Opinion ID: 543116
Heading Depth: 4
Heading Rank: 1

Heading: The Schlesinger Study.

Text: 31 The district court found that Schlesinger's testimony and report were not sufficiently specific with regard to their analysis of the Mississippi intrastate gas market. Virtually all of Schlesinger's information sources, when they reported on specific transactions, disclosed only prices. Sellers, and also buyers in some cases, were not identified; interstate and intrastate sales were not segregated; no consideration was given to the variable-take requirements of many buyers and whether in the reported transactions the buyer assured a consistent take; the wellhead quality and volumes of gas in the transactions were not reported; and the purchase contract terms, such as length of the commitment, were omitted. 32 Most of these omissions infected all of the seven separate reports (labeled Tab A through Tab G) that Schlesinger had compiled in his study. The data in Tabs D and E, entitled NGPA Section 107 Deregulated Gas Prices, 1980-1985 and Market-out Prices by Interstate Gas Prices, 1982-1987, respectively, were perhaps less effectively challenged by Shell in the district court than were the other reports; although contract lengths and guarantees were not included with the information in Tabs D and E, purchasers, sellers (in Tab D), and approximate volumes and (in Tab D) quality of gas involved were identified. Moreover, these two reports covered only periods during which the NGPA was in effect, and thus the difference between interstate and intrastate prices was less pronounced than in earlier periods; hence, these markets were closer to being comparable. 33 Nonetheless, because of the lack of comparable contract information, we do not find clear error on the part of the district court in not crediting these parts of Schlesinger's study as establishing market price for the relevant period. We also note that the Tab D and E reports compiled only post-1979 prices, for which, as we discuss later, we remand for possible redetermination.b. The Bennett Study. 34 The Bennett study consisted of an apparently comprehensive listing of intrastate gas sales in Mississippi between 1972 and 1986. Shell limited most of its rebuttal of the Bennett study to the data for the years 1972-1978. Similarly, the district court's opinion thoroughly scrutinized the pre-1979 sales presented by the Bennett study. 35
36 As Bennett compiled much of his list of sales prices from severance tax reports, he often directed his attention almost exclusively to price and overlooked particular features of the transactions that might distinguish the sale from what a hypothetical sale from the Thomasville plant would be like. Among the most glaring errors found by the district court was the use of casinghead gas sales in this list of sales prices with which Bennett intended to establish the market for a comparable gas sales. With its higher BTU value, casinghead gas was worth more per mcf than the sweet gas produced by the Thomasville plant. Thus the inclusion of casinghead gas sales resulted in artificially high sweet gas market value estimates, undermining the royalty owners' attempts to establish a market value for sweet gas in Mississippi. 37 Although, if BTU values are known, casinghead gas prices can be used as an indicator of sweet gas prices, Bennett did not attempt to modify his results by making the appropriate adjustments for gas of differing BTU values. 5 Rather, in response to the criticism of his use of casinghead prices, Bennett argued that even without the inclusion of the casinghead gas entries, his study still would establish a market price for sweet gas in Mississippi consistently higher than those prices at which gas was actually sold from the Thomasville plant. This is a reasonable contention: Although the deletion of the casinghead entries would diminish the ultimate market value established by the royalty owners, the remainder of the sales listed in the Bennett study (were they truly comparable to the sales from the Thomasville plant) still would have established a market value higher than Shell's contract price and thus would have entitled the royalty owners to some damages. 38
39 However, the district court identified a myriad of other inadequacies in Bennett's study of comparable sales. Almost all of the district court's reasons (other than that of the casinghead gas entries) for finding the Bennett study speculative and unreliable were related to the uniqueness of the particular transactions among the royalty owners, MCC, and Shell. 