Chevron USA Inc v. Santa Fe Snyder Corp, et al

United States Court of Appeals
Fifth Circuit
F I L E D
May 22, 2003
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 02-20757
_______________
CHEVRON U.S.A., INC.,
Plaintiff-Appellee,
VERSUS
SANTA FE SNYDER CORPORATION, ET AL.,
Defendants,
SANTA FE SNYDER CORPORATION; SAMEDAN OIL CORPORATION;
RANGER OIL COMPANY,
Defendants-Appellants
_______________
Appeal from the United States District Court
for the Southern District of Texas
m H-00-CV-847
_________________________

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Before SMITH and BARKSDALE, Circuit
Judges, and FITZWATER,* District Judge.
JERRY E. SMITH, Circuit Judge:**
Defendant Santa Fe Snyder Corporation
and others appeal a summary judgment for
Chevron U.S.A. entered on the basis that San-
ta Fe contracted to have Chevron process its
entire monthly natural gas production. Al-
though the parties’ agreement requires Santa
Fe to pay minimum monthly processing fees, it
does not require Santa Fe to deliver any or all
of its production to Chevron. We reverse and
remand.
I.
Chevron owns and operates a gas process-
ing facility, a well, and a lease, designated
South Timbalier Block 177 (“Block 177"),
located on a platform off the coast of Louisi-
ana. Santa Fe and others jointly own oil and
gas wells and a lease, designated South Tim-
balier Block 178 (“Block 178"), located on a
nearby offshore platform. In 1996, Chevron
and Santa Fe entered into an agreement by
which Chevron agreed to process Santa Fe’s
production from Block 178. In March 1998,
the parties amended the agreement to accom-
modate the production from another well
owned by Santa Fe, South Timbalier Block
179 (“Block 179").1
The agreement was terminable by either
party on or after October 1, 2001. By way of
the March 1998 amendment, Santa Fe re-
served the right to terminate the agreement
early with respect to Block 179 (but not Block
178) by giving written notice ninety days in
advance. In November 1998, Santa Fe in-
voked this provision by notifying Chevron that
it intended to install its own processing facili-
ties. Santa Fe also stated that as soon as its
processing facilities were functional, it would
process all production from Blocks 178 and
179. For Block 178, Santa Fe stated that it
would pay the minimum monthly processing
and administrative fees specified in the agree-
ment.
Chevron replied that cessation of produc-
tion deliveries in advance of the termination
date would be viewed as a breach of contract.
Specifically, Chevron notified Santa Fe that its
offer to pay minimum fees in lieu of fees gen-
erated through processing was not acceptable
substitute performance. In February 1999,
Santa Fe ceased delivery of production to
Chevron and began paying the minimum
monthly fees.
Chevron sued for, inter alia, declaratory
relief and breach of contract, contending it is
entitled to process Santa Fe’s entire produc-
tion for the full term of the agreement, subject
only to its own operational constraints and the
February 27, 1999 (ninety days after notice)
termination date for Block 179. Defendants
counterclaimed, seeking a declaratory judg-
ment that the agreement did not obligate them
to deliver any or all of the production from
Blocks 178 and 179. The district court grant-
ed Chevron’s motion for partial summary
judgment, finding that “the parties contracted
for the delivery and processing of actual pro-
duction from Santa Fe’s wells in Timbalier
* District Judge of the Northern District of
Texas, sitting by designation.
** Pursuant to 5TH CIR. R. 47.5, the court has
determined that this opinion should not be pub-
lished and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4
1 Block 178 contains two wells (Wells A-1 and
A-3), and Block 179 contains one well (Well B-1).

