Common Stream Operating Agreement

The Model Common Stream Operating Agreement prepared for the PJVA has been developed to support the role of a Common Stream Operator. That role can include all the activities that are associated with managing the Product Owner's interest in the streams feeding into and through a production facility like a gas plant. This can include all the activities associated with the meter difference allocations, the ownership allocations and the contract sales allocations (marketing arrangements). Although some of these activities have been covered in plant CO & O agreements, the general agreement support for all the activities has historically been weak. But in spite of this lack of agreement clarification, plant operators have performed these activities. This unfortunately has led to many audit issues, many lost business opportunities and in some cases the allocation processes have become inefficient and ineffective over time and no longer meet the Product Owners needs. The PJVA Model Common Stream Operating Agreement is intended to highlight these issues and provide a model that would minimize them for the current and future business environments.

To better understand the business drives that exist to use the Model Common Stream Operating Agreement we need to first define the weaknesses or shortcomings with the existing situation. Every operation will have it's own unique situation, but the analysis done by the task force has found that most areas will have one or more of the following shortcomings:

• Limited or no definition of the contract (marketing arrangement) allocation processes
• Limited or no definition of the nomination receipt and confirmation process
• Limited or no definition of how meter difference is handled from wells to sales
• Unclear definition of the owner allocation rules
• Limited or no definition of the required daily estimating or allocation processes
• Site specific agreement terms that don't represent current activities
• An inflexible agreement structure that is difficult to amend and accommodate business changes
• Lack of clarity for handling custom processed product versus plant owners' product
• Limited or no authority to carry out the common stream activities
• Limited or no authority to ensure compliance with production, sales or shipping arrangements
• Fees that don't reflect the effort expended and, or are not shared equitably

The limited or lack of definition around the Common Stream Operator's activities is a common theme for many of these weaknesses. One of the key reasons for this general lack of definition is the business environment and arrangement changes that have occurred without complementary agreement changes. The business changes that most accentuated the shortcomings are as follows:

• More variable and complex sales arrangements
• More complex linking of facilities and use of Receipt Points
• Shifting of activities from 'Boss Buyers' to the Common Stream Operator
• More accuracy required of daily values
• Lower margins and lower staff levels

The more variable and complex sales arrangements evolved as a response to deregulation of the product owner marketing arrangements. The new arrangements had appreciable incentives but Common Stream Operators were not always able to satisfy the supply arrangements. This failure to adequately supply is often a result of misunderstandings between the Common Stream Operator, the Product Owners and the Purchasers. Additionally, the allocation processes may not have been capable of supporting these changes in the time frames required.

The inability to control, and in some cases abuse, of the inventory in pipelines along with an unwillingness to pay higher tariffs has led to the need for more accurate daily values to support the balancing of the shipping accounts on a daily basis. The information to support this change has to come from the Common Stream Operator. Arrangements to provide this information have in most cases not been put in place with the Common Stream Operator.

Lower margins have led to lower staff levels. These lower staff levels have reduced the Common Stream Operator's ability to implement and manage the new supply and sales arrangements. As a result the Common Stream Operators must find new more efficient and effective ways to support the allocation processes. In some cases, this may involve changes to the existing allocation procedures. These procedure changes can be cumbersome and very time consuming if a model agreement using a common language for the allocation processes is not used.

These business environment changes and lack of a structure to support the changes have caused companies to miss business opportunities, make incorrect allocation assumptions that led to audit issues and generally burden the Common Stream Operator with a significant increase in work with limited direction.

In response to these shortcomings and the changes in the business environment, a Model Common Stream Operating Agreement was developed that would establish a new business environment for the Common Stream Operator. The key features of this new business environment are as follows:

• A clear defined Common Stream Operator Role
• A clear defined set of services provided by the Common Stream Operator
• A clear defined set of allocation processes and rules for each allocation process
  - Measurement Difference Allocation
  - Ownership Allocation
  - Sales Allocation
  - Nomination Receipt and confirmation
• A common structure and language to define the allocation processes and rules
• A Clear definition of the fees to be paid and their basis

The first feature of the new environment is a clear role for the Common Stream Operator (CSO). In the a Model Common Stream Operating Agreement the Common Stream Operator's activities are not just an extension of the activities associated with operating a gas plant. The Common Stream Operator's domain starts at the source of production and follows this production through to the Receipt Points where the products are sold. The Common Stream Operator is no longer constrained by the bounds of one facility and its operating agreement. To a large extent, this just recognizes the current operating environment for most Common Stream Operators. This approach is driven by the need to provide information to Shippers and Transporters on a daily basis where it is not practical for a well operator to pass his allocated results to the gathering system operator who in turn performs his allocations and passes these results on to the gas plant operator who can finally determine the product ownership and perform the contract allocations for the Transporters' Receipt Points.

The second feature of the new Common Stream Operator environment is the clear definition of the services that will be provided by the Common Stream Operator. This ensures that there is no misunderstandings of what is to be done by the Common Stream Operator, and what results are to be forwarded to others. Included in this definition of services, is the accuracy and or quality level that must be met. Business changes that require amendments to the service arrangements would have to initiate actions to ensure the new business arrangements will be properly supported. This would prevent the common evolution of requirements without the understanding and recognition of the consequences of these changes. This change process need not be any more cumbersome than a letter to the Common Stream Operator or mail ballot to the Product Owners in the Common Stream Operator Agreement.

