to the other provisions of this

article, Seller shall pay or cause to be paid all taxes

and assessments imposed on Seller with respect to the gas

delivered hereunder prior to its delivery to Buyer, and

Buyer shall pay or cause to be paid all taxes and assess-

ments imposed upon Buyer with respect to gas delivered

hereunder after its receipt by Buyer. Neither party shall be

responsible or liable for any taxes or other statutory

charges levied or assessed against any of the facilities

of the other party used for the purpose of carrying out

the provisions of this agreement.

Section 2. Any sales, transaction, occupation, service,

production, severance, gathering, transmission, export or

excise tax, assessment or fee levied, assessed or fixed by

the United States, the State of Texas, or other govern-

mental authority and taxes of a similar nature or equiva-

lent in effect (not including income, excess profits, capital

stock, franchise or general property

[210]

taxes) in respect of or applicable to the gas delivered

hereunder to Buyer in addition to or greater than those,

if any, being levied, assessed or fixed on the date of this

ee ed ne cn ee

59

agreement in respect of or applicable to such gas and

which Seller may be liable for, either directly or indirectly,

or through any obligation to reimburse others, are here-

inafter collectively referred to as an “additional tax”.

It is expressly understood and agreed between the parties

hereto that Buyer shall, subject to the conditions herein-

after set forth, pay to Seller three-fourths (34ths) of any

such additional tax. Should Seller so become liable for any

such additional tax, Seller shall notify Buyer immediately.

Within ninety (90) days after the end of each calendar

month, Seller shall prepare and submit to Buyer a state-

ment setting forth the amount of any such additional tax

that Seller has paid during such calendar month, and

within thirty (30) days after submission of such statement,

adjustment between the parties hereto shall be made by

Buyer reimbursing Seller to the extent of three-fourths

(%ths) of the amount of any such additional tax which

Seller shall have so paid. The tax reimbursement herein

provided for shall apply to the total amount of money

Seller is required to pay by virtue of any such additional

tax but shall not apply to any delinquent interest or pen-

alty payments that may be applicable to any such ad-

ditional tax. Taxes applicable to any royalty, overriding

royalty, production payment or similar interest shall be

considered to be covered by the provisions of this Section

2 only if the reimbursement made by Buyer to Seller

with respect thereto is passed on by Seller to the owner

of such royalty, overriding royalty,

[211]

production payment or similar interest.

ARTICLE XVI

Term

This agreement shall be effective from the date hereof

ah a on on a

ARTICLE XVII

Connection of Wells

mn accordance with the provisions heveof, Buyer shell

gas wells then situated on Seller's properties. Thereafter,

as each additional gas well is completed or recompleted

on Seller's properties, Seller shall nouf y Buyer in wnting

of the completion or recompiction thereof, and Buyer

shall, within ninety (90) days after receipt of such

notice, Connect such well to its gathering system. Buyer's

obligation to connect wells to its gathering system shall

be subject to the provisions of Section 3 of Article VIII

of this agreement.

ARTICLE XVIII

Regulation of Flow

ge era anne

late the flow of gas at the delivery points ~

actuating demands, subject. however, pate “

control to the extent necessary to pr =

rates of withdrawal as in Seller's opinion may result in well

or reservoir damage.

aie: Reeiy gaat and anign t Sayer, teeter a

Seller has the right so to do, all requisite cascments and

par of Buyers pipcines, exer stanons, and other equip

taxes and other taxes. As between Buyer and Seller, Seller

shall at all umes have the obiigation to make settlement

for all royalnes, overriding royalties and other payments

due to the owners of the mineral, royalty and other in-

terests under Seller's

[213]

leases, as modified by such assignments, unitizati

aguements oud ties Gotimants on exep eqgeen of canned

or otherwise be binding upon Seller, and to make scttie-

ments with all other persons having any interest in the

gas (or the proceeds of the sale thereof) sold by Seller

hereunder. Seller shall save and hold Buyer free and harm-

less from all suits, actions, debts, accounts, damages,

costs, losses and expenses arising from or out of adverse

claims of any and all persons to the gas sold by it here-

under or to royalties, overriding royalties or other pay-

ments with respect thereto, or to taxes, licenses, fees or

the gas passes to Buyer or which may be levied and

assessed upon the sale thereof to Buyer, subject, however.

to the other provisions of this agreement. In case of any

asus ein to Ge Gis of any gus bengit and suid

agreement, retain the purchase price thereof up to the

amount of such claim, without interest, until such claim

bond, in form and with sureties acceptable to Buyer,

conditioned to save Buyer harmless.

ARTICLE XXI

Force Majeure

Except for Buyer's obligations to make payment for gas

delivered hereunder, neither party hereto shall be liable

custadaen, tontngy or antiten @ undies artes

pipe, freezing of wells or pipelines, the making of repairs

or alterations to pipelines or plants, or any other cause,

whether of the kind herein enumerated or otherwise, not

reasonably within the control of the party claiming

“force majeure”. Upon the occurrence of an event con-

stituting “force majeure”, the same shall, so far as possible,

be remedied with all reasonable dispatch. The settlement

of strikes or lockouts or industrial disputes or disturbances

shall be entirely within the discretion of the party having

the difficulty, and the above requirement that any “force

majeure” shall be remedied with all reasonable dispatch

shall not require the settlement of strikes, lockouts or

industrial disputes or disturbances by acceding to the

demands of any opposing party therem when such course

is inadvisable im the discretion of the party having the

difficulty.

m4

ARTICLE XXII

Rights of Seller

[215]

assigns, the following prior rights with respect to the gas

subject hereto:

(a) The right to deliver to lessors under any of the

eames culiject Lteste, gus soquised in kind to mest tee

dunt gm tenth tonen. enees

(b) The mght to use gas reasonably required to de-

velop and operate Seller's propertics, including, but not

acluding, however, te gas fing of ol and for presur

operations.

(c) ne eee ene Canine Speen ot

of first deliveries of gas hereunder.

(d) Subject to the other provisions of this |

subject to this agreement shall be and remain the ex-

clusive right of Seller. Seller may, in its sole uncontrolled

discretion and as it deems advisable, drill new wells. re-

pair or rework old wells, renew or extend in whole or in

part any lease or unit, and abandon any well or sur-

render, terminate or release all or any part of any lease

which im Seller's sole opinion is i

production methods of producing gas in payi —

wi +e or eDpre ae

(e) The right from time to time to alter any gas uni

by imcreasing or decreasing the acreage contained therein

or to pool or combine any lease or unit or any part thereof

with other

aa ae aoe ae ce ubr ohs (a)

and (b) above shall be taken upstream from Buyer's

metering faciliues.

ARTICLE XXIll

Rules and Regulations

79701, or to Buyer at P. O. Box 1492, El Paso, Texas

79999, as the case may be, or to such other address

as either party shall respectively hereafter designate in

true copy of such conveyance or transfer; provided, fur-

ther, that either Buyer or Seller, or both, may assign its

oe, Oe one ees eee

) il Sra ey bonds oe

comtso te © companion, eliieat ie ae

the parties hereto to qualify to do business in the State of

Tanes, Ret £9 Ca Ss ee ee eee

ming party of its obligations hereunder.

67

ARTICLE XXVI

Topical Headings

The topical headings used herein are inserted for con-

venience only and shall not be construed as having any

substantive significance or meaning whatsoever or an in-

dicating that all of the provisions of this agreement rela-

ting to any particular topic are to be found in any par-

[218]

IN WITNESS WHEREOF, the parties hereto have

caused this agreement to be duly executed in duplicate

originals, on this the day and year first above written.

“BUYER”

El Paso Natural Gas Company

By: V. M. PLUMMER

V. M. Plummer

Attorney-in-Fact

“SELLER”

Shell Oil Company

By: C. P. BRISTOL

Vice President

68

[219]

EXHIBIT “A”

This Exhibit “A” is attached to and made a part of

agreement between EL PASO NATURAL GAS COM-

PANY and SHELL OIL COMPANY, dated February 3,

1966:

SELLER'S PROPERTIES:

Lease Acres

Number Description Gross Net

J. D. BODKINS All of Section 2, PSL,

Lease UN-33, et al Block C-4, Reeves County,

Texas 627 472.65

J. M. RAPE NE/4 of Section 12 and all

Leases WT-4619, of Section 13 and Section

WT-4601 and 14, PSL, Block C-3, Reeves

WT-4602 County, Texas 1440 1085.51

O. P. BECKEN All of Section 11,

Leases WT-4613, PSL, Block C-3

WT-4672, et al Reeves County, Texas 640 361.84

Total - - - - 2707 1920.00

[220]

APPENDIX A

SCHEDULE 2

SOUTH MARSH ISLAND BLOCK 6

CONTRACT WITH MICHIGAN WISCONSIN

Factors affecting gas delivery and take obligations:

Provisions PAGE(S)

Reservations of gas 3-4

Plant fuel and shrinkage 6

Reservations of control over operations 7-8

Reserve redeterminations 8-9

Lack of Buyer’s capacity 9-10

Whether contract is in its first 36 months 12-13

Daily minimum take 13

Whether it is oil well or gas well gas 13

Allowables 13

Deliverability reduction 13-14

Deliverability restoration 14-15

Ratable withdrawals 15

Credit for over-takes 16

Mak 16

Btu iency 20

Non-specification gas 20

Government orders 30

Force majeure 30-31

EE EEE EL

70

[221]

GAS SALES CONTRACT

THIS AGREEMENT, made and entered into as of the

3rd day of May, 1968, by and between SHELL OIL

COMPANY, a corporation of the State of Delaware

(hereinafter referred to as “Seller”) and MICHIGAN

WISCONSIN PIPE LINE COMPANY, a corporation of

the State of Delaware (hereinafter referred to as “Buy-

er”);

WITNESSETH:

WHEREAS, Buyer desires to obtain an additional sup-

ply of natural gas to supplement and augment the supply

now committed to Buyer; and

WHEREAS, Seller owns or controls certain gas reserves

underlying lands and leaseholds located in the South

Marsh Island Area, Offshore, Louisiana, from which

Seller desires to sell gas to Buyer under the terms and

conditions hereinafter set forth:

NOW, THEREFORE, in consideration of the mutual

covenants hereof, the parties agree together as follows:

ARTICLE I

DEFINITIONS

1. The term “gas well gas” shall mean that part of

the effluent produced from a well classified as a gas-well

by the regulatory agency having jurisdiction in such mat-

ters, which remains in the vapor phase after passing such

well effluent through a conventional mechanical separator

or separators for the separation of liquids and gas.

ee ae ee eam

71

2. The term “oil well gas” shall mean that part of the

effluent produced from a well classified as an oil-well by

the regulatory agency having jurisdiction in such matters

which remains in the vapor phase after passing such well

effluent

[222]

through a conventional mechanical separator or separators

for the separation of liquids and gas.