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Blocks 178 and 179.”
II.
We review a summary judgment de novo.
King v. Ames, 179 F.3d 370, 373 (5th Cir.
1999). Summary judgment “shall be rendered
forthwith if the pleadings, depositions, answers
to interrogatories, and admissions on file,
together with the affidavits, if any, show that
there is no genuine issue of material fact and
that the moving party is entitled to judgment
as a matter of law.” FED. R. CIV. P. 56(c). In
the context of contract interpretation, “only
when there is a choice of reasonable
interpretation of the contract is there a
material fact issue concerning the parties’
intent that would preclude summary judg-
ment.” Amoco Prod. Co. v. Tex. Meridian
Res. Exploration, Inc., 180 F.3d 664, 669 (5th
Cir. 1999).
III.
The dispute centers on whether Santa Fe
was required to deliver all production from its
Block 178 and 179 wells or whether, instead,
it retained the right to process its gas
elsewhere so long as it paid the minimum
monthly processing and administrative fees.
Because the agreement originates from a
federal lease on the outer continental
shelfSSoff the coast of LouisianaSSthe choice-
of-law provisions of the Outer Continental
Shelf Lands Act, 43 U.S.C. §§ 1333(a)(2)(A),
1349(b)(1), apply, so construction of the
agreement is governed by Louisiana law to the
extent such law is not inconsistent with federal
law. Union Tex. Petroleum Corp. v. PLT
Eng’g, Inc., 895 F.2d 1043, 1050 (5th Cir.
1990).
Under Louisiana law, “[w]hether a contract
is ambiguous or not is a question of law.”
Lawrence v. Terral Seed, Inc., 796 So. 2d
115, 123 (La. App. 2d Cir. 2001) (citation
omitted), writ denied, 808 So. 2d 341 (La.
2002). If “the words of a contract are clear
and explicit and lead to no absurd
consequences, no further interpretation may be
made in search of the parties’ intent.” LA.
CIV. CODE ANN. art. 2046 (West 1987). “The
rules of construction do not authorize a
perversion of the words or the exercise of
inventive powers to create an ambiguity where
none exists or the making of a new contract
when the terms express with sufficient
clearness the part ies’ intent.” Campbell v.
Melton, 817 So. 2d 69, 76 (La. 2002)
(citations omitted). “The fact that one party
may create a dispute about the meaning of a
contractual provision does not render the
provision ambiguous.” Id.
Key to the district court’s conclusion that
Santa Fe was required to deliver all of its pro-
duction is the agreement’s preamble, which
sets forth its purpose:
WHEREAS, Santa Fe desires to
produce gas, condensate and water
production from the Well (the
“Production”) through its construction
of an eight inch (8”) N.D. pipeline from
the initial Well, and any subsequent
Lease Wells, to that certain Chevron
operated “E” platform . . . .
WHEREAS, Chevron desires to receive
the Production at the Chevron Operated
Platform, perform certain processing
services and redeliver the Production
. . . .
The term “production”SSdefined as “gas, con-
densate and water production from the

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Well”SSis used throughout the agreement.2
Sections one and two state the obligations of
each party. In section one, Santa Fe agrees to
“deliver the Production at the Connection
Point at . . . the Chevron Operated Platform”
and “properly treat all of its Production to
prevent the entry of any corrosive product(s)
or chemicals into Chevron’s facilities.”
Section two obligates Chevron to “receive the
Production at the Chevron Operated Platform
and perform” certain duties, including the sep-
aration, compression, treatment, and redelivery
of natural gas.
Section three defines “Processing Fees”:
The “Processing Fees” are hereby
defined (i) as not less than minimum
processing fees of $3,000.00 per
calendar month (“Minimum Processing
Fees”) from initial commencement of
Processing until termination of this
Agreement, except and excluding any
such calendar month during which
Chevron is not prepared to receive the
Production and perform the Processing
and further except and excluding any
calendar month lacking at least twenty
(20) days of Processing due to force
majeure pursuant to Section 21, and (ii)
as itemized hereafter . . . .
Section three continues by setting per-unit
rates for the separation, compression, and
treatment of gas, as well as administrative
overhead of $1000. For example, compression
fees are set at $0.20 per MCF, and the
treatment of oil and condensate is set at $0.50
per barrel. Section six limits Chevron’s pro-
cessing obligation to “volume rates not to ex-
ceed 2,500 barrels of condensate per day, 50
MMCF of natural gas per day, and 1000 bar-
rels of produced water per day; provided,
however, that Chevron shall not be required to
compress gas hereunder in excess of 1 MMCF
of natural gas per day.”
The district court reasoned that the
preamble’s definition of “production”
“suggests that the agreement contemplates the
processing of the actual production from Santa
Fe’s wells and not simply an option either to
process or pay a de minimus [sic] monthly
fee.” Although section three does not
explicitly provide Santa Fe with an “option” of
delivering production or paying a minimum
monthly fee, the court interpreted section three
as “provid[ing] Chevron a minimal amount of
revenue in the event that deliveries of
production for a parti cular month
unexpectedly fell below projections.”
Given that an unambiguous contract
contains terms that are “clear and explicit,”
LA. CIV. CODE ANN. art. 2046 (West 1987),
the agreement did not unambiguously grant
Chevron the right to process all of Santa Fe’s
production. The agreement discusses
minimum monthly fees but nowhere requires
Santa Fe to deliver any, much less all, of its
production to Chevron. The district court
focused on the preamble’s definition of
“production,” meant to serve as shorthand for
“gas, condensate and water production from
the Well,” and erroneously interpreted it as
creating an exclusivity arrangement.3 Yet, an
2 In the amended agreement, the parties
expanded the definition of “production” to include
“the comingled production from South Timbalier
178 and South Timbalier 179.”
3 Generally, a preamble does not create rights
beyond those conveyed by the contract’s operative
terms. See Grynberg v. F.E.R.C., 71 F.3d 413,
(continued...)

