Transcontinental Gas Pipe Line Corp. v. American Nat. Petroleum Co.

• Decision Date: 08 November 1988
• Docket Number: No. 9602,9602
• Citation: 763 S.W.2d 809
• Parties: TRANSCONTINENTAL GAS PIPE LINE CORPORATION, Appellant, v. AMERICAN NATIONAL PETROLEUM COMPANY, On Behalf of Itself and Oil Investments, Ltd., Appellees.
• Court: Texas Court of Appeals

Page 809

763 S.W.2d 809

TRANSCONTINENTAL GAS PIPE LINE CORPORATION, Appellant, v. AMERICAN NATIONAL PETROLEUM COMPANY, On Behalf of Itself and Oil Investments, Ltd., Appellees.

No. 9602.

Court of Appeals of Texas Texarkana.

Nov. 8, 1988.

Rehearing Denied Dec. 20, 1988.

Murray Fogler, Roger Townsend, Fulbright & Jaworski, Houston, for appellant.

James R. Leahy, Baker, Brown, Sharman & Parker, Houston, for appellees.

PER CURIAM.

Transcontinental Gas Pipe Line, Inc. ("TRANSCO") appeals a judgment granted to American National Petroleum Co. ("ANPC") and Oil Investments, Ltd. ("Oil Investments"). TRANSCO contests the award to ANPC and Oil Investments of $3,886,715 in damages for breach of gas purchase contracts, $16,000,000 as exemplary damages for tortious interference with agreements between ANPC, Oil Investments and others, $1,000,000 in attorney's fees and a permanent injunction restraining TRANSCO from specified conduct. ANPC and Oil Investments appeal from that part of the judgment requiring ANPC to provide TRANSCO with 31,550 mcf ¹ of gas which TRANSCO had paid for but not received and from an award to TRANSCO of $21,080 as attorney's fees.

ANPC and Oil Investments are independent producers owning fractional interests The Vermilion and Oakvale contracts obligated TRANSCO to take-or-pay for specified annual and monthly percentages of ANPC's and Oil Investments' gas delivery capacity.

in two gas wells in the Vermillion field in the Gulf of Mexico off the Louisiana coast. ANPC also owns a fractional interest in five gas wells in the Oakvale field in Mississippi. Oil Investments owns no interest in that field. TRANSCO buys gas from ANPC and Oil Investments under a 1981 contract, as amended, for the Vermilion field and from ANPC under a 1979 contract, as amended, for the Oakvale field.

ANPC and Oil Investments were parties to a gas balancing agreement ² with the other fractional interest owners in the Vermilion field. In another agreement, the owners designated Samedan Oil Corporation ("Samedan") as the gas operator for the field. Under the agreements, if a particular owner's working interest was underproduced and another owner's interest was overproduced, the underproduced owner could ask the gas operator to bring him back into balance with the other working interest owners by reallocating an appropriate amount of the sales proceeds from gas taken by TRANSCO. The gas operator received monthly from TRANSCO a notice (called a "nomination") of how much gas TRANSCO intended to buy from the fields for that month. The gas operators would then instruct TRANSCO how to allocate the payments to the various working interest owners in the field in accordance with their respective ownership interests and with due regard for underbalanced and overbalanced situations. ANPC entered into similar agreements with the other owners in the Oakvale field. APC Operating Partnerships ("APC") was designated as the gas operator for that field.

As market conditions changed, excess capacity occurred. In 1983, at TRANSCO's request, the Vermilion contract was modified by reducing the annual take-or-pay percentage obligation and by adding a "market-out" clause which permitted TRANSCO to reduce the contract price to be paid ANPC and Oil Investments for their gas when, in TRANSCO's sole opinion, the existing contract price would be uneconomic to TRANSCO or its customers. ³ ANPC and Oil Investments contend, and a TRANSCO official conceded in testimony, that TRANSCO was required to exercise the market-out provision fairly, honestly and in good faith when setting a new price for the gas to be taken. The amended Vermilion contract provided that if ANPC and Oil Investments were dissatisfied with a market-out price established by TRANSCO, their sole remedy was to request that TRANSCO release all of their gas obligations. The remedy could only be exercised, however, if they produced evidence to TRANSCO that they had a buyer willing to pay a gas price higher than that set by TRANSCO as the new market-out price. ⁴

In 1984, again at TRANSCO's request, the Oakvale contract was amended by deleting TRANSCO's take-or-pay obligation altogether and instead required that TRANSCO take ANPC's gas production ratably with other producers in the Oakvale field. ANPC also agreed to participate in a "market maintenance program" established by TRANSCO under which ANPC's Oakvale gas was temporarily sold at reduced prices in order to remain competitive with the existing market conditions.

