(referred to in paragraphs 2.36 and 4.71)
Types of contract for gas supply
1. Shippers’ agreements to purchase gas from producers differ in detail but are of two basic types:
seller’s option and buyer's option.
2. Seller’s option contracts are usually depletion contracts and are often for small amounts of gas
produced in association with oil and liquids from fields in the Northern and Central North Sea. In a
depletion contract the buyer contracts to purchase all the gas that can be economically produced from a
particular reservoir before a specified termination date. Some guidance about expected annual and daily
quantities is usually provided in advance for seller’s option contracts, but it is not until immediately
before the gas day that the seller makes a final nomination for the volume of gas that it has available. The
onus is then normally on the buyer to take it.
3. Buyer’s option can apply to depletion or supply contracts. Under a buyer’s option depletion con-
tract, the annual contract quantity (ACQ) is typically declared by the seller one to two years in advance
of each contract year and varies with the physical performance of the field and the buyer’s previous
takes. A supply contract is generally not related to a particular reservoir and the ACQ for each year of the
contract life is agreed from the start. In both cases the ACQ generally applies to a 12-month period, but
can be restricted to the winter months if the supply is seasonal. Some supply contracts have no flexibility
for either buyer or seller, or there may be a very limited option for the buyer to decide on a fixed monthly
profile before the start of the contract year.
4. Most fully flexible contracts, whether supply or depletion, were signed before the competitive gas
market was well developed. They are often termed ‘take-or-pay’ contracts because the buyer is required
to pay for, but not necessarily take, a minimum quantity in each year, usually between 85 and 100 per
cent of the ACQ (the minimum bill). Volumes that have been paid for but not taken can, in most cases,
be recovered as ‘free gas’ in a subsequent year once the minimum bill quantity has been taken. Some-
times volumes taken above the minimum bill quantity and paid for in the normal way can be used to
reduce the minimum bill quantity in a future year.
5. In most of these flexible contracts, the buyer has the right to call for gas (nominate) at a rate some-
where between defined maximum and minimum levels on any day provided that 24 hours’ notice has
been given. Both minimum and maximum rates can vary with the season, tending to be at their lowest in
summer. The maximum daily rate (in winter) expressed as a percentage of the average rate over the year
(the daily contract quantity or DCQ) defines the swing of the contract. Swing in these contracts typically
ranges from 110 to 167 per cent. Depending upon the contract, the minimum rate can be as high as
90 per cent of the DCQ or as low as zero. If a field is not producing, the lead-time for positive nomin-
ations may be greater than 24 hours. The buyer can change the nomination at shorter notice, typically
12 hours and occasionally 6 hours, but this option is usually restricted to a percentage of the existing
nomination because of the time needed to get a physical response from the field. Additionally, sellers
may have a ‘reasonable endeavours’ obligation to provide gas at shorter notice.