269 F.3d 528 (5th Cir. 2001), 00-30724, Houston Exploration Co v Halliburton Energy

Docket Nº:00-30724
Citation:269 F.3d 528
Party Name:THE HOUSTON EXPLORATION COMPANY, Plaintiff-Appellee, v. HALLIBURTON ENERGY SERVICES, INC., Defendant-Appellant,
Case Date:October 22, 2001
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 528

269 F.3d 528 (5th Cir. 2001)

THE HOUSTON EXPLORATION COMPANY, Plaintiff-Appellee,

v.

HALLIBURTON ENERGY SERVICES, INC., Defendant-Appellant,

No. 00-30724

United States Court of Appeals, Fifth Circuit

October 22, 2001

Page 529

Appeal from the United States District Court For the Eastern District of Louisiana

Before DAVIS and JONES, Circuit Judges, and PRADO[*], District Judge.

W. EUGENE DAVIS, Circuit Judge:

The Houston Exploration Company ("THEC") sued Halliburton Energy Services, Inc. ("Halliburton") for damages incurred when THEC's gas well blew out after Halliburton conducted drill stem testing on the well. At trial, Halliburton argued that it was shielded from liability under an indemnity agreement between Halliburton and THEC, which required THEC to release and indemnify Halliburton. Finding that Halliburton's conduct constituted gross negligence, the district court refused to enforce the indemnity agreement and entered a judgment for THEC. Halliburton now appeals, arguing that it was not grossly negligent, and thus, that the indemnity agreement should be enforced. Because we conclude that the district court clearly erred in finding that Halliburton's conduct amounted to gross negligence, we vacate the judgment of the district court and remand the case for further proceedings consistent with this opinion.

I.

The facts giving rise to this action are largely undisputed. THEC owned a natural gas well, known as Well C-1 ("the Well"), located on the Outer Continental Shelf in the Gulf of Mexico offshore of Louisiana, which blew out on May 31, 1997. Pursuant to a Work Order Agreement, THEC contracted with Halliburton to perform drill stem testing operations on the Well. Significantly, the Work Order Agreement required THEC "to defend, indemnify and hold Halliburton . . . harmless from and against any and all liability, claims, costs, expenses, attorney's fees and damages . . .

Page 530

resulting from . . . [l]oss of well control." The blowout that is the subject of this litigation occurred after Halliburton completed the third of three drill stem tests.

Drill stem testing entails perforating natural gas bearing formations at different depths in the well to determine at what depth or depths the well should be completed. One tool necessary for the test is a Halliburton tool known as an Internal Pressure Operating ("IPO") valve. The IPO valve is a tubular tool fitted with one or more pins, which will shear when the variance between the internal pressure in the hollow core of the valve and the external pressure surrounding it reaches a preset differential. Each pin is designed to shear at a pressure differential of 610 psi; thus, the total pressure differential required to open the ports is 610 psi multiplied by the number of pins. When the IPO's pins shear, ports in the valve open, allowing the well fluid to circulate inside and outside the drill stem. In this way, the IPO valve acts as a back-up circulating valve, which circulates mud or fluid through the well in the course of the well testing operations. It is not designed to function as a well control device.

At the time of the blowout, Halliburton's practice was to ship IPO valves from its tool shop fitted with only one pin. The Halliburton tool operator would then calculate the number of pins required for the job, open the valve, inspect it, and fit it with the correct number of pins. In this case, Halliburton shipped three IPO valves to the rig: first, two valves with serial numbers 374 and 154, and later, a valve numbered 351.

The three well tests were conducted on May 21, 28, and 31, aboard the mobile drilling vessel PHOENIX II. Wayne Lemaire was the Halliburton tool operator for the first two tests. During the first test, the pins in IPO valve number 374 sheared. That valve could not be reused and was returned to Halliburton's on-shore shop to be redressed. As a result, Halliburton shipped valve number 351 as a replacement.

The second test was conducted on May 28, 1997. According to Halliburton's policy, Lemaire inspected valve number 351 and correctly fitted the valve with five pins. Lemaire did not record the serial number on the valve or mark it for identification. During a delay of several hours before the second test, the dressed valve was moved...

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