What Is a Gas Supply Agreement? – Terms for Power Plant Fuel
Two things keep a gas-fired power plant running: machines and a promise. The machines are easy to see. The promise lives in a contract, usually a stack of paper nobody on site ever reads until the gas stops flowing on a cold morning. That contract decides how much fuel you can count on, what you pay for it and who owes whom when something goes wrong. If you are planning on-site power, you will need one. So what is a gas supply agreement, and which terms matter most for power plant fuel?
A gas supply agreement is a contract in which a seller, such as a producer or gas marketer, agrees to deliver natural gas to a buyer at a set place, in set quantities and at a set price formula over a set period. For power plants, the terms that matter most are the daily quantity, whether delivery is firm or interruptible, the delivery point, the price index, the remedy if one side fails to perform, and force majeure. Most U.S. deals use a standard form from the North American Energy Standards Board (NAESB), with deal details in a short transaction confirmation. The gas still needs separate pipeline capacity to reach you.
What Does a Gas Supply Agreement Cover?
It covers the sale of the gas molecules, not the trip they take. That surprises people. A gas supply agreement says the seller will hand over a certain amount of gas at a certain point. Getting it from there to your plant is usually a separate transportation contract with a pipeline, or a delivery service from a local utility.
Most agreements in North America follow a two-layer structure:
- A master or base contract that sets the general rules: billing, payment, credit, default, remedies and force majeure.
- Transaction confirmations, short documents for each deal that set the quantity, price, delivery point and term.
NAESB maintains the most widely used master form, the Base Contract for Sale and Purchase of Natural Gas. Its strength is that both sides already know the language. You negotiate the special provisions and the confirmations instead of rewriting a hundred pages every time.
What Are the Key Terms for Power Plant Fuel?
Here are the terms that do the most work in a power plant deal:
| Term | What it sets | Why a plant cares |
|---|---|---|
| Contract quantity | Gas per day, in MMBtu or dekatherms | Must cover full-load burn on the hardest day |
| Firm or interruptible | Whether either side can stop without penalty | Interruptible gas can vanish when you need it |
| Delivery point | Where title and risk pass to the buyer | Sets which pipeline capacity you need |
| Price | Fixed, index or index plus a basis adder | Fuel is usually the plant's biggest operating cost |
| Remedies | What the failing party pays | Decides who eats a price spike |
| Force majeure | Events that excuse performance | Defines how "firm" firm really is |
| Term | Start date, end date, renewal | Plants run for decades; contracts often do not |
How Much Gas to Contract
Size the quantity from the plant, not a guess. Say a 20 MW plant at a heat rate of 9,500 British thermal units per kilowatt-hour (Btu/kWh), running flat out, burns 20,000 kW × 9,500 = 190 million Btu (MMBtu) per hour. Over 24 hours that is 4,560 MMBtu per day. A buyer might contract around that number with some swing, meaning the right to take more or less within a band.
What Is the Difference Between Firm and Interruptible Supply?
Firm supply means the seller must deliver and the buyer must take the contract quantity, and failure carries a financial penalty unless force majeure applies. Interruptible supply means either side can stop, usually with notice, and nobody owes damages. Interruptible gas is cheaper and useful for loads that can shut down or switch fuels.
For a plant that has promised power to a customer, interruptible supply is a gamble. Making fuel delivery dependable takes pipeline capacity and backup fuel too, which is what firm gas supply is really about. The short version: firm gas plus firm transport is the starting point, not the finish line.
How Is Gas Priced in a Supply Agreement?
Usually against a published index, with a few common variations:
- Fixed price. One price per MMBtu for the term. Simple and predictable, but the seller builds in a premium for the risk.
- Monthly index. The price resets each month to a published first-of-month index at a named trading location.
- Daily index. The price follows a daily index, which is how most plants buy swing gas.
- Index plus or minus a basis. The index price adjusted up or down for location or service.
Many buyers mix these, fixing part of their volume and leaving part on index. Hedging with financial instruments is another layer entirely, and it is worth getting professional advice before you go there.
What Happens When Someone Fails to Deliver?
The remedy clause decides. The NAESB form offers two standard choices. Under the cover standard, if the seller fails to deliver firm gas, it pays the buyer the difference between what the buyer had to pay for replacement gas and the contract price, plus some costs. Under the spot price standard, damages are based on a published spot price index instead. Similar rules run the other way when the buyer fails to take gas.
For a power plant, that difference matters during a price spike. If replacement gas jumps tenfold during a cold snap, a strong remedy clause shifts that pain to the seller. A weak one leaves it with you. Even NAESB's older 1996 short-term form, still posted on its site as a historical reference, shows how long these cover and spot price choices have been standard.
Why Is Force Majeure So Important?
Because it quietly decides when "firm" stops being firm. Force majeure excuses a party from performing when something outside its control, like a pipeline rupture or a natural disaster, prevents delivery. The fight is always over the details. Does a freeze-off at the wellhead count? What about a seller whose own supplier failed? Is a price spike alone ever enough? (Under most standard forms, the answer to that last one is no.)
My advice is to read this clause slowly and ask your counsel to walk you through real scenarios. This article is general information, not legal advice. Contracts differ, and state law and pipeline tariffs can change how a clause works.
What About Gas Quality and Measurement?
Quality and measurement usually follow the pipeline's rules. Gas delivered into a pipeline has to meet its tariff specifications for heat content, water, hydrogen sulfide (H2S), carbon dioxide and other items. Measurement happens at a custody transfer meter, and the contract says whose meter governs and how disputes get settled.
Deals for wellsite power are different. If you are buying raw gas straight from an operator at the lease, there may be no pipeline tariff to lean on. The contract itself has to spell out quality limits, who pays for conditioning, how the gas gets metered and what happens when the well declines. Those deals also touch royalty owners, so the operator will want them handled carefully.
How Does a Gas Deal Fit Into the Rest of the Project?
It is one piece of a bigger puzzle. Many companies look at on-site gas power because waiting in the utility interconnection queue can take years. But skipping the grid line puts all the weight on fuel. The gas deal, the pipeline capacity, the delivery meter and the plant's equipment schedule all have to land together. A plant ready to run with no signed supply is a very expensive lawn ornament.
Lenders and investors know this. They will usually want to see the supply agreement, the transport contracts and some backup plan before they commit money to a project.
Signing a Gas Supply Agreement You Can Live With
A gas supply agreement is the promise behind every gas-fired plant: a contract to deliver a set quantity of gas at a set point, at a set price formula, for a set term. Most U.S. deals ride on the NAESB base contract with transaction confirmations on top, and the terms that matter most for power are quantity, firmness, delivery point, price, remedies and force majeure.
Before you sign, run the math on your real daily burn, match the delivery point to pipeline capacity you can actually get, and test the remedy and force majeure clauses against your worst winter week. Then have experienced energy counsel review the whole package. The gas may be plentiful. The paper is what makes it yours.