Transcontinental Gas Pipeline Corp v. Texaco

• Decision Date: 08 June 2000
• Citation: 35 S.W.3d 658
• Parties: <!--35 S.W.3d 658 (Tex.App.-Houston 2000) TRANSCONTINENTAL GAS PIPELINE CORPORATION AND TRANSCO GAS SUPPLY COMPANY, APPELLANTS v. TEXACO, INCORPORATED AND TEXACO EXPLORATION AND PRODUCTION, INCORPORATED, APPELLEES NO. 01-98-00488-CV Court of Appeals of Texas, Houston (1st. Dist.)
• Court: Texas Court of Appeals

Page 658

35 S.W.3d 658 (Tex.App.-Houston [1st Dist.] 2000)

TRANSCONTINENTAL GAS PIPELINE CORPORATION AND TRANSCO GAS SUPPLY COMPANY, APPELLANTS v TEXACO, INCORPORATED AND TEXACO EXPLORATION AND PRODUCTION, INCORPORATED, APPELLEES

NO. 01-98-00488-CV

Court of Appeals of Texas, Houston (1st. Dist.).

June 8, 2000.

Rehearing Overruled February 1, 2001.

On Appeal from the 189th District Court Harris County, Texas Trial Court Cause No. 94-011538

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Panel consists of Justices Mirabal, Taft, and Price^*.

OPINION

Frank C. Price, Justice(Assigned).

Appellees, Texaco, Incorporated and Texaco Exploration and Production, Incorporated (collectively "Texaco") sued appellants, Transcontinental Gas Pipeline Corporation and Transco Gas Supply Company (collectively "Transco") for breach of contract. The jury found for Texaco and awarded in excess of $20,000,000 (including prejudgment interest and attorneys' fees). In 10 points of error, Transco appeals the judgment. We affirm.

BACKGROUND

In the 1970s, there was a shortage of natural gas. During this time of high demand and low supply, pipelines like Transco sought to increase its gas supplies in order to meet their customers' demands for gas. Because of the shortage, experts predicted that oil and gas prices would rise. Indeed, in 1978, Congress passed the Natural Gas Policy Act, which raised the maximum legal price that pipelines such as Transco could pay for gas.

Oak Hill Contract

Around this time, Transco, as buyer, and Texaco, as seller, entered into 72 gas-purchase agreements covering property leased by Texaco in Texas, Louisiana, and the Gulf of Mexico. This case concerns one particular gas-purchase agreement, the Oak Hill Gas-purchase Agreement ("the Oak Hill contract"), executed in 1980. Under the Oak Hill contract, Texaco agreed to deliver to Transco, and Transco agreed to take or pay for, a quantity of "gas well gas" produced from the Oak Hill field equal to 80% of Texaco's delivery capacity from 1980 to 1995. Transco also agreed to reimburse Texaco for all excess royalty payments that Texaco might find itself required to pay to any of its royalty owners with respect to gas delivered to Transco under the Oak Hill contract. ¹ The contract expressly restricted "excess royalty" coverage to claims for royalties on gas actually produced. Transco and Texaco continued their relationship under the Oak Hill contract and the other gas-purchase agreements until the mid-1980s, when economic and regulatory changes jarred the natural gas industry.

The Natural Gas Policy Act motivated producers to increase drilling and production. As a result of the increase, Transco found itself obligated to buy much more gas than it could resell. Texaco claims this was Transco's first breach of the Oak Hill contract. In response to the Natural Gas Policy Act, Transco devised a series of market programs designed to reduce the price Transco paid and the volumes it was obligated to take under contracts such as the Oak Hill contract. Texaco participated in two such programs, the Market Retention Program (MRP) and the Market Maintenance Program (MMP). Both the MRP and the MMP contained restrictions that expressly limited excess-royalty protection to claims for lost royalties on produced gas. For its part, Transco granted Texaco and other program participants a more favorable status than other sellers. The market programs were intended to be temporary measures, entered into with the idea that all the terms of the original gas-purchase agreements would resume when the market regained its strength.

Omnibus

In 1984, the Federal Energy Regulatory Commission ("FERC") issued Order 380, which effectively released many of Transco's previously captive customers from their contractual take-or-pay obligations to purchase gas from Transco and allowed it to purchase gas from other sources. Order 380 also created a large low-cost spot market ² for natural gas. But FERC did nothing to free pipelines like Transco from its obligations to take or pay for gas from the producers or from its concomitant obligations to deliver the gas. In fact, FERC later issued Order 436, which allowed a pipeline's customers to buy gas directly from producers and , for the first time, required pipelines to transport gas for the producers even though the producers might sell the gas more cheaply than the pipelines to the pipeline's own customers.

