Superior Oil Co. v. Western Slope Gas Co.
| Decision Date | 27 September 1979 |
| Docket Number | Nos. 77-1806,77-1807,s. 77-1806 |
| Citation | 604 F.2d 1281 |
| Parties | The SUPERIOR OIL COMPANY, a Nevada Corporation, Plaintiff-Appellant, v. WESTERN SLOPE GAS COMPANY, a Colorado Corporation, Defendant-Appellee. CONTINENTAL OIL COMPANY, a Delaware Corporation, Plaintiff-Appellant, v. WESTERN SLOPE GAS COMPANY, a Colorado Corporation, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Robert C. Hawley, Denver, Colo. (Gretchen A. VanderWerf, Ireland, Stapleton, Pryor & Holmes, Denver, Colo., on brief), for plaintiffs-appellants Superior Oil Co. and Continental Oil Co.
W. B. Wagner, Jr., Patrick F. Timmons, Houston, Tex., on brief, for plaintiff-appellant Superior Oil Co.
Tom Burton, Joseph C. Johnston, Houston, Tex., on brief, for plaintiff-appellant Continental Oil Co.
James R. McCotter, Denver, Colo. (Richard W. Bryans, Kelly, Stansfield & O'Donnell Denver, Colo., on brief), for defendant-appellee Western Slope Gas Co.
Thomas L. Barton, Thomas M. Blume, Dale A. Mayer, Darryl L. Harvey, Denver, Colo., for amicus Phillips Petroleum Co.
Before McWILLIAMS and BARRETT, Circuit Judges, and MILLER, * Judge.
These appeals are from separate orders of the district court granting summary judgment in favor of defendant-appellee Western Slope Gas Company ("Western Slope"). The judgment against Superior Oil Company ("Superior") was entered pursuant to Western Slope's motion for summary judgment. The judgment against Continental Oil Company ("Conoco") was entered on the court's joinder of the cases for the purposes of said motion and on its determination that the grant of summary judgment against Superior was decisive of the issues raised in the Conoco case. The orders are vacated, and the cases are remanded.
It appears that the issues before this court in the two cases are, in all material respects, identical. Accordingly, we will direct our attention to only the Superior case, 1 with the understanding that the discussion and disposition of that case also apply to the Conoco case.
On January 3, 1964, 2 a 20-year contract for the intrastate (in Colorado) sale and purchase of natural gas was entered into by Western Slope, the "Buyer," and Superior and Conoco, collectively referred to as "Seller." The contract includes provisions relating to heating value, delivery pressure at the wellhead, measurement (unit of measurement is 1,000 cubic feet ("MCF") of gas at base temperature of 60 degrees Fahrenheit and pressure of 15.025 pounds per square inch absolute), specific gravity, deviation from Boyle's Law, and degree of purity.
The contract states that, subject to adjustment for differences in heating value, the base price for deliveries prior to August 17, 1967, is 13cents per MCF, 14cents per MCF for the next five years, with a 1cents per MCF increase for each five years thereafter. However, Article 8.4 ("FAVORED NATIONS CLAUSE "), provides, in pertinent part, as follows:
If, at any time during the term of this Agreement, Buyer pays to a producer of natural gas in Mesa, Garfield and Rio Blanco County, Colorado, for the purpose of reselling such gas in its Colorado market area, a price per MCF higher than that being paid to Seller hereunder, due consideration being given to the quality of the gas, bases of measurement, delivery pressure, and Other conditions of sale, Buyer shall, commencing upon the date of the first delivery of such natural gas at such higher price, and continuing so long as such higher price is paid for such gas, increase the price being paid to Seller hereunder to equal such higher prices. . . . (Emphasis supplied.)
Thus, as the district court found, "A favored nations clause ensures that the seller receives the highest price paid by the buyer . . . to any other seller in a specified area For a substantially similar product." (Emphasis supplied.)
Article 7.1 ("INTRASTATE UTILIZATION "), provides in pertinent part as follows:
Buyer represents that it is engaged solely in intrastate transportation of natural gas within the State of Colorado and represents that gas purchased hereunder shall be sold and used only in connection therewith. In the event Buyer should, at any time, propose to sell or use gas purchased hereunder in such manner that in Buyer's good faith judgment will subject Seller to the jurisdiction of the Federal Power Commission or any successor body thereto with respect to the sale made hereby, Buyer shall notify Seller at least ninety (90) days before such resale or other disposition is commenced and Seller shall have the right hereunder, upon thirty (30) days' notice to Buyer to terminate this Agreement. . . .
