Valero Transmission Company v. Mitchell Energy Corporation ( 1987 )

GBptnttttt
In The
GJnurt of Appeals
For The
ifftrat Supreme Sufctctal Etatrtrt of ffiexas
NO. 01-87-00137-CV
VALERO TRANSMISSION COMPANY, Appellant
„ FILED IN
V. COURT OF APPEALS
HOUSTON, TEXAS
MITCHELL ENERGY CORPORATION, Appellee/j- 3 1 j.0
KAIHRYNCOX
CLERK
On Appeal from the 295th District Court
Harris County, Texas
Trial Court Cause No. 85-05219
Valero Transmission Company ("Valero"), a natural gas
pipeline company, appeals from a temporary injunction order
requiring that it purchase and take, pending a trial on the merits,
certain quantities of gas from Mitchell Energy Corporation
("Mitchell"), a gas producing company, pursuant to its gas purchase
agreement with Mitchell.
In the temporary injunction order, the trial court found
that on March 21, 1975, Mitchell and Valero entered into a gas
purchase contract that as amended, has a contract term of 20 years
from February 1, 1981. The court found that under the provisions of
this contract, Valero agreed to:
(i) exercise its best efforts in good faith,
and in cooperation with [Mitchell], to request
deliveries of gas that will maintain
[Mitchell's] leases in force and effect; and to
(ii) actually purchase from [Mitchell]
quantities of gas sufficient to permit
[Mitchell] to prevent drainage of gas from
[its] leases by producers other than
[Mitchell].
The court found that Valero breached these agreements,
and that as a result, Mitchell's leases in three fields subject to
the contract were being drained by offsetting producers. The court
found that as a further result of the breach, Mitchell was in
imminent danger of losing 11 leases that were subject to the gas
purchase contract.
Based on the foregoing findings, the court required that
Valero, pending a final hearing on the merits, do the following:
(i) To prevent drainage of gas from Mitchell's
leases, Valero is required to purchase and take
gas from designated wells "in an amount equal
to the full prorated allowable assigned to each
such well by the Railroad Commission of Texas
[but not more gas than a particular well is
physically capable of producing]"; and
(2) To prevent Mitchell from losing its leases,
Valero is required to purchase and take from
designated wells "the amount of gas which each
such well can physically produce in one day,
[but not to exceed the prorated allowable
assigned to such well]." Valero is further
required to make any necessary nominations to
the Texas Railroad Commission so that its
purchases and takes under this paragraph ...
will not cause Valero to violate Texas law.
Under the gas purchase contract, Mitchell dedicated
exclusively to Valero all of its gas reserves in designated lands
and leases in several counties. Mitchell agreed to sell and deliver
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to Valero, and Valero agreed to purchase and take, all gas produced
from said lands and leases during the 20-year term of the contract.
The contract specifies the quantities, quality, and prices to be
paid for the gas, and contains clauses designed to protect Mitchell
against drainage and against the loss of its leases because of lack
of production. The contract also contains a force majeure clause
and a provision that the contract is deemed to be modified by any
contrary Texas law. The contract was amended in 1978 to include
additional acreage, and again in 1981, when Mitchell agreed to
drill 15 additional wells in return for a higher price per unit for
gas produced from the new wells.
Beginning in 1983, Valero no longer complied with the
minimum purchase and take requirements of the gas purchase
contract, and thereafter, Mitchell brought suit alleging breach of
contract. Ancillary to the main action, Mitchell sought a temporary
injunction, which is the subject of this appeal.
We first address Valero's contention that the trial court
lacked subject matter jurisdiction to enter the temporary
injunction. Valero contends that Mitchell's suit constitutes a
collateral attack on the rules, regulations, and orders
administered by the Texas Railroad Commission, and that the
district courts of Travis County have exclusive jurisdiction to
hear such suits. See Alpha Petroleum Co. v. Terrellf 122 Tex. 257,
59 S.W.2d 364 (1933); Tex. Nat. Res. Code Ann. sec. 85.241 (Vernon
1978).
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We overrule Valero's contention. Mitchell's suit was for
breach of contract, and its action for a temporary injunction
merely sought to compel Valero's continuing performance of certain
terms of the gas purchase contract pending a trial on the merits.
Mitchell's suit does not challenge or seek an exemption from any
rule, regulation, or order of the Texas Railroad Commission.
