St. Mary's Law Journal


David L. Roland


A prompt solution to the take-or-pay problem is vital to the survival of the natural gas industry. Due to the increasingly turbulent and unpredictable natural gas market, most natural gas producers include a take-or-pay provision in their gas purchase contracts. Take-or-pay provisions require a pipeline company to either take an amount of natural gas from the producer or the company must pay for the specified amount. The market, however, has changed and the demand for natural gas declined. The demand can be partly attributed to the energy crisis of a decade ago. As a result of the crisis, consumers are conserving more energy and using less natural gas. Consequently, pipeline companies find themselves in the unenviable position of paying for gas which cannot be marketed because of insufficient demand. Moreover, since take-or-pay contracts have pipeline companies locked into purchasing gas at inflated prices, the high costs eventually pass to the consumer in the form of high rates. Although the critical nature of the situation is evident, the Federal Energy Regulatory Commission appears hesitant to confront the issue. Natural gas legislation also does not promise a timely resolution. Courts may provide a short-term solution by applying contract law principles but will likely not take action until they recognize the actual gravity of the issue. Once the courts recognize the problem, pipeline companies can utilize basic contractual defenses such as commercial impracticability, mutual mistake of fact, and frustration of purpose to relieve them of their take-or-pay obligations. Eventually, the industry must find a long range judicial or regulatory solution which will permit flexible responses to future market alterations. Until then, producers, pipeline companies, and local gas distributors must cooperate to minimize the damage that take-or-pay provisions have already caused the industry.


St. Mary's University School of Law