3. The term “gas”, unless the context otherwise re-

quires, shall mean gas well gas, oil well gas, the combina-

tion of both, and shall include the residue gas resulting

from processing of gas well gas and/or oil well gas.

4. The term “reserves” shall mean the estimated quan-

tities of recoverable gas to be delivered hereunder that re-

mains, as of the date of initial delivery hereunder, in

reservoirs which underlie the lands and leaseholds owned

or controlled by Seller subject to this Agreement and in

which a flowing gas test or a wire line test (Schlumberger

Formation Tester or equivalent) in each segment thereof

has been made indicating commercial quantities of gas

are available.

5. The term “accounting year” shall mean each calen-

dar year or portion thereof, during the term of this Agree-

ment.

6. The term “annual contract quantity” shall mean a

quantity of gas equal to the sum of the daily contract

quantities in effect during an accounting year.

7. The term “day” shall mean the 24-hour period com-

mencing at seven o’clock (7:00) a.m. Central Time.

72

8. The term “month” shall mean a calendar month or

portion thereof.

9. The unit of volume for all purposes hereunder, un-

less otherwise herein specified, shall be one cubic foot

of gas at a base temperature of sixty (60) degrees

Fahrenheit and at an absolute pressure of fifteen and

twenty-five one-thousandths (15.025) pounds per square

inch and as otherwise provided by the Standard Gas

Measurement Law of the State of Louisiana.

[223]

ARTICLE Il

CERTIFICATION AND RIGHT OF TERMINATION

1. Both Seller and Buyer agree, upon the execution

of this Agreement, to file within thirty (30) days with

the Federal Power Commission and to prosecute with due

diligence applications for Certificates of Public Conveni-

ence and Necessity or such other authorizations as may

be necessary to authorize Seller to initiate and carry or

the sale of gas contemplated hereunder and to authorize

Buyer to construct and operate the facilities necessary

to accept and transport the quantities of gas to be pur-

chased hereunder.

2. If either party shall fail to obtain such Certificate

or other necessary authorization from the Federal Power

Commission containing terms and conditions acceptable

to the party to whom issued by August 1, 1968, or if

an unacceptable authorization is issued prior to such

date, either party may cancel this Agreement by giving

written notice thereof to the other party at any time

prior to the issuance of acceptable authorizations to both

73

parties. Each party hereto shall promptly notify the

other party in writing when such party has received a

Certificate or authorization and whether or not it is ac-

ceptable. It is agreed and understood that a determina-

tion as to whether or not such Certificate or authoriza-

tion is acceptable shall be made in the sole and exclusive

discretion of the party to whom such Certificate or au-

thorization is issued.

ARTICLE III

RESERVATIONS OF SELLER

1. Seller hereby expressly reserves and excepts from

the terms of this Agreement such portion of the gas now

underlying the lands and leaseholds subject to this Agree-

ment as may be required in Seller's opinion as a prudent

[224]

operator for processing plant fuel and shrinkage, lease

fuel, drilling, deepening, reworking, compression, operat-

ing, and gas lifting. Seller also reserves the right to use

gas committed hereunder for cycling, repressuring and

secondary recovery purposes. Such reservations (except

for drilling, deepening and/or reworking) shall be limited

to uses associated with Seller's leases hereunder.

2. In addition, Seller hereby expressly reserves and

excepts from the terms of this Agreement all gas pro-

duced including gas sold to others than Buyer, prior to

the date on which Buyer initially takes gas hereunder;

provided, however, that any such sales shall be termi-

nated prior to such date.

74

3. Seller shall have the right to process or have pro-

cessed at an onshore location all or a portion of the gas

deliverable to Buyer hereunder for the removal of lique-

fiable hydrocarbons. Such processing shall be at the same

point on Buyer’s 20” lateral line (or loops thereof)

which extends from Eugene Island Block 199 to

Buyer's 20” mainline in the Patterson Field Area,

St. Mary Parish, Louisiana at which Seller processes

gas delivered under the Gas Sales Contract dated

July 18, 1967 between Buyer and Seller. Such processing

shall be under conditions acceptable to both parties.

Seller shall exercise the right reserved by this Section 3

by giving notice to Buyer within three (3) years from

the date of initial delivery hereunder. Title to all products

so removed shall remain vested in Seller. Nothing con-

tained herein shali be construed so as to prevent Seller

from using conventional separation equipment (which

shall include low temperature well head separation units)

prior to delivery to Buyer.

If Seller elects to process gas deliverable to Buyer

hereunder such processing shall be in a plant owned by

Seller or by Seller and others. Seller agrees that gas

owned by others than Buyer will not be commingled in

such processing plant with gas owned by Buyer (except

for minor volumes of flash gas). Seller, to

[225]

the extent it has the right to do so, further agrees that

all other producers selling gas to Buyer and delivered

by Buyer or such other producer to such plant shall be

given the opportunity to participate in such plant on an

eee a

AMS

AaB NN MS, 1048 TRE PSO I ce

Ne i OO OIE 81a LOFT OM IIRLIT ABE ARIEL

75

equitable basis. Such processing shall be for recovery and

disposition solely by Seller (and other plant owners or

plant suppliers) of liquefiable hydrocarbons, helium gas

to the extent that Seller has the right to extract helium

and other constituents of the raw gas stream other than

methane (except methane necessarily removed in such

processing), it being understood that Buyer shall not

acquire any right, title or interest in any products resulting

from such processing.

Buyer agrees to install measuring facilities and other

facilities necessary to permit the tie-in and the delivery

and redelivery of the gas. Buyer’s materials and installa-

tion of such facilities (including overheads) shall be re-

imbursed by Seller and Seller (as to its share) shall re-

store in kind gas vented by Buyer in making tie-in con-

nections. Buyer agrees that in the event Buyer delivers

a portion of the gas flowing in its 20” offshore pipeline

or loops thereof to be processed by others than Seller

such gas after being processed will not be redelivered

into the 20” offshore pipeline or loops thereof prior to

the delivery of Seller’s gas to Seller for processing.

Seller’s right to process its gas for extraction of lique-

fiable hydrocarbons is subject to the following general

conditions:

(i) Residue gas shall be returned to Buyer without

cost to Buyer;

[226]

(ii) Such processing shall not cause a plant volume

reduction (consisting of shrinkage resulting from

extraction of liquefiable hydrocarbons, plant fuel

76

and other uses or losses of gas in the plant) of

more than ten (10) per cent;

(iii) Such processing shall not render the gas so pro-

cessed incapable of meeting the quality specifica-

tions contained in Article VII of this Agreement;

and

(iv) Seller agrees to restore any pressure decline great-

er than fifty (50) psig resulting from such process-

ing.

Gas processed by Seller in Seller’s plant shall be de-

livered, redelivered, measured and accounted for in ac-

cordance with procedures mutually satisfactory to Buyer

and Seller.

Seller's plant volume reduction shall be subtracted from

the volume delivered at the delivery point, or points, here-

under and the net volume thus obtained shall be used for

purposes of computing Buyer’s payments hereunder for

gas delivered and in determining whether Buyer and Seller

have met their delivery and purchase obligations under

this Agreement; however, it is agreed that Seller shall have

the right to deliver to Buyer, at the delivery point, or

points, hereunder, a volume of gas in excess of that

volume requested by Buyer equal to the total volume

reduction resulting from processing.

All plant operations conducted by Seller shall be at

its sole cost and expense and Seller agrees to indemnify

and save Buyer harmless from all losses, damages and

expenses which may occur or be asserted by reason of

accident or occurrences resulting from Seller’s exercising

its processing rights as provided hereunder.

-

Pe pee

77

[227]

In the event gas other than gas delivered under this

Agreement is being transported through Buyer’s facilities

at the point at which Buyer makes delivery of gas to

Seller from processing, or in the event Seller's gas de-

livered to Buyer under this Agreement at some future

date is transported through a line other than Buyer's

20” offshore pipeline, or loops thereof, Seller shall have

the right to process a quantity of the commingled gas in

Buyer’s line referred to above, having a liquefiable hydro-

carbon content equal to the total liquefiable hydrocarbon

content of the gas delivered by Seller to Buyer under this

Agreement.

Buyer agrees that the pressure of the gas at the point

at which Buyer makes delivery of gas to Seller for process-

ing shall not be in excess of 1050 psig.

