What is off-specification gas?

A gas sales or transportation agreement will typically contain terms and conditions for liability for delivery of off-specification (or off-spec) gas.

The quality of the gas delivered will be tested at the delivery point in order to ensure that it meets contractual specification requirements as to quality. The difficulty with off-spec gas, is that it may be commercially unusable by the buyer, or by the party to whom the buyer sells the gas. Off-spec gas may also cause damage to the facilities in question – this might for example include corrosion damage to the piping through which the gas flows.

Typically, the contract will provide that the party who has knowledge of the off-spec quality of the gas will inform the other party or parties accordingly, so that all parties can take steps to deal with the off-spec gas. Where gas is being delivered in a commingled stream, the contract will regulate how the parties decide who is responsible for delivering off-spec gas. 

The buyer’s remedies against the seller for the delivery of off-spec gas will generally fall into one of three scenarios:

• where the gas in question is known to be off-spec prior to its delivery to the buyer, and the buyer has been notified of this, but the buyer decides nevertheless to take delivery of the gas
• where the buyer is informed that the gas is off-spec prior to its delivery, but the buyer refuses to take delivery, exercising its right to reject off-spec delivery 
• where the buyer takes delivery of off-spec gas at the delivery point, without knowing that that gas is off-spec

The liabilities and remedies available to the respective parties will usually consist of the following:

Where the buyer knowingly takes delivery of off-specification gas:  often there may be a degree of debate as to what constitutes ‘knowledge’, but in other cases the contract may provide expressly for a mechanism by which to determine this. Typically, the parties will agree that only actual knowledge, rather than merely imputed or constructive knowledge, should constitute ‘knowledge’ for this purpose. The seller may claim that delivery is valid delivery given that the buyer had knowledge of the off-spec quality of the gas, but had taken delivery of this notwithstanding. The buyer may demand a price discount for the off-spec delivery taken, and / or an indemnity requiring the seller to indemnify it against loss and damage arising from the delivery of off-spec gas.

In the event that the buyer refuses to take off-spec gas, a key question is the degree to which the gas is off-specification, in short whether this is marginal or de minimis, in which case the seller may want the buyer to take delivery. However, if the extent to which the gas is off-specification is greater than that, the buyer will have the right to reject the gas and refuse to take delivery.

The gas sales contract itself may contain express provisions for determining whether gas is off-specification, or describing the circumstances in which gas is to be considered off-specification, and therefore for the circumstances in which the buyer would be entitled to reject delivery – for example, this may involve the situation where the off-spec gas could cause damage to the relevant facilities, harm or injury and so on, to persons, or could lead to unacceptable commercial loss to the buyer. In most cases, though, the buyer will argue for an absolute right to reject any off-specification delivery.

If the buyer does reject the delivery, and refuses to take this, the consequence of this will be akin to a seller shortfall – in that regard, the buyer should ensure that the gas sales contract makes it clear that where the buyer rejects the off-spec gas, and refuses to take delivery, this does not constitute buyer undertake, or cause the seller to allege buyer undertake.

In the third scenario, namely where the buyer unknowingly takes delivery of the gas, the buyer should have the right to either take delivery, or reject the gas and refuse delivery. What will remain to be determined will be what the seller’s liability should be, and what remedies the buyer would have at hand.

One option is for the parties to treat the delivery as seller shortfall, and for the remedy for shortfall delivery to apply. An alternative option is for the buyer to be excused from any payment for the off-spec gas. A further alternative would be for the seller to indemnify the buyer for the costs the buyer incurs for (for example), cleaning up the buyer’s facilities for having taken off-spec gas (or the facilities of any third party consumers of the gas), and/or for any third party claims.

We have noted above that a delivery of off-specification gas can be treated by the parties as though it were seller shortfall. The gas sales contract should provide that where the buyer has rejected delivery of off-spec gas, the buyer should not be permitted to recover twice for that off-spec delivery – both as an off-spec delivery, as well as a seller shortfall. In short, the buyer should not be allowed to recover under both the off-spec delivery provisions, and also the shortfall provisions.

Where the seller delivers gas to the buyer and that gas is off-specification, but is also less than the nominated quantity of gas, the buyer should be required to treat that off-spec delivery only under the off-spec delivery provisions in the contract.

The gas sales contract may also provide for a mechanism to deal with any off-spec gas delivered, which the buyer opts to reject – for example, the parties may agree that any such off-spec gas should be flared. Having rejected an off-spec delivery, the buyer may nevertheless (inadvertently, or otherwise) have a quantity of off-spec gas in its own system, which it may need to deal with in similar fashion – this may, for example, require the buyer to purge its system of that off-spec gas.

Any gas delivered by the shipper to its transporter, will be analysed for the correct specs at the point of entry to the transporter’s system. Similarly, the gas will be analysed again for the correct specs, at the delivery point, when the transporter delivers the gas to the shipper. As regards the transporter’s pipeline facilities, any off-spec gas which enters into the system might damage this, and if the gas delivered joins a commingled stream in the transporter’s pipeline, that off-spec gas might also render the commingled stream off-specification. As a consequence, the transporter may have no option but to close down its pipeline system while this is purged of the off-specification gas, adversely affecting the shipper, and also other shippers in the case of a commingled stream of gas delivery.

Would the transporter be free to decide whether or not to take delivery of off-specification gas?

In all cases, it will be a matter of negotiation between the shipper and the transporter, as to whether the transporter should be under a conditional obligation to take off-specification gas at the point of input. Notwithstanding, the transporter will want to ensure that it is excused from any liability in the event that it does have an obligation under the gas transportation agreement to take delivery. In addition, the transporter will also likely want to be fully indemnified by the shipper, for any off-specification gas it takes delivery of, against any losses or damage which the transporter may incur as a consequence.

These are therefore some of the considerations which the parties to a gas sales or gas transportation agreement will want to have in mind when negotiating and drafting off-specification provisions in contractual documentation.

This note is for information purposes only. It does not comprise legal advice. For legal advice on this or any related matter, contact allbless@inarakconsultants.com