Texas Eastern Transmission Corp. v. Amerada Hess Corp.

• Decision Date: 07 July 1998
• Docket Number: No. 97-31037,97-31037
• Citation: 145 F.3d 737
• Parties: Util. L. Rep. P 14,224 TEXAS EASTERN TRANSMISSION CORPORATION, Plaintiff-Appellee, v. AMERADA HESS CORPORATION, Defendant-Appellant. AMERADA HESS CORPORATION, Plaintiff-Appellant, v. TEXAS EASTERN TRANSMISSION CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 737

145 F.3d 737

Util. L. Rep. P 14,224

TEXAS EASTERN TRANSMISSION CORPORATION, Plaintiff-Appellee, v. AMERADA HESS CORPORATION, Defendant-Appellant.

AMERADA HESS CORPORATION, Plaintiff-Appellant, v. TEXAS EASTERN TRANSMISSION CORPORATION, Defendant-Appellee.

No. 97-31037.

United States Court of Appeals Fifth Circuit.

July 7, 1998.

John Mason McCollam, C. Peck Hayne, Jr., Scott Allen O'Connor, Jason A.T. Jumonville, Gordon, Arata, McCollam & Duplantis, New Orleans, LA, for Texas Eastern Transmission Corporation, Plaintiff-Appellee.

John M. Wilson, Michael David Rubenstein, Liskow & Lewis, New Orleans, LA, Michael M. Wilson, R. Michael Peterson, Lance Charles Arney, Bristow, Hackerman, Wilson & Peterson, Houston, TX, for Amerada Hess Corporation, Defendant-Appellant.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before HIGGINBOTHAM, PARKER and DENNIS, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Amerada Hess Corp. appeals a summary judgment in favor of Texas Eastern Transmission Corp. This case requires us to interpret a gas substitution clause in a "take or pay," gas purchase contract. Reading the contract as a whole, the district court concluded that the contract restricts the quantity of gas substituted from another lease to the amount of gas produced from the leaseholds and lands dedicated to the contract. We agree.

I.

Amerada Hess owns an undivided interest in the natural gas produced from a federal offshore mineral lease at South Pass Block 89, which is located in federal waters off the coast of Louisiana. The Marathon Oil Company is the operator and a co-working interest owner with Amerada Hess of the SP 89 Lease. Texas Eastern is a natural gas pipeline company which purchases, sells, and transports natural gas. Amerada Hess produces natural gas from oil and gas reservoirs in the outer continental shelf.

The present dispute is over the proper construction of a gas substitution clause in a twenty-year, "take-or-pay" gas purchase contract between Amerada and TX Eastern, dated April 1, 1982, as amended in 1991 and 1992.

The 1982 contract is based on an Advance Payment Agreement entered into by the parties in 1971. In 1971, there were critical shortages of natural gas for customers served by interstate pipelines, such as TX Eastern. The AP agreement was made under the auspices of the Advance Payment Program, which the Federal Power Commission set up in order to encourage pipelines to contribute funds for exploration and development of gas reserves.

Under the AP agreement, TX Eastern advanced Amerada $5.5 million to explore and develop natural gas from seven offshore leases that Amerada owned in the Gulf of Mexico. In return, TX Eastern had the option to buy any gas found on the designated leases. In 1981 Amerada found oil and gas under South Pass Block 89, and in 1982 the parties executed a twenty-year contract in which TX Eastern agreed to take or pay gas produced from the SP 89 Lease, explicitly identified in the contract as the "contract area."

In the 1980s the natural gas market underwent dramatic changes, and in 1989 TX Eastern sued Amerada to terminate the 1982 gas purchase contract. In 1991, pursuant to a 1990 settlement arising from this lawsuit, the parties amended the 1982 contract by limiting to 15 Bcf the volume of gas that TX Eastern was required to buy from the Northern Area of SP 89, and by reducing the price for gas under the contract, in exchange for a $21.6 million payment by TX Eastern to Amerada. ¹ In 1992, pursuant to a buyout agreement, the parties further amended the 1982 contract to terminate all remaining purchase obligations for gas produced from the Northern Area of SP 89, in exchange for a $19.3 million payment by TX Eastern to Amerada.

Article III, paragraph 5 of the 1982 contract, referred to as the "Gas Substitution Clause," states:

[Amerada] shall have the right at its election during the term of this Agreement to substitute other gas for all or a portion of the gas hereunder and the right to deliver such substitute gas to [Texas Eastern] at mutually agreeable points in the area of or downstream of delivery points set forth in this Agreement, provided the substituted source contains reserves and deliverability equal to or in excess of the reserves under the leases originally committed to this Agreement.

This substitution clause was included in the 1971 Advance Payment Agreement, was incorporated into the 1982 contract and has since remained in the contract without modification for the last 16 years.

