The move in the United States to restructure the electric power industry will present the oil and gas industry with synergistic opportunities that have been widely discussed in the trade press. The commentary has focused, however, upon competition in the public utility industry and the effects of the wave of mergers that increased competition is likely to cause.
This paper will explore an incidental benefit presented to oil and gas producers by the increased flexibility of electric distribution companies - the possibility that oil or gas produced from a property can be traded, royalty free, for electricity or other services, commodities, or equipment to develop or operate the property under the terms of a lease or unit "free use" clause.
Royalty-free production trades could benefit oil producers, lessors and their communities. A case in point is the East Kremlin Misner Unit in Oklahoma, the subject of Golden Gas Production Company, an order of the Oklahoma Corporation Commission. Testimony before an administrative judge indicated that a royalty-free trade of oil for electricity to operate the unit would permit the production of an additional 232,000 barrels of oil over seven years at a flat price of $20 per barrel, which would more than double incremental net revenues to the royalty owners and to Oklahoma's severance tax fund.Production trades like the one approved in Golden Gas Production Company might also benefit the nation. Gas or oil for electricity trades would likely prolong the productive life of many secondary and tertiary recovery projects in the United States and, in turn, provide a needed lift to U.S. long-term production.
The thesis of this article is that the typical "free use" clause found in most oil and gas leases or unit agreements permits the royalty-free trade of oil or gas for electricity or other products or services to operate the property. This conclusion is supported by the free use provision's history, by its judicial interpretation, and by its logic. One of the oldest lease or unit clauses can be used in a new way; it may indeed be possible and desirable to put new wine into old bottles.
Natural Resources Journal
electric power industry, natural resources, oil and gas, royalty-free production trades, lease power, right of free use
John S. Lowe, The Lessee's Right of Free Use of Produced Substances: New Wine in Old Bottles, 37 Nat. Resources J. 729 (1997)