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W&T Offshore, Inc. v. Apache Corporation

United States District Court, Fifth Circuit

January 16, 2014

W&T OFFSHORE, INC., Plaintiff,


LEE H. ROSENTHAL, District Judge.

In 2005, Apache Corporation and W&T Offshore Inc. entered into a Production Handling Agreement ("PHA") to process oil produced off the Louisiana coast. The PHA called for W&T to send oil from its platform, the South Timbilier 229 ("ST-229"), to Apache's platform, the Grand Isle 116 ("GI-116"). (Docket Entry No. 68, Ex. 1 ("PHA")). Apache processed its own and W&T's oil production on GI-116, allocating the amounts between the two companies. W&T alleges that Apache breached the PHA in multiple ways, including misallocating the production to favor Apache. W&T also alleges that Apache committed fraud and other state-law torts by misrepresenting how it made the allocations and by concealing misallocations. (Docket Entry No. 27).

W&T filed this suit in Texas state court in July 2011. Apache timely removed on the basis of federal subject-matter jurisdiction under the Outer Continental Shelf Land Act ("OCSLA"), 43 U.S.C. §§ 1331, 1349(b)(1). (Docket Entry No. 1). Apache then moved to dismiss some of W&T's claims. (Docket Entry No. 19). This court granted Apache's motion to dismiss W&T's claims for conversion, negligent misrepresentation, and gross negligence on the basis that Louisiana law precluded them, but denied the motion to dismiss W&T's fraud claim.[1] (Docket Entry No. 45). Apache filed an amended counterclaim for costs it incurred from processing W&T's production. (Docket Entry No. 54, Ex. A).

The motions for summary judgment, and the court's rulings on them, are as follows:

• W&T moved for summary judgment that Apache breached the PHA. (Docket Entry No. 68 at 43-44). This motion is denied. Apache cross-moved for summary judgment that it did not breach. (Docket Entry No. 70 at 32-49). This motion is granted in large part, but denied in part as well.
• W&T moved for summary judgment on damages. (Docket Entry No. 68 at 38-41, 44). Apache cross-moved for summary judgment that it is not liable for the damages W&T seeks. (Docket Entry No. 70 at 6-24). W&T's motion for summary judgment that it is entitled to damages for Apache's wrongful allocation and that these damages should be measured in at least one of three alternative methods presented is denied; Apache's cross-motion for summary judgment that none of the three damages measures is admissible is granted, and Apache's cross-motion for summary judgment that W&T is not entitled to recover damages for costs related to installing processing equipment is granted.
• W&T moved for summary judgment that it is not liable for the damages Apache asserted in its amended counterclaim. (Docket Entry No. 68 at 41-43). This motion is granted.
• Apache moved for summary judgment dismissing W&T's fraud claim and W&T's claims for exemplary or punitive damages, special or consequential damages, attorneys' fees, estoppel, and an accounting. (Docket Entry No. 70 at 21-32, 49-50). Apache's motion is granted.

The reasons for these rulings are explained in detail below, and a status conference is scheduled for January 31, 2014, at 5:00 p.m. in Courtroom 11-B.

I. Background

Apache owned and operated the GI-116 offshore oil-production platform; W&T owned and operated the ST-229 platform. Both are located off the Louisiana coast on the Outer Continental Shelf. Under the PHA, effective June 1, 2005, W&T sent oil produced from its well on ST-229 through a 6.6-mile subsea pipeline to Apache's processing facility on GI-116. Production from W&T's well consisted of a mixture of oil, water, sediment, and other impurities. The parties refer to the mixture of water, sediment, impurities using the industry acronym, "BS&W."

As part of its obligations under the PHA, W&T installed processing equipment on Apache's platform. ( See PHA § 2.02). The processing equipment included separators to separate W&T's production into oil, gas, and water. One piece of equipment was a proportional-to-flow sampler to measure BS&W in oil production. The parties dispute whether the PHA required Apache to measure W&T's production using this type of measurement device. W&T contends that the PHA required Apache to measure BS&W in W&T's oil production using only a proportional-to-flow sampler. (Docket Entry No. 68 at 36-37). Apache responds that the PHA did not require the use of a proportional-to-flow sampler, and even if it did, W&T installed the sampler incorrectly so that it did not accurately measure BS&W in W&T's production. (Docket Entry No. 86 at 6-16). Apache argues that any duty it had to use the sampler was conditioned on W&T's correct installation of a sampler capable of measuring BS&W accurately. (Docket Entry No. 70 at 37-41).

