Court Opinion

ID: 31349
Source: CourtListenerOpinion
Date Created: 2010-04-25 10:15:31+00
Date Added: 2024-06-11T10:33:55.770955
License: Public Domain

United States Court of Appeals
                                                                     Fifth Circuit
                                                                    F I L E D
                                                                      May 22, 2003
                            In the
                                                                 Charles R. Fulbruge III
                                                                         Clerk
       United States Court of Appeals
                  for the Fifth Circuit
                      _______________

                        m 02-20757
                      _______________

                  CHEVRON U.S.A., INC.,

                                           Plaintiff-Appellee,

                           VERSUS

         SANTA FE SNYDER CORPORATION, ET AL.,

                                           Defendants,

SANTA FE SNYDER CORPORATION; SAMEDAN OIL CORPORATION;
                 RANGER OIL COMPANY,

                                           Defendants-Appellants

                      _______________

          Appeal from the United States District Court
              for the Southern District of Texas
                       m H-00-CV-847
               _________________________
Before SMITH and BARKSDALE, Circuit                            The agreement was terminable by either
  Judges, and FITZWATER,* District Judge.                  party on or after October 1, 2001. By way of
                                                           the March 1998 amendment, Santa Fe re-
JERRY E. SMITH, Circuit Judge:**                           served the right to terminate the agreement
                                                           early with respect to Block 179 (but not Block
    Defendant Santa Fe Snyder Corporation                  178) by giving written notice ninety days in
and others appeal a summary judgment for                   advance. In November 1998, Santa Fe in-
Chevron U.S.A. entered on the basis that San-              voked this provision by notifying Chevron that
ta Fe contracted to have Chevron process its               it intended to install its own processing facili-
entire monthly natural gas production. Al-                 ties. Santa Fe also stated that as soon as its
though the parties’ agreement requires Santa               processing facilities were functional, it would
Fe to pay minimum monthly processing fees, it              process all production from Blocks 178 and
does not require Santa Fe to deliver any or all            179. For Block 178, Santa Fe stated that it
of its production to Chevron. We reverse and               would pay the minimum monthly processing
remand.                                                    and administrative fees specified in the agree-
                                                           ment.
                       I.
   Chevron owns and operates a gas process-                   Chevron replied that cessation of produc-
ing facility, a well, and a lease, designated              tion deliveries in advance of the termination
South Timbalier Block 177 (“Block 177"),                   date would be viewed as a breach of contract.
located on a platform off the coast of Louisi-             Specifically, Chevron notified Santa Fe that its
ana. Santa Fe and others jointly own oil and               offer to pay minimum fees in lieu of fees gen-
gas wells and a lease, designated South Tim-               erated through processing was not acceptable
balier Block 178 (“Block 178"), located on a               substitute performance. In February 1999,
nearby offshore platform. In 1996, Chevron                 Santa Fe ceased delivery of production to
and Santa Fe entered into an agreement by                  Chevron and began paying the minimum
which Chevron agreed to process Santa Fe’s                 monthly fees.
production from Block 178. In March 1998,
the parties amended the agreement to accom-                    Chevron sued for, inter alia, declaratory
modate the production from another well                    relief and breach of contract, contending it is
owned by Santa Fe, South Timbalier Block                   entitled to process Santa Fe’s entire produc-
179 (“Block 179").1                                        tion for the full term of the agreement, subject
                                                           only to its own operational constraints and the
                                                           February 27, 1999 (ninety days after notice)
                                                           termination date for Block 179. Defendants
   *
    District Judge of the Northern District of             counterclaimed, seeking a declaratory judg-
Texas, sitting by designation.                             ment that the agreement did not obligate them
   **                                                      to deliver any or all of the production from
      Pursuant to 5TH CIR. R. 47.5, the court has
                                                           Blocks 178 and 179. The district court grant-
determined that this opinion should not be pub-
lished and is not precedent except under the limited       ed Chevron’s motion for partial summary
circumstances set forth in 5TH CIR. R. 47.5.4              judgment, finding that “the parties contracted
                                                           for the delivery and processing of actual pro-
   1
    Block 178 contains two wells (Wells A-1 and            duction from Santa Fe’s wells in Timbalier
A-3), and Block 179 contains one well (Well B-1).

