IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 97-31037
TEXAS EASTERN TRANSMISSION CORPORATION,
Plaintiff-Appellee,
versus
AMERADA HESS CORPORATION,
Defendant-Appellant
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AMERADA HESS CORPORATION,
Plaintiff-Appellant,
versus
TEXAS EASTERN TRANSMISSION CORPORATION,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Louisiana
July 7, 1998
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
2
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
1
Attachment “A” to the 1991 amendment to the 1982 contract
clearly delineates the boundary between the Northern and Southern
Areas of South Pass 89.
3
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:
4
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
2
The evidence on record indicates that of the 176 Bcf of gas
reserves in South Pass 89, 137 Bcf are proven gas reserves and the
remaining 39 Bcf represent possible gas reserves.
3
The record indicates that the recoverable proven gas
reserves from the SP 87 D Development Area, as of April 1997, is
178 Bcf which exceeds the 1981 initial estimates for the total
possible and proven gas reserves from SP 89 of 176 Bcf.
5
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
4
The incentives are large. The 1997 gas price under the
contract, as amended in 1991, was $9.857/MMBtu. In comparison, the
prevailing spot market price for gas produced in the Louisiana
coastal area for the first five months of 1997 averaged
$2.36/MMBtu. Moreover, the gas price under the contract increases
by 10 percent annually (each January 1st) resulting in a contract
price of 15.875/MMBtu by the year 2002.
6
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,
7
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, 34 F.3d 291, 294 (5th Cir. 1994). “The
construction of an unambiguous contract is reviewed de novo, but
while interpretation of an unambiguous contract is a question of
law, clear error is the standard of review when a district court
uses extrinsic evidence to interpret an ambiguous contract.”
Tarrant Distribs., Inc. v. Heublein, Inc., 127 F.3d 375, 377 (5th
Cir. 1997) (citations omitted). A district court’s rulings
regarding evidence it will consider in deciding a motion for
summary judgment are reviewed for abuse of discretion. See
Richardson v. Oldham, 12 F.3d 1373, 1376 (5th Cir. 1994).
8
The gas subject to the purchase contract at issue is from a
federal lease on the outer continental shelf, off the coast of
Louisiana. The parties agree that under the mandatory choice-of-
law provision in the Outer Continental Shelf Lands Act, 43 U.S.C.
§§ 1333(a)(2)(A), 1349(b)(1), construction of this contract is
governed by Louisiana law, to the extent that such law is not
inconsistent with federal law. See Union Tex. Petroleum Corp. v.
PLT Eng’g, Inc., 895 F.2d 1043, 1050 (5th Cir.), cert. denied, 498
U.S. 848 (1990).
B.
Under Louisiana law, the interpretation of an unambiguous
contract is an issue of law for the court. See Rutgers, State
Univ. v. Martin Woodlands Gas Co., 974 F.2d 659, 661 (5th Cir.
1992). “When the words of the contract are clear and explicit and
lead to no absurd consequences, no further interpretation may be
made in search of the parties’ intent.” La. Civ. Code Ann. art.
2046 (West 1995). In addition, a contract provision is not
ambiguous where only one of two competing interpretations is
reasonable or merely because one party can create a dispute in
hindsight. See Lloyds of London v. Transcontinental Gas Pipe Line
Corp., 101 F.3d 425, 429 (5th Cir. 1996); Rutgers, 974 F.2d at 662.
This court has stated that when the contract is not ambiguous, it
has no authority to reach beyond the four corners of the document.
9
See Huggs, Inc. v. LPC Energy, Inc., 889 F.2d 649, 653 (5th Cir.
1989).
On the other hand, a contract is ambiguous, under Louisiana
law, “when it is uncertain as to the parties’ intentions and
susceptible to more than one reasonable meaning under the
circumstances and after applying established rules of
construction.” See Lloyds of London, 101 F.3d at 429. Under these
rules of construction, “[e]ach provision of a contract must be
interpreted in light of the other provisions so that each is given
the meaning suggested by the contract as a whole.” La. Civ. Code
Ann. art. 2050 (West 1987). Contract provisions susceptible to
different meanings should be interpreted “to avoid neutralizing or
ignoring any of them or treating them as surplusage,” Lambert v.
