096 Northern Natural Gas Company v. Conoco, Inc.

Thursday, September 3rd, 2015

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Northern Natural Gas Company v. Conoco, Inc., 939 S.W.2d 676 (Tex. App. – El Paso 1996, writ granted), construes a natural gas transportation and processing agreement as to the intent behind the dedication of reserves and whether the gas purchaser can unilaterally terminate gas purchase contracts and escape the obligation to deliver gas. Northern purchased gas from producers for delivery into Conoco’s gas processing and gathering facilities. The agreement was to continue “for so long as the various Gas Purchase Contracts dedicated hereunder remain in effect, but not less than twenty (20) years, unless terminated pursuant to the terms herein.” Northern agreed to deliver and Conoco agreed to accept “all gas for gathering, compressing and processing in keeping with all the quantity and other provisions of [Northern’s] various gas purchase contracts in effect from time to time.”
 
As the Federal Energy Regulatory Commission proceeded with the deregulation of gas marketing, Northern began canceling and buying out its contractual obligations to purchase gas from producers. By 1990, Northern was no longer purchasing gas from these producers and was acting only as a gas transporter. Conoco contended that Northern was obligated to continue purchasing all of the gas produced from the wells listed in the agreement and to deliver that gas to Conoco for the productive life of the wells. Conoco got a judgment for $20,000,000.00 in damages for lost gas processing profits.
 
The court concluded that the agreement was unambiguous and that it did not require Northern to deliver all natural gas reserves from dedicated wells for the productive life of the wells. Northern was required to make deliveries only for so long as the gas purchase contracts remained in effect.
 
The court reversed, but did not render for Northern. Conoco had contended that Northern’s contract cancellations were contrary to the good faith standard of Tex. Bus. & Com. Code Ann. §1.203 and Texas case law holding that every contract includes an element of confidence and trust that each party will faithfully perform his obligation under the contract. Concluding that nothing in the agreement permitted Northern to cancel all the contracts in bad faith, the court remanded on the fact question of good faith/bad faith.