                                                       2
Blocks 178 and 179.”                                   omitted), writ denied, 808 So. 2d 341 (La.
                        II.                            2002). If “the words of a contract are clear
   We review a summary judgment de novo.               and explicit and lead to no absurd
King v. Ames, 179 F.3d 370, 373 (5th Cir.              consequences, no further interpretation may be
1999). Summary judgment “shall be rendered             made in search of the parties’ intent.” LA.
forthwith if the pleadings, depositions, answers       CIV. CODE ANN. art. 2046 (West 1987). “The
to interrogatories, and admissions on file,            rules of construction do not authorize a
together with the affidavits, if any, show that        perversion of the words or the exercise of
there is no genuine issue of material fact and         inventive powers to create an ambiguity where
that the moving party is entitled to judgment          none exists or the making of a new contract
as a matter of law.” FED. R. CIV. P. 56(c). In         when the terms express with sufficient
the context of contract interpretation, “only          clearness the part ies’ intent.” Campbell v.
when there is a choice of reasonable                   Melton, 817 So. 2d 69, 76 (La. 2002)
interpretation of the contract is there a              (citations omitted). “The fact that one party
material fact issue concerning the parties’            may create a dispute about the meaning of a
intent that would preclude summary judg-               contractual provision does not render the
ment.” Amoco Prod. Co. v. Tex. Meridian                provision ambiguous.” Id.
Res. Exploration, Inc., 180 F.3d 664, 669 (5th
Cir. 1999).                                               Key to the district court’s conclusion that
                                                       Santa Fe was required to deliver all of its pro-
                      III.                             duction is the agreement’s preamble, which
   The dispute centers on whether Santa Fe             sets forth its purpose:
was required to deliver all production from its
Block 178 and 179 wells or whether, instead,              WHEREAS, Santa Fe desires to
it retained the right to process its gas                  produce gas, condensate and water
elsewhere so long as it paid the minimum                  production from the Well (the
monthly processing and administrative fees.               “Production”) through its construction
Because the agreement originates from a                   of an eight inch (8”) N.D. pipeline from
federal lease on the outer continental                    the initial Well, and any subsequent
shelfSSoff the coast of LouisianaSSthe choice-            Lease Wells, to that certain Chevron
of-law provisions of the Outer Continental                operated “E” platform . . . .
Shelf Lands Act, 43 U.S.C. §§ 1333(a)(2)(A),
1349(b)(1), apply, so construction of the                 WHEREAS, Chevron desires to receive
agreement is governed by Louisiana law to the             the Production at the Chevron Operated
extent such law is not inconsistent with federal          Platform, perform certain processing
law. Union Tex. Petroleum Corp. v. PLT                    services and redeliver the Production
Eng’g, Inc., 895 F.2d 1043, 1050 (5th Cir.                ....
1990).
                                                       The term “production”SSdefined as “gas, con-
   Under Louisiana law, “[w]hether a contract          densate and water production from the
is ambiguous or not is a question of law.”
Lawrence v. Terral Seed, Inc., 796 So. 2d
115, 123 (La. App. 2d Cir. 2001) (citation

                                                   3
Well”SSis used throughout the agreement.2                per barrel. Section six limits Chevron’s pro-
Sections one and two state the obligations of            cessing obligation to “volume rates not to ex-
each party. In section one, Santa Fe agrees to           ceed 2,500 barrels of condensate per day, 50
“deliver the Production at the Connection                MMCF of natural gas per day, and 1000 bar-
Point at . . . the Chevron Operated Platform”            rels of produced water per day; provided,
and “properly treat all of its Production to             however, that Chevron shall not be required to
prevent the entry of any corrosive product(s)            compress gas hereunder in excess of 1 MMCF
or chemicals into Chevron’s facilities.”                 of natural gas per day.”
Section two obligates Chevron to “receive the
Production at the Chevron Operated Platform                 The district court reasoned that the
and perform” certain duties, including the sep-          preamble’s definition of “production”
aration, compression, treatment, and redelivery          “suggests that the agreement contemplates the
of natural gas.                                          processing of the actual production from Santa
                                                         Fe’s wells and not simply an option either to
   Section three defines “Processing Fees”:              process or pay a de minimus [sic] monthly
                                                         fee.” Although section three does not
   The “Processing Fees” are hereby                      explicitly provide Santa Fe with an “option” of
   defined (i) as not less than minimum                  delivering production or paying a minimum
   processing fees of $3,000.00 per                      monthly fee, the court interpreted section three
   calendar month (“Minimum Processing                   as “provid[ing] Chevron a minimal amount of
   Fees”) from initial commencement of                   revenue in the event that deliveries of
   Processing until termination of this                  production for a parti cular month
   Agreement, except and excluding any                   unexpectedly fell below projections.”
   such calendar month during which
   Chevron is not prepared to receive the                   Given that an unambiguous contract
   Production and perform the Processing                 contains terms that are “clear and explicit,”
   and further except and excluding any                  LA. CIV. CODE ANN. art. 2046 (West 1987),
   calendar month lacking at least twenty                the agreement did not unambiguously grant
   (20) days of Processing due to force                  Chevron the right to process all of Santa Fe’s
   majeure pursuant to Section 21, and (ii)              production.      The agreement discusses
   as itemized hereafter . . . .                         minimum monthly fees but nowhere requires
                                                         Santa Fe to deliver any, much less all, of its
Section three continues by setting per-unit              production to Chevron. The district court
rates for the separation, compression, and               focused on the preamble’s definition of
treatment of gas, as well as administrative              “production,” meant to serve as shorthand for
overhead of $1000. For example, compression              “gas, condensate and water production from
fees are set at $0.20 per MCF, and the                   the Well,” and erroneously interpreted it as
treatment of oil and condensate is set at $0.50          creating an exclusivity arrangement.3 Yet, an