By 1985, gas prices had dropped drastically, and TRANSCO took various actions TRANSCO elected to establish its market-out price on the basis of the market price for "spot" gas, which is gas sold on a short term, interruptible basis and which is not dedicated to a specific buyer. As such, it was less expensive than the "system" gas sold under the long-term dedicated and uninterruptible contracts between TRANSCO and its producers, such as ANPC and Oil Investments. The result was lower prices offered to the producers, and TRANSCO justified this policy on the ground that federal regulation required it to buy gas at the lowest price available.

which it contends reduced its obligations for taking the higher priced gas under its Vermilion and Oakvale contracts. TRANSCO, which bought gas from approximately 1400 producers such as ANPC and Oil Investments, developed an "omnibus agreement" under which the producers had to waive any outstanding liability claims against TRANSCO and agree to a lower price and reduced purchase obligations for their gas. To pressure the producers into signing the agreement, TRANSCO adopted a policy of taking only three percent of the gas capacity of each nonsigning producer, regardless of take-or-pay or minimum-take requirements or ratable-take clauses in its contracts with the producers. A TRANSCO official conceded in testimony that TRANSCO took more than three percent of the gas of those producers who signed the agreement on TRANSCO's terms, and also testified that TRANSCO's objective was to place financial pressure on the nonsigners to induce them to waive their liability claims against TRANSCO, agree to a price for their gas which was considerably less than the price to which they previously had agreed, and to accept the proposed omnibus agreement.

TRANSCO applied its three-percent policy to ANPC's and Oil Investments' gas in both the Vermilion and Oakvale fields, even though ANPC and Oil Investments offered all of their gas reserves to TRANSCO. Moreover, TRANSCO set the Oakvale contract gas price for ANPC using a market-out method, even though the Oakvale contract had no such provision. A TRANSCO official testified that the company focused pressure on producers who refused to sign the proposed omnibus agreement without regard to whether TRANSCO had a right to reduce the prices. TRANSCO's witness also admitted that TRANSCO paid more to the settling producers for their gas than it did for the gas purchased from ANPC and Oil Investments and others who refused to waive their liability claims or to sign the agreement.

TRANSCO concedes in its brief that as a result of its three percent policy, it did not take the monthly minimum required volumes from November 1985 through July 1986 or take the contract annual minimum quantity for the year ended June 30, 1986. It also conceded that as another result of that policy, ANPC and Oil Investments became underbalanced in the Vermilion field.

In November, 1986, ANPC and Oil Investments asked their gas operators, Samedan and APC, to bring them back into balance in the Oakvale and Vermilion fields. The operators passed this request on to TRANSCO. On December 1, 1986, TRANSCO vice-president for purchasing Phil McGowan responded in two letters. One concerned the Oakvale field and included the following language:

The purpose of this letter is to reiterate that until such time as ANPC and Transco enter into a settlement agreement Transco will continue to regard ANPC as a non-settling producer and we will take gas from you accordingly. Necessarily, until a settlement is reached with you, we will not take from you an additional twenty-five percent (25%) of each over-produced working interest owners' percentage of production from the referenced wells in order to make up under-production.

An ANPC witness testified that TRANSCO agents told ANPC officials that it would not begin to take ANPC's pro rata share of gas under the Vermilion contract until ANPC replaced both the Vermilion and Oakvale contracts with the proposed omnibus agreement.

McGowan testified that TRANSCO advised the gas operators that, if they insisted Q. And what you were trying to tell Samedan and Apache [APC] that if you do that [ask that ANPC and Oil Investments be brought back into balance] we will not buy any gas. That was the purpose of your letter, wasn't it?

on revised allocations to bring the appellees into balance, TRANSCO would not honor the allocations and that it would refuse to take any gas from the ANPC's and Oil Investments' interest in the Vermilion and Oakvale fields. TRANSCO argues in a supplemental brief that this is a mischaracterization, but the record contradicts TRANSCO's disclaimer. McGowan was questioned at trial as to the meaning of the letter and answered as follows:

A. [by McGowan] I believe that is right.

TRANSCO characterizes this testimony as being merely a "stray comment." The clear import of the testimony, however, is that TRANSCO would not buy any gas from ANPC and Oil Investments if their gas operators, Samedan and APC, insisted to TRANSCO that they be brought back into balance. There was other testimony which indicated that both gas operators thereafter told ANPC and Oil Investments that "their hands were tied" and "they couldn't do any thing about" enforcing the provisions of the gas balancing agreements with other producers in the Vermilion and Oakvale fields.

McGowan also testified that in order to bring...