Texas Supreme Court Finds No Liability for "Lost Gas"
By:
John Bain
In the recent case of Dynegy Midstream Services and Versado Gas Processors v. Apache Corporation, the Texas Supreme Court (the Court) held that a purchaser of natural gas (Gas) is not obligated to compensate a Gas seller for (i) any loss of Gas incidental to transporting such Gas from seller's wellhead to the processing plant tailgate or (ii) any liquid field condensate dropped out of the Gas stream at compressor stations, in each case because the underlying Gas purchase and transportation contracts did not expressly allocate such liability to buyer.
In a series of "percentage of proceeds" gathering and processing contracts between Apache Corporation (Apache) and Versado Gas Processors (Versado), Versado agreed to transport Gas from Apache-owned wellheads to a Gas processing plant, process such Gas at the plant, and sell the residue Gas and natural Gas liquids to third parties. During Versado's transportation of Gas from the wellhead to the processing plant, a portion of Gas went "lost and unaccounted for." Apache claimed that it was entitled to compensation from Versado for the "lost and unaccounted for" Gas. The Court disagreed, noting that (i) the contracts in dispute only obligated Versado to pay Apache a percentage of the proceeds from the actual sales of residue Gas and (ii) none of the contracts contained provisions that would create contractual liability for "lost and unaccounted for" Gas.
The Court also considered whether Versado was obligated to pay Apache for field condensate that dropped out of the Gas stream at the compressor stations located on the gas gathering system between the wellhead and the processing plant. The Court concluded that "compressor stations" are a part of the "gas gathering system" and are not "plants" under the contracts because compressor stations do not treat Gas but instead aid in moving the Gas along the pipeline. The Court further noted that the contracts make clear that Versado (i) is only obliged to pay for liquids "saved and sold" at the plant, (ii) owns all the Gas after it leaves the wellhead, and (iii) owns any liquids that fall out of the Gas in the gathering system. Based on the contracts' express provisions, the Court ultimately found that Versado owed Apache no compensation for field condensate that never reaches the plant.
If you have any questions, please contact John Bain at 214.953.6013 or jbain@jw.com or Craig Enochs at 713.752.4315 or cenochs@jw.com.
If you wish to be added to this e-Alert listing, please
CLICK HERE
to sign up. If you wish to be removed, please reply to this e-mail with REMOVE in the subject line and include your first and last name.
