200 ConocoPhillips Co. v. Incline Energy, Inc.

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
ConocoPhillips Co. v. Incline Energy, Inc., 189 S.W. 3d 377 (Tex. App. – Tyler 2006, pet. denied) holds that Buyer under a gas purchase agreement was not required to account to Seller for the sale of natural gas liquids (NGLs). The pricing clause provided:
 
Subject to all terms, conditions and provisions of the Agreement, for the period beginning on the effective date hereunder and extending for the Term hereof, the price per MMBTU to be paid by Buyer to Seller each month shall be eighty percent (80%) of the price(s) which Buyer receives under its Resale Agreement(s) for all gas purchased and sold hereunder at the Point(s) of delivery, such gas produced from the subject lands and leases.
 
Buyer based its payment to Seller on the weighted average residue gas price applied to the full volume and heating value (MMBTU) at the point of delivery into the Buyer’s pipeline. Seller contended it should also be paid on processed NGLs in addition to residue gas.
 
The court held that Buyer was correctly paying for the gas, and that the “resale” of gas would exclude NGLs which were removed prior to the time of the first gas resale. In reversing the trial court’s finding that the contract was ambiguous and its entry of a judgment for Seller, the court refused to find either a patent or latent ambiguity in the contract. At the time of the execution of the gas purchase agreement and the subsequent amendment, the Natural Gas Policy Act (NGPA) of 1978 was in effect. Under the provisions of the NGPA, the sale from Seller to Buyer would have been a “first sale” and the subsequent sale by Buyer to a third party would be a “resale”. Resales based upon residue gas were always expressed in terms of MMBTUs and sales of NGLs were always stated in terms of gallons. Therefore, the court found the contract could be given a definite and certain meaning, and therefore it was not patently ambiguous.
 
The court summarily rejected the trial court’s finding of a latent ambiguity. Latent ambiguities only arise when a contract fails by reason of some collateral matter when it is applied to the subject matter of the contract. Here, the alleged ambiguity did not arise out of some collateral matter, but out of the “very heart and essence of the agreement: the pricing mechanism.”