If Seller exercises the right to process its gas as reserved

by the first paragraph of this Section 3 of Article III,

Buyer shall reduce the amount of its payments for gas

deliveries by an amount obtained by multiplying Seller’s

plant volume reduction by 1.5 cents per Mcf as compen-

sation for transporting the plant volume reduction to the

plant delivery point from the point of delivery. It 1s under-

stood that the foregoing provision of this paragraph shall

not be applicable if and to the extent that Seller restores

such plant volume reduction in kind from other gas at

the plant or such other onshore point or points as may

be mutually agreeable to the parties hereto.

4. The obligations of Seller hereunder are subject to

the ability of Seller’s wells to produce without waste and

in accordance with prudent oil and gas field practice, and

ee

78

Seller shall not be required to produce any well in excess

of the maximum rate of flow fixed by law or regulatory

body or in excess

[228]

of the maximum efficient rate of flow of such well. The

control and operation of Seller’s lands and leaseholds

producing gas to be sold to Buyer hereunder shall remain

the exclusive right of Seller. Seller may also, at its sole

discretion, abandon or shut-in any well or surrender, re-

lease or terminate any lease.

5. It is understood that certain of Seller’s properties

subject hereto are now or may hereafter be subject to

agreements with other producers providing for the pooling,

joint operation and/or unitization of said properties and

all or a portion of the gas to be delivered by the Seller

to Buyer hereunder shall be the gas attributable and

allocated to Seller under the terms of said agreement or

agreements as a result of the leases committed thereto.

ARTICLE IV

COMMITMENT OF GAS

1. Subject to the provisions of Article III hereof, Seller

commits to the performance of this Agreement Seller’s

interest now owned or hereafter acquired in all gas which

underlie the lands and leaseholds within the areas out-

lined in Exhibit “A” and which is recoverable from said

lands and leaseholds pursuant to the terms and provisions

of this Agreement from and after the date hereof. Seller

and Buyer agree that the reserves of Seller available for

delivery from the lands and leaseholds subject to this

OEE LAR LTRS LT OEE DEE LOLA EOE IY OTIS ic ERI

79

Agreement are 75 billion cubic feet which shall constitute

the initial determination of reserves for the purpose of

this Agreement.

2. Seller may request in writing one or more re-

determinations of reserves hereunder prior to September

1, 1971. Thereafter either Seller or Buyer may request

in writing a redetermination of reserves provided, how-

ever, such requests shall not be made more often than

once each year. Any request for such reserve redetermina-

tion must be based upon significant new or different data

than that used in the previous determination or redeter-

mination.

[229]

If upon any redetermination of reserves the volume of

reserves is less than the volume last previously determined,

Seller shall have the right, but not the obligation, to

commit within ninety (90) days after the completion of

the redetermination such additional gas reserves for de-

livery at the then existing, points of delivery, or at mutu-

ally agreed points of delivery on Buyer’s pipeline system

onshore in the State of Louisiana or in the Gulf of Mexico

offshore therefrom, as may be necessary to make available

to Buyer reserves from such combined committed reserves

equal to the volume last previously determined.

Buyer shall notify Seller in writing, within thirty (30)

days after the redetermination of reserves, of the date such

redetermination shall become effective, provided that,

subject to the provisions of Section 3 of this Article IV,

such date shall not be later than sixty (60) days after

the completion of the redetermination.

80

3. If Buyer requires additional authority to enable it

to transport or sell all or a portion of the gas committed

to the performance of this Agreement following a re-

determination of reserves, as provided in Section 2 of this

Article IV, Buyer shall notify Seller within thirty (30)

days after such redetermination that Buyer will apply

to the Federal Power Commission for requisite authority

to take such gas, whereupon the effective date of the re-

determination shall be postponed pending decision by the

Federal Power Commission and construction of any neces-

sary facilities. Thereupon Buyer shall, within ninety (90)

days after the date of redetermination of reserves, file

with the Federal Power Commission and thereafter prose-

cute with due diligence an application for such authoriza-

tion as may be necessary to enable Buyer to take the

additional gas. Upon receipt of such authorization, Buyer

Shall proceed with due diligence to construct

[230]

such facilities as may be required. The redetermination

of reserves provided in Section 2 of this Article IV shall

be effective as of the first day of the month following the

date of completion of the facilities authorized. If Buyer

shall fail to obtain such authorization from the Federal

Power Commission within twelve (12) months after the

date of redetermination of reserves, then at Seller’s written

request to Buyer, at any time prior to the issuance of

such authorization, Buyer shall release such excess re-

serves.

4. If Buyer and Seller shall be unable to agree on a

redetermination of the reserves as provided in Section 2

of this Article IV, the same upon written notice by either

81

party to the other shall be determined by an independent

engineer or geologist (including a member of an inde-

pendent firm) mutually acceptable to Seller and Buyer.

Within fifteen (15) days after the independent engineer

or geologist is appointed pursuant to the foregoing pro-

visions of this Section 4 the independent engineer or

geologist shall meet, hear the parties hereto with respect

to the matter of said reserves, and within thirty (30)

days after his appointment he shall arrive at a redeter-

mination of said reserves. Any determination made by

such independent engineer or geologist shall be final and

binding on the parties hereto. The fee and expenses of

such independent engineer or geologist shall be equally

divided between Buyer and Seller. In the event Buyer

and Seller cannot agree upon an independent engineer or

geologist or any such party selected shall fail to submit

a written reserve determination as above provided, either

party may request in writing that the matter be arbitrated,

and within ten (10) days after such request, the same

shall be determined by arbitration in the following man-

ner: Buyer shall appoint one arbitrator and Seller shall

appoint one arbitrator and the two

[231]

arbitrators so appointed shall select a third arbitrator. If

either Buyer or Seller shall fail to appoint an arbitrator

within ten (10) days after a request for such appoint-

ment is made by the other party in writing, then the

party making request for such appointment shall name

the second arbitrator. If the two arbitrators so appointed

shall fail within ten (10) days after the appointment of

the second of them to agree on a third arbitrator, the

——~ Fa ae

82

arbitrator necessary to complete a board of three arbitra-

tors shall be appointed upon application by either party

therefor by the Judge, senior in point of service, of the

United States District court for the Eastern District of

Louisiana. In the event such Judge should fail or refuse

to act within ten (10) days after application has been

made, then either party hereto may request the American

Arbitration Association to select the arbitrator to com-

plete the Board of three. Within fifteen (15) days after

the third arbitrator is appointed pursuant to the fore-

going provisions of this section, the arbitrators shall meet,

hear the parties with respect to the matter of said reserves,

and within thirty (30) days after the selection of the third

arbitrator the arbitrators shall arrive at a redetermination

of said reserves. Any redetermination agreed to in writing

by at least two of said arbitrators shall be final and bind-

ing on the parties hereto. All arbitrators appointed pur-

suant to this Section 4 shall be qualified independent

engineers or geologists experienced in the oil and gas

industry and competent to pass on the matter of said

reserves. Each party hereto shall pay the fees and ex-

penses of the arbitrator selected by it. The fees and ex-

penses of the third arbitrator shall be borne equally by

the parties hereto.

5. Upon request, Seller shall promptly furnish Buyer

copies of such information as Seller may possess with

respect to the lands and leaseholds subject to this Agree-

menty including but not limited to legal description of

such lands and

[232]

leaseholds, gas and liquid production, tests relating to the

83

ability of wells to produce, pressures, flow characterisics,

completion reports, electric logs, core analyses, gas and

other fluid analyses, and any and all other information

relating to such wells provided, however, that Seller shall

not be required to disclose anything which in Seller’s

sole discretion is of a confidential nature. Seiler upon

request of Buyer will furnish Buyer each month with

copies of all reports filed with the Louisiana Department

of Conservation or other regulatory bodies having juris-

diction over such wells and gas committed to this Agree-

ment, including but not limited to production, well test,

completion and recompletion reports.

ARTICLE V

QUANTITY

1. Subject to the following provisions of this Agree-

ment, commencing with the date of first delivery here-

under and continuing for a period of thirty-six (36)

months, the daily contract quantity of gas hereunder shall

be equal to one hundred-fifty (150) per cent of one

million (1,000,000) cubic feet for each seven and three-

tenths billion (7,300,000,000) cubic feet of reserves, as

established under Article IV hereof. If the volume of

committed reserves should either increase or decrease as

a result of any redetermination made in accordance with

Article IV hereof, or Seller is unable to maintain a daily

delivery equal to the volumes requested by Buyer up to

Seller's maximum delivery obligation, said daily contract

quantity of gas shall be adjusted in accordance with the

provisions of Section 1, Section 4 or Section 5 of this

Article V, whichever is applicable.

2. Subject to the following provisions of this Agree-

OR tN rt eae

84

fent, commencing at the end of the first thirty-six (36)

month period and continuing during the

[233]

remaining term of this Agreement, the daily contract

quantity of gas hereunder shall be equal to one million

(1,000,000) cubic feet for each seven and three-tenths

billion (7,300,000,000) cubic feet of reserves, as estab-

lished under Article IV hereof. If the volume of com-

mitted reserves should either increase or decrease as a

result of any redetermination made in accordance with

Article IV hereof, or Seller is unable to maintain a daily

delivery equal to the volumes requested by Buyer up to

Seller’s maximum delivery obligation, said daily contract

quantity of gas shall be adjusted in accordance with the

provisions of Section 2, Section 4, or Section 5 of this

Article V, whichever is applicable.

3. Buyer agrees that its take of gas hereunder during

any one day shall never be less than sixty-five (65) per

cent of the applicable daily contract quantity hereunder

nor less than the volume of oil well gas tendered by

Seller, and Seller agrees to deliver such quantity of gas

per day as Buyer may from day to day elect to purchase,

up to the maximum efficient rate of flow permitted by

Seller's wells and facilities. Seller shall not be required

to produce wells in excess of the maximum rate of flow

fixed by law or regulatory body.

