Allocation agreements

As indicated above, allocation agreements are used at a variety of different points in the gas chain: upstream, midstream and downstream. There will be different commercial and technical drivers according to the type of gas system involved and the point in the gas chain. These will obviously impact what is covered in the allocation agreement and the nature and content of the allocation, attribution and/or substitution rules that it contains. The allocation agreement will also have to fit appropriately into the framework of commercial contracts between the relevant parties.

To illustrate our comments on various aspects of allocation agreements, we are going to use an example of a fairly typical upstream gas-gathering system in the UK North Sea currently servicing four offshore gas condensate fields (see diagram on next page). The offshore pipeline system and onshore gas processing plant were originally developed by the owners of fields 1 and 2. Fields 3 and 4 are newer fields which have been tied into the pipeline system subsequently. As gas production from the current fields 1 to 4 depletes, there will be ullage in both the pipeline system and the gas processing plant which could provide throughput capacity allowing other (third party) fields or new discoveries to be tied into the pipeline system. Fields 1 to 4 each produce a mixture of oil and gas; most of the oil is extracted offshore and exported via a neighbouring oil pipeline export system. However, the gas gathering system has been designed as a wet gas system and so a proportion of the liquids remains commingled within the gas stream and is delivered together with the gas to the onshore gas processing terminal. At the onshore gas terminal, natural gas liquids are extracted from the commingled gas stream and then fractionated into three separate natural gas liquid streams (propane C3, butane C4 and condensate C5+) to

maximise sales value. The remaining dry gas stream is processed to meet NTS (national transmission system) entry specification and can be redelivered either to the national transmission system or piped direct to a gas-fired power station.

The composition of the gas streams delivered into the offshore pipeline system by fields 1 to 4 differs significantly across the four fields. The composition of gas from fields 1 and 4 is relatively lean, whilst the gas streams from field 2 and 3 are much richer and contain significantly more natural gas liquids. A component-based allocation system has been chosen to take account of these differences in composition, with a view to ensuring that the owners of the fields receive a fair and equitable proportion (of the components and resulting energy content) of each redelivery stream, to take account of their respective input contributions. The allocation agreement will need to include rules and mechanisms to enable the operator of the pipeline system and processing plant to allocate and attribute metered quantities in each redelivery stream to the users of the system (being the owners of fields 1 to 4) on a daily or hourly basis. The precise length of allocation periods will be a matter for negotiation between the parties and may be driven by their need for near-real-time data to facilitate balancing of their positions in the downstream network (in this case the national transmission system).⁴

4 History plays a part here. As an example, the original North Sea allocation agreements were primarily an after-the-day accounting process used to divide up the energy stream delivered to the monopoly buyer, British Gas, between the various gas fields and hence gas contracts. Today a downstream shipper has a need to know its allocated portion of the delivered energy in a much more timely manner, as it has to balance its downstream energy position in accordance with downstream Network Code (or equivalent) rules, which will be based on either hourly or daily balancing. Within-day (hourly or continuous) data on allocation clearly has a benefit in these situations.

North Sea wet gas pipeline system

Power

Before considering the contents of the allocation agreement in more detail, it is important to consider which other commercial agreements are likely to be in place between the various parties, as the allocation agreement will have to fit into this contractual framework. The likely commercial contracts are listed below:

• There will be a joint operating agreement between the owners of each field and probably a separate lifting agreement governing the rights and obligations of each owner to lift gas from the field.

• For reasons of competition law compliance⁵ (and possibly commercial reasons as well), the owners of each field will each sell their respective gas entitlements separately through individual gas sales agreements (GSAs). They have a number of choices. Typically, they could sell their gas to a third party at the entry point to the national transmission system downstream of the onshore gas processing plant or transfer it to their gas marketing affiliate at the same point. In this example, they may have a third option of negotiating a direct sale to the power station.⁶

• There will probably be a joint operating agreement between parties A, B, C and D concerning the ownership and operation of the offshore gas gathering system and the onshore gas processing plant (the system).

