OXY U.S.A., Inc. v. Seagull Natural Gas Co., 91-1436
| Decision Date | 03 January 1992 |
| Docket Number | No. 91-1436,91-1436 |
| Citation | 949 F.2d 799 |
| Parties | OXY U.S.A., INC., Plaintiff-Appellee, v. SEAGULL NATURAL GAS COMPANY, f/k/a Liberty Natural Gas, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Patricia F. Eldridge and J. Clifford Gunter, III, Bracewell & Patterson, Houston, Tex., for defendant-appellant.
Elizabeth D. Whitaker, Diane M. Sumoski, Jeffrey S. Levinger, James E. Coleman, Jr., Carrington, Coleman, Sloman & Blumenthal, Dallas, Tex. and Michael L. Pate, OXY, U.S.A., Inc., Tulsa, Okl., for plaintiff-appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before CLARK, Chief Judge, WILLIAMS and BARKSDALE, Circuit Judges.
Appellant Seagull Natural Gas Company ("Seagull") appeals the district court's summary judgment in favor of Appellee OXY, U.S.A. ("OXY"). The district court found Seagull contractually liable to OXY for retroactive payments for tight sands gas delivered from January 1982 to April 1, 1983. Liability was premised on the permission granted in the contract in conjunction with 18 C.F.R. § 273.204 (1987).
Seagull asserts three bases for reversal of the district court's summary judgment: (1) the contract in question did not permit retroactive collections; (2) retroactive payments would render the market-out provision in the contract meaningless; and (3) OXY did not rely on the incentive price for tight sands gas in deciding to drill. We affirm the trial court's decision. The contract need not expressly authorize the collection of retroactive payments; it must only not foreclose that possibility. Retroactive payments do not render the market-out provision meaningless. The market-out provision, in fact, limits the amount OXY can collect retroactively. Finally, whether OXY relied on the incentive price for tight sands gas is irrelevant as long as there is a "negotiated contract price."
A background of the regulations at issue sets the stage for this case. On July 15, 1979, President Carter addressed "a clear and present danger to our Nation"--the energy crisis and our dependence on foreign oil. In response, the Federal Energy Regulatory Commission ("FERC"), under its authority set out in Section 107(c)(5) of the Natural Gas Policy Act of 1978 ("NGPA"), 15 U.S.C. § 3301 et seq., implemented an incentive price for gas produced from a "tight formation." 1 Its general purpose was to allow producers to charge a higher price for gas produced from a "tight formation" in order to encourage them to spend the extra money necessary to recover the gas. In turn, natural gas customers would be using more domestic gas in place of foreign gas. 2
As a means of preventing the higher price from being merely a windfall for the producer instead of an incentive to drill, the FERC established numerous requirements which a producer had to meet before he could collect the higher tight sands price. Initially, there was a four step process to obtain a tight formation designation for a well. First, the local regulatory authority--in this instance, the Texas Railroad Commission--had to recommend that a field be designated a tight formation. Second, the FERC had to designate the field as a tight formation. 3 Third, the local regulatory authority had to recommend that a specific well be classified as a tight formation well. 4 Fourth, the FERC had to approve the recommendation designating that well as producing tight formation gas. 5
A producer was not authorized, however, to charge the higher tight sands price merely because a specific well had been designated a tight sands well. Instead, it was necessary that the contract between the buyer and seller contain a "negotiated contract price." 6 In theory, the "negotiated contract price" prevented the higher price for tight formation gas from being merely a windfall to the seller because the purchaser would only agree to a "negotiated contract price" if it was essential as an incentive to drill:
A producer of tight formation gas does not have authority to charge these ceiling prices unless the producer has the requisite contractual authority.... The Commission believes that the imposition of the negotiated contract price requirement is therefore necessary to insure that a purchaser is given an opportunity to bargain for increased production of tight formation gas before he agrees to pay a price higher than the otherwise applicable maximum lawful price.... Thus, in the Commission's view a "necessary" price for tight formation gas is one that is contractually agreed upon either at or below the ceiling price.
Order No. 99 (Final Rule), 45 Fed.Reg. 56,034, 56,040-41 (1980).