4. Should Seller fail on any day for any reason other

than force majeure to deliver the daily volume requested

by Buyer hereunder up to one hundred twenty-five (125)

per cent of the daily contract quantity, then the daily

contract quantity for that day shall be reduced to eighty

;

©

;

4

3

4

i

3

ERA AGL TE eS whee sie

a ETI CROP ho hoc BE gs

85

(80) per cent of the volume which Seller delivered on

any such day, provided, that Seller shall he allowed a

daily variation in deliveries of five (5) per cent of the

daily quantity requested by Buyer, provided further, that

the aggregate daily deliveries during each month are

within one (1) per cent of the aggregate daily volumes

requested by Buyer for such month.

5. In the event Seller fails for any reason other than

force majeure to deliver the volumes requested by Buyer

up to one hundred twenty-five (125) per cent of the daily

contract quantity for five (5) consecutive days, then at

[234]

Buyer’s option, commencing with the first day of the

month following the end of the fifth day of such failure

to deliver and continuing thereafter until adjusted as

hereinafter provided, the daily contract quantity shall be

reduced to eighty (80) per cent of the average daily

volume delivered during such five day period.

In the event the daily contract quantity is adjusted

downward as provided in this Section 5, then Seller shall

have the opportunity to restore all or a portion of the

daily contract quantity determinable under Sections 1

or 2 of this Article V, whichever is applicable, in the

following manner. In not more than seven (7) days after

Seller has notified Buyer in writing that the inability to

deliver gas hereunder has been remedied, Buyer shall,

upon twenty-four (24) hours notice by Buyer to Seller,

commence a five day test period during which time Seller

will deliver and Buyer will purchase the maximum volumes

deliverable by Seller, but not to exceed one hundred

twenty-five (125) per cent of the maximum daily con-

i a tite Wt miei ol “

86

tract quantity determinable under Sections 1 or 2 of this

Article V, whichever is applicable. Commencing with

the first day of the month following the last day of such

test period, the daily contract quantity shall be deemed

to be eighty (80) per cent of the average daily volume

delivered by Seller during such five day test period.

If, as a result of such test the daily contract quantity

is not restored, Seller shall not be permitted until three

(3) months following the completion of such test to again

request Buyer to conduct a subsequent test unless a reason-

able amount of additional development or remedial work

has been performed by Seller since that last test, in which

case, evidence of such work shall be sufficient to permit

a subsequent test.

[235]

Upon receipt of notice from Seller that the inability

to deliver has been remedied, Buyer may, in lieu of con-

ducting such test, notify Seller that commencing with the

first day of the month following receipt of said notice

from Seller, the downward adjustment in daily contract

quantity as provided in Section 5 hereof, shall no longer

be effective.

6. If withdrawals by others from a reservoir or com-

mon source of supply containing reserves committed here-

under cause drainage of Seller’s reserves, Buyer shall be

obligated upon written notice from Seller to Buyer ac-

companied by sufficient proof of such drainage, to in-

crease, within the limits of the physical and certificated

capacity of its facilities, its receipt of gas therefrom to

the extent necessary to equalize withdrawals and prevent

such drainage. In the event such capacity of Buyer’s

a: eevee at. ts —

Se eee!

EOS ORES tl Pp BLES Pt EPPS Bi id nl

Ee FL.

87

facilities is not sufficient to handle the increase in volume

necessary to prevent drainage of Seller’s reserves and

Buyer does not desire to construct the necessary addi-

tional capacity, then Seller reserves the right to sell and

dispose of such gas which Seiicr deems necessary in order

to equalize its withdrawals with withdrawals of gas by

others so as to prevent drainage of gas by others. Buyer

agrees that in the event that such capacity of Buyer's

facilities is not sufficient to handle the increase in volume

necessary to prevent drainage of Seller’s reserves ana

Seller does not elect to sell and dispose of gas in order

to equalize its withdrawals with withdrawals of gas by

others, tnen Buyer will include as a part of its next appli-

cation to the Federal Power Commission for onshore or

offshore Louisiana facilities a request for such authoriza-

tion as may be necessary to accept and transport the

quantities of gas necessary to prevent such drainage.

Buyer shall not be obligated to purchase and receive in

excess of its desired quantities if Seller without jeopardiz-

ing its leaseholds or

[236]

reserves committed hereunder is able to decrease its with-

drawals from other sources delivering gas hereunder and

increase its withdrawals from such reservoir or source of

supply to the extent necessary to prevent such drainage.

7. At the end of each accounting year the parties

shall promptly determine (a) the annual contract quan-

tity, (b) the cumulative annual contract quantity from

the date of first delivery under this Agreement to the end

of the accounting year in question, (c) the total quantity

of gas taken under this Agreement by Buyer from the

PE te orn iy oust.

88

date of first delivery hereunder to the end of the account-

ing year in question, and (d) the total quantity of gas

previously paid for by Buyer but not taken, for which

Buyer has not taken credit under the makeup provision

hereinafter provided.

If the volume computed under (b) above exceeds the

sums of the volumes computed under (c) and (d), Buyer

shall within thirty (30) days after such computation pay

Seller an amount determined by multiplying such excess

volume by the price per Mcf applicable at the end of the

accounting year in question. If in any accounting year

during the first five accounting year period following an

accounting year for which Buyer paid Seller for gas not

taken, Buyer takes gas in excess of the annual contract

quantity, Buyer shall deduct, as recoupment for gas

previously paid for but not taken, from future payments for

gas delivered under this Agreement. The deduction for

recoupment volumes shall apply to the first volumes of

gas in the earliest accounting year in which Buyer is

entitled to receive recoupment and shall continue in order

by accounting years until the total recoupment volumes

of prepaid gas equals the lesser of the volume of gas

taken in excess of the annual contract quantity or the

total recoupment Buyer is entitled to receive. The amount

of the payments to be deducted shall be computed on the

same basis for which Buyer prepaid for an equivalent

volume of gas.

[237]

8. Notwithstanding anything to the contrary contained

herein, on any day when deliveries or takes are affected

by force majeure and the volumes delivered are less than

the applicable daily contract quantity, the daily contract

quantity hereunder, or portion thereof, shall be deemed to

be the actual volume delivered and purchased during the

effective period of such force maieure.

9. Deliveries of gas by Seller to Buyer hereunder will

be at more than one point thus from time to time as

required Buyer and Seller, after giving consideration to the

ability of wells to produce and facilities to handle gas,

will agree as to the volume of gas Seller can deliver and

Buyer can transport from each point of delivery.

ARTICLE VI

INITIAL DELIVERY AND TERM

1. After Buyer and Seller notify each other that their

respective Certificates of Public Convenience and Neces-

sity or such other authorizations issued by the Federal

Power Commission are acceptable, both parties agree to

commence and proceed with reasonable diligence to con-

struct the lines and facilities required to deliver and re-

ceive gas under this Agreement so that the facilities shall

be completed and placed in operation by November 1,

1968, or four (4) months after the notification referred

to above, whichever is later, and commencing on Novem-

ber 1, 1968, or four (4) months after such notification,

whichever is later, Buyer shall be obligated to take or pay

for gas hereunder.

[238]

2. This Agreement shall become effective as of the date

hereof and shall remain effective for a period of twenty

(20) years from the date of initial delivery hereunder and

90

from year to year thereafter until cancelled by written

notice given by either party to the other not less than six

(6) months prior to the end of such twenty (20) year

period or any subsequent anniversary date thereof. If

Seller uses gas co hereunder for repressuring

or secondary recov perations and during such time

the daily contract Qmantity is adjusted downwards in

accordance with the provisions of Sections 4 and 5 of

Article V hereof, the primary term of this Agreement

shall be extended for a period of time sufficient for Buyer

to purchase a volume of gas equivalent to that volume

which Buyer would have been entitled to receive if the

repressuring or secondary recovery operation had not

been conducted.

ARTICLE VII

QUALITY OF GAS

1. All gas delivered by Seller under the terms of this

Agreement shall conform to the following specifications:

(a) The gas shall be commercially free from dust,

gum, gumforming constituents, gasoline and other liquids

and solids which may become separated from the gas.

(b) The gas shall not at any time have an oxygen

content in excess of one(1) per cent by volume and Seller

shall make every reasonable effort to keep the gas free

of oxygen.

(c) The gas shall not contain more than one grain

of hydrogen sulphide per one hundred (100) cubic feet.

This purity requirement shall be considered as satisfied

if a strip of white filter paper recently moistened

OM WOK so. OSM

91

[239]

with a solution of one hundred (100) grains of lead

accetate in one hundred (100) cc. of water be ex-

posed to the gas for one and one-half (14%) minutes

in an apparatus previously purged through which

gas is flowing at a rate of approximately five (5)

cubic feet per hour, the gas not impinging from a jet

upon the test paper and after this exposure the test

paper is not found distinctly darker than a second

paper freshly moistened with the solution and not

exposed to the gas. If the gas does not meet the purity re-

quirements determined in the above test, the hydrogen

sulphide content shall be determined by a cadmium sul-

phide quantitative test.

(d) The gas shall not contain more than twenty (20)

grains of total sulphur (including the sulphur in any hy-

drogen sulphide and mercaptans) per one hundred (100)

cubic feet.

