Most Favored Nation Clause
(Midstream Energy)

Summary

This midstream energy most favored nation clause allows a producer to protect its financial interests from being undercut by similarly situated producers who also do business with a gas processor entity. The clause ensures equal treatment in similar circumstances. The clause can be found in a gas processing agreement. This clause contains practical guidance and a drafting note. There is no requirement in contract law mandating that a contracting party treat two counterparties the same. A contracting party is free to charge one counterparty full price, while providing another with a significant discount. This disparate treatment may be attributed to the fact that one party’s contract has significantly larger dollar value than the other’s contract, or that one party is a more important customer than the other. Parties can do little to counter these market forces. However, when two similarly situated counterparties enter into separate relationships with a contracting party, they generally expect to be treated similarly. This is done through the use of a most favored nation clause—which mandates that the contracting counterparty receive the most favorable treatment given to all similarly situated counterparties. A most favored nation clause within a gas processing agreement offers significant protections for a gas producer, by requiring the gas processor to provide the producer with the most favorable pricing for the processing functions listed in the Processing and Related Services clause of the Gas Processing Agreement. Often, a most favored nation clause within this context is dependent on the volume of gas to be processed. A producer that delivers only a small amount of gas to a processor should expect to pay more for processing services on a per-unit basis than a producer who delivers significant volume of gas to the processor. But, for similarly situated producers, a most favored nation clause will ensure that the processor treats everyone equally, if not completely fairly. This most favored nation clause provides the same pricing structure to all third party customers that utilize processor’s facility. Counsel for the processor may wish to limit this pricing guaranty to only those third party customers within the same volume tranche as the producer counterparty. In this way, a processor can provide fair (although tiered) pricing to all of its customers, while reserving the best pricing structure for its best customers. Because this clause only utilizes a single pricing structure, providing the smallest customer with the same price as the largest, it is more favorable to the producer. This clause can be found in the template Gas Processing Agreement. For additional information on midstream energy transactions, and the types of transactions where a midstream energy most favored nation clause would be utilized, see Midstream Oil & Gas Transactions and Agreements, and Acquisition, Construction, and Project Development.