Subsequent to the district court's orders dated July 29, 1977, the functions vested in the Federal Power Commission ("FPC") were transferred to the Secretary of Energy under 42 U.S.C. § 7151(b).
Under date of October 24, 1972, and regarding the contract of January 3, 1964, Western Slope wrote to Superior as follows:
With reference to the gas we are currently purchasing from you under the above gas purchase agreement, Article 8.4 provides that in the event Western pays a higher price to others under certain conditions, you shall be entitled to an equivalent price. We have analyzed the applicable conditions and have concluded that Western has commenced paying a higher price to which you are entitled under the above Article.
The price that Western is paying is the ceiling rate as set forth in FPC Order 435. . . . The price is subject to the terms and conditions of the FPC Order which provides for appropriate discounts from the ceiling rate for water content, inert gas, delivery pressure and BTU content. The applicable ceiling rate is 23.75cents per MCF at 15.025 psia. . . .
As a result of the above, the average price to be paid by Western under our gas purchase agreement is 23.75cents per MCF. The effective date for payment of the above price is November 14, 1971, subject to the conditions hereinafter stated. Western will continue to pay this price for so long as it pays an Equivalent price to another as provided in Article 8.4. The price is subject to change in the event that (a) the quality or Conditions of delivery of the gas we are receiving from you changes; or (b) FPC Order No. 435 is declared to be invalid or is modified by subsequent FPC Orders. . . . (Emphasis supplied.)
This appears to have been the first time that the favored nations clause was triggered. Particularly to be noted is that FPC Order 435 applied to gas sold under contracts dated on or after June 17, 1970. Even though the contract with Superior was dated January 3, 1964, Western Slope considered that its payment of 23.75cents per MCF to another producer triggered Article 8.4.
A similar letter, dated May 30, 1974, from Western Slope to Superior advised that on May 15, 1974, Western Slope commenced paying a higher price to which Superior was entitled, namely: 35cents per MCF. The letter stated:
Western will continue to pay this price for so long as it pays an Equivalent price to another as provided in Article 8.4. The price is subject to change in the event that the quality or Conditions of delivery of the gas we are receiving from you changes. ( 3 (Emphasis supplied.)
We note that the higher price that Western Slope had begun paying on May 15, 1974, was under a contract with another producer which provided for a price of 35cents per MCF for gas delivered From wells drilled on or after January 1, 1973. On June 5, 1974, Western Slope received gas under another contract also providing a base price of 35cents per MCF (without regard to vintage).
About this time, Western Slope began including in new contracts with intrastate producers an "F.P.C. price protection clause," which provides an alternative ("which results in the greater price to Seller") to the base price. Such a clause typically reads: 4
The price 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 same general terms and conditions as applicable to such base price which shall include any vintage dates specified by the Federal Power Commission.
"Vintage dates" relate to dates when wells are drilled, with gas from older wells being priced lower than gas from recently drilled wells. Thus, an "F.P.C. price protection clause" is designed to incorporate FPC price regulations into intrastate contracts.
By letter to Western Slope dated February 21, 1975, Superior complained that Western Slope had advised that it was entitled to a price of only 45cents per MCF (note 3, Supra ), whereas Western Slope was paying a price for gas within the favored nations area which was equal to that prescribed by the Federal Power Commission in Opinion No. 699, June 21, 1974 (50cents per MCF). Western Slope replied on February 27, 1975, that the contract under which it was paying the higher price called for the same price as that for interstate gas from wells connected after January 1, 1973; further, that:
(W)e have been advised that the vintage date provisions as established by the F.P.C. and which have been incorporated into our more recent gas supply contracts are legitimate conditions of sale and apply equally to those contracts and To contracts containing Favored Nations clauses. (Emphasis supplied.)
Superior wrote back on March 11, 1975, stating:
We call your attention to that certain letter directed to Superior from your company dated October 24, 1972 (Supra ) advising us that we were entitled to receive a price equivalent to that under Federal Power Commission Order No. 435 by virtue of the Favored Nations provision in our contract. As you know, Order 435 applied to gas sold under contracts dated on or after June 12, 1970. Since our contract is dated January 3, 1964 if vintaging...
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