(e) The gas shall have a total heating value per cubic

foot of not less than one thousand (1,000) British

thermal units. The term “total heating value per cubic

foot” shall mean the number of British thermal units, pro-

duced by the combustion at constant pressure, of the

amount of gas, saturated with water vapor, which would

occupy a volume of one (1) cubic foot at a temperature

of sixty (60) degrees Fahrenheit and under pressure

equivalent to that of thirty (30) inches of mercury at

thirty-two (32) degrees Fahrenheit and under the standard

gravitational force with air of the same temperature and

pressure as the gas, when the products of combustion are

cooled to the initial temperature of gas in air and when

the water formed by combustion is condensed to a liquid

stage.

92 »

(f) The water content of the gas shall not be more

than six (6) pounds per million cubic feet of gas meas-

ured at a pressure of 14.7 pounds per square inch

absolute and sixty (60) degrees Fahrenheit temperature;

provided, however, so long as the gas hereunder is pro-

cessed subject to the provisions of Article III, Section 3

hereof, Seller shall be permitted to deliver gas at

[240] \

the points of delivery hereunder containing up to seven

(7) pounds of water per million cubic feet of gas meas-

ured at a pressure of 14.7 pounds per square inch absolute

and sixty (60) degrees Fahrenheit temperature.

(g) The gas shall be delivered at a temperature not

in excess of one hundred thirty (130) degrees Fahren-

heit.

2. Should the heating value of the gas be found to

average less than one thousand (1,000) British thermal

units per cubic foot during any given month, Buyer shall

have the option to suspend the portion of the deliveries

hereunder causing such condition without obligation here-

under, or to reduce the total amount payable as the

purchase price to be paid for gas by an amount determined

by multiplying such total amount ordinarily payable

by a fraction whose numerator is the deficiency of British

thermal units below one thousand (1,000) and its de-

nominator one thousand (1,000). Nothing herein con-

tained shall be construed as to allow Seller to reduce

the heating value of the gas below one thousand (1,000)

British thermal units by processing methods.

3. Should the gas offered for sale to Buyer fail at any

time to conform to any of the specifications of this Article,

93

Buyer shall notify Seller of any such failure and Seller

shall make a diligent effort to correct such failure so as to

deliver gas conforming to the above specifications. if Seller

is unable to deliver gas conforming to the above specifica-

tions by treatment consistent with prudent operations and

by means which are economically feasible in Seller's

opinion, Buyer may at its option suspend purchase of all

or a portion of such gas, and it shall be relieved of its

obligations hereunder, for the duration of such time as

the gas does not meet such specifications. Failure of Buyer

‘Oo accept gas not meeting specifications for a period of

thirty (30) consecutive days, where such failure is not

occasioned by default of Seller, shall give Seller or Buyer

the right to cancel and terminate this Agreement upon

ten (10) days’ written notice, only insofar as it relates

to the reserves relative to the gas not meeting such specif-

cations.

* * *

[241]

year from the rendition thereof.

ARTICLE XIV

REGULATION

1. This Agreement, insofar as it is affected thereby,

shall be subject to all applicable and valid laws, ordi-

nances, rules and regulations of Federal, State, Parochial

and Municipal Governments and authorities having juris-

diction, and in the event this Agreement or any provisions

hereof shall be found contrary to, or in conflict with any

such law, ordinance or regulation, the latter shall be

deemed to control.

94

ARTICLE XV

WARRANTY

1. Seller warrants generally the title to all gas delivered

hereunder and agrees to indemnify Buyer from all suits,

actions, debts, acts, damages, costs, losses and expenses

arising from or out of adverse claims of any or all persons

to said gas and to royalties or charges thereon incurred

prior to the delivery thereof.

ARTICLE XVI

LIABILITY

1. As between the parties hereto, Seller shall be in

control and possession of the gas deliverable hereunder

and responsible for any damage or injury thereby until

same shall have been delivered to Buyer at the points of

delivery, after which del:very Buyer shall be in exclusive

control and possession thereof and responsible for any

injury or damage thereby.

ARTICLE XVII

FORCE MAJEURE

1. If either Buyer or Seller is rendered unable, wholly

or in part, by force majeure or any other cause of any

kind not reasonably within

[242]

such party’s control to perform or comply with any obli-

gation or condition of this Agreement, upon giving notice

and reasonably full particulars to the other party such

obligation or condition shall be suspended during the

continuance of the inability so caused and such party

shall be relieved of liability and shall suffer no prejudice

95

for failure to perform the same during such period;

provided, obligations to make payments then due for gas

delivered hereunder shall not be suspended and the cause of

suspension (other than strikes or lockouts) shall be reme-

died so far as possible with reasonable dispatch if, in the

sole discretion of the party unable to perform its obliga-

tions, it is economically feasible to remedy such cause of

suspension. Settlement of strikes and lockouts shall be

wholly within the discretion of the party having the

difficulty. The term “force majeure” shall include, without

limitation by the following enumeration, acts of God and

the public enemy, the elements, fire, accidents, break-

downs, shut-downs for purposes of necessary repairs,

relocation, or construction of facilities, breakage or acci-

dent to machinery or lines of pipe, the necessity of making

repairs or alterations to machinery, or lines or pipe, in-

ability to obtain materials, supplies, permits, or labor to

perform or comply with any obligation or condition of

this Agreement, strikes and any other industrial, civil or

public disturbances, any act or omission (including failure

to take gas) of a purchaser of gas from Buyer which is

excused by any event or occurrence of the character

herein defined as constituting force majeure, and any laws,

orders, rules, regulations, acts or restraints of any govern-

ment or govenmental body or authority, civil or military.

ARTICLE XVIII

ASSIGNMENT

The terms, covenants, and conditions hereof shall be

binding on the parties hereto, their successors and assigns

It is provided, however, that no assigninent of this

Agreement shall

96

[243]

APPENDIX A

SCHEDULE 3

GRAND ISLE BLOCK 76

CONTRACT WITH FLORIDA GAS

Provisions

Limitation of dedication

Reservation of control over operations

Reservations of Gas

Oil well gas take

Gas well gas take

Favored nations on take

Failure to deliver daily volume

Extended failure to deliver

Deliverability determinations

Minimum daily take

Minimum monthly take

Make-up

Ratable take

Limit on deliveries

Prudent operations

Allowables

Excess pressure in Buyer’s line

Election not to install compression

Discontinuance of compression

Incapable wells

Non-specification gas

Government orders

Plant fuel and shrinkage

Limit on plant fuel and shrinkage

Restoration of plant fuel and shrinkage

Force majeure

Factors affecting gas delivery and take obligations:

PAGE(S)

>

fon

COC MIIVAAAUUUALWYWND

97

[244]

GAS PURCHASE AND SALE CONTRACT

THIS CONTRACT, made and entered into as of Au-

gust 21, 1975, by and between SHELL OLL COMPANY,

herein called “Seller”, and FLORIDA GAS TRANS-

MISSION COMPANY, herein called “Buyer”;

WITNESSETH;

WHEREAS, Seller desires to sell and deliver to Buyer

and Buyer desires to purchase and receive from Seller

natural gas, in the quantities and upon the terms and

conditions hereinafter set forth, from the reservoirs here-

inafter described.

NOW THEREFORE, for and in consideration of the

premises and the mutual benefits and covenants herein

contained, Seller and Buyer hereby covenant and agree

as follows:

ARTICLE I — DEFINITIONS

1.1 Except where the context otherwise indicates

another different meaning or intent, the following words

and terms as used herein shall be construed to have the

meanings indicated:

- (a) The word “day” shall mean a period of twenty-

four (24) consecutive hours beginning at 7:00

a.m. (local time). The date of a day shall be that

of its beginning.

(b) The word “month” shall mean a period beginning

at 7:00 a.m. (local time) on the first day of a

Se Tt AB a om

98

calendar month and ending at 7:00 a.m. (local

time) on the first day of the next succeeding

calendar menth.

(c) “Contract Year” shall mean a calendar year ex-

(d)

(e)

cept that the first Contract Year shall mean a

period beginning on January 1, 1976, or on the

date of first delivery of gas hereunder, whichever

is the earlier date, and continuing to the end of

the last day of the calendar year during which

such date occurred.

[245]

“Oil Well Gas” shall mean gas produced from a

well classified as an oil well under the laws or

rulings of the regulafory body having jurisdiction

of production allowables of the well, and, in the

absence of such classification, such term shall

mean gas which is associated or blended with

crude oil at the time of its production.

“Gas Well Gas” shall mean gas other than Oil

Well Gas.

(f) The word “gas” shall mean both Oil Well Gas

(g)

and Gas Well Gas.

“Mcf” shall mean one thousand (1,000) cubic

feet of gas.

(h) The term “psig” shall mean pounds per square

(i)

(j)

inch gauge.

“Btu” shall mean British thermal units.

“Delivery Capacity” shall mean the maximum daily.

99

quantity of Gas Well Gas Which, in the course

of prudent operation (as determined in the sole

discretion of Seller, exercised in good faith), can

be delivered to Buyer from Seller’s interest in the

properties covered hereunder.

ARTICLE Il — GAS SUBJECT TO CONTRACT

2.1 Subject to all of the terms, conditions, and limita-

tions herein set forth, Seller agrees to sell and deliver or

cause to be delivered to Buyer, and Buyer agrees to

purchase and receive from Seller, during the term hereof,

gas attributable to twenty-five percent (25% ) of Seller's

interest in gas to be produced from the reservoirs identi-

fied or described below, but only to the extent that such

reservoirs underlie the acreage outlined on Exhibit “A”:

The Nos. 9, 10 and 12 sands, the “A” series sands,

the B. sand, the “C” series sands and the “D” series

sands existing within the stratigraphic interval be-

tween electric log measured depths of 3200 feet and

9450 feet in OCS-G 2161 Well No. 1.