Maryland Cas. Co., 418 So. 2d 553, 559-60 (La. 1982), and “to
preserve validity [of the contract],” Gibbs Constr. Co. v. Thomas,
500 So. 2d 764, 769 (La. 1987). Louisiana courts will not
interpret a contract in a way that leads to unreasonable
consequences or inequitable or absurd results even when the words
used in the contract are fairly explicit. See Makofsky v.
Cunningham, 576 F.2d 1223, 1229 (5th Cir. 1978). “A doubtful
provision must be interpreted in light of the nature of the
contract, equity, usages, the conduct of the parties before and
after the formation of the contract, and of other contracts of a
like nature between the same parties.” La. Civ. Code Ann. art.
2053 (West 1987).
10
C.
This dispute centers around the scope of the gas substitution
clause in Article III, paragraph 5 of the contract. While the
vicissitudes of supply and demand in the natural gas industry over
the past three decades are a tiger in the reeds beside our path, we
must limit our travel to the four corners of the contract. Article
III, paragraph 5 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.
Both TX Eastern and Amerada agree that Amerada has a right to
substitute under the contract. They dispute what the object is
that may be substituted. TX Eastern states that the object is gas
while Amerada urges that the object is leaseholds, lands or both.
This translates into a dispute over the quantity of gas that may be
substituted under the contract.
Amerada contends that it has the right to substitute a new gas
source, the SP 87 D Lease, for the SP 89 Lease originally committed
to the contract. Relying on the words “the substitute source
contains reserves and deliverability equal to or in excess of the
reserves under the leases originally committed to this Agreement”
in the gas substitution clause, Amerada urges that since SP 89 was
11
the lease originally committed under this contract, it has a right
to find a “substitute source,” a new gas lease, to replace the
lease originally committed.
TX Eastern contends that, while this clause gives Amerada the
right to substitute, the words “to substitute other gas for all or
a portion of the gas hereunder” means that Amerada may substitute
volumes of gas that materialize from the SP 89 Lease with volumes
of gas from another source provided two conditions are met: that
source contains reserves in excess of SP 89 reserves and the
substitute gas is delivered at mutually agreeable points.5 TX
Eastern asserts that, if the parties had intended to allow the
addition of new leases, they would not have used the term
“substitute gas” in the gas substitution clause, rather they would
used the words “substitute leaseholds and/or leases.” Since the
“object” of this gas purchase agreement is a movable – gas “after
[it] leaves the wellhead,” Hawthorne Oil & Gas Corp. v. Continental
Oil Co., 377 So. 2d 285, 287 (La. 1979), according to TX Eastern,
the right to substitute gas is a right to only substitute movables
as opposed to immovables, such as leaseholds or lands. TX Eastern
also notes that the SP 87 D Leases that Amerada seeks to substitute
did not exist in 1982, and the first production of gas from them
occurred in mid-1995.
5
Neither party disputes that the substituted source, South
Pass 87 D, contains reserves in excess of the reserves under South
Pass Block 89 and its delivery point is in the area of or
downstream from the delivery points for South Pass Block 89.
12
We agree with TX Eastern that the gas substitution clause only
permits gas to be substituted with other gas. While this clause
uses the words “substitute gas” and “substituted source,” it only
refers to the right to substitute other gas and does not state or
imply any right to substitute gas sources. Indeed, the words
“substituted source” appear in this clause only when explicitly
stating a condition that must be satisfied in order to exercise the
right to substitute gas, namely, that the substitute source must
contain reserves that are greater than or equal to the reserves in
the SP 89 Lease.
Amerada forcefully protests that the gas substitution clause
does not explicitly state any volume restrictions or specifications
in order to exercise its right to substitute gas. We are persuaded
that the words “substitute other gas for all or a portion of the
gas hereunder” restrict volume because they indicate that a portion
or all of the total volume of gas may be replaced by other gas. It
is difficult to impute any other meaning to the words “for all or
a portion of the gas.” As we read the gas substitution clause, any
substitute gas must be at least comparable in volume and
availability to the gas produced from the dedicated SP 89 Lease.
