Pogo Producing Co. v. Shell Offshore, Inc.
| Decision Date | 26 April 1990 |
| Docket Number | No. 89-3318,89-3318 |
| Citation | 898 F.2d 1064 |
| Parties | POGO PRODUCING COMPANY, Plaintiff-Appellant, v. SHELL OFFSHORE, INC., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
David R. Richardson and Kenneth J. Servay, Chaffe, McCall, Phillips, Toler & Sarpy, New Orleans, La., for plaintiff-appellant.
John T. McMahon and George J. Domas and Robert L. Theriot, Liskow & Lewis, New Orleans, La., for defendant-appellee.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before HIGGINBOTHAM, SMITH and DUHE, Circuit Judges.
Pogo Producing Company appeals the dismissal of its complaint seeking a cash recovery from Shell Offshore, Inc. for natural gas overproduced by Shell. We affirm.
In October 1979 Pogo, Shell, and several others executed an operating agreement governing the production of oil and gas from a federal lease on the outer continental shelf of the United States. Shell was designated the operator under the agreement. Section 10.4 of the agreement states:
Any party's failure to timely take or sell its share of gas production shall not prohibit the other party or parties from producing their share of production, provided that non-producing party or parties may recoup or recover their share from future production and/or in cash by suitable agreement.
Under a 1975 settlement agreement Pogo was obligated to offer United Gas Pipeline Company the right of first refusal to purchase Pogo's gas from the offshore lease. Accordingly, while the other lessees agreed to sell their shares of production to Tennessee Gas Pipeline Company, United elected to purchase from Pogo and the two parties entered into a gas sales contract in June 1982. When production commenced in July, however, United did not have a pipeline connection to the lease and was therefore unable to take deliveries of Pogo's gas. No deliveries were made under the United/Pogo contract, and the contract was rescinded in January 1985. Pogo began deliveries of gas to Texas Eastern Transmission Corporation in February 1985.
During the period Pogo was unable to deliver gas it did not take its share of production, and imbalances continued to some extent after Pogo began selling to Texas Eastern. Shell and Pogo corresponded through the end of 1986 regarding the imbalances in production. The main point of dispute was a gas balancing agreement executed by all lessees except Pogo. Pogo objected to a provision of the balancing agreement which required an underproduced party who commenced to take "makeup gas" to remit to the operator any difference in value between the makeup gas and the value of the gas when taken by the overproduced party. Pogo initially asked Shell to balance in kind, but later sought a one-time cash settlement for its underproduction. Shell refused to make a cash settlement and urged Pogo to join the balancing agreement.
In June 1987 Shell transferred its interest in the property to Hughes-Denny Offshore Exploration, Inc., and others (the "Hughes-Denny group"). As part of the transfer the Hughes-Denny group assumed Shell's rights and obligations under the operating agreement subject to Pogo's right to recover its imbalance.
Pogo sued Shell seeking a cash recovery for approximately 2,000,000 Mcf of underproduced natural gas. Both parties moved for summary judgment. The district judge denied Pogo's motion and granted Shell's motion, concluding that under section 10.4 of the Operating Agreement the parties had simply made an "agreement to agree," and that in the absence of an agreement the custom and usage of the industry required balancing in kind. The judge found no reason to believe that balancing in kind would be inequitable to either party, and accordingly dismissed the complaint.
Pogo offers several grounds to support its assertion that the district judge improperly concluded balancing in kind was the appropriate remedy. Pogo first argues that no evidence supports the district judge's inference that Pogo was "playing the market" and demanding cash balancing in order to gain a better recovery after a decline in gas prices. The judge, however, made no finding on the evidence regarding Pogo's motives, but simply commented that the rule favoring balancing in kind, as a general matter, discourages an underproduced party from alternatively demanding balancing in cash or in kind as the market favors him.
Pogo next argues that under Louisiana law a court should order cash balancing at the price received by the overproduced party when the underproduced party, through no fault of its own, is shut in without a market for its gas. The argument does not accord with Louisiana law. A recent case concerned an order of the Louisiana Commissioner of Conservation providing in part for the accounting among co-owners for production from a compulsory drilling and production unit. The court commented:
The preferred method of judicial partition is partition in kind, wherein each co-owner receives his proportionate share of the common property.... However, partition in kind cannot be utilized when the common property is indivisible or when it cannot be conveniently divided.... Common property cannot be conveniently divided in kind if a diminution of value occurs (a diminution in value occurs when the total value of the parts is less than the value of the property as a whole), or if the division in kind causes loss or inconvenience to one of the owners.
Amoco Prod. Co. v. Thompson, 516 So.2d 376, 388 (La.App. 1st Cir.1987) (citations omitted) (emphasis in original), writ denied, 520 So.2d 118 (La.1988). The court also cited certain provisions of the Conservation Law which give the Commissioner of Conservation the authority to modify the right to take in kind. These provisions govern circumstances in which taking in kind (1) causes waste, (2) precludes another owner from recovering or receiving his just and equitable share, or (3) infringes on the correlative rights of another owner by limiting his liberty to enjoy his rights or causing damage to him. Id. at 393. The court commented that these principles "are consistent with the mutual rights and obligations of all owners in indivision." Id. at 393 n. 5.
On remand the Commissioner of Conservation found that during a certain critical period in which the non-producing owners did not have a viable market for their gas, "partition in kind would adversely affect the rights of the non-taking owners to take their just and equitable shares in kind, and would adversely affect their correlative rights." Supplement to Office of Conservation Order Nos. 1102, 1102-A, 1102-A-1, 1102-A-2, 1102-A-3, and 1102-A-4, at 7, 8 (December 14, 1988). On appeal the district court concluded that the Commissioner's determination was contrary to the decision of the Court of Appeals, since the administrative record indicated that the gas remaining in each unit was sufficient to provide each owner with his fair share of gas production. Amoco Prod. Co. v. Thompson, No. 283,872 (La. 19th Jud.Dist.Ct. Oct. 10, 1989). The disposition by the district court is consistent with the holding of the Court of Appeals, which commented:
If, in taking their share in kind, some owners deplete the unit, then those owners who did not get their share in kind prior to depletion may be entitled to a cash accounting. However, if the unit is not depleted and the gas remaining in the unit is enough to provide each owner with his fair share (if properly balanced) then a balancing in kind accounting may be appropriate.
Amoco, 516...
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