• Parties A, B C and D, as owners of the system, will also be parties to a transportation and processing agreement (the TPA⁷) with each set of field owners for fields 1 to 4. The transportation and processing agreement will set out the details of the service to be provided by the owners of the system to owners of the field (essentially gas export via the offshore pipeline system, processing at the onshore plant and redelivery of gas and natural gas liquids) and the tariff to be paid by the field owners for this service. There will usually be one transportation and processing agreement for each field connected to the system.

• Each of the field owners will then probably have agreements for storage, offloading and/or sale of the natural gas liquids redelivered to it.

The allocation agreement is critical to the gas sales agreements and natural gas liquid sales agreements as it will define the quantities available for sale in any time period. The administration and provision of allocation services is usually carried out by the operator of the system and would normally be included as part of the service, as defined under the transportation and processing agreement. In fact in many cases upstream allocation provisions start off as a schedule of allocation principles or an agreed allocation procedure which is included as part of the transportation and processing agreement. However, where a pipeline system and/or processing plant is being used by more than one set of users and there is more than one relevant transportation and processing agreement, the allocation rules applicable to each set

5 Joint gas sales normally involve the sellers fixing their gas sales price and therefore risk infringing Article 81 of the EC Treaty and the Chapter 1 prohibition in the UK Competition Act.

6 A direct delivery to the power station from the processing plant would have the advantage of avoiding any NTS capacity or commodity charges.

7 Not to be confused with third-party access!

of users need to be the same. The rules and mechanisms often become quite complicated with multiple fields and need to be set out in more detail in a separate allocation agreement to avoid uncertainty and to ensure all system users will be dealt with fairly under a single set of consistent rules.

Some gas buyers have historical rights to be party to the allocation agreement and would argue that they have a demonstrable need to be a party, especially where they are buying gas from more than one gas field in the commingled system under more than one gas sales agreement (and hence at differing gas prices). This was particularly the case where buyers bought gas under dedicated field-depletion contracts. Today, with most gas bought under supply contracts (ie, not depletion based), there is less argument for a buyer to want assurance and an audit trail to ensure that a particular hydrocarbon molecule originated from a particular gas field.

Producers and upstream gas sellers will tend to resist gas buyers being party to the allocation agreement. There will also be a concern that gas buyers may be able to use information disclosed under allocation agreements for gas trading purposes, rather than for verifying compliance with the relevant gas sales agreement.

6.1 Allocation principles

Allocation agreements will often set out a series of allocation principles, with the intent that the detailed allocation and attribution rules should be consistent with such principles. The principles will establish the essential basis of allocation – whether based on a pro rata allocation of volumes, or on balance of energy, or on a mass component basis, or on a combination of these methods. The allocation principles may define input and output streams to be metered and may set certain metering standards.⁸

The allocation agreement is likely to set out certain other allocation principles such as:

• the allocation and attribution rules shall be fair and equitable and shall be applied by the operator to all users of the system in a non-discriminatory fashion;

• the allocation and attribution rules may be modified in accordance with the modification procedure (to improve fairness or accuracy), but no modification may be made which introduces material and/or systematic bias into the allocation process; and/or

• the basis for priority rules as between users.

6.2 Allocation/attribution priorities

It is usual for upstream gas allocation systems to be driven by the gas redelivery nominations of the system users as, particularly where gas production is the main value driver for a field, gas sales agreements are likely to be buyer nominated and gas buyers are likely to have flexible nomination rights. The system user will want to be

8 The metering standards are likely to be amplified by a substantial set of measurement provisions.

Measurement and metering is a very technical area and is, of course, crucial to the accuracy and fairness of any allocation system. Measurement provisions are often contained in a schedule to the allocation agreement or sometimes in a separate measurement manual.

able to reflect his gas buyer’s nomination rights under the allocation agreement and, as part of the service under the transportation and processing agreements, the system operator will be expected (by the system users) to operate the system so as to deliver in each allocation period the aggregate of users’ nominations at each gas redelivery point (in this case, the power station and the national transmission system) with a high degree of accuracy. System users will not normally nominate redeliveries of specific quantities of natural gas liquids, but will be obligated to take delivery of and export from the gas processing plant (usually by pipeline) whatever quantities of natural gas liquids are allocated and attributed to them, as a result of processing the required quantity of gas to ensure that the gas nominations are met.

