|May 15, 2014|
Previously published on May 7, 2014
In a ruling of significant importance for those confronting force majeure (“FM”) issues in natural gas trades, and a win for Hess Corporation (“Hess” or “Plaintiff”), the Superior Court of New Jersey, Appellate Division ruled that Eni Petroleum US, LLC (“Eni” or “Defendant”) cannot rely on a force majeure provision in its North American Energy Standards Board (“NAESB”) base contract to excuse its obligation to deliver a certain quantity of natural gas at a specified delivery point where the:
- transaction confirmation did not specify a particular source for the gas that Defendant would provide;
- transaction confirmation did not specify a particular transporter to be utilized for each delivery; and
- delivery point specified in the transaction confirmation, which was fed by a number of different sources, remained open and unaffected by the events that caused the alleged force majeure.1
This decision articulates a bright-line as it concerns pool gas versus well-specific production in force majeure situations. Whether this decision finally lays to rest disputes over FM remains to be seen. We are optimistic that this decision brings useful clarity here.
Eni and the Pipelines
The facts of this case are important. Eni is a producer of natural gas, including from wells located in the Gulf of Mexico. Its wells are connected through underwater pipelines to the Independent Hub (“I-Hub”), which is a floating platform in the Gulf of Mexico used by Eni and other producers. Gas in the I-Hub is aggregated, processed, and transported to shore through other underwater pipelines. Here, the natural gas that Eni produced was transported through the Independence Trail Pipeline, owned and operated by Enterprise, which leads to another platform in the Gulf called the West Delta 68. From the West Delta 68, gas is transported on-shore to the Tennessee Gas Pipeline on the 2i - Zone L - 500 Leg (“Tennessee 500”) and placed into the pool.2
Relevant Terms of the NAESB Base Contract and Transaction Confirmation
Pursuant to a transaction confirmation under their NAESB agreement, Hess and Eni had agreed to the purchase and sale, on a firm basis, of 20,000 MMBtu of gas per day to be delivered at the Tennessee 500 delivery point from April 1, 2008 through April 30, 2008 at an index price. It is important to note the pool price used and not a well-specific price. On the transaction confirmation, Hess and Eni had left blank the “transporter” information and listed “None” under the “Special Conditions.” The force majeure provision, which is the standard FM provision in Section 11 of the NAESB base contract, stated that “neither party shall be liable to the other for failure to perform a Firm obligation, to the extent such failure was caused by Force Majeure. The term “Force Majeure” as employed herein means any cause not reasonably within the control of the party claiming suspension. . . .” More specifically, Section 11.2 of the NAESB base contract states that “Force Majeure shall include, but not be limited to . . . interruption and/or curtailment of Firm transportation and/or storage by Transporters. . . .”
Events Underlying Eni’s Claim of Force Majeure
On April 8, 2008, there was a leak in the Independence Trail Pipeline where it connected to the I-Hub. Thereafter, Enterprise stopped all gas transportation through the pipeline. As a result, Eni could not get gas from the I-Hub to the Tennessee 500.
Eni notified Hess that it was declaring FM and would not be delivering any gas to the Tennessee 500. Hess, however, rejected Eni’s force majeure claim arguing that the Tennessee 500 pool is fed by a number of sources, and therefore, “the leak in the Independence Trail Pipeline did not affect the availability of natural gas at the Tennessee 500 delivery point.”3 In addition, Hess claimed that Eni’s performance obligations were not excused by reasons of force majeure because the transaction confirmation did not specify Enterprise or the Independence Trail Pipeline as the specific transporter.
The Court’s Decision
The court affirmed the lower court’s finding that Eni had agreed to provide a specified quantity of gas at a specified delivery point and that nothing in the contract required Eni to provide such gas through a specific transporter or route. The court found: “Gas remained available from other sources at the delivery point” and the “leak in the Independence Trail Pipeline” did not constitute a force majeure event under the contract and was not grounds for excusing [D]efendant’s failure to perform the clear terms of its agreement with [P]laintiff,”4 the court ruled.