On June 8, 2005, Apache submitted an application to the Department of Interior's Minerals Management Service ("MMS") asking permission to commingle its oil production with W&T's production. (Docket Entry No. 68, Ex. 2 at 1). In July 2005, Apache sent MMS an application to amend its June submission. ( Id., Ex. 3). The amended application stated that W&T's production would be measured for allocation purposes using turbine meters downstream of the separators. Under the MMS regulations then in effect, when turbine meters were used to determine allocation, the samples had to be taken proportional-to-flow. See 30 C.F.R. § 250.1202(k)(2). MMS approved Apache's amended application on July 20, 2005 and confirmed the approval in writing on August 8, 2005. (Docket Entry No. 68, Ex. 4 at 7).

On July 25, 2005, Apache began processing W&T's production on the GI-116 platform. Apache separated the oil from the BS&W and, for an additional fee, disposed of the excess water. The PHA required Apache to allocate the processed oil between itself and W&T in a "consistent and equitable manner." (PHA § 6.11). To make the allocation, Apache used a separator to extract the oil from W&T's production and used a turbine meter to measure that oil. Apache then used "shakeouts" to adjust W&T's oil production for BS&W. Shakeouts are a method of determining BS&W content by putting a sample of processed oil in a centrifuge to separate the BS&W and then measure it. The percentage of BS&W in the sample is then subtracted from the overall oil production to determine the final allocation.

Apache measured its own production using "well tests." Well tests are conducted by diverting oil from the usual separator to a test separator that measures the oil, water, and other materials in the oil. The PHA required Apache to give W&T advance notice of these well tests. (PHA § 6.12). Both sides ignored this part of the PHA. Apache did not give W&T notice of the tests; W&T did not ask about the tests but continued to send its production to Apache.

After processing, W&T and Apache's oil was commingled and sent to an export sales pipeline. The commingled production was metered for sales purposes at the Lease Automatic Custody Transfer meter ("LACT"). Because the only oil flowing through the LACT was from W&T and Apache, any barrel not allocated to one was allocated to the other.

In April 2007, W&T installed a "heater treater" on its platform. (Docket Entry No. 68, Ex. 33 at 136). The heater treater did much of the processing work previously done on Apache's platform. On August 1, 2007, W&T stopped sending production to Apache on a daily basis, instead sending its production to a company called Trunkline. ( Id., Ex. 15 at ¶ 11). Installing the heater treater and sending production to Trunkline meant that W&T did not need to send its oil to GI-116, which in turn allowed it to avoid paying Apache handling fees for oil and water. ( See PHA § 5.01). W&T nevertheless has kept the PHA in effect and continues to send a small amount of production to Apache each month.

The PHA gave W&T the right to audit Apache's records. ( See PHA § 18.04). W&T initiated an audit in October 2007 by asking Apache to provide, among other things, "Apache Daily Field Reports for GI 116." (Docket Entry No. 68, Ex. 17).[2] In November 2007, W&T sent Apache audit exceptions, claiming that Apache had underallocated oil that was properly W&T's, and that as a result, W&T unfairly lost (and Apache gained) oil worth $9, 777, 192.99. ( Id., Ex. 19). Apache responded that it disagreed with W&T's audit exceptions. ( Id., Ex. 21). Apache then sent W&T computer files containing spreadsheets of "gauge-off reports, " which included BS&W measurements and meter-flow readings. ( Id., Exs. 22-23). W&T asked for additional supporting documentation but did not specify what it wanted. ( Id., Ex. 24). Apache responded that the computer files containing the gauge-off reports were enough to allow W&T to verify the allocations made. (Docket Entry No. 86, Ex. 30).

During the audit, Apache did not give W&T the well-test records from Apache's wells used to determine its own production. Apache recorded data from its well tests in reports called "platform morning reports" and in well-test logs. (Docket Entry No. 86, Exs. 19 (morning reports), 21 (well-test logs)). Apache has since provided W&T with these records.

On January 10, 2013, five days before the court filed its Memorandum and Order granting in part and denying in part Apache's motion to dismiss, Apache informed W&T that it had underallocated $444, 020.92 worth of oil to W&T between April 2006 and July 2007. (Docket Entry No. 70, Ex. 30). Apache sent W&T a check in that amount. ( Id. ).

