The Texas Supreme Court has upheld a 1979 take-or-pay contract requiring a U.S. interstate pipeline to pay above market prices for gas it doesn't want.
The decision supported claims by three producers that Tennessee Gas Pipeline Co. (TGP) is obligated to pay for gas produced in Bob West field of South Texas at prices based on Section 102(b)(2) of the Natural Gas Policy Act of 1978 (NGPA).
The gas purchase contract requires Tennessee to take or pay for 85% of the deliverability of wells within certain Bob West units through January 1999.
Under NGPA's price escalation provisions, gas covered by the contract would fetch more than $11/MMBTU. TGP in an interim agreement with the producers, Coastal Oil & Gas Corp., Houston, KCS Energy Inc., Edison, N.J., and Tesoro Petroleum Corp., San Antonio, had paid $3/MMBTU for gas purchased under the contract since September 1994.
Less payments under the interim agreement, Coastal, KCS, and Tesoro would net $8.32/MMBTU for gas volumes subject to the NGPA.
Producers with Bob West contract claims against TGP said the court's decision settled all issues in the contract dispute, essentially affirming their positions. They said the finding cleared the way for Coastal, KCS, and Tesoro to share $206 million of bonds posted by TGP rather than pay full price for gas purchased from contract units in Bob West field.
However, Tenneco Energy, Houston, TGP's parent company, said it will ask the court to again rehear the case, "particularly since two of the current justices did not become members of the court until after the case had been argued and originally decided."
In August 1995, Texas Supreme Court justices upheld a lower court's ruling that the gas purchase agreement is an "output" contract as defined by the Texas business and commercial code.
Meantime, TransTexas Gas Corp., Houston, said the court's finding on the Bob West contract strengthens a TransTexas claim that TGP failed to comply with a similar contract covering Liz field in Webb County, Tex.
Coastal Corp. Chief Executive Officer David A. Arledge said the court's decision recognized the need for contractual certainty in the U.S. gas industry.
Tenneco expressed disappointment that the Texas Supreme Court reversed its earlier decision, in which it ruled the gas purchase agreement is an output contract under jurisdiction of state commercial code.
"The code states that any increase in production under an output contract must be made in good faith and in reasonable proportion to historical levels," Tenneco said.
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