   2                                                        3
      In the amended agreement, the parties                  Generally, a preamble does not create rights
expanded the definition of “production” to include       beyond those conveyed by the contract’s operative
“the comingled production from South Timbalier           terms. See Grynberg v. F.E.R.C., 71 F.3d 413,
178 and South Timbalier 179.”                                                               (continued...)

                                                     4
exclusivity arrangement cannot be created by                   In the 1996 agreement, the parties likely
implication.                                                contemplated Santa Fe’s delivering its entire
                                                            production to Chevron, though this was never
    In Pogo Producing Co. v. Sea Robin                      reduced to writing. Perhaps the geographical
Pipeline Co., 493 So. 2d 909, 914 (La. App.                 isolation of the platforms prevented
3d Cir.), cert. denied, 497 So. 2d 310 (La.                 competition, while the prospect of Santa Fe
1986), the court recognized the efficiencies of             developing its own processing facilities was
exclusivity arrangements, or output contracts,              remote. By the time the agreement was
but only where mutual consideration or                      amended, Santa Fe’s construction of
“cause” exists. Exclusivity arrangements                    processing facilities evidently became a
benefit sellers of services such as Chevron,                possibility, hence the insertion of the ninety
because they are assured a constant demand,                 day termination clause.
while buyers of services such as Santa Fe are
assured a constant supply. Chevron processed                   The parties’ intentions are irrelevant,
its own natural gas derived from its Block 177              however; because the agreement did not state
Well and therefore did not look to Santa Fe as              that Santa Fe was required to deliver all or any
an exclusive source of business. Instead,                   of its production to Chevron, there is no
evidence suggests Chevron entered into the                  ambiguity. So long as Santa Fe paid the
agreement to fill excess capacity.                          contractually defined monthly minimum
                                                            processing and administrative fees, it could
   As part of the bargain, Chevron received                 not, as a matter of law, have breached the
$4000 in minimum monthly processing fees,                   agreement except by failing to pay additional
while simultaneously imposing a ceiling on the              fees incurred as a result of processing actual
amount of Santa Fe’s gas it was willing to                  deliveries or by failing to meet section two’s
process. This suggests a lack of mutuality if               qualitative obligations. As we have already
the contract is interpreted as an output con-               said, quoting Campbell, 817 So. 2d at 76, the
tract: Why would Santa Fe pay additional                    rules of construction do not authorize us to
consideration to lock itself into an exclusivity            pervert the words of a contract or to create an
arrangement?4
                                                               4
                                                                 (...continued)
   3                                                        to make a single annual payment to the producer to
    (...continued)
416 (D.C. Cir. 1995) (“[I]t is standard contract            the extent that the volumes of gas taken during any
law that a Whereas clause, while sometimes useful           contract year fall short of the minimum annual
as an aid to interpretation, ‘cannot create any right       contract quantity.”         Diamond Shamrock
beyond those arising from the operative terms of            Exploration Co. v. Hodel, 853 F.2d 1159, 1164
the document.’”).                                           (5th Cir. 1988). Louisiana courts have construed
                                                            take or pay contracts as imposing alternative
   4
    Santa Fe argues that the agreement resembles            obligations. Pogo Producing, 493 So. 2d at 916.
a “take or pay” contract. Natural gas sales                 Santa Fe was not required to perform alternative
contracts typically contain a take or pay clause that       obligations; it was required only to pay a minimum
requires the “pipeline-purchaser either to take (and        monthly processing and administrative fee, while
pay for at the maximum lawful price) a specified            meeting certain qualitative delivery specifications;
quantity of natural gas during each contract year or        it otherwise was free to decide how much of its
                                       (continued...)       production to deliver to Chevron for processing.

                                                        5
ambiguity or to make a new contract. Given
that the agreement makes no mention of an
exclusivity arrangement or a minimum delivery
volume, the district court should have granted
summary judgment for defendants.

   The judgment is REVERSED, and this mat-
ter is REMANDED for further appropriate
proceedings.

                                                 6