Although the Texas Railroad Commission is given general statutory
authority to regulate the production of gas, the Commission does
not have authority to hear contract disputes or to abrogate the
parties' respective rights under the gas purchase contract. See
Railroad Comm'n v. City of Austinf 524 S.W.2d 262 (Tex. 1975); see
also Humble Oil & Refining Co. v. Railroad Comm'n. 133 Tex. 330,
128 S.W.2d 9 (1939); Railroad Comm'n v. United Gas Pipe Line Co. f
358 S.W.2d 907 (Tex. Civ. App.—Austin 1962, writ ref'd n.r.e.); A.
Anderson, The Texas Approach to Gas Proration and Ratable Take. 57
U. Colo. L. Rev. 199, 220-21 (1986). Indeed, the Texas Railroad
Commission, in adopting 16 Tex. Admin. Code sees. 3.30, 3.34
(1987), has itself expressly acknowledged that these rules "shall
not affect existing contractual rights and obligations between
parties." 12 Tex. Reg. 536 (February 17, 1987).
Mitchell sought temporary specific performance of certain
terms of a contract, pending a trial on the merits, and such suit
could properly be determined by the district court of Harris
County, notwithstanding the fact that the parties are generally
subject to the regulatory authority of the Railroad Commission. We
accordingly hold that the trial court has subject matter
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jurisdiction over this contract dispute and over Mitchell's
ancillary action for temporary injunction. See Zimmerman v. Texaco.
Inc., 413 S.W.2d 387 (Tex. 1967), refusing writ n.r.e. on 409
S.W.2d 607, 612-13 (Tex. Civ. App.—El Paso 1966); Loonev v. Sun
Oil Co,, 170 S.W.2d 297, 300 (Tex. Civ. App.—Texarkana 1943, writ
ref'd).
We therefore overrule Valero»s seventh point of error.
We next consider Valero»s contentions that the trial
court abused its discretion in granting the temporary injunction.
The purpose of a temporary injunction is to preserve the status
quo, and one seeking such relief must show a probable right to
recover on the merits at the eventual trial, irreparable injury in
the interim if the injunction is not granted, and the absence of an
adequate remedy at law. Arkansas Louisiana Gas Co. v. Fenderf 593
S.W.2d 122, 123 (Tex. Civ. App.—Tyler 1979, no writ). Valero
contends that Mitchell failed to sustain its burden of showing
these elements.
In its first point of error, Valero asserts that Mitchell
failed to demonstrate a probable right to recover under the
provisions of the gas purchase contract. Under this point, Valero
argues that it has taken gas under the contract in accordance with
its market demand and that any contractual requirement that it
purchase additional amounts would constitute a violation of Texas
law. In addition, Valero contends that Mitchell failed to present
evidence of probative value showing that it would sustain damages
from Valero's failure to take minimum quantities of gas. In its
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related point of error nine, Valero asserts that the temporary
injunction order requiring performance of the contract, as written,
violates the law and is therefore void and unenforceable.
A trial court is clothed with broad discretion in
deciding whether to issue a temporary injunction to preserve the
rights of the parties pending a final trial on the merits. Texas
Foundries. Inc. v. Int'l Moulders & Foundry Workers' Unionr 151
Tex. 239, 248 S.W.2d 460 (1952). On review of a temporary order, a
trial court's decision will be reversed only if the record shows a
clear abuse of discretion. Id. at 462; see Davis v. Hueyr 571
S.W.2d 859 (Tex. 1978).
Thus, in reviewing the temporary injunction order, we are
not permitted to decide questions of factual insufficiency or reach
the underlying merits of the case. Id. at 861-62. Nor may we
substitute our judgment for that of the trial court. Indeed, we
must draw all reasonable inferences in favor of the trial court's
decision. Davis v. Bache Halsey Stuart Shields. Inc.. 630 S.W.2d
754, 757 (Tex. App.—Houston [1st Dist.] 1982, no writ).
We first conclude that the contract, and the temporary
injunction order enforcing it, is not illegal on its face, so that
Valero had the burden of demonstrating its defense of illegality.
We may find an abuse of discretion in the trial court's holding
against Valero only if illegality was established as a matter of
law.