40 The Thomasville plant produced 40,000 mcf per day of gas, much more than that of any other field in Mississippi in the 1970's. During these early years of the study, most of the fields used for comparison purposes were delivered no more than 5,000 mcf per day, and many fields 41 produced far less than that. While we have previously observed that higher delivery volumes usually fetch higher prices per mcf, see Piney Woods II, 726 F.2d at 239 n. 17, Shell argued before the district court (and again on appeal) that, because of the peculiar nature of Thomasville's ultrasour gas with its associated risks of non-delivery and explosions, price per mcf would be significantly lower under any contract that would guarantee to take these large quantities of gas than under contracts governing sales in which gas delivery was more certain or the guarantees were less comprehensive. While the royalty owners' experts disagreed with those of Shell on this issue, the district court did not err by adopting Shell's viewpoint. 6 42 We stated in Piney Woods II that examining comparable sales of ultrasour gas similar to that at the Thomasville plant would be preferred but that apparently such sales did not exist. See id. at 238-39. Neither party challenges this conclusion. The royalty owners, though, argue that comparable sales of sweet (processed) gas exist. The method of analysis approved in Piney Woods II for assessing the market value of Thomasville's ultra-sour gas at the wellhead by using comparable sweet gas sales was to take the price established for the sweet gas market, then deduct the processing costs inherent in changing the sour gas to sweet gas, and thus arrive at the price of sour gas at the wellhead. See id. The royalty owners contend this method will allow this court to disregard any arguments made by the district court or by Shell that focus upon the unique nature of the ultrasour gas at the Thomasville plant. 43 However, we find the royalty owners' reasoning flawed. Sales comparable in quality are those of similar physical properties such as sweet, sour, or casinghead gas. Id. at 239 n. 17. In this case, the ultrasour nature of the gas is inextricably tied to any attempt to assess what Thomasville gas would have been worth in the market had Shell not been locked into its long-term contract. Even though the buyer of the Thomasville gas would be buying sweet gas (as Shell did process the Thomasville gas), the delivery of that gas still would be uncertain, as all the problems that can occur with the ultrasour gas would directly affect the downstream delivery of the sweet gas. Thus, it was not clear error for the district court to find that what was paid for other sweet gas 44 produced in smaller amounts and with more certain delivery and perhaps other less adverse logistical factors was not an accurate reflection of what the market value of gas from the Thomasville plant would have been. 45 We do not read our endorsement in Piney Woods II of the comparable-sweet-gas-sales-less-processing-costs method of assessing market value (in the absence of comparable sour gas sales) as necessarily embracing the notion that all sweet gas sales are comparable merely because the sweet gas itself is comparable in quality. Where processed sweet gas sales are being used to assess the market value of wellhead sour gas, the district court was within its discretion to find that the risk inherent in guaranteeing to take large quantities of sweet gas processed from ultrasour gas could not be decoupled from the value of a contract for that sweet gas. As gas is almost always sold pursuant to executory contracts, the court was correct in not attempting to price sweet gas as a commodity divorced from the terms of, and conditions surrounding, the contracts under which the gas is sold. Moreover, many of those sales in the Bennett study that did involve relatively larger volumes, such as those in January 1976 from the Seminary field (about 3,000 mcf per day) and the Bassfield field (possibly as much as 22,000 mcf per day 7 ), were made under short-term contracts, which may have reflected one buyer's particular urgent needs rather than a more widespread market value. 46
47 We note that there are other oversights and inconsistencies in the Bennett study, as pointed out by Shell. These include ignoring transportation costs that, for certain buyers in the study, would make the purchase of Thomasville gas more expensive than it would otherwise appear; failing to compensate for various forms of consideration apparent in the gas purchase contract but not embodied in the price term alone; and not including a few sales, where those sales as a group had prices significantly lower than Bennett's reported market values. 48 c. Potential Purchasers. 49 The royalty owners did present some evidence showing that certain purchasers were interested in buying large quantities of gas. However, one of these potential purchasers, Mississippi Valley Gas (MVG), bought gas primarily from interstate pipelines. Shell presented evidence suggesting that because the supply of interstate gas fluctuated considerably, MVG needed considerable flexibility in supplementing its interstate supply, and thus, MVG could not enter into a consistent-take contract with respect to any purchase from the Thomasville facility. 8 50 Moreover, significant transportation distances would be involved in MVG's use of the gas to supplement interstate supplies. This increased cost of course would make the gas less valuable to MVG. We do not find error in the district court's rejection of MVG as a potential purchaser at the prices and conditions suggested by the royalty owners. 