Because there was nothing limiting [D]efendant’s performance to only gas it produced through the I-Hub, an interruption in the Independence Trail Pipeline bringing that gas to the Tennessee 500 was irrelevant to [D]efendant’s obligation. Defendant was required to have gas available in the Tennessee 500 pool for [P]laintiff, regardless of how it got there. Defendant was free to use its other sources of gas to fill part of the contract or to purchase gas from the pool or the spot-market to meet its contractual obligation to [P]laintiff. Therefore, [D]efendant could not invoke force majeure as a defense to [P]laintiff’s breach of contract claim.5
In addition, the court rejected Eni’s argument that its performance was excused by the language in the NAESB force majeure provision in Section 11.2 that a force majeure event specifically includes interruption and/or curtailment of firm transportation by the transporter. In this case, Eni argued, Enterprise could not make its deliveries to Eni, which excused Eni’s performance. Again, the court held that the parties had not identified Enterprise as a transporter or the Independence Trail Pipeline as the sole source of gas. Instead, the relevant provision refers to “transporters,” which according to the court, indicates that gas could be transported from other sources.6
The court affirmed the lower court’s award of judgment in the amount of $317,000 in damages, $81,476.87 in prejudgment interest, and $263,024.15 in legal fees.7
How Hess Compares to Virginia Power Energy Marketing, Inc. v. Apache Corporation
The issue of whether the NAESB FM clause is properly invoked when a seller’s desired source for supplying the gas to the buyer stops performing has persisted a long time. A Texas appeals court had previously ruled on a similar case where the seller, Apache Corporation (“Apache”), failed to deliver natural gas to Virginia Power Energy Marketing (“VPEM”) at two specific locations due to what Apache claimed to be events of force majeure. The contract at issue in Apache was also the NAESB base contract, including identical force majeure provisions as in Hess. VPEM, however, claimed that Apache was obligated to use “reasonable efforts” to deliver the specified natural gas at a different delivery location. The court in Apache ruled that because the delivery location specified in the transaction confirmation was damaged such that no delivery could be made there, Apache could rely on a claim of force majeure and was not obligated to use reasonable efforts to find an alternative delivery point, the court stated.
The parties expressly agreed that Apache was to deliver 610,000 MMBtu of natural gas to a specific Delivery Point: the Tennessee L-500 pooling area. The parties also agreed, through the Base Contract, to relieve Apache from performing if a force majeure event were to prevent delivery. However, both of these contract provisions would be rendered meaningless under VPEM’s interpretation of the “reasonable efforts” clause, which would force Apache to deliver gas, notwithstanding an acknowledged force majeure event, to a location other than that to which the parties expressly agreed.8
With respect to a second delivery point (Transco-65, where Apache had delivered half of its obligations under the contract); however, the court ruled that summary judgment was not appropriate regarding Apache’s force majeure claim. The court reasoned that because delivery was possible at that location, the force majeure clause would apply only if it determined that Apache’s “gas supply” was affected by the force majeure event such that it could not deliver the agreed quantity. Apache argued that its “gas supply” was determined by an internal plan to fulfill its obligations to VPEM from specific oil and gas platforms that were affected by force majeure. The court rejected this argument and remanded the case to trial to determine whether the hurricanes caused a loss of “gas supply” that prevented delivery of the full contract quantity.9 Further discourse on the Apache VPEM dispute never occurred in court filings because those parties apparently settled their dispute.
In Hess, the court cites this second part of the Virginia Power opinion and stated that the Texas court also found that the “gas supply” was not limited to a specific supply source.
This latest interpretation of the force majeure provision of the NAESB in Hess marks an important development for all natural gas transactions. One market participant hailed this decision as “hopefully putting to rest a contentious issue about how force majeure applies to the gas market.” We agree.
The reason is that the price of pool gas reflects the firmness of supply from the liquid pool whereas pricing well-specific gas tends to reflect the interruptible nature of that supply. Market participants should take care to ensure that, when entering into gas transactions, any intentions to allow the seller to use specific sources of supply should be explicitly disclosed. Likewise, any limitations on transportation facilities and delivery points to be used should be expressly agreed at the time the transaction is entered into and reflected in the transaction confirmation. Transactions with more contingencies (“outs”) are less valuable than transactions with fewer contingencies. Although the Hess court did not say so in its opinion, the court may have been influenced by the notion that if a buyer is receiving a product that is more contingent (and therefore less valuable) than what it thought it paid for, those contingencies had better be reflected clearly in the documentation.
1 Hess Corp. v. Eni Petroleum US, LLC, 2014 N.J. Super. LEXIS 40 (App. Div. 2014).
2 Id. at *3.
3 Id. at *7.
4 Id. at *9.
5 Id. at *12.
6 Id. at *25.
7 Defendant purchased natural gas on the spot market to fulfill its own obligations at a cost of $300,000 more than what it would have paid under the contract.
8 Virginia Power Energy Mktg. v. Apache Corp., 297 S.W.3d 397, 403 (Tex. App. Houston 14th Dist. 2009) (citing Tex. Workers’ Comp. Ins. Facility v. State Bd. of Ins., 894 S.W.2d 49, 54 (Tex. App.- Austin 1995, no writ) (“[O]ne party cannot unilaterally modify the terms of the original contract.”)).
9 Va. Power Energy Mktg. at 400.