Transcontinental Gas Pipeline Corp. v. Texaco, Inc.

35 S.W.3d 658, 2000 WL 730657
CourtCourt of Appeals of Texas
DecidedFebruary 1, 2001
Docket01-98-00488-CV
StatusPublished
Cited by85 cases

This text of 35 S.W.3d 658 (Transcontinental Gas Pipeline Corp. v. Texaco, Inc.) is published on Counsel Stack Legal Research, covering Court of Appeals of Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Transcontinental Gas Pipeline Corp. v. Texaco, Inc., 35 S.W.3d 658, 2000 WL 730657 (Tex. Ct. App. 2001).

Opinions

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 [662]*662(“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 Tran-sco’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 market2 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-credit[663]*663ing 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 Transeo 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, Transeo 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. Transeo 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 Transeo and Texaco’s rights and obligations, as expressed in the gas-purchase agreements. Under the agreements, as modified by the Omnibus, Transeo 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 Transeo was obligated to take from Texaco under the gas-purchase agreements. Pursuant to the Omnibus, Transeo 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 Transeo 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. Transeo 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 Transeo to release, from one or more of the gas-purchase agreements, any gas that Transeo did not request.

The Omnibus’s Excess Royalty Payments Provision (“ERPP”)3

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Bluebook (online)
35 S.W.3d 658, 2000 WL 730657, Counsel Stack Legal Research, https://law.counselstack.com/opinion/transcontinental-gas-pipeline-corp-v-texaco-inc-texapp-2001.