W&T filed suit in July 2011 in state court, asserting claims for breach of contract, unjust enrichment, negligence, fraud, and conversion. (Docket Entry No. 1, Ex. B). W&T sought actual and punitive damages, attorneys' fees, and a declaratory judgment that Apache had failed to perform its duties under the PHA and had to comply with its payment and other contract obligations. ( Id. ). Apache:

• answered, asserting several affirmative defenses, including the statute of limitations, waiver and equitable estoppel, laches, and failure to mitigate damages, (Docket Entry No. 1, Ex. D);
• removed the case to this court based on federal-question jurisdiction under the OCSLA, (Docket Entry No. 1); and
• counterclaimed for damages for breach of contract and negligence or, alternatively, for the value of oil improperly allocated to W&T instead of Apache, (Docket Entry No. 17).

W&T filed a second amended complaint, asserting claims for breach of contract, negligent misrepresentation and gross negligence, fraud, and conversion, and seeking declaratory relief and an accounting, exemplary damages, and estoppel. (Docket Entry No. 27 ("SAC")). W&T also invoked the discovery rule to toll any statute-of-limitations affirmative defense Apache might raise. ( Id. at 18-19).

Apache filed an amended counterclaim, alleging that W&T breached the PHA by failing to install processing equipment or installing it incorrectly. (Docket Entry No. 54, Ex. A at 3-4).[3] Apache also alleged that W&T sent Apache oil containing large quantities of water and other contaminants, which failed to meet the PHA's quality specifications and caused Apache to incur unnecessary costs. ( Id. ).

In July 2012, Apache moved to dismiss the second amended complaint. (Docket Entry No. 28). The court:

• granted Apache's motion to dismiss W&T's claims for conversion, negligent misrepresentation, and gross negligence on the basis that Louisiana law precluded them;
• denied the motion to dismiss W&T's fraud claim; and
• denied Apache's motion to dismiss W&T's "claims" for estoppel, attorneys' fees, and exemplary damages on the basis that those were remedies rather than separate claims for relief, and thus inappropriate to rule on in a motion to dismiss.

(Docket Entry No. 45).

After the court ruled on the motion to dismiss, W&T moved for summary judgment on its claims that Apache breached the PHA by failing to:

• use a proportional-to-flow sampler to measure BS&W content in W&T's production;
• retain the results of all well tests;
• retain "individual well tests forms";
• comply with the PHA's audit procedures;
• provide W&T with advance notice of well tests;
• adjust its production for "flash factor" or "shrink"; and
• conduct accurate well tests.

(Docket Entry No. 68, at 43-44). Apache cross-moved for summary judgment on all claims except for the alleged failures to adjust for flash factor and conduct accurate well tests. (Docket Entry No. 70).

W&T moved for summary judgment on damages for oil Apache allegedly underallocated and for the costs of installing the heater treater, the subsea pipeline between the ST-229 and GI-116 platforms, and the other processing equipment. Apache cross-moved for summary judgment that W&T is not entitled to these requested damages.

W&T also moved for summary judgment on Apache's counterclaim, contending that it is untimely under the PHA. Apache moved for summary judgment on W&T's fraud claim and its claims for exemplary or punitive damages, special or consequential damages, attorneys' fees, costs associated with the audit, estoppel, and an accounting.

Each of the motions is addressed below.

II. The Legal Standard for Summary Judgment

"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to summary judgment as a matter of law." FED. R. CIV. PROC. 56(a). "A party asserting that a fact cannot be or is genuinely disputed must support the assertion by citing to particular parts of materials in the record...." FED. R. CIV. PROC. 56(c)(1)(A). "[T]he plain language of Rule 56[] mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

"Initially, the moving party bears the burden of demonstrating the absence of a genuine issue of material fact." Cannata v. Catholic Diocese of Austin, 700 F.3d 169, 172 (5th Cir. 2012) (citing Celotex, 477 U.S. at 323). If the burden of proof at trial lies with the nonmoving party, the movant may satisfy its initial burden by "showing' - that is, pointing out to the district court - that there is an absence of evidence to support the nonmoving party's case." Celotex, 477 U.S. at 325. While the party moving for summary judgment must demonstrate the absence of a genuine dispute of material fact, it does not need to negate the elements of the nonmovant's case. Duffie v. United States, 600 F.3d 362, 371 (5th Cir. 2010).

"A fact is material' if its resolution in favor of one party might affect the outcome of the lawsuit under governing law." Sossamon v. Lone Star State of Tex., 560 F.3d 316, 326 (5th Cir. 2009) (quotation omitted). "If the moving party fails to meet its initial burden, the motion for summary judgment must be denied, regardless of the nonmovant's response." Duffie, 600 F.3d at 371 (internal quotation marks omitted).

