Baker & O'Brien, Inc.

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How “Petroleum” is Defined Can Have Important Contractual Implications

Jury Trial, United States

July 1, 2013

An oil and gas partnership agreement stipulated that a third-party consultant—who had been instrumental in a successful discovery—would receive an “incentive override” comprising a percentage of the sales revenues from the “petroleum produced at the concession.”  When crude oil production initially commenced, the consultant received the agreed override.  However, given that associated natural gas was re-injected and not sold, no override was paid on this produced gas.

Over a period of time, a gas processing plant and other facilities were built to
recover liquefied petroleum gases (LPGs), and convert the produced gas into derivative products.  Although the LPGs and the other products were sold at world market prices, the consultant’s override was based on the lower transfer price of natural gas sold to the downstream facilities.

The consultant filed lawsuits against the owners in an effort to have his override paid based on the sales revenues from the downstream products, arguing that the partnership agreement defined petroleum as oil, condensate, natural gas, and all marketable materials produced from them. 

In their defense, the owners claimed that since crude oil and natural gas comprised the only petroleum “produced at the concession,” they were the only products eligible for the override.  Resolution of the case depended not only on interpretation of the override agreement, but also the definition of “petroleum.”  Baker & O’Brien was engaged to provide expertise in petroleum production contracts, natural gas processing, and the production of LPGs and other derivative products.  A report outlining our opinions proved instrumental in helping facilitate a settlement between the parties.