Dynegy Midstream Services v. Apache Corp.

• Decision Date: 28 August 2009
• Docket Number: No. 07-0043.,07-0043.
• Citation: 294 S.W.3d 164
• Parties: DYNEGY MIDSTREAM SERVICES, LIMITED PARTNERSHIP and Versado Gas Processors, LLC, Petitioners, v. APACHE CORPORATION, Respondent.
• Court: Texas Supreme Court

294 S.W.3d 164

DYNEGY MIDSTREAM SERVICES, LIMITED PARTNERSHIP and Versado Gas Processors, LLC, Petitioners, v. APACHE CORPORATION, Respondent.

No. 07-0043.

Supreme Court of Texas.

Argued September 9, 2008.

Decided August 28, 2009.

Mike A. Hatchell, Locke Lord Bissell & Liddell, LLP, Austin, TX, John B. Hall, Christopher Benjamin Dove, Gregory F. Burch, Alfonso Antroy Arreola, Jesus Garcia Jr., J. Michael Dorman, Locke Lord Bissell & Liddell, LLP, S. Shawn Stephens, Baker & Hostetler, LLP, Houston, TX, for Dynegy Midstream Services.

Roger Townsend, Jennifer R. Tillison, Alexander Dubose Jones & Townsend LLP, Geoffrey L. Harrison, Kenneth E. McNeil, Susman Godfrey, L.L.P., Christopher W. Barnes, Houston, TX, Laurie Lavigna Gallun, McKool Smith PC, Austin, TX, for Apache Corporation.

David M. Gunn, Beck, Redden & Secrest, L.L.P., Houston, TX, for Amicus Curiae Gas Processors Association.

David R. Taggart, Lemle & Kelleher, L.L.P., Shreveport, LA, for Amicus Curiae Texas Pipeline Association.

Justice WILLETT delivered the opinion of the Court.

In this gas-contract dispute, Apache Corporation seeks recovery for an allegedly large volume of "unaccounted-for" gas that disappeared between production at Apache's wellheads (where title to all gas transferred to the processor) and sale to customers at the processing facility (the tailgate). We hold that Apache's claim is contrary to the governing contract language, which focuses on gas sold, not gas delivered, thus avoiding disputes over how (and how much) gas failed to reach the point of sale. When calculating the proceeds due to Apache under these "percentage of proceeds" contracts, only one criterion matters: sales. Common throughout the natural-gas industry, these contracts unambiguously base payment on the amount of gas ultimately sold at the tailgate (not the amount initially delivered at the wellhead), and Apache admits it was paid in full for "every molecule of gas" sold at the tailgate of the processing plants.

Our decision today, besides clarifying the contractual payment standard — one that rewards processors for minimizing leakage and maximizing the amount of gas actually sold — also addresses other claims. In sum, we affirm the court of appeals' judgment in part and reverse it in part, and remand to the trial court to render a judgment in conformity with this opinion.

I. Background

Though technical in nature, and part of a voluminous record, the relevant facts are neither complicated nor disputed. Apache owns gas wells in Texas and New Mexico. Apache and Versado Gas Processors, LLC are parties to eighteen gas-purchase contracts in issue. Under these contracts, gas is transported from Apache's wellheads through Versado's gathering system (pipelines and compressor stations) to Versado's three processing plants:¹ the Eunice, Monument, and Saunders plants. While en route some hydrocarbon liquids, known as field condensate, precipitate out of the gas and are removed by Versado. The processing plants employ compression, refrigeration, and other processes to remove water and other contaminants and to produce gas liquids. The end products are marketable hydrocarbon liquids and "dry gas," also known as "residue gas." Versado sells these products to third parties. The volume of residue gas sold is metered at the plant tailgate and then sent to purchasers via sales lines.

Versado and amici curiae² categorize the gas-purchase contracts as "percentage of proceeds" contracts. The contracts are not identical, but all of them expressly provide that Versado is obliged to pay Apache a percentage of the "net proceeds" generated from the sale of "residue gas." Residue gas is not defined in three of the contracts. In all the others the term is defined as gas that has arrived at the processing plants or gas that is otherwise available for sale to third parties.³ The contracts also entitle Apache to compensation for the hydrocarbon liquids extracted at the plants. All the contracts provide that title to the gas transfers to Versado at or near the wellhead. Five of the contracts additionally provide that Apache conveys to Versado "free of cost" all gas that is "flared, leaked, or otherwise lost" between production at the well and sale at the processing plant tailgate.⁴

Gas is metered at the wellhead and at the plant tailgate. There is no dispute that more gas enters the gathering system at Apache's wellheads than exits at Versado's tailgates, because (1) some gas is lost in transmission due to pipeline leaks, (2) some gas is used to fuel equipment at the plant or along the pipeline route, and (3) gas must sometimes be flared or vented during repair or other routine or emergency operations. In addition, the volume of gas exiting the tailgate is smaller than the volume at the wellhead because natural gas liquids and impurities such as water vapor are condensed from the gas stream before the residue gas at the tailgate is sold to third parties.

