Celeron Gathering Corp. v. United States

40 Cont. Cas. Fed. 76,888, 34 Fed. Cl. 745, 1996 U.S. Claims LEXIS 13, 1996 WL 47654
CourtUnited States Court of Federal Claims
DecidedFebruary 6, 1996
DocketNo. 93-260C
StatusPublished
Cited by3 cases

This text of 40 Cont. Cas. Fed. 76,888 (Celeron Gathering Corp. v. United States) is published on Counsel Stack Legal Research, covering United States Court of Federal Claims primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Celeron Gathering Corp. v. United States, 40 Cont. Cas. Fed. 76,888, 34 Fed. Cl. 745, 1996 U.S. Claims LEXIS 13, 1996 WL 47654 (uscfc 1996).

Opinion

OPINION

MARGOLIS, Judge.

This contract ease is before the court after a three-day trial. Plaintiff, Celeron Gathering Corporation (Celeron), contracted with defendant, the United States, to purchase an estimated 10,000 barrels per day (BOPD) of crude oil from delivery location 24Z (24Z) at the Elk Hills Naval Petroleum Reserve (NPR) in Kern County, California. The plaintiff contends that due to production un-[748]*748derruns at 24Z the government breached the contract and claims damages of $1,125,602. Plaintiff seeks to predicate liability on a wide array of legal theories, including misrepresentation, failure to disclose superior knowledge, breach of contract, warranty, bad faith, and equitable estoppel. Plaintiffs primary argument is that the government knew or should have known that the contract’s BOPD estimate was erroneous because it failed to account for significant operational difficulties experienced by a water disposal well. Defendant argues that it reasonably believed that the problems afflicting the water disposal well were routine and capable of repair' and that its conduct before and during contract performance conformed with its obligations under the contract.

FACTS

Plaintiff was the successful bidder for contract No. DE-SC01-88FE61697, with the United States through the Department of Energy (DOE), for the purchase of crude oil at the NPR for the period of October 1,1988 to April 1, 1989. Under the contract, Celer-on was to receive an estimated 10,000 BOPD of light crude oil at 24Z. Essentially, Celer-on’s business consisted of gathering crude oil, blending it to quality specifications, and shipping it for resale.

A. NPR Operations

The NPR produces oil from multiple subsurface geologic formations, two of which, the Stevens Zone and the Tulare Zone, are relevant here. The Stevens Zone is the source of crude oil delivered for purchase at 24Z. Stevens Zone production is routed to different delivery locations, including 24Z and 18G, a neighboring delivery location. At these sites the crude oil is processed and prepared for delivery. NPR operators1 can send crude oil production normally routed to 24Z to 18G through an adjustment of underlying pipes and valves.

Stevens Zone raw production includes crude oil and associated water and natural gas that are removed before delivery. After the gas is removed from the raw production, the production is pumped into a settling tank. In the settling tank, the oil and wastewater separate by gravity. The wastewater byproduct is disposed of by returning it to designated underground zones. At 24Z the wastewater is reinjected through “water disposal wells” into the Tulare Zone, an underground sandstone formation. The wastewa-ter wells are instrumental to the processing of raw production into deliverable crude oil. At 24Z, water disposal well 24WD-24Z (24WD) was the primary disposal well and its use was therefore critical to full production at 24Z. The underdeliveries of crude oil experienced by Celeron, from October 1988 to early January 1989, were caused by the malfunction of 24WD.

B. Operational Difficulties Experienced at Water Disposal Well 2iWD Prior to Cel-eron’s Contract

Sand in the Tulare Zone formation could enter perforations in the casings of water disposal wells. The casing systems were designed to facilitate reabsorption of the waste-water into the surrounding geology and to exclude as much sand as possible. Periodically, as part of general maintenance, sand was removed by a bailing and foaming process. 24WD was placed into service in 1981, with a total bore hole depth of 930 feet. Perforated fiberglass casing was installed in 24WD. For a few years after its construction, 24WD operated uneventfully, and occasional sand influx was addressed by bailing and foam treatment, as well as acidizing the well.

24WD began to experience difficulties in February 1987. Bailing operations following a well shut down revealed fiberglass fragments from the well casing mixed with sand influx. In the following months, NPR operators initiated a series of repair efforts to end sand influx into 24WD. In April 1987, NPR operators attempted unsuccessfully to introduce a wire wrapped screen into the well. In June 1987, NPR operators successfully inserted a five-inch slotted liner into the well’s fiberglass casing. Successful injection then [749]*749resumed until injection abruptly stopped on December 17,1987. The well was then foam cleaned. An inspection detected two enlarged liner slots at the 416-foot level and the 456-foot level. NPR operators undertook no repair efforts at this time; instead, they foam cleaned the well in January and February of 1988, in order to maintain normal injection levels.

In July 1988 the well clogged, and NPR operators began a bailing operation. The sand influx in this period was substantial and rapid. At one point, tubing that was part of the cleaning operation was stuck for several days in the sand in the well.2 Hal Owens, a Production Engineering Manager at BPOI, admitted that, after the July events, 24WD could not have been a consistent injector in August or September in the absence of a repair effort.

To address the problem, NPR operators received approval in early September 1988 to install a ten foot and a forty foot casing patch to seal off the enlarged liner slots. By a program revision dated September 8, 1988, however, DOE decided to patch the enlarged liner slots by installing a phenolic resin plug because use of the plug would avoid a long delivery delay for the casing patches. The resin would be released in the well and flow into the enlarged liner slots, hopefully correcting the defect. The resin plug was not a common repair technique, but it had the advantage of being a quick repair method. Owens testified that he believed the resin plug had “a reasonable chance of success” based on the fact that a resin plug had been successful in another well at the NPR, although the other well had less inherent pressure. On cross-examination, Owens stated that, at the time, he felt the resin plug “stood a good chance of working,” or a “50/50 chance.” Based on this testimony and other evidence in the record, the court does not find that the NPR operators should have known that the resin plug was an inadequate repair measure, although their assessment of the probability of success may have been overly optimistic.

The resin plug was installed in mid-September, and on September 21, 1988 the well was restored to service. The repair appeared to be successful. 24WD, however, began to experience difficulties on September 30. On October 4, the fill in the well was measured at a depth of 415 feet. 24WD was then foamed cleaned, and the fill cleared to the bottom of the well. On October 5, an inspection revealed that the resin plug had failed.

C. Celeron’s Contract and the BOPD Estimate

As specified in the invitation for bids (IFB) and Celeron’s contract, the government estimated that there would be 10,000 BOPD of oil available at 24Z.

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Bluebook (online)
40 Cont. Cas. Fed. 76,888, 34 Fed. Cl. 745, 1996 U.S. Claims LEXIS 13, 1996 WL 47654, Counsel Stack Legal Research, https://law.counselstack.com/opinion/celeron-gathering-corp-v-united-states-uscfc-1996.