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Dynegy Midstream Services, Limited Partnership v. Apache Corp.

The proper payment-measuring point under a "percentage of proceeds" contract is the amount of gas sold at the processor's tailgate, not the amount delivered at the producer's wellhead. This payment standard rewards processors for minimizing leakage and maximizing the amount of gas actually sold. Texas Supreme Court, No. 07-0043, 08-28-2009

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Argued September 9, 2008

In this gas-contract dispute, Apache Corporation seeks recovery for an allegedly large volume of “unaccounted-for” gas that disappeared between production at Apache’s wellheads (where title to all gas transferred to the processor) and sale to customers at the processing facility (the tailgate). We hold that Apache’s claim is contrary to the governing contract language, which focuses on gas sold, not gas delivered, thus avoiding disputes over how (and how much) gas failed to reach the point of sale. When calculating the proceeds due to Apache under these “percentage of proceeds” contracts, only one criterion matters: sales. Common throughout the natural-gas industry, these contracts unambiguously base payment on the amount of gas ultimately sold at the tailgate (not the amount initially delivered at the wellhead), and Apache admits it was paid in full for “every molecule of gas” sold at the tailgate of the processing plants.

Our decision today, besides clarifying the contractual payment standard – one that rewards processors for minimizing leakage and maximizing the amount of gas actually sold – also addresses other claims. In sum, we affirm the court of appeals’ judgment in part and reverse it in part, and remand to the trial court to render a judgment in conformity with this opinion.

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