In determining amounts to be attributed to system users in each output stream in each allocation period, upstream allocation agreements often take into account additional criteria over and above the system users’ respective inputs into the system and their nominations for gas redeliveries from it, for example:

• whether the user had booked firm transportation and processing capacity in respect of such nomination, or whether the user is relying on a reasonable endeavours (ie operationally interruptible) transportation and/or processing right; and

• whether the user’s nominations were timely or were given or changed after an applicable nomination gate closure (typically this would give higher priority to nominations made on Day D-1).

The attribution rules may incorporate the above concepts into an attribution hierarchy, which is used to allocate (between the users) any shortfall or excess amounts of aggregate metered gas redelivery quantity (eg, to the national transmission system) in an allocation period as compared with users’ aggregate nominations. The raison d’être for incorporating concepts such as firmness of transportation/processing capacity and timeliness of nominations into the attribution hierarchy is to give value to the higher cost of booking firm capacity and to incentivise users to nominate (or re-nominate) in a timely fashion.

6.3 Pipeline stock

Gas pipelines of a significant length are able to store a substantial amount of gas and can operate safely within a range of pressures and operating conditions. The ability to store gas in the offshore pipeline system as ‘linepack’ without immediately delivering it to the onshore gas processing plant potentially gives the users of such facilities increased flexibility and gas deliverability.

One question for the transportation and processing agreement and for the allocation agreement is whether the users of the system should be allowed to use the pipeline storage capability as part of the service they have paid for, whether they should pay extra for it, or whether the benefit of such storage capability should be reserved for the owners and the operator of the pipeline system.

Where the users are not entitled to access the pipeline’s storage capability, in each allocation period their inputs into the system need to balance (on an energy basis) their offtakes from the system in gas and natural gas liquids, except where the

system operator agrees otherwise. In circumstances where the users are entitled to share in the pipeline’s storage capability, this is usually given effect in the allocation agreement through the concept of pipeline stock accounts.

The idea of pipeline stock accounts is to give each system user or field group the right (and obligation) to manage its own stock of gas in the pipeline within certain operational limitations. This gives each of the system user’s a right to share the storage and linepack capability of the offshore pipeline system, but the responsibility to manage its stock in such a way that the system operator is able to operate it within safe operating parameters. Usually, each system user or field group will be required to establish and maintain a minimum pipeline stock and will not be entitled to allow its pipeline stock to exceed a maximum level. The allocation agreement will prescribe sanctions (probably rights for the system operator either to buy or sell gas on the system user’s/field group’s behalf in order to bring the relevant pipeline stock account within the permitted range), if a system user/field group breaches either its minimum or maximum limit. Provided that they remain within the permitted range, pipeline stock accounts give system users/field groups access to a share of the flexibility/linepack capability of the pipeline system. This assists system users in supporting their gas delivery obligations (eg, if their field experiences operational difficulties) and may allow users to maximise deliveries to the downstream network to meet price and demand peaks.

A similar concept has been incorporated downstream, in the contractual arrangements for users of the Bacton–Zeebrugge Interconnector. Here the shippers each

‘own’ and operate a share of the pipeline inventory on a pipe-within-a-pipe basis.

6.4 Substitution

The concept and purpose of substitution has been considered above (see Sections 3 and 4 of this chapter) and this fulfils a similar function to pipeline stock and may provide additional delivery support. Substitution provisions for fields connected to an offshore pipeline system are often included in the allocation agreement.

6.5 Fuel gas

The operation of the offshore pipeline system and the gas processing plant will consume fuel (eg, in gas compression, extraction and fractionation of natural gas liquids and in removal of contaminants). The allocation agreement and probably also the transportation and processing agreements will entitle the system operator to use gas from the commingled stream as fuel gas. There may also be an element of shrinkage across the system.

The allocation agreement will contain provisions for the allocation of fuel gas and shrinkage amongst the system users. Generally, this will be done pro rata to throughput during the relevant period. Where fuel gas has been consumed to remove certain contaminants from the gas stream and measurements (eg, by gas chromatograph or sampling) indicate that such contaminants have been introduced by a particular field, the allocation agreement may include provisions to enable the relevant fuel gas usage to be allocated to the owners of that field. Fuel gas and shrinkage allocation can be implemented by the system operator making an