After Apache conducted a routine audit, it concluded that Versado could not account for large quantities of gas and that Apache was entitled to compensation for this unaccounted-for gas. Apache sued Versado for breach of contract, and the parties also sought a declaratory judgment on whether Apache was entitled to payment for condensate collected at compressor booster stations that had once been processing plants. Apache also sued for violations of the New Mexico Unfair Practices Act (NMUPA).⁵

The trial court granted summary judgment for Versado on some claims, and the remaining claims went to trial. With regard to unaccounted-for gas, Apache argued that unaccounted-for gas is a separate category apart from plant and field losses and other categories of gas specified in the contracts. Apache based its proof in part on some of Versado's own internal accounting documents, which purported to account for fueled, flared, or leaked gas, as well as other documents referencing "unaccounted-for" gas, "unaccountables," and "lost and unaccounted-for" gas. Versado contends that unaccounted-for gas simply refers to gas that was used as fuel or lost through pipeline leaks or flaring, but regardless Versado is only obliged under the contracts to pay Apache a percentage of the proceeds from the actual sales of residue gas to third parties. Since Versado indisputably complied with this obligation, it claims it is not liable to Apache as a matter of law.

The jury found that Versado failed to comply with its contractual obligation to pay Apache for unaccounted-for gas, and found damages of $1,508,674. The jury also found that Versado and Dynegy deceived Apache by engaging in an unfair or deceptive trade practice under the NMUPA, and that Apache's damages on this claim also resulted in damages of $1,508,674.

The trial court granted Versado's motion for judgment notwithstanding the verdict, and entered a judgment that Apache take nothing on its claims except the condensate claim. On this claim, the trial court rendered a declaratory judgment that Apache was entitled to its allocated share of condensate collected at the Eunice North and Eunice South booster stations, and awarded Apache $75,000 in attorney's fees.

The court of appeals reversed the trial court on the unaccounted-for gas claim, and entered a judgment for Apache of $1,508,674, consistent with the jury's verdict.⁶ It concluded that the contracts unambiguously did not permit Versado to deduct unaccounted-for gas when calculating residue gas.⁷ The court of appeals also reversed the trial court on the condensate claim, concluding that Apache was not entitled to payment for liquids condensing at the Eunice North and South booster stations.⁸ The court did not reach the NMUPA claim, viewing the damages the jury awarded Apache under that claim as duplicative of damages awarded under the contract claim for unaccounted-for gas.⁹

II. Discussion

A. "Unaccounted-For" Gas Claim

Whether a contract is ambiguous is a legal question for the court.¹⁰ "A contract is ambiguous when its meaning is uncertain and doubtful or is reasonably susceptible to more than one interpretation."¹¹ We give contract terms their plain and ordinary meaning unless the instrument indicates the parties intended a different meaning.¹² A contract is not ambiguous simply because the parties disagree over its meaning.¹³ The court construes an unambiguous contract as a matter of law.¹⁴

Many contracts involving the transportation of goods apportion the risk of loss during transport. The Uniform Commercial Code, for example, provides that parties may allocate this risk as they please by express agreement,¹⁵ and also has provisions for allocating risk of loss in the absence of an express agreement.¹⁶ Indeed, some of the gas contracts here make reference to Versado's obligation as buyer to pay Apache a percentage of the "net proceeds f.o.b. the Plant tailgate." Generally, the Uniform Commercial Code recognizes that when parties specify "F.O.B. the place of destination," the risk of loss during transport is on the seller.¹⁷

Under these contracts, Versado sold gas that reached the tailgate after processing, and Apache received a percentage of the net proceeds derived from the sale of that gas. Both parties suffered from losses occurring during the transportation of gas from the wellhead to the plant tailgate. The contracts did not expressly require Versado to meet specified efficiency targets with respect to leakage, flaring, or Versado's use of gas as fuel. Nor did the contracts require Versado to pay Apache for losses that exceeded specified thresholds or losses that could not be categorized.

The parties were free to apportion the risk of pipeline losses or other losses as they wished. Here, the contracts unambiguously provided that title to the gas was conveyed to Versado at the wellhead and Apache's payment for the gas it sold Versado was limited to a percentage of the proceeds from actual sales of residue gas at the...