Paragraph 8 of Article IV (entitled "Quantity of Gas") in the 1982 contract, as amended in 1990, states:

[I]t is understood and agreed that nothing in this Agreement shall be construed to require [Amerada] to sell and deliver to [Texas Eastern] or [Texas Eastern] to purchase or pay for on any day a quantity of gas in excess of the total quantity of gas per day which the wells on the leaseholds and/or lands covered by this Agreement are capable of producing into [Texas Eastern]'s line ...

The scope of the gas committed to the 1982 contract, as amended in 1990, is defined in Article II, paragraph 1, as that gas produced from specific "leaseholds and/or lands" above a specific depth, namely:

the leaseholds and/or lands which [Amerada] now owns or controls in said Block 89 Field, South Pass Area, Offshore Louisiana, as described in Exhibit "A" and shown on Exhibit "A-1" attached hereto, from the surface down to the base of the deepest hydrocarbon bearing reservoir or its correlative zone encountered in said block as of the date hereof [April 1, 1982].

Exhibits "A" and "A-1" attached to the 1982 contract define the designated "contract area" as the geographic area covered by "Block 89, South Pass Area, South and East Addition, Offshore Louisiana."

When the SP 89 contract was executed in 1982, TX Eastern and Marathon, as operator of the SP 89 Lease, estimated that there were 176 billion cubic feet ("Bcf") of proven and possible gas reserves in the geographic area covered by the SP 89 Lease. ² By March 1997, 194 Bcf of gas had been produced, with another 9 Bcf of proven reserves estimated to be recoverable thereafter from the Southern Area of SP 89.

In 1995, Amerada began production in another newly developed OCS lease area, referred to as the "South Pass 87 D Development Area." Amerada's estimated gas production from April 1997 through the expiration of the 1982 contract on November 30, 2002 is more than twenty times greater for the SP 87 D Development Area than for the Southern Area of SP 89. ³

In February 1997, after TX Eastern had been purchasing gas from the SP 89 Lease for fifteen years, Amerada advised TX Eastern by letter that, pursuant to its alleged right under the gas substitution clause in Article III, paragraph 5 of the contract, it intended to substitute 100 percent of its gas reserves and deliverability from its interests in the South Pass 87 D Development Area for 100 percent of its gas reserves previously dedicated to the contract from the SP Block 89 Area. Thus, TX Eastern's take-or-pay obligations from February 21, 1997 through to November 30, 2002, when this contract expires, would be determined by the enormous production potential from the South 87 D Development Area rather than the nearly depleted gas reserves in the Southern Area of SP 89. Under this scenario, by exercising its alleged gas substitution right, Amerada could double the total volume of gas sold during the 20-year contract term and TX Eastern would be required to buy an additional 43 Bcf of gas and pay Amerada an extra $624 million. ⁴

TX Eastern replied that Amerada was entitled to tender, as substitute gas from another source, a volume of gas equivalent to all or a portion of Amerada's gas that was being produced from the SP Block 89 Lease. In other words, while Amerada could substitute specific volumes of gas from the SP 89 Lease for gas from another source, it could not substitute one gas source with another source, without any volume limitations. For the moment, in their response TX Eastern agreed to accept the gas deliveries from the SP 87 D Development Area "with a full reservation of rights."

Amerada then filed a declaratory judgment action in state court in Harris County, Texas, which was first removed to the Southern District of Texas and subsequently transferred to the Eastern District of Louisiana. Two days after Amerada filed suit, TX Eastern filed a declaratory judgment action in the Eastern District of Louisiana. These suits were consolidated. Shortly thereafter, with limited discovery, both parties moved for summary judgment, arguing that the SP 89 gas purchase contract was unambiguously in their favor. TX Eastern submitted the affidavits of several scientists and law professors including Dr. Saul Litvinoff, Professor Shael Herman, and Professor L. Linton Morgan, who testified on custom and usage in the oil and gas industry. The district court denied Amerada's motion to strike much of this evidence as being extrinsic to the contract. In a thirty-eight page order granting TX Eastern's motion for summary judgment and denying Amerada's motion for summary judgment, the district court stated:

Reading the Substitution provision, Article III, Paragraph 5, in conjunction with Article IV, Paragraph 8, the Court concludes that there is a limit on the total amount of gas that can be delivered or can be paid for.

The district court concluded that, under the provisions of the SP 89 contract, Amerada could not substitute gas from the SP 87 D Lease in excess of the quantity of gas produced by the SP 89 Lease per day.

The district court entered a judgment in favor of TX Eastern and against Amerada for $11,282,826.19, plus court costs and prejudgment interest. This appeal followed. We have jurisdiction under 28 U.S.C. § 1291.

II.

A.

This court reviews a grant of summary judgment de novo. See Montgomery v. Brookshire, ...