Valero's claim of illegality is based upon the premise
that there was no market demand for the gas Valero contracted to
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purchase from Mitchell. Valero argues that a market for gas is
defined by price; that the price at which it would have to sell
contract gas, based on its cost, is over $4 per unit; that
currently natural gas is selling on the spot market for under $2
per unit; and thus, there is no existing market for $4 gas. Valero
contends that any contractual requirement that it take and pay for
gas in excess of its market demand violates the law.
The Texas Railroad Commission has statutory jurisdiction
to govern and regulate all oil and gas wells, common carrier
pipelines, persons owning or operating pipelines, and persons
owning and operating oil and gas wells in Texas. See Tex. Nat. Res.
Code Ann. sec. 81.051 (Vernon 1978). However, as discussed above,
the Railroad Commission has no authority to abrogate contract
rights. Nor do the Railroad Commission rules purport to affect
contract rights. 12 Tex. Reg. 536." A previous attempt to preempt
contractual provisions that were inconsistent with a Railroad
Commission interpretive order was struck down by the District Court
of Travis County on a complaint that the Commission had exceeded
its authority. See Dallas Production Co. v. Railroad Comm'n. No.
260,641 (Travis Cty. Dist. Ct., June 10, 1977).
Even if we were to assume that the Railroad Commission
rules cited by Valero did affect the parties' obligations under the
contract, we find that Valero has not proven that complying with
the contract would violate the law.
The primary purpose of regulating natural gas is to
prevent waste, to promote conservation, and to compel ratable
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production for protection of correlative rights in a common
reservoir. See Tex. Nat. Res. Code Ann. sec. 86.001 (Vernon 1978).
The statutory definition of "waste" includes the production of gas
in excess of reasonable market demand for the type of gas produced.
Section 86.012(7) (Vernon Supp. 1987).
Under current Texas Railroad Commission rules, the
production or purchase of gas in excess of "market demand" is
prohibited. 16 Tex. Admin. Code sees. 3.30 and 3.34. These rules
also prohibit discrimination by a purchaser between producers in a
common field and establish a priority system for the purchase of
different types of natural gas. Id.
The Texas Railroad Commission sets production allowables
for gas that are based on monthly estimates of market demand by gas
purchasers. These "buyer nominations" must show expected gas
requirements from each field from which the buyer purchases gas.
Sections 3.30(c), (d) . Based on this information, the Commission
divides the total allowable monthly production in a field among the
wells in that field and assigns a "prorated allowable" to each
well. The allowables are computed so as to accord each producer the
opportunity to produce its fair share of the total gas to be
produced from the field that month.
The monthly demand nominations from gas purchasers such
as Valero must include estimates for each field of gas from which
the purchaser takes gas. Thus, Valero's nominations, its own
estimates of demand, will affect the Commission's determination of
total market demand for any month, as well as the prorated
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allowable assigned to Valero's producers. If actual demand turns
out to be more or less than the estimates, the allowables may be
adjusted accordingly.
There was testimony that the Texas Railroad Commission
determines the "total market demand" for any month by considering
the volume of gas generally salable on the market as shown by gas
purchaser nominations. In this case, there was evidence that the
gas market demand, and Valero's total volume of purchased gas,
dropped considerably from 1981 to 1986. But there was also evidence
showing that special marketing programs of Valero's parent company
replaced 30-40% of that lost volume, and these special arrangements
made it possible for Valero to move its expensive gas, even though
the market price for gas was lower.1
In two of the fields subject to the parties' contract,
Mitchell is the only producer in the field that has connections to
Valero's pipeline, so discrimination is not an issue there. In the
fields that Mitchell shares with other of Valero's producers,
Valero contends that because it is required to take gas ratably
among those producers, it cannot purchase contract amounts only
There was testimony that the market for expensive gas
consisted mostly of long-term contracts or "captive"
markets. To hold up its sales of higher-than-market-price gas,
Valero sometimes will sell a downstream purchaser a "mix" of
differently priced gas, e.g., 20% of the purchaser's
requirements from expensive contract gas and 80% from cheaper
special marketing program gas. The average price for the gas
is thus lower than it would be if Valero sold only the
expensive gas.
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from Mitchell. That is, it must take the same percentage of
production capability from all producers in a field.