The FERC determined that it was inappropriate to allow interim collection of the incentive price prior to designation of the formation. Order No. 99, 45 Fed.Reg. at 56,042. Instead, the FERC provided for retroactive collection of the incentive price for gas produced from qualifying wells. 7 Retroactive collection was limited, however, to the extent permitted by the sales contract. 8
Thus, before a producer could charge the higher tight sands price retroactively, each of the following requirements had to be met: (1) the formation had to be designated a tight formation by both the local regulatory authority and the FERC; (2) the specific well in question also had to be designated a tight formation well by both the local regulatory authority and the FERC; (3) the sales contract had to contain a negotiated contract price; and (4) the contract had to permit retroactive collection of the tight sands price.
We turn to the facts of the case. In April of 1981, Seagull contacted OXY about the possibility of purchasing gas. 9 Negotiations followed until a gas sales contract was executed on September 11, 1981. Two relevant facts as to the negotiations are of particular significance. First, the six wells at issue in this case are all within the Travis Peak formation, and, during the negotiation process, the Texas Railroad Commission was considering whether to recommend the Travis Peak formation as a tight formation. Second, OXY insisted upon the inclusion of a negotiated contract price within the contract.
On October 26, 1981, the Texas Railroad Commission recommended that the entire Travis Peak formation be designated as a tight formation. The entire formation, however, has never been designated as a tight formation by the FERC. 10
On September 10, 1984, the Texas Railroad Commission recommended that the Toolan Field within the Travis Peak formation be designated as a tight formation. The Toolan Field includes five of the six wells at issue in this case. The FERC designated the Toolan Field as a tight formation effective May 10, 1985. On June 24, 1985 and July 1, 1985, the Texas Railroad Commission recommended that OXY's five wells in the Toolan Field be designated tight formation wells. On July 17, 1985, OXY sent notice to Seagull indicating OXY's intent to collect the tight sands price on an interim basis for the five wells. OXY then sent notice to Seagull on August 5, 1985 that two of the wells had been designated as tight formation wells. OXY also sent notice on August 21, 1985 when the other three wells were designated as tight formation wells by the FERC. After unsuccessfully attempting to collect $2,717,871.66 in retroactive payments for tight sands gas in the Toolan Field from Seagull, OXY filed its original complaint on June 29, 1987.
Subsequently, the Texas Railroad Commission recommended that the Appleby N. Field be designated as a tight formation, and the FERC approved this recommendation on December 6, 1988. The sixth well involved in this case is in the Appleby N. Field. On May 3, 1989, OXY sent notice to Seagull indicating OXY's intent to make retroactive collection for the gas from the well in the Appleby N. Field. The well was approved as a tight formation well by the FERC on August 19, 1989, and OXY sent Seagull notice of this fact on August 25, 1989. OXY then demanded $780,409.47 from Seagull for retroactive payments on the production of the well in the Appleby N. Field. When the retroactive payments were not forthcoming, OXY amended its complaint to include the sixth well.
OXY is attempting to make retroactive collections for all gas delivered from January 1982 through April 1, 1983. Deliveries under the Contract began in January 1982, and the market-out provision was exercised by Seagull and became effective on April 1, 1983. As later discussion shows, the use of the market-out provision preempted the effectiveness of the "negotiated contract price."
All parties involved agree the proper procedures were followed in classifying the wells as tight formation wells. Similarly, they agree the sales contract contains a "negotiated contract price" which allows prospective collection of the higher tight sands price. Thus, the only issue is whether the contract provides for retroactive collection of the higher price.
This case turns upon the meaning and application of the word "permitted" in the regulation which provides: "[Retroactive] collection under this section may be made only to the extent permitted by the applicable sales contract." 18 C.F.R. § 273.204(c)(4) (1987). Seagull contends that the applicable sales contract must expressly authorize retroactive payments. OXY, on the other hand, argues that such a contract allows retroactive payments unless it expressly forbids them. OXY's position comports with the legal definition of "permit" as well as the FERC's rulings on this issue.
United States v. Launder, 743 F.2d 686, 689 (9th Cir.1984), holds that the word "permitted" in the regulation "require[s] a willful act or a willful failure to act in the face of a clear opportunity to do so." (emphasis added). The case also cites the following definition of "permit": "To suffer, allow, consent, let; to give leave or license; to acquiesce, by...
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