Amoco Production Co. v. Western Slope Gas Co.

• Decision Date: 05 February 1985
• Docket Number: No. 82-1581,82-1581
• Citation: 754 F.2d 303
• Parties: 40 UCC Rep.Serv. 370 AMOCO PRODUCTION COMPANY, a Delaware corporation, Plaintiff-Appellant, v. WESTERN SLOPE GAS COMPANY, a Colorado corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 303

754 F.2d 303

40 UCC Rep.Serv. 370

AMOCO PRODUCTION COMPANY, a Delaware corporation, Plaintiff-Appellant, v. WESTERN SLOPE GAS COMPANY, a Colorado corporation, Defendant-Appellee.

No. 82-1581.

United States Court of Appeals, Tenth Circuit.

Feb. 5, 1985.

Robert J. Kapelke of Gorsuch, Kirgis, Campbell, Walker & Grover, Denver, Colo. (Charles W. McDermott and Lawrence P. Terrell of Gorsuch, Kirgis, Campbell, Walker & Grover, and R.H. Landt, Denver, Colo., with him on brief), for plaintiff-appellant.

James R. McCotter, Denver, Colo. (Marla S. Petrini, Denver, Colo., with him on brief) of Kelly, Stansfield & O'Donnell, Denver, Colo., for defendant-appellee.

Before HOLLOWAY, BARRETT, and SEYMOUR, Circuit Judges.

SEYMOUR, Circuit Judge.

Amoco Production Company brought this diversity action against Western Slope Gas Company alleging breach of a contract to sell natural gas. Amoco claims that the terms of the contract entitle it to a price increase for its intrastate gas equal to the maximum price allowable for newly discovered gas under sections 102 and 105 of the Natural Gas Policy Act of 1978, 15 U.S.C. Secs. 3312, 3315 (1982), even though most of the gas is not new gas within the meaning of the Act. The district court examined the circumstances surrounding the contract, concluded that the parties did not intend to give Amoco this price increase, and granted judgment for Western Slope. 535 F.Supp. 1305 (D.Colo.1982). On appeal, Amoco argues that the contract is not ambiguous and that the district court therefore erred in resorting to extrinsic evidence. Alternatively Amoco urges that even if the district court properly considered extrinsic evidence, the evidence does not support its decision. We disagree and affirm.

I. BACKGROUND

Amoco's predecessor in interest and Western Slope entered into a gas purchase agreement in 1961 that provided for the intrastate sale of natural gas to Western Slope from wells in La Plata County, Colorado. The contract was effective for a primary term of twenty years and thereafter from year to year unless terminated by either party. Neither party has sought termination and the contract is now in its extended term.

The contract provides a specific price for gas sold from March 1961 through December 31, 1968. For each five-year period thereafter, the contract sets a price of fifteen cents per 1,000 cubic feet (Mcf) or such higher price as the parties determine under a price renegotiation clause. ¹ The parties did not renegotiate the contract price until October 1973, when they executed an agreement covering sales from January 1, 1974 through December 31, 1978 (the "1973 Letter Agreement"). The 1973 Letter Agreement established the contract price at the higher of (a) a base price of 33 cents (plus two cents for the value of recoverable liquids contained in the purchased gas), escalated by one cent per year, or (b) the price determined according to the following escalation clause "The price or rate established from time to time by the Federal Power Commission (or any successor agency) as the area ceiling price or rate so authorized, for the specific area within which subject gas well or wells are located, subject to the general terms and conditions established by the FPC including heating value and applicability to specific wells."

Pl.Ex. 7, at 1. ²

The parties began negotiating a new pricing arrangement during the summer of 1978 in anticipation of the end of the 1973 Letter Agreement. Western Slope initiated matters with a proposed letter agreement dated July 3, 1978 that provided for a price equal to the higher of a base price of 55 cents, plus one cent annual escalation, or the price established by a price escalation clause that was in substance equivalent to that used in the 1973 agreement.

Arles Barrett negotiated for Amoco and James Valenta negotiated for Western Slope. Although Barrett had Amoco's authorization to accept the escalation clause as initially proposed, he insisted that certain additions be made to the clause before he would recommend acceptance. By letter on July 18, Western Slope's proposal was returned to Valenta with Barrett's changes noted in the margins. On July 21, Western Slope sent Amoco a revised proposal that incorporated Barrett's additional language, and on August 2 Amoco signed the new agreement (the "1978 Letter Agreement"). With Barrett's additions italicized, the relevant pricing provision and escalation clause of the 1978 Letter Agreement reads as follows:

"In accordance with Article 5.1(a), Buyer and Seller hereby agree that the following price schedule shall be effective January 1, 1979. The price of gas to Seller shall be either 1 or 2 below, whichever results in a greater price to Seller.