[246]

ARTICLE III — RESERVATIONS

3.1 Seller expressly reserves unto itself, its successors

and assigns, the following rights with respect to gas sub-

ject to this Contract and a quantity of gas sufficient to

satisfy such rights:

(a) To operate Seller’s leaseholds, lands and/or in-

terests therein, free from any control by Buyer, in

such manner as Seller deems advisable, including

Pa ts ae

7

(b)

(c)

(d)

(e)

(f)

100

the right (but never the obligation) to driil new

wells, to repair and rework old wells, renew and

extend (in whole or in part) any lease, to abandon

any well or surrender any lease (in whole or in

part) for any reason, and to abandon, modify,

extend or dispose of any facilities owned or in-

stalled (in whole or in part) by Seller.

To deliver gas to lessors in quantities sufficient to

fulfill Seller’s lease obligations.

To use gas for the development and operation of

the properties subject hereto and properties which

Seller operates for itself and others in the vicinity

of the properties subject hereto, including (bu!

not limited to) the use of gas for fue’, drilling

(including gas drilling), deepening, reworking.

compressing, gas lifting, processing and treating.

and to use gas on the properties subject hereto

for cycling, repressuring or other supplementat

recovery operations.

To sell gas to others for drilling (including gas

drilling) in the vicinity of Seller’s properties which:

are subject hereto.

To process gas as hereinafter provided.

To form or participate in formation of any uni!

or units, including (but not limited to) any field.

wide unit or units, which may include all or part

of the reservoirs subject hereto; provided, that this

Contract shall apply to the interest of Seller in

such unit or units to the extent that such interes!

is attributable to the reservoirs subject hereto.

101

[247]

ARTICLE IV — QUANTITIES

4.1 Commencing on January 1, 1976, or on the date

of first delivery of gas hereunder, whichever is the earlier

date, and continuing throughout the term hereof, Seller

shall sell and deliver to Buyer and Buyer shall purchase

and take from Seller, during each day, all of the Oil Well

Gas made available for sale by Seller from the reservoirs

subject hereto. If, for any reason, Buyer fails to take Oil

Well Gas tendered to it by Seller, Buyer shall pay Seller

therefor as if such gas had been actually taken by Buyer

without any right to make up Oil Well Gas; provided,

that Buyer’s failure to take Oil Well Gas for reasons of

force majeure shall be excused from and after the date

of first delivery hereunder.

4.2 Commencing on January 1, 1976, or on the date

of first delivery of gas hereunder, whichever is the earlier

date, Seller shall sell and deliver to Buyer and Buyer

shall purchase and take from Seller

[248]

hereunder or, if available and not taken, Buyer shall pay

Seller for, during each Contract Year, a daily contract

quantity of Gas Well Gas equal to ninety percent (90% )

of Delivery Capacity. Delivery Capacity shall be deemed

to be sixteen thousand six hundred seventy (16,670) Mcf

until a determination of Delivery Capacity has been made.

The daily contract quantity provided for in this paragraph

Shall be subject to change or adjustment in accordance

with the provisions of Paragraph 4.3. Buyer shall give

Seller reasonable notice of any change in the daily quan-

ee

102

tity Gas Well Gas which Buyer elects to take hereunder.

Selle: shall change the rate of Gas Well Gas to conform

as closely as practicable to each such notice.

4.3 If, at any time during the term of this Contract,

Buyer purchases or agrees to purchase from properties

within the States of Texas or Louisiana (including the

federal offshore), from any party, daily quantities of Gas

Well Gas equal to a percentage of delivery capacity

greater than that provided in Paragraph 4.2, Buyer shall

promptly notify Seller of such purchase. Seller may then,

by notice to Buyer, elect to have the daily contract quan-

tity hereunder determined by use of such higher per-

centage, effective as of the first day of the month next

following Buyer’s receipt of such notice.

4.4 If on any day, for any reason other than force

majeure, Seller fails to deliver the volume of Gas Well

Gas requested hereunder up to Delivery Capacity, then

the daily contract quantity for that day shall be reduced

to the volume of Gas Well Gas which Seller delivered on

that day.

[249]

4.5 If for thirty (30) consecutive days, for any reason

other than force majeure, Seller fails to deliver the vol-

umes of Gas Well Gas requested by Buyer up to Delivery

Capacity, then, commencing on the first day of the month

following the end of the thirtieth (30th) day of such

failure to deliver and continuing thereafter until further

adjusted, the daily contract quantity shall be reduced to

ninety percent (90%) of the average volume of Gas

Well Gas delivered during such thirty (30) day period.

103

4.6 Delivery Capacity shall be determined in the fol-

lowing manner at the request of either party, provided,

however, such requests shall not be made more often

than once each thfee (3) months unless Seller has per-

formed a reasonable\ amount of additional development

or remedial work since the last determination: Within

seven (7) days after Buyer has received Seller’s request,

Buyer shall, with twenty-four (24) hours’ notice to Seller,

commence a seventy-two (72) hour test period during

which Seller shall deliver and Buyer shall take the maxi-

mum volumes of Gas Well Gas deliverable by Seller.

Commencing on the day following the last day of such

test period, the daily contract quantity shall be deemed

to be ninety percent (90% ) of the average daily volume

of Gas Well Gas delivered by Seller during such seventy-

two (72) hour period.

4.7 Buyer agrees to purchase and take during each

day after deliveries have commenced hereunder a quan-

tity of Gas Well Gas equal to at least seventy-five percent

(75%) of the daily contract quantity in effect. Buyer

further agrees to purchase and take during each month

after deliveries have commenced hereunder a quantity

of Gas Well Gas equal to at least ninety

[250]

percent (90%) of the sum of the daily contract quan-

tities in effect during such month.

4.8 If, for any reason other than force majeure, Buyer

shall fail to take during any Contract Year a quantity

of Gas Well Gas equal to the sum of the daily contract

quantities in effect for such year, Buyer shall, within sixty

104

(60) days after the end of such year, pay Seller for a

quantity of Gas Well Gas equal to the difference between

such sum and the quantity taken during such year. The

price to be paid for such gas not taken shall be the price

in effect at the end of the Contract Year during which the

gas was not taken.

4.9 If Buyer pays for a quantity of Gas Well Gas not

received by it, Buyer shall thereafter be entitled to re-

ceive, without payment, such quantity of Gas Well Gas

in any one or more of the five (5) Contract Years next

following the Contract Year in which Buyer failed to take

such Gas Well Gas and in which Buyer shall have first taken

the applicable sum of the daily contract quantities in

effect for each such Contract Year; provided, however,

(a) that this provision shall not operate to extend the

term of this Contract, and (b) that Buyer shall pay any

increase in price between that upon which payments were

made and that applicable at the time of taking. If, at the

end of such five (5) Contract Years, Buyer has not made

up such quantity of Gas Well Gas, Buyer shall have no

further right to receive such quantity without payment,

and Seller shall have no liability to Buyer on account of

Buyer's failure to have made up such quantity.

4.10 Buyer and Seller shall make such nominations

and/or forecasts for Gas Well Gas allowables as are

required to permit Seller to produce and

[251]

Buyer to receive the quantities of Gas Well Gas which

Buyer is obligated to take or pay for whether taken or

not hereunder. Buyer’s failure to make such nominations

105

when required shai! excuse Seller’s inability to deliver gas

because of the lack of a proper allowable, but such ex-

cused inability to deliver shall not reduce Buyer’s obli-

gation to take or pay for the daily contract quantity of

Gas Well Gas then in effect pursuant to the foregoing

provisions of this Article.

4.11 Buyer agrees that its takes of Gas Well Gas from

pony wells will be at least ratable with takes by Buyer

or others, of Gas Well Gas from each of th

subject to this Contract. epinti sal

4. 12 If on January 1, 1976, Seller is capable of com-

mencing deliveries but Buyer is unable to commence the

taking of gas hereunder, then, effective as of such date.

Buyer shall make monthly payments to Seller as though

deliveries had commenced. For each month for which

payment is due under this paragraph, Buyer shall pay

Seller on or before the tenth (10th) day of the following

month at the price in effect for such month pursuant to

Article V hereof. Such payment shall be the total of (a)

an amount calculated by multiplying such price by the

estimated volumes of Oil Well Gas produced and flared

or vented in such month and (b) an amount calculated

by multiplying such price by the sum of the daily contract

quantities of Gas Well Gas for such month as provided

for in Paragraph 4.2 hereof. Monthly payments made by

Buyer pursuant to this paragraph shall continue until

the end of the month during which actual deliveries of gas

commence hereunder. The force majeure provisions of

Article XVII hereof shall not be applicable to excuse the

payments required under this Paragraph.

106

[252]

4.13 If Buyer makes payments for Gas Well Gas pur-

suant to Paragraph 4.12, Buyer shall have the right to

make up the volumes of Gas Well Gas pursuant to Para-

graph 4.9. If this Contract is terminated pursuant to the

provisions of Article XIII hereof, payments made by

Buyer pursuant to Paragraph 4.12 for Gas Well Gas not

taken shall be promptly refunded, without interest, by

Seller to Buyer.

4.14 If, in any month, Seller is not permitted by any

governmental authority to produce any oil weil solely

because of Buyer’s failure to provide a market for Oil

Well Gas, and if Buyer’s said failure is not excused for

reason of force majeure from and after the date of first

delivery hereunder, then the payments to be made by

Buyer to Seller for Oil Well Gas pursuant to Paragraphs

4.1 or 4.12, whichever is applicable, shall be calculated

by using a volume of 6,000 Mcf times the number of

completed oil wells which Seller was not permitted to

produce in the month.