The trial court's injunction order sets out its
requirements with specific reference to Railroad Commission
standards. It first requires Valero, in order to prevent drainage
from Mitchell's wells, to take the full prorated allowable assigned
to each well by the Commission. A well's prorated allowable is
generally the amount of gas that the well is allowed to produce and
that a buyer may purchase from it. However, allowables are not an
absolute legal limit on production in any specific month. See Tex.
Nat. Res. Code Ann. sec. 86.090 (Vernon Supp. 1987). Section
86.090, for example, provides for temporary overproduction and
underproduction of wells to adjust owners' correlative rights to
produce and sell gas from a common reservoir. Further, Mitchell
presented evidence that the rules relating to allowables are
flexibly interpreted by the Commission based on individual
circumstances and based on the policies underlying regulation of
oil and gas in Texas. Valero's contentions that the injunction
would require it to illegally take gas in excess of market demand
and discriminate in favor of Mitchell are speculative. See
Universal Resources Corp. v. Panhandle E. Pipe Line Co. , 813 F.2d
at 80. Valero has not demonstrated that requiring it to take the
prorated allowable of gas from Mitchell's wells would result in a
violation of the law.
The court's temporary injunction order further requires
Valero, in order to maintain Mitchell's leases in effect, to take
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an amount of gas equal to one day's deliverability each month,
subject again to each well's prorated allowable. That is, the order
limits Valero's required taking to the well's prorated allowable if
one day's production would exceed that allowable. Because the
monthly well production allowables are based upon buyer gas
nominations, the temporary injunction also requires that Valero
make any necessary nominations to the Railroad Commission so that
its purchases and takes will not cause it to violate Texas law.
Again, the injunction's requirements are defined in terms of
complying with all applicable laws, and Valero has failed to
conclusively demonstrate its defense that the court's order
requires it to violate the law.
Valero also relies on the force majeure clause in the
contract, asserting that any failure of performance on its part was
"due to causes beyond its reasonable control," which it could not
have prevented by the exercise of due diligence. It argues that
under Commission rules, it had only slight control over the price
it had to charge for its gas, and that neither party could control
downstream market demand for gas at the high contract price. Thus,
Valero argues, the force majeure clause in the gas purchase
contract excuses its performance and precludes Mitchell's right to
a temporary injunction. At the very least, Valero asserts, it
should not be required to pay above market price for the gas that
the injunction requires it to take.
We overrule these assertions. A force majeure clause does
not relieve a contracting party of the obligation to perform,
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unless the disabling event was unforeseeable at the time the
parties made the contract. See Gulf Oil Corp. v. Federal Energy
Regulatory Comm'n. 706 F.2d 444, 452 (3rd Cir. 1983), cert, deniedf
464 U.S. 1038 (1984) ; Mainline Inv. Corp. v. Gaines. 407 F. Supp.
423, 427 (N. D. Tex. 1976). An economic downturn in the market for
a product is not such an unforeseeable occurrence that would
justify application of the force majeure provision, and a
contractual obligation cannot be avoided simply because performance
has become more economically burdensome than a party anticipated.
Alamo Clav Prod.. Inc. v. Gunn Tile Co.. 597 S.W.2d 388 (Tex. Civ.
App.—San Antonio 1980, writ ref'd n.r.e.); see Measdav v. Kwik -
Kqpv Corp.. 713 F.2d 118, 126 (5th Cir. 1983); Mainline Inv. Corp..
407 F. Supp. at 427.
Indeed, the uncertainty of future market prices is often
the motivation for entering into a long-term contract. The primary
purpose of a price agreement is to fix the price and consequently
to avoid the risk of price fluctuation. 407 F. Supp. at 427. Thus, a
sudden or significant change in price, or the fact that one of the
parties may gain or lose during a particular period of the
contract, is not sufficient to constitute an extraordinary,
unforeseeable event that would excuse performance under the force
majeure clause. Id.
In summary, we find that the court-ordered requirements
are reasonable and do not require Valero to violate the law. We
therefore conclude that Valero has failed to establish its claims
of illegality, and we overrule points of error one and nine.
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In its second and third points of error, Valero argues
that Mitchell was not entitled to temporary injunctive relief,
because Mitchell failed to establish probable irreparable harm and
the absence of an adequate remedy at law.
There was evidence from which the trial court could
reasonably have decided that drainage was occurring from several of
Mitchell's wells subject to the contract. Mitchell's expert witness
presented data on pressure comparisons over time and related it to
production from wells offsetting Mitchell's wells in the same
field. He also explained other methods of attempting to measure
drainage and justified why his technique was more reliable.