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exclusivity arrangement cannot be created by
implication.
In Pogo Producing Co. v. Sea Robin
Pipeline Co., 493 So. 2d 909, 914 (La. App.
3d Cir.), cert. denied, 497 So. 2d 310 (La.
1986), the court recognized the efficiencies of
exclusivity arrangements, or output contracts,
but only where mutual consideration or
“cause” exists. Exclusivity arrangements
benefit sellers of services such as Chevron,
because they are assured a constant demand,
while buyers of services such as Santa Fe are
assured a constant supply. Chevron processed
its own natural gas derived from its Block 177
Well and therefore did not look to Santa Fe as
an exclusive source of business. Instead,
evidence suggests Chevron entered into the
agreement to fill excess capacity.
As part of the bargain, Chevron received
$4000 in minimum monthly processing fees,
while simultaneously imposing a ceiling on the
amount of Santa Fe’s gas it was willing to
process. This suggests a lack of mutuality if
the contract is interpreted as an output con-
tract: Why would Santa Fe pay additional
consideration to lock itself into an exclusivity
arrangement?4
In the 1996 agreement, the parties likely
contemplated Santa Fe’s delivering its entire
production to Chevron, though this was never
reduced to writing. Perhaps the geographical
isolation of the platforms prevented
competition, while the prospect of Santa Fe
developing its own processing facilities was
remote. By the time the agreement was
amended, Santa Fe’s construction of
processing facilities evidently became a
possibility, hence the insertion of the ninety
day termination clause.
The parties’ intentions are irrelevant,
however; because the agreement did not state
that Santa Fe was required to deliver all or any
of its production to Chevron, there is no
ambiguity. So long as Santa Fe paid the
contractually defined monthly minimum
processing and administrative fees, it could
not, as a matter of law, have breached the
agreement except by failing to pay additional
fees incurred as a result of processing actual
deliveries or by failing to meet section two’s
qualitative obligations. As we have already
said, quoting Campbell, 817 So. 2d at 76, the
rules of construction do not authorize us to
pervert the words of a contract or to create an
3(...continued)
416 (D.C. Cir. 1995) (“[I]t is standard contract
law that a Whereas clause, while sometimes useful
as an aid to interpretation, ‘cannot create any right
beyond those arising from the operative terms of
the document.’”).
4 Santa Fe argues that the agreement resembles
a “take or pay” contract. Natural gas sales
contracts typically contain a take or pay clause that
requires the “pipeline-purchaser either to take (and
pay for at the maximum lawful price) a specified
quantity of natural gas during each contract year or
(continued...)
4(...continued)
to make a single annual payment to the producer to
the extent that the volumes of gas taken during any
contract year fall short of the minimum annual
contract quantity.” Diamond Shamrock
Exploration Co. v. Hodel, 853 F.2d 1159, 1164
(5th Cir. 1988). Louisiana courts have construed
take or pay contracts as imposing alternative
obligations. Pogo Producing, 493 So. 2d at 916.
Santa Fe was not required to perform alternative
obligations; it was required only to pay a minimum
monthly processing and administrative fee, while
meeting certain qualitative delivery specifications;
it otherwise was free to decide how much of its
production to deliver to Chevron for processing.

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ambiguity or to make a new contract. Given
that the agreement makes no mention of an
exclusivity arrangement or a minimum delivery
volume, the district court should have granted
summary judgment for defendants.
The judgment is REVERSED, and this mat-
ter is REMANDED for further appropriate
proceedings.

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