4.15 Nothing in this Contract shall require Seller to

deliver on any day a quantity of Gas Well Gas greater

than one hundred and ten percent (110%) of the daily

contract quantity in effect hereunder from time to time.

4.16 Seller’s obligations hereunder are subject to the

ability of Seller’s wells to produce without waste and in

accordance with prudent oil and gas field practice. Seller

shall not be required to produce any well at a rate in

excess of a maximum rate of flow fixed by law or regula-

tory body or in excess of the maximum efficient rate of

flow of such well.

107

ARTICLE V — PRICE

5.1 Subject to the further provisions of this Article,

Buyer agrees to pay Seller for each Mcf of gas delivered

or for which payment is

[253]

of any injuries, claims, liabilities or damages occurring

while the gas is in the former's possession.

ARTICLE VIII — PRESSURES

8.1 Except as otherwise provided in this Article, Seller

Shall deliver gas hereunder at a pressure: sufficient to

permit the gas to enter Buyer's facilities, but Buyer shall

never operate its facilities at a working pressure in excess

of 1050 psig, nor shall Seller ever be obligated to deliver

gas at a pressure in excess of 1050 psig. If Buyer does not

operate the pipeline facilities used to take gas hereunder,

and if Buyer is required by the operator of such facilities

to have gas delivered at a pressure in excess of 1050 psig,

Seller agrees to deliver gas at the required pressure, up

to 1275 psig. If Seller compresses gas to so deliver at a

pressure in excess of 1050 psig, Buyer agrees to pay Seller

a fee of seven-tenths cents (0.7¢) per Mcf of gas com-

pressed and further agrees to furnish the fuel used for

such compression, free of cost to Seller. Seller may dis-

continue compression at any time Seller deems it un-

economic.

8.2 Either party may, but neither shall be obligated

to, install and operate compression facilities for the de-

livery of gas hereunder, it being understood that either

party may discontinue the operation of such facilities if,

4 108

in the sole judgment of such party, such operation is or

becomes uneconomical.

8.3 If any well covered by this Contract is or be-

comes incapable of delivering gas against the working

pressures maintained in Buyer's line, and if neither party

elects to install a compressor, then Buyer shall, upon

request from Seller, release such well and the gas to be

produced therefrom from the

[254]

terms and provisions of this Contract.

ARTICLE 1X — MEASUREMENT

9.1 A “cubic foot of gas” for all purposes hereunder,

except where specifically provided to the contrary, is the

amount of gas necessary to fill a cubic foot of space at

a base pressure of fifteen and twenty-five thousandths

(15.025) pounds per square inch absolute and at a base

temperature of sixty degrees (60°) Fahrenheit.

9.2 The atmospheric pressure at each Delivery Point

shall be assumed to be fourteen and seven tenths (14.7)

pounds per square inch.

9.3 The gas delivered hereunder shall be measured

with orifice meters constructed and installed, and whose

computations of volume are made, in accordance with the

provision of Gas Measurement Committee Report No. 3

of the American Gas Association, as revised and reprinted

September, 1969, with any subsequent amendments or

revisions which may be mutually acceptable to Seller and

Buyer.

109

9.4 The temperature of the gas shall be determined

by a continuously recording thermometer so installed that

it may record the temperature of the gas flowing through

the meters. The average of the record, to the nearest one

degree (1°) Fahrenheit, obtained while gas is being

delivered shall be the applicable flowing gas temperature

or the period under consideration.

9.5 The specific gravity of the gas shall be determined

by spot tests made with an Edwards or other standard

type specific gravity instrument, or by a continuously

recording gravitometer so installed that it may record the

specific gravity of the gas flowing through the meters.

If the spot test method is used, the tests shall be made

quarterly or at such wther interval as

[255]

10.5 The charts and records from Buyer’s meas: ing

equipment shall remain the property of Buyer and shall

be kept by Buyer on file for a period of not less than

three (3) years. At any time within such period, Buyer

shall, upon request of Seller, submit to Seller records and

charts from its measuring equipment, together with calcu-

lations therefrom, for Seller’s inspection and verification,

subject to return by Seller within thirty (30) days from

receipt therefor.

ARTICLE XI — QUALITY

11.1 The gas delivered to Buyer hereunder shall meet

the following specifications, which herein are collectively

called “Quality Specifications”:

(a)

(b)

(c)

(d)

(e)

110

Water. The gas shall in no event have a water

content in excess of seven (7) pounds of water

per one million (1,000,000) cubic feet of gas.

Hydrogen Sulphide. The gas shall not contain

more than one (1) grain of hydrogen sulphide per

one hundred (100) cubic feet.

Total Suiphur. The gas shall not contain more

than twenty (20) grains of total sulphur per one

hundred (100) cubic feet of gas.

Temperature. The gas shall not have a tempera-

ture of more than one hundred and twenty de-

grees (120°) Fahrenheit.

Carbon Dioxide. The gas shall not contain in

excess of three percent (3%) by volume of car-

bon dioxide.

(f) Oxygen. The gas shall not contain in excess of

(g)

(h)

three percent (3%) by volume of oxygen.

Objectionable Liquids and Solids. The gas shall

(i) be free of objectionable liquids and solids and

(ii) be commercially free from dust, gums, gum-

forming constituents, or other liquid or solid mat-

ter which might become separated from the gas

in the course of transportation through pipelines.

[256]

Heating Value. The gas shall have a gross heat-

ing value of at least one thousand (1,000) Btu’s

per cubic foot. The gross heating value of the

gas shall be determined by adjusting the heating

value obtained from a mutually acceptable test of

111

one cubic foot of gas at a temperature of sixty

degrees (60°) Fahrenheit and at a pressure of

fifteen and twenty-five thousandths (15.025)

pounds per square inch absolute to compensate

for differences between the water vapor content

under testing conditions and the average water

vapor content of the gas being delivered. The

gross heating value so determined shall be ex-

pressed in Btu for all purposes hereunder. Tests

for such determination of heating value shall be

conducted at least once each month, and the re-

sult of any test shall be used until the results of a

subsequent test shall be known.

11.2 All tests required by this Article shall be con-

ducted by Buyer and at Buyer’s expense and shall be

made as often as reasonably required by approved stand-

ard methods in general use by the gas industry. Buyer

shall give Seller reasonable notice of all such tests in

_ order that Seller may have its representatives present, if

Seller so desires.

11.3 If the gas subject hereto when produced fails

to meet the Quality Specifications, Buyer shall have to

waive such failure and to continue to receive such gas.

If Buyer refuses to receive such gas and Seller does not

elect to process the gas so as to cause the same to meet

the Quality Specifications because Seller does not deem

it economically feasible to do so, then Seller shall stop

the delivery of gas from the well or wells which are pro-

ducing the gas which. is causing the gas tendered for

delivery to fail to meet such Quality Specifications. At the

election of Seller, the well or wells from which Buyer so

refuses to receive the production and the gas to be pro-

112

duced therefrom shall be released from the terms and pro-

visions of this Contract.

* * *

{257}

cost, damage or expense resulting or arising from Seller’s

failure to install, maintain and inspect such controls and

devices in accordance with such laws, regulations and or-

ders, or arising from the failure of any such control or de-

vice.

12.4 Buyer covenants and agrees to fully protect, in-

demnity and hold Seller, its successors and assigns, harm-

less from and against each and every claim, demand, or

cause of action, and any liability, cost, expense, damage

or loss in connection therewith which may be made on

account of personal injury or death, or on account of

property damage, resulting from or arising out of the in-

stallation, presence, maintenance and operation of Buy-

er’s facilities on Seller’s properties, platforms, lands and

leases, except for those damages or losses caused by Sel-

ler’s negligence.

ARTICLE XIII — REGULATORY AUTHORITIES

13.1 This Contract, insofar as it is affected thereby,

shall be subject to all present and future valid and applic-

able laws and to the valid and applicable present and fu-

ture rules, regulations or orders of any regulatory agency

or authority.

13.2 Seller and Buyer agree to seek promptly any

governmental permits, licenses and authorizations which

they individually deem necessary to carry out their re-

113

spective obligations under this Contract. Seller and Buyer

also agree to file promptly with the Federal Power Com-

mission for such Certificates of Public Convenience and

Necessity authorizing the performance by each party of

its obligations under this Contract as they individually

deem necessary, but Seller shall not be required to apply

for a temporary

[258]

certificate if, in the exercise of its sole discretion, it be-

lieves a permanent certificate to be the oniy satisfactory

form of authorization. Upon the issuance of a certificate,

the party receiving such certificate agrees promptly to

furnish the other party with a copy of the certificate issued

to it and to notify the other in writing of its acceptance of

such certificate or to furnish such party with a copy of

its rejection notice sent to the Federal Power Commission.

13.3 Immediately upon the acceptance by Seller and

Buyer of all such governmental authorizations as may be

required for each party to perform its respective obliga-

tions under this Contract, and such authorizations becom-

ing final and no longer subject to judicial review, Buyer

and Seller shall commence such action as may be required

for the performance of this Contract and diligently prose-

cute same to completion.

13.4 If Seller has not obtained a Certificate of Public

Convenience and Necessity from the Federal Power Com-

mission, if required, which is satisfactory to Seller within

six (6) months after the date of Seller’s application there-

for, then either party may terminate this Contract at any

time after such period by giving written notice of such

termination to the other party. If Buyer has not obtained

114

a Certificate of Public Convenience and Necessity from

the Federal Power Commission, if required, which is

satisfactory to Buyer within twelve (12) months after the

date of Buyer’s application therefor, then either party

may terminate this Contract at any time after such period

by giving written notice of such termination to the other

party. If this Contract is cancelled under the provisions

of this paragraph, neither party

[259]

shall be under any obligation, or liable for any damages,

to the other by reason thereof, except for payments to

be refunded pursuant to Paragraph 4.13.