1. Effective January 1, 1979, the price shall be fifty-five cents (55cents) per Mcf....

(a) For each succeeding one (1) year period thereafter, the price shall be increased one cent 1cents) per Mcf at 14.73 psia.

2. The price or rate established from time to time by the enactment of any federal law or by the Federal Energy Regulatory Commission [FERC] (or any successor agency) as the ceiling price or national rate for the specific area within which subject gas well or wells are located, subject to the same general terms and conditions applicable to such price or rate, including but not limited to quality, pressure and vintage conditions."

Pl.Ex. 8 (emphasis added). The crux of Amoco's case lies in this italicized language.

On November 9, 1978, Congress enacted the Natural Gas Policy Act, 15 U.S.C. Secs. 3301 et seq. (1982) (NGPA or the Act). The NGPA erects a comprehensive regulatory scheme establishing maximum lawful prices, or ceiling prices, for all wellhead sales of gas in the United States, whether intrastate or interstate. The Act creates categories for different types of wellhead sales, ³ prescribing an initial ceiling price for each category and a specific formula for raising that ceiling price each succeeding month. The NGPA further provides that, where gas falls within the scope of multiple categories prescribing different ceiling prices, the highest ceiling price is applicable. NGPA Sec. 101(b)(5), 15 U.S.C. Sec. 3311(b)(5). The Act generally adopts an incentive-based approach to rate setting by providing substantially higher prices for recently developed gas sources than for gas obtained from older, previously drilled wells. See Pennzoil v. FERC, 645 F.2d 360, 367 (5th Cir.1981), cert. denied, 454 All of the gas sold by Amoco to Western Slope is covered by section 105(b)(1) of the Act, 15 U.S.C. Sec. 3315(b)(1), which applies to gas being sold in intrastate commerce as of the day Congress enacted the NGPA. ⁴ Section 105 provides, in pertinent part:

U.S. 1142, 1002 S.Ct. 1000, 71 L.Ed.2d 293 (1982).

"(a) Application.--The maximum lawful price computed under subsection (b) of this section shall apply to any first sale of natural gas delivered during any month in the case of natural gas, sold under any existing contract or any successor to an existing contract, which was not committed or dedicated to interstate commerce on November 8, 1978.

(b) Maximum lawful price--

(1) General rule.--Subject to paragraphs (2) and (3), the maximum lawful price under this section shall be the lower of--

(A) the price under the terms of the existing contract, to which such natural gas was subject on November 9, 1978, as such contract was in effect on such date; or

(B) the maximum lawful price, per million Btu's computed for such month under section 3312 of this title [NGPA Sec. 102] (relating to new natural gas)."

15 U.S.C. Sec. 3315. Thus, the maximum lawful price that a seller may obtain under section 105 for gas that is sold entirely intrastate is the price under the terms of the existing intrastate contract, limited by a rate equal to that given in the referenced section 102 of the Act, 15 U.S.C. Sec. 3312.

At the relevant time in this case, section 102 would have prescribed a maximum price of $2.07 for Amoco's gas, as compared to the unescalated contract price of approximately 55cents. Although section 105 states that the maximum lawful price is the lower of the contract price and the section 102 price, Amoco argues that the parties' intention in adding the Barrett language to the 1978 escalation clause was "to set the contract price at the highest price allowed by federal law for all the gas sold under the contract." Brief of Appellant at 17. Since section 105 uses the section 102 new gas price ceiling as the highest possible price for intrastate gas, Amoco contends it is entitled to escalate its price to the section 102 price.

Western Slope's response is that the section 102 prices are incentive prices intended for newly developed or difficult to develop gas, and none of the gas under this contract qualifies under the location or vintaging criteria set out in section 102. See 15 U.S.C. Sec. 3312(a), (c), (d), (e). Western Slope points out that the escalation clause in the 1978 Letter Agreement specifically conditions price escalation on Amoco's gas meeting all the criteria under the new federal law, "including but not limited to quality, pressure and vintage conditions." It argues that Amoco's approach reads these conditions out of the escalation clause. ⁵

Western Slope contends that the escalation clause was intended merely to ensure that Amoco would receive for its intra state gas the maximum established price for inter state gas, because as a practical matter, interstate sales were the only alternatives available to Amoco if it chose not to sell its gas to Western Slope. ⁶ Western The District Court examined the circumstances surrounding the 1978 Letter Agreement and the renegotiation of the contract in 1973. From this extrinsic evidence, the court concluded that the parties intended the 1978 Letter Agreement escalation clause, like the one in 1973, to tie "the price of the intrastate gas sale to the price permitted for...