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

*******************************************************************

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:
2

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
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

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
4

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:
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

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
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

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
7

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,
8

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).
9

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-oflaw 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.
10

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).
11

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
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

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.
13

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
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

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
15

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.
16

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.