ARTICLE XIV — PROCESSING

14.1 Seller reserves the right at any time to process

the gas to be delivered hereunder for the extraction of

substances contained therein other than methane (except

such methane necessarily removed in such processing).

Seller may process gas hereunder individually, jointly with

others, or by assignment of such right to one or more

parties. Seller reserves the right to process gas hereunder

at any mutually agreeable point on Buyer’s pipeline sys-

tem downstream from any Delivery Point. Buyer agrees

it will not permit any other party to process its gas on

Buyer’s pipeline system at a point on such system or de-

liver processed gas into such system upstream of such

mutually agreeable point. All substances extracted from

gas in the processing thereof by Seller shall be owned by

Seller (and other plant owners and plant suppliers, if

any), and Buyer shall not acquire any right, title or in-

terest in any substances so extracted.

115

14.2 If Seller elects to process gas at a point on Buy-

er’s pipeline system, the remaining paragraphs of this

Article shall apply to such processing and the facilities

used to process gas shall be referred to herein as the

“Plant”.

14.3 Buyer agrees to install, at no cost to Seller, main

line block valves and bypasses, Plant inlet and outlet

valves and all other facilities necessary to permit the tie-

in and operation of the Plant and the safe and satisfactory

operation of Buyer’s pipeline system, including but not

limited

[260]

to, measuring facilities, blowdown connections and scraper

traps.

14.4 Buyer agrees to deliver to the Plant, at no cost

to Seller (except that Seller shall pay such charges im-

posed by reason of any valid and applicable law, order

or rule of any governmental authority having jurisdiction),

a volume of gas containing the same number of gallons

of propane and heavier hydrocarbons as are delivered

to Buyer by Seller at the Delivery Points. If gas other than

gas delivered hereunder is being transported through

Buyer’s facilities at the Plant, Seller shall have the right

to process a quantity of such other gas as contains a quan-

tity of propane and heavier hydrocarbons equal to the

propane and heavier hydrocarbons contained in the gas

delivered at the Delivery Points hereunder. If Seller is

processing gas at the Plant and there is gas in Buyer’s pipe-

line system upstream of the Piant the processing rights for

which are owned by Buyer, then Buyer shall also deliver

116

a proportionate part of such gas to the Plant, and Buyer

hereby grants to Seller all its right, title and interest in

all substances extracted at the Plant from such propor-

tionate part of such gas. The volume of such proportionate

part of such gas shall be in the ratio that volumes of

gas delivered by Seller into Buyer’s pipeline system during

the preceding month bears to the volume of gas delivered

by all other parties into said system during such month.

14.5 All gas delivered to the Plant shall be delivered

at operating pressures between 700 and 1000 psig and at

temperatures not in excess of 100°F.

[261]

14.6 Seller shall deliver to Buyer all volumes of residue

gas remaining after processing the gas delivered here-

under in the Plant. Such residue gas shall conform to the

Quality Specifications hereia provided except that the

temperature shall be as hereinafter further provided. Seller

shall be obligated to provide such compression as may be

necessary to make up any pressure drop in excess of a

drop of 35 pounds per square inch which may occur in

the Plant. If recompression is required at the Plant, the

temperature of the residue gas shall not be in excess of

ten degrees Fahrenheit (10°F) above the temperature

of the gas delivered to the Plant nor more than one hun-

dred degrees Fahrenheit (100°F).

14.7 Gas processed in the Plant and the residue gas

therefrom shall be delivered, redelivered, measured and

accounted for in accordance with procedures mutually

satisfactory to Buyer and Seller.

14.8 Seller shall account to Buyer for the Plant volume

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reduction, which shall include Plant fuel, shrinkage and

incidental losses in the Plant. The Plant volume reduction

shall not exceed ten percent (10%) of the volume of

Seller’s gas processed in the Plant. Seller shall also ac-

count to Buyer for the difference in heating value between

the gas delivered to the Plant and the residue gas re-

delivered to Buyer to the extent that Seller has been

compensated for such heating value. At Seller’s option,

such accounting shall be by one or more of the follow-

ing methods; provided, that no such method shall inflict

any cost on Buyer by reason of the Plant volume reduc-

tion or the reduction in heating value at the Plant:

(a) By payment to Buyer for the purchase cost of the

Plant volume reduction as adjusted for the differ-

ence in heating value.

(b) By reducing Buyer’s payments hereunder by the

purchase cost of the Plant volume reduction as

adjusted for the difference in heating value.

[262]

(c) By Seller’s restoration of the Plant volume reduc-

tion by delivery to Buyer from other sources of

gas meeting the Quality Specifications hereof at

the Plant and/or at a point on Buyer's pipeline

system downstream of the Plant.

14.9 Buyer reserves the right to use such gas from

Buyer's pipeline upstream of the Plant as is required for

the reasonable and prudent operation of Buyer’s facilities

and the right to make nominal sales of gas to others for

drilling fuel, lease operations, pumping stations and other

118

similar purposes. It is also recognized that some losses

of gas volumes may occur in the operation of such fa-

cilities. Seller’s proportionate part of such gas so used

or lost shall be deducted from the quantity of gas other-

wise deliverable to Seller for processing hereunder.

14.10 All Plant overations conducted by or on behalf

of Seller shall be at its sole cost, risk and expense, and,

as between Seller and Buyer, Seller shall be responsible

for the safe handling of the gas while it is in Selier’s

custody (or the custody of another on Seller's behalf)

for processing.

ARTICLE XV — ACCOUNTING

15.1 Buyer shall furnish Seller, on or before the fifth

(5th) day of each month, a statement showing the total

quantity of gas received by Buyer during the preceding

month at each Delivery Point hereunder. If the allocation

statement referred to in Paragraph 15.2 of this Article

XV is not then applicable to a Delivery Point, Buyer shall

make payment to such address as Seller may designate

from time to time, by check on or before the twenty-fifth

(25th) day of the month following the month in which

gas was delivered to Buyer at such Delivery Point.

15.2 During any period Buyer purchases gas at any

Delivery Point from Seller and from other parties, Seller

shall furnish or cause to be furnished to

* * *

[263]

to may request the American Arbitration Association

to select the arbitrator or arbitrators to complete the

119

board of three. After three arbitrators are appointed

pursuant to the foregoing provisions of this Para-

graph 16.1, they shall meet, hear the parties with

respect to the matter to be arbitrated, and issue a

decision thereon. Any decision agreed to in writing

by at least two of the said arbitrators shall be final

and binding on the parties hereto.

16.2 All arbitrators appointed hereunder shall be

qualified by training and experience to decide the matter

to be arbitrated. Buyer and Seller shall each bear its own

costs of arbitration hereunder, including the costs of

appointing its own arbitrator. The fees and expenses of

all arbitrators not appointed by either Buyer or Seller

shall be borne equally by the parties.

ARTICLE XVII — FORCE MAJEURE

17.1 If either party is unable, wholly or in part, by

force majeure to carry out its obligations (except financial

obligations) under this Contract, it is agreed that, on

such party’s giving notice and reasonable full particulars

of such force majeure in writing or by telegraph to the

other party within a reasonable time after the occurrence

of the cause relied on, then the obligations of the party

giving such notice, so far as they are affected by such

force majeure, shall be suspended during the continuance

of any inability so caused, but for no longer period, and

such cause shall so far as possible be remedied with all

reasonable dispatch. The term “force majeure,” as em-

ployed herein, shall mean acts of God, strikes, lockouts

or other industrial disturbances, acts

120

[264]

of the public enemy, wars, blockades, insurrections, riots,

epidemics, landslides, lightning, earthquakes, fires, storms,

floods, high water, washouts, arrests and restraints of gov-

ernment and people, civil disturbances, explosions,

breakage or accident to machinery or lines of pipe, freez-

ing of wells or lines of pipe, partial or entire failure of

wells, and any other causes, whether of the kind herein

enumerated or otherwise, not reasonably within the control

of the party claiming suspension; such term shall like-

wise include (a) in those instances where any party here-

to is required to obtain servitudes, rights of way grants,

permits or licenses to enable such party to fulfill its ob-

ligations hereunder, the inability of such party to acquire,

or the delays on the part of such party in acquiring, at

reasonable cost and after the exercise of reasonable dili-

gence, such servitudes, rights of way grants, permits or

licenses, and (b) in those instances where any party here-

to is required to furnish materials and supplies for the

purpose of constructing or maintaining facilities or is re-

quired to secure permits or permissions from any govern-

mental agency to enable such party to fulfill its obliga-

tions hereunder, the inability of such party to acquire,

or the delays on the part of such party in acquiring, at

reasonable cost and after the exercise of reasonable dili-

gence, such materials and supplies, permits and permis-

sions.

17.2 It is understood and agreed that the settlement of

strikes or lockouts shall be entirely within the discretion

of the party having the difficulty, and that the above re-

quirement that any force majeure shall be remedied with

all reasonable dispatch shall not require the settlement of

—

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[265]

strikes or lockouts by acceding to the demands of an op-

posing party when such course is inadvisable in the dis-

cretion of the party having the difficulty.

ARTICLE XVIII—WARRANTY

18.1 Seller hereby warrants title to the gas delivered

hereunder, the right to sell the same, and that it is free from

all liens and adverse claims, and agrees, if notified there-

of by Buyer, to indemnify Buyer against lawsuits, actions,

debts, accounts, damages, costs (including attorneys’

fees), losses and expenses arising from or out of any ad-

verse legal claims of any and all persons to, or against,

said gas prior to delivery thereof to Buyer.

18.2

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