This is the most natural and common sense reading of the
contract. Amerada’s interpretation of the contract leads to absurd
consequences. Under its interpretation, Amerada would be permitted
13
to substitute a new and untapped source of gas6 as and when the
existing gas source becomes depleted, thereby requiring TX Eastern
to take or pay for a virtually unlimited quantity of gas produced
by Amerada during the contract’s twenty-year term. Amerada could
then potentially receive a $621.9 million windfall by substituting
a newly developed gas source for the depleted reserves of SP 89.
See Shell Offshore, Inc. v. Marr, 916 F.2d 1040, 1048, 1048 n.7
(5th Cir. 1990) (noting that one contracting party “on the strength
of one provision of [an a]greement” could not “tak[e] unfair
advantage of [the other party] and enrich [it]self at the [other
party]’s expense, in direct conflict with the definition of equity
in Louisiana Civil Code Article 2055.”). That an agreement proves
to be a poor bargain offers no escape from its obligations. A
contract allocates risk. That does not make the consequences of an
urged interpretation irrelevant in the effort to find its meaning.
To the point, Amerada’s position is implausible as it runs afoul of
various other provisions in the contract.
Article IV, Paragraph 8, which limits TX Eastern’s overall
purchase obligation, states in pertinent part:
[I]t is understood and agreed that nothing in this
Agreement shall be construed to require [Amerada] to sell
6
While exercising its substitution right, Amerada must
satisfy the two conditions spelt out in the gas substitution
clause. Any new gas source substituted by Amerada must contain
reserves and deliverability equal to or in excess of the reserves
under the SP 89 Lease, and the substitute gas must be delivered at
mutually agreeable points in the area of or downstream of delivery
points set forth in the contract.
14
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 . . .
TX Eastern contends that this clause limits the amount of gas that
it is obligated to purchase to a quantity equal to the volume of
gas produced by the leaseholds and/or lands covered by the SP 89
contract, namely, the Southern Area of the SP 89 Lease. Amerada
counters that the words “leaseholds and/or lands covered by this
Agreement” includes its right to substitute new gas leases for the
SP 89 Lease since this right is part of the Agreement.
Amerada’s interpretation is untenable. Each provision in a
contract must be interpreted in light of other provisions giving
each provision a meaning suggested by the contract as a whole and
avoiding any interpretation that neutralizes or ignores any
provision or treats it as surplusage. See La. Civ. Code Ann. art.
2050 (West 1987); Lambert, 418 So. 2d at 559-60. Amerada’s
interpretation wholly negates the Quantity of Gas provision in
Article IV, paragraph 8 and renders it empty and meaningless.
In addition, Article II, Paragraph 1 in the original 1982
contract, and as amended in 1991, carefully identifies the gas
areas dedicated to the contract with technically precise depth
limitations. This provision would be reduced to surplusage if
Amerada could substitute new gas sources at will.
15
Furthermore, in 1992 Amerada and TX Eastern amended the
contract to release TX Eastern from the obligation to purchase gas
from the Northern Area of SP 89 in return for a $19.3 million
payment by TX Eastern. Under Amerada’s interpretation, it could
conceivably substitute gas from the Northern Area of SP 89 and thus
reduce the entire 1992 amendment to a nullity.
In sum, without reaching beyond the four corners of the SP 89
contract and its amendments, we are convinced that the gas
substitution clause, when read together with other provisions in
the contract, permits Amerada Hess to substitute some portion of or
all of the gas from the SP 89 Lease with similar quantities of
other gas from another lease, provided other conditions stated in
the gas substitution clause are satisfied. Since we find the
contract as a whole to be unambiguous and susceptible to only one
reasonable interpretation, Rutgers, 974 F.2d at 661-63, we do not
address Amerada’s argument that the district court improperly
relied on extrinsic evidence to interpret the contract.
Benefitted by the excellent argument from all counsel, we are
finally persuaded that we must AFFIRM the district court’s grant of
summary judgment in favor of Texas Eastern Transmission
Corporation.
16