064 Southwestern Gas Pipeline, Inc. v. Scaling

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of some significance to you.
 
Southwestern Gas Pipeline, Inc. v. Scaling, 870 s.W.2d 180 (Tex. App.–Fort Worth 1994, writ den.), considers the meaning of an “unprofitability” clause in a gas contract. Under the take- orpay gas purchase contract, the pipeline company was required to take and pay for or to pay for minimum quantities of gas produced by the wells covered by the contract. The contract also contained a provision whereby the pipeline company could refuse to purchase the minimum quantities required, if it would be unprofitable to do so. “Unprofitable” was not defined in the contract.
 
Held: The test for determining whether it is profitable for a gas pipeline company to purchase gas from a producer, absent a specific contract provision, is whether the gas may be sold by the pipeline company at a price higher than the sum of the purchase price of the gas from the producer and transport and processing costs incurred from the specific wellhead delivery point to the end of the pipeline where the gas is sold. The Court remanded the case to the trail court to make factual findings regarding transportation and processing costs, market price of the gas during the contract term, as well as other facts in connection with the issue of profitability.
 
Although the take-or-pay cases are winding down, the case is significant because some of the later take-or-pay contracts had this form of economic “escape” clause. The case is also likely to serve as authority in other contracts which include a similar economic out.