51 The royalty owners also presented evidence that Mississippi Power Company would have been willing to buy 30,000 mcf per day at $2.00 per mcf during the 1970's. Shell's experts testified to the contrary, asserting that the only potential large-scale buyers of gas from the Thomasville facility were those with whom Shell already had a contract, namely MCC and MP&L. Moreover, the royalty owners' expert, Mr. Tierney, was largely unaware of the conditions peculiar to the Thomasville plant and also was unable to deny Shell's charge that Mississippi Power Company had substantially fluctuating needs in terms of gas takes, thus making the Thomasville gas less suitable. We discern no clear error here. 52 Apparently, the only other fairly large purchaser for which the royalty owners produce a corresponding offering price was St. Regis Paper Company (St. Regis), which, they maintain, was ready to buy 12,000 to 14,000 mcf per day at $1.80 to $2.00 per mcf. St. Regis, though, also had variable-take needs. Tierney seemed to imply that the pipeline company that was selling gas to St. Regis during the relevant time could have adjusted its deliveries as appropriate to St. Regis's needs, but given Tierney's unfamiliarity with Thomasville's conditions and Shell's experts' testimony, the district court could have found that St. Regis could not enter into a contract for uniform daily distributions, as the Shell-MisCoa contract provided. 9 53 d. Actual Thomasville Production. 54 The royalty owners also presented rebuttal evidence showing that the actual monthly production of gas at Thomasville, until March 1978, was, with the exception of seven of the months, far below what would be necessary for a daily average of 40,000 mcf. By presenting this data, the royalty owners attempt to undermine Shell's arguments concerning the uniqueness of Thomasville's high-volume, consistent-take requirements. However, as comparable contracts are necessarily fairly long-term, the potential buyer of the Thomasville plant gas would still have to be prepared to take the large volumes at any time, even if those volumes actually were not taken frequently. 55 Furthermore, the royalty owners do not present any evidence to show that there were not certain days in the months in question on which volumes were as high as 40,000 mcf. Thus the royalty owners' evidence really does not show that potential buyers of gas from the Thomasville plant would face less difficulty or risk merely because Thomasville did not always deliver its full allotment under the contract. 10 56 e. Price Redetermination Clauses. 57 We are not oblivious to the fact that during the 1972-1978 period, gas prices usually rose sharply where contracts permitted prices to be redetermined and that even if the sales under such contracts were for gas not comparable to that sold from the Thomasville plant (and hence such sales could not establish any particular market value for the Thomasville gas), price increases in other contracts might at least suggest that the market value at Thomasville did increase during the years 1972-1978. 58 However, the existence of such an increase in value is still sufficiently speculative that we cannot say that the district court erred in finding that market value was more likely reflected in actual sales prices. It cannot be enough for the plaintiffs merely to show by a preponderance of the evidence that actual sales prices are not a correct representation of market value. Possible market values form a continuum, and the level of uncertainty inherent in the assessment of market value of a unique gas field over a period of fifteen years, fraught with fluctuating market conditions and varying governing legal regimes, is such that any given market value could be shown to be inexact by a preponderance of the evidence. 59 Even if the residuum of credible evidence left after Shell's rebuttal of the royalty owners' proof showed by a preponderance of the evidence (based upon price increases under contracts that had allowances for price redetermination) that market value exceeded Shell's contract price, the court has no basis on which to award damages without some proof of the relationship between prices at Thomasville and those elsewhere. Therefore, even if actual sales prices under the Shell-MisCoa contract were less than market value, the district court would not necessarily be required to award damages where it also could find that the royalty owners' evidence, given appropriate weightings, fails to establish by a preponderance of the evidence any lower limit for market value (other than that of the actual sales under the Shell-MisCoa contract). 60 f. Conclusion--1972-1978. 61 Therefore, for the period through December 1978, we are not left with the definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). We discern no clear error and affirm the district court's finding that the actual sales prices received under the Shell-MisCoa contract were the best indicator of market value. 11 62