Mitchell also presented evidence that all of its leases
were beyond their primary term and that the land covered by at
least 11 leases would automatically revert back to the holders of
the mineral interests if there was no production from the leased
tracts. There was testimony that Mitchell had spent millions of
dollars acquiring the leases and drilling and operating these
wells.
Although the probative value of Mitchell's evidence was
seriously challenged by Valero, the trial court could reasonably
have found from the evidence that because of drainage, Mitchell
would probably suffer a permanent loss of gas from beneath its
leased tracts, and that due to such drainage, it would likely be
deprived of a chance to recover its fair share of gas from the
common reservoir. There was also evidence supporting the finding
that Mitchell was threatened with the loss of 11 leases due to lack
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of production. The court could reasonably have decided that the
extent of Mitchell's probable loss was beyond precise measurement,
so that it would be extremely difficult to quantify Mitchell's
right of compensation for such loss. Thus, the record supports the
trial court's conclusion that Mitchell would suffer imminent,
irreparable injury in the absence of temporary injunctive relief,
and that it lacked an adequate remedy at law.
Because we find that there is some evidence of probative
value to support the trial court's decision, we overrule Valero's
second and third points of error. See Matuszak v. Houston Oilers.
Inc.. 515 S.W.2d 725, 728 (Tex. Civ. App.—Houston [14th Dist.]
1974, no writ).
In its sixth point of error, the appellant contends that
the court abused its discretion in granting relief that disrupts
the status quo and exceeds that necessary to prevent irreparable
harm. Essentially, Valero complains that even if it should be
required to comply with the provisions of the temporary injunction,
it should not be compelled to pay the contract price, but rather
should be permitted to pay the market price for the gas purchased.
Valero argues that the "high prices" required by the order are
unnecessary to prevent lease loss or drainage, and thus the
temporary injunction order grants relief beyond that required to
preserve the status quo.
There is evidence in the record that the interim prices
at which the temporary injunction ordered Valero to purchase gas
were the last noncontested prices Valero had paid for Mitchell's
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gas under the contract. Given this circumstance, we conclude that
the trial court's temporary injunction order tends to preserve the
status quo. The court did not abuse its discretion in setting the
prices that Valero must pay for gas pending a trial on the merits.
The sixth point of error is overruled.
In its fifth point of error, Valero contends that
Mitchell was not entitled to equitable relief because it failed to
demonstrate that it had "clean hands." Valero asserts that
Mitchell had other potential buyers of gas available, i.e., special
marketing programs of its own and of other companies that buy gas
cheaply on the spot market, and that Mitchell unreasonably refuses
the opportunity to sell its gas at a price $2 to $4 under the
contract price. Valero argues that these alternative markets would
afford Mitchell wholly adequate relief and would not require Valero
to illegally discriminate in favor of Mitchell over its other
producers.
We overrule this point, because there was no showing that
Mitchell engaged in any wrongful conduct relating to the gas
purchase agreement or that it did anything that brought about the
alleged breach. Indeed, there was evidence that on several
occasions, when Valero took no gas under the contract, Mitchell
eventually agreed to sell its gas at a lower price to Valero's own
special marketing program, VIGAS, in an attempt to avoid some of
its anticipated damages. Mitchell's refusal to re-negotiate its gas
purchase contract with Valero certainly does not constitute
wrongful conduct precluding its right to equitable relief.
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In its eighth point of error, the appellant contends that
the temporary injunction was an abuse of discretion because it will
impede the public interest by forcing Valero to violate the laws
relating to the oil and gas industry. In its fourth point of
error, the appellant asserts summarily that Mitchell failed to
sustain its burden to demonstrate a balance of equities in its
favor, because Mitchell allegedly sought to take action contrary to
Texas law and Commission rules, which supersede any inconsistent
contract provisions. We have found previously found that Valero
has not met its burden of demonstrating that the temporary
injunction order is illegal, or that it will force Valero to
violate any law or regulation. Points of error four and eight are
overruled.
The trial court's temporary injunction order is affirmed.
FRAN^xG. EVANS
lef Justice
Justices Cohen and Hoyt also sitting.
Do not publish. Tex. R. App. P. 90.
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