Those negotiating contracts to move hydrocarbons by FERC-regulated pipelines need to keep in mind that sometimes a deal’s a deal, even when the dealmakers themselves want to make adjustments later on.

Two attorneys who guide clients through the liquids pipeline regulatory landscape discussed the impact of plunging oil prices on those who sign contracts at the Institute for Energy Law’s recent Midstream Oil & Gas Law Conference in Houston. They noted that there has been a seismic shift in the industry in the direction of long-term commitments.

“Typically if you have a contract and the two sides agree to change it, you can change it,” said Elizabeth Kohlhausen, Houston-based partner with Caldwell Boudreaux Lefler PLLC. “Here, the problem with that is that FERC [Federal Energy Regulatory Commission] would say, ‘These contracts were entered into as part of an open season where everyone was given equal opportunity. So, if you enter into them and then five years down the road, you change the rate 30% but you’re still giving people firm service on your pipeline, then there’s a whole host of people who may have entered into it five years prior if they had known that the rate was going to be 30% less.’”

The constraint is based on the interests of those who chose not to enter into the contract. Does that mean, Kohlhausen is often asked, that those who agreed to the contracts cannot agree to change them on their own?

“The answer is, no, you can’t change them materially unless you go back to FERC and ask for approval,” she said. “We haven’t seen that yet, but this is what people don’t exactly appreciate—even if the pipeline and the shipper want to change it, it’s not as simple as changing it.”

Kohlhausen brought a different perspective to agreements made before pipelines are built than her co-presenter, Erica Rancilio, attorney with Edwards & Floom LLP in Washington, D.C.

“I can think of a client in 2005 that thought it needed an expansion and put a very expensive expansion in the ground,” Kohlhausen said. “Then 2008 happened and that expansion was no longer needed—they had already put everything into the ground; spent the money. Here, pipelines are getting some assurances that when you spend the money, you’ll get some type of return off that. I think that’s the biggest benefit.”

Rancilio, whose firm represents shippers, agreed that those able to pay the contract rate are assured certainty of rates over time, along with increased access to capacity and priority rights on the lines. However, she also saw drawbacks.

“First, from a shipper perspective, these long-term contracts obviously don’t take into account changing market conditions,” she said. “The economics of the oil pipeline industry have been changing rapidly and we have some contracts that we’ve entered into as recently as 2011 that are completely non-economical because the rate that we agreed to exceeds the value to us in moving our product to market.”

The other drawback Rancilio mentioned was one of fairness. A pipeline company with market power can put a shipper at a disadvantage when setting the rate.

“We’ve seen imbalanced bargaining here in the open season where a pipeline will offer a contract rate and call it a take-it-or-leave-it rate when a prospective shipper wants to negotiate,” she said. “Shippers have no way of assuring that they are paying a fair price; they are essentially paying what the market will bear. When a pipeline has market power, it can be an excessive rate over and above competitive rates.”

Joseph Markman can be reached at jmarkman@hartenergy.com.

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