Chevron USA Inc v. Santa Fe Snyder Corp

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).

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

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

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.

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.

Footnotes

[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...)