Introduction: Two parties disagreed on the interpretation of a clause in a minerals lease regarding the basis for the valuation of gas produced from a group of wells. We reviewed the competing valuation bases, determined gas specific gravities, identified associated gas heating values, and assessed whether varying compositions of gas components would provide a basis for analysis. Our review of the competing bases was submitted to the court and was instrumental in achieving a settlement before the court proceeding began.

Standard gas industry practice establishes the sales value of natural gas according to its calorific (heating) value, which is to say, the amount of energy generated when it is combusted. Royalty payments for gas produced from a well or group of wells are generally dependent on both the products derived from the gas and the resulting calorific value of the gas. Although natural gas is primarily composed of methane, varying proportions of heavier molecules such as ethane or propane raise the heating value. On the other hand, there may be appreciable amounts of inert gases that do not burn and thus lower the heating value. Determining the precise economic gas value without the full molecular gas composition can be challenging.

Two parties disagreed on how to value the gas produced from a group of wells because the exact composition and its associated heating value were unknown. One party argued that the specific gravity of the gas was adequate to derive a reasonably accurate heating value. At the same time, the other party claimed that the specific gravity methodology relied on unvalidated assumptions. Baker & O’Brien was requested to review the competing claims and determine whether the specific gravity heating value methodology was acceptable. We identified the specific gravities of gas produced from subject wells and compared them to the specific gravity of mixtures of natural gas components. Then, we identified the associated gas heating values and assessed varying compositions of gas components to determine whether the gas would meet the natural gas pipeline specifications without further treatment.

Our independent determination and review of the competing bases was detailed in a written report submitted to the court. This was instrumental in allowing the parties to settle before court proceedings began.