Because of the availability of cheaper gas and the release of the customers' contractual obligations to purchase more expensive gas from Transco under the existing agreements, Transco lost the majority of its market to spot competition. This caused its gas sales to fall to all-time lows. These market conditions were a national problem; pipelines were unable to continue buying the quantities of natural gas they had contracted to buy.

Order 436 was eventually appealed, and federal courts found that FERC had erred adversely to the pipelines in passing it. The courts directed FERC to address the order's serious ramifications to the pipelines. In response, FERC issued Order 500. That order contained a cross-crediting mechanism that allowed a pipeline transporting gas for a producer that had displaced pipeline sales in its market to credit that volume of gas against the pipeline's own take-or-pay obligations to that producer. The order gave pipelines such as Transco the upper hand in renegotiating gas-purchase agreements to a level more consistent with market realities. Most gas-purchase agreements in the industry were renegotiated because of Order 500. Under these conditions, Transco and Texaco negotiated a global settlement of accrued claims under, and modifications to, all 72 gas-purchase agreements between them. First, they modified all of the agreements on an interim basis. Then, in April 1988, they incorporated their settlement of and modifications to the gas-purchase agreements into an Omnibus Contract Amendment and Settlement Agreement (the "Omnibus"). The Omnibus settled Texaco's claims under the gas-purchase agreements with regard to accrued take-or-pay obligations, minimum takes, volumes, and pricing. Transco gave Texaco lump-sum payments of $4,000,000.00 and $4,900,000.00, and other non-cash considerations.

The Omnibus also modified some of Transco and Texaco's rights and obligations, as expressed in the gas-purchase agreements. Under the agreements, as modified by the Omnibus, Transco gave Texaco an annual weighted average price for all gas quantities Texaco delivered from the various fields covered by the Omnibus, including the Oak Hill field. The agreed weighted average price was less than the contract price then in force under some of the gas-purchase agreements, including the Oak Hill contract, but generally higher than market prices.

The Omnibus lowered the quantity of gas that Transco was obligated to take from Texaco under the gas-purchase agreements. Pursuant to the Omnibus, Transco was to take or pay for 70 percent of Texaco's gas deliverability from the aggregate of all fields covered by the Omnibus, rather than the 80 percent required under the Oak Hill contract. In other words, the Omnibus reduced Transco's volume obligation to 70 percent of Texaco's total deliverability, and allowed Transco to meet that volume obligation from any of the fields covered by the 72 agreements. The Omnibus reduced the average price of all Texaco gas to $1.80 per MMBtu. At the time, the Oak Hill price was $8.80 per MMBtu. Transco estimated that the pricing and volume reductions in the Omnibus relieved them of take-or-pay obligations having a present value of $241 million. In return, Texaco sought Transco's protection against royalty owner complaints that Texaco should not have signed the Omnibus. The Omnibus also gave Texaco the right to force Transco to release, from one or more of the gas-purchase agreements, any gas that Transco did not request.

The Omnibus's Excess Royalty Payments Provision ("ERPP") ³ obligated Transco to reimburse Texaco for all "excess royalty payments" that were claimed based on the price Texaco would have received under the provisions of the applicable contracts, including the Oak Hill contract, prior to being modified. Unlike the Oak Hill contract, the MMP, and the MRP, the Omnibus did not define the term "excess royalty payments." Texaco's lead negotiator, Gerald Hahn, was unable to anticipate all of the royalty owners' complaints, and therefore requested broad excess-royalty protection. Hahn testified that without this broad excess royalty protection, Transco would not have gotten the hundreds of millions of dollars in relief from its gas contract obligations. Texaco contends the parties intentionally omitted the prior language restricting the excess royalty protection to produced volumes.

The price set in the Omnibus could be renegotiated each year, and if the parties could not reach an agreement, the Omnibus gave each party the right to terminate any of the gas-purchase agreements, up to 50 percent of total deliverability. In accordance with this provision, Texaco terminated the Oak Hill contract, along with 61 other gas-purchase agreements, by sending Transco a termination letter on April 19, 1989. The effective date of the termination was May 19, 1989. Transco later terminated the remaining gas-purchase agreements, leaving none in force between the parties. Both parties agree that the Omnibus Settlement Agreement was never terminated.

Royalty owners' Claims

In 1990, in cause number 90-195, O'Neal Brightwell, et al. v. Texaco, Inc., et al., a group of approximately 80 royalty owners in the Oak Hill field sued Texaco and other companies operating in the Oak Hill field. One of the royalty owners' claims was that Texaco had failed to develop their lands, i.e., had failed to drill wells from which gas could be produced in the Oak Hill field. The royalty owners also claimed that Texaco failed...