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Effective December 31, 1982, Old Petroleum and Products
entered into a service agreement under which Products agreed, for
a cash fee, to act as an agent for Petroleum to process and sell
its propane to unrelated third parties. As Petroleum's agent,
Products handled Petroleum's marketing, distribution, storage,
sales, and collection efforts. Pursuant to the service
agreement, Petroleum retained title to its propane until Products
sold the propane on Petroleum's behalf to unrelated third
parties. Neither Products nor Texgas was a buyer or seller under
Petroleum's sales contracts with unrelated third parties.
Petroleum produced natural gas from individual wells, which
went to 10 different processing plants. From 3 of the 10
processing plants, Petroleum moved its propane by pipeline to a
storage terminal at Mont Belvieu, Texas. By exchange agreements,
Petroleum exchanged the volumes of propane at the 7 other plants
for a like volume of propane held by Products. Petroleum's use
of the exchange agreements as a substitute for physical
transportation was both economically efficient and a common
practice in the oil and gas industry. Moreover, the propane
owned by Petroleum and Products satisfied strict industry
standards so that the propane volumes could be easily commingled
and exchanged.
As Products sold Petroleum's propane, the accounting group
recorded those sales as Petroleum's sales in accordance with
Petroleum's accounting practices, which were customary in the oil
and gas business and were consistently applied. Petroleum's
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