The third feature of the new Common Stream Operator environment is the clear definition of each of the allocation processes and their rules. By explicitly defining the processes and their rules, both the Common Stream Operator and the Product Owners will have a clear understanding of the expected results of the allocation processes. This approach will also eliminate any assumptions that were being made by the Common Stream Operator on behalf of the Product Owners. There should be few, if any, surprises in the allocation results.

The fourth feature of the new Common Stream Operator environment is the use of a common structure and language to define the allocation processes and their rules. This approach will minimize misinterpretations by all parties involved. Additionally, it will eliminate site specific language and structures, which can have quite different meanings at other locations. Supporting and maintaining a site specific language and structure is both labour intensive and very prone to misinterpretations.

The last feature of the new Common Stream Operator environment is a fee structure that will allow Product Owners to share the costs of providing the common stream services on a usage basis. This allows Product Owners to control their cost by the selection of services they require or use.

The benefits that a given area would realize as a result of implementing the Model Common Stream Operating Agreement will be unique to that area and its business arrangements. The benefits, however, can be group into six categories for discussion purposes. These categories are as follows:

• Reduced Audit Costs
• Reduced CSO Liability
• More Satisfied Business Arrangements
• More focused Allocation Processes
• Reduced Agreement Support Effort
• More Equitable Cost Sharing

The largest benefit category, for most implementations of the Model Common Stream Operation Agreement, will be reduced audit resolution costs. These costs will be lowered as a result of more clearly defined allocation processes and allocation rules. Additionally there is a mechanism to keep these rules current with the business arrangements that are being supported. With these clearly defined processes, the Common Stream Operator is unlikely to make many errors that result in significant rework and settlement activities. With clear explicit rules, the effort to perform an audit of both simple and complex operations will be significantly reduced.

The liability benefit is closely related to the audit benefit category discussed above. With clearly defined allocation processes and rules, the Common Stream Operator will no longer be forced to make assumptions on behalf of the Product Owners. Where these assumptions are judged to be wrong (through an audit), the Common Stream Operator could be pursued for liability of the losses incurred. Depending upon the assumptions made and the issues, this could be a substantial cost to the Common Stream Operator.

The benefits resulting from more satisfied business arrangements is difficult to quantify. The situation that support this benefit area arises when changes are made to a sales or shipping arrangement but these changes are not incorporated into the allocation process correctly, or at the appropriate time. This results in product not moving to the desired business arrangement. To minimize this, some companies have forgone business opportunities because they are not certain the changes will be implemented correctly and sufficiently timely to capture the benefits.

Providing clearly defined allocation processes and rules allows the Common Stream Operator to refine his allocation calculation tools to be the most efficient and cost effective for the defined processes. This is emerging as a significant benefit for Common Stream Operators and their Product Owners where the Common Stream Operator is able to consolidate support staff and, or allocation programs across a group of facilities. This emerging benefit area is arising from the evolution of the allocation software and the declining price of the supporting computer systems.

The Model Common Stream Operating Agreement uses a structure and descriptive language that enables participants to define either simple or very complex business arrangements or processes. The benefit of using this approach is the reduction in the required support effort. This reduction is achieved by having staff support a larger number of properties. This becomes viable when all site specific definitions and language no longer exist. With a common language and structure, staff are able to quickly identify the uniqueness of each area and focus on the real business issues.

The final benefit area is the equitable sharing of the Common Stream Operator costs among the Product Owners. This benefit is different than the other benefits because it will only aid some of the Product Owners. Others would pay proportionately more.

The effort and cost to implement the Common Stream Operator model agreement can be an issue for may participants. To address some of the concern areas associated with the implementation, some effort reducing approaches were incorporated into the model. The approaches are as follows:

• Existing arrangements can be accommodated in the new agreement structure
• The Model Common Stream Operating Agreement has been designed to supersede other agreements - revisions to existing agreements are not required
• Transporter and Shipper Schedules have been incorporated into the model
• Specific allocation rules and relationships are not in the agreement but are provided through commits and exhibit schedules in the agreement
• A commentary of the agreement exhibits has been developed to support the new approach, language and techniques used

The Model Common Stream Operating Agreement has been structured such that the existing business arrangements do not have to be changed. The model provides a structure where the existing business arrangements and allocation rules can be explicitly defined. Participants may wish to change the rules once they examine them in detail but this is at their option.

In the event that the participants wish to change the allocations, it is not necessary to amend the existing agreements to take out their allocation provisions. The Model Common Stream Operating Agreement has been designed to supersede any previous agreement that the participants (Product Owners, Common Stream Operator) have signed.

The Model Common Stream Operating Agreement has incorporated a Transporter and Shipper Exhibit into the agreement to ensure that there is no misunderstanding about the activities the CSO needs to perform in order that the appropriate information be supplied for the Shippers and Transporters. Although the current exhibits are specific to gas, the interactions with other producer Shippers and Transporters is not appreciably different.

The most volatile portion of the common stream allocation process is the sales or contract allocation rules. It is not uncommon for some of these rules to change several times during a month. To keep the support effort manageable these rules are not contained in the exhibits but are provided through obligations that are defined in the exhibits. For administrative purposes all these rules are documented in schedules to the exhibits. These rule changes would not require a vote nor would they need to be circulated to unaffected participants. The method the product owners use to reach consensus for an allocation rule change impacting them is outside the scope of the Model Common Stream Operation Agreement.

The final approach used to reduce implementation effort is the development of an extensive commentary for the exhibits. The exhibit commentary provides business purpose of each clause along with some discussion of the implications of each of the choices suggested. A more abbreviated commentary is provided for the body. The abbreviated commentary provides focus to only those articles that are not commonly used in other agreements or can have appreciable impact on the participants.