"When the moving party has met its Rule 56[] burden, the nonmoving party cannot survive a summary judgment motion by resting on the mere allegations of its pleadings." Id. The nonmovant must identify specific evidence in the record and articulate how that evidence supports that party's claim. Id. (internal quotation marks omitted). "This burden will not be satisfied by some metaphysical doubt as to the material facts, by conclusory allegations, by unsubstantiated assertions, or by only a scintilla of evidence.'" Boudreaux v. Swift Transp. Co., 402 F.3d 536, 540 (5th Cir. 2005) (quoting Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc)). "In deciding a summary judgment motion, the court draws all reasonable inferences in the light most favorable to the nonmoving party." Duffie, 600 F.3d at 371.

III. W&T's Breach of Contract Claims

A. The Applicable Contract-Interpretation Principles

The parties now agree that Louisiana law applies as federal law to govern this dispute. ( See Docket Entry No. 45 (holding that Louisiana state law applies under the OCSLA regardless of the parties' Texas choice-of-law provision)). Under Louisiana law, a "contract is an agreement by two or more parties whereby obligations are created, modified, or extinguished." LA. CIV. CODE. ART. 1906. "The essential elements of a breach of contract claim are (1) the obligor's undertaking an obligation to perform, (2) the obligor failed to perform the obligation (the breach), and (3) the failure to perform resulted in damages to the obligee." Favrot v. Favrot, 68 So.3d 1099, 1108-09. (La. Ct. App. 2011). "The plaintiff has the burden of proving the damage suffered by him [w]as a result of a breach of contract." First Alarm Fire Equip., Inc. v. Southland Int'l of La., Inc., 114 So.3d 1168, 1172 (La. Ct. App. 2013).

"Interpretation of a contract is the determination of the common intent of the parties." LA. CIV. CODE ART. 2045; see also Prejean v. Guillory, 38 So.3d 274, 279 (La. 2010). To determine intent, courts first look to a contract's language. See Prejean, 38 So.3d at 279. When the language is not clear or explicit and thus ambiguous, courts apply the Louisiana Civil Code articles on contract interpretation and pertinent Louisiana cases to discern the parties' intent. See, e.g., Henry v. Ballard & Cordell Corp., 418 So.2d 1334, 1339-40 (La. 1982) ("In ascertaining th[e] [contracting parties'] intention (where it cannot be adequately discerned from the contract or agreement as a whole) the circumstances surrounding the parties at the time of contracting are a relevant subject of inquiry."); Russell v. City of New Orleans, Dep't of Prop. Mgmt., 732 So.2d 66, 70 (La. Ct. App. 1999) ("The words of the contract are not clear and explicit... so further interpretation may be made in search of the common intent.").

B. Analysis

1. W&T's Claim that Apache Breached the PHA by Failing to Use a Proportional-to-Flow Sampler to Measure BS&W in W&T's Production

Apache used the centrifugal-shakeout method to measure BS&W in W&T's production. W&T contends that this breached the PHA. (Docket Entry No. 68 at 43). Apache responds that the PHA did not require it to use a proportional-to-flow sampler to measure W&T's BS&W. The parties have cross-moved for summary judgment on the issue.

Section 6.01(b) of the PHA provides the method for determining W&T's allocation. It states:

Total oil/condensate production for allocation purposes ("Producer's theoretical production") will be determined based on production information obtained from well tests utilizing the test separator located on the Host Production Facility prior to being commingled with Other Production. Producer's gross barrels will be adjusted for BS&W, meter factor, temperature correction factor and flash factor to obtain net standard barrels ("Producer's net theoretical production").

(PHA § 6.01(b)).

This section does not prescribe how Apache should measure BS&W. The lack of detail is reflected in the testimony. Ronnie Barras, Apache's corporate representative on measurement and allocation requirements, testified that he thought Apache was supposed to measure the BS&W content in W&T's production using a proportional-to-flow sampler. (Docket Entry No. 82, Ex. 5 at 92). By contrast, W&T's corporate representative, Carl Carline, thought the PHA was badly drafted because it did not clearly state whether a proportional-to-flow sampler had to be used. ( See Docket Entry No. 91, Ex. 45 at 1 ("PHAs should always state constant sampling proportional-to-flow on allocation meters.... In the attachment [to this email] is the ...

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