307 Dynegy Midstream Servs., Ltd. P’ship v. Apache Corp.,

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Dynegy Midstream Services, L.P. v. Apache Corp., 294 S.W.3d 164 (Tex. 2009), holds that for gas sold at the wellhead under common “percentage of proceeds” contracts, the gas processor was not obligated to compensate the producer for drips or condensate gathered before the gas reached the processing plant or for unaccounted-for gas lost between the wellhead and the tailgate of the processing plant. Apache, the producer, entered into multiple “percentage of proceeds” contracts (covering production in Texas and New Mexico). Pursuant to these contracts, Apache transferred title to gas it produced to the processor (which also owned the gathering system) at or near its wellheads and received a percentage of the proceeds from the sale of residue gas at the tailgate of various processing plants. Apache contended it should be compensated for condensate gathered before the gas reached the processing plant and for unaccounted-for gas that disappeared between production at the wellheads and the sale at the tailgate of the processing facilities. Apache sued for breach of contract and violations of the New Mexico Unfair Practices Act (“the Act”) and Apache sought a declaratory judgment on whether it was entitled to payment for condensate collected at compressor booster stations.
 
Typical percentage of proceeds contracts, like Apache’s contracts, base payment to the producer on the amount of gas sold at the tailgate of the processing plant. “The parties were free to apportion the risk of pipeline losses or other losses as they wished.” However, there were no provisions in Apache’s contracts requiring the processor to meet efficiency targets with respect to leakage or to compensate Apache for unaccounted-for gas. Apache’s payment was limited to a percentage of the proceeds from actual sales, but Apache was seeking to recover for sales that never occurred. Accordingly, contract damages for gas lost between the wellhead and the tailgate were not recoverable.
 
The Act covers unfair and deceptive trade practices that include misrepresentations. Recovery of actual damages under the Act requires an injury and a causal relationship between the misrepresentation and injury. However, the alleged misrepresentations of the  gas  processor related to the failure to pay Apache for unaccounted-for gas. Because the gas processor was not obligated to pay Apache for unaccounted-for gas that was never sold, even if the Act was applicable and the misrepresentations were made, Apache was not injured, and there could be no recovery under the Act.
 
Title to the gas was transferred at or near the wellhead. Therefore, the liquids and condensate from the gas stream downstream of the wellheads, removed at compressor stations, were owned by the gas processor. The contracts provided that Apache would be paid for liquids that were saved and sold at the processing plant. The compressor stations were not processing plants, and gas liquids were not “saved and sold” at the compressor stations. “Liquid field condensate drops out of the gas stream because of changes in pressure and temperature, and must be removed from the gathering system to prevent blockage.” The liquids are not marketable until impurities are removed. Further, “ten of the eleven contracts expressly provide[d] that any liquids exiting the gas stream en route to the final processing plants belonged to the processor. None of the percentage of proceeds contracts specified “that condensate precipitating at compressor stations is treated differently from condensate precipitating at any other point in the gathering system.” Accordingly, the processor was not obligated to account to Apache for condensate that fell out of the gas stream at the compressor stations.
 
This case is a reminder that parties to a percentage of proceeds contract are free to apportion the risk of pipeline losses and to allocate the proceeds of production in the contract. If a producer wants to further apportion the risk of pipeline loss, the producer should ensure that the percentage of proceeds contract contains efficiency thresholds and that the contract requires the processor to account for losses that exceed the specified thresholds. Similarly, if a producer wants to share in the proceeds from liquids collected out of field separators, drips, or compressor stations, then the contract must specify that the producer will share in proceeds for products extracted at points other than the tailgate of the processing plant.