MIECO LLC v. Pioneer Nat. Res. USA, Inc.

May a seller of energy invoke force majeure to excuse its non-performance under a delivery contract – a contract that obligates the seller to deliver a particular quantity of energy at a particular delivery point, but does not specify the source of that energy – when the seller is deprived of its intended source of energy but can satisfy its delivery obligations through other reasonable means? A recent Texas court said “yes.”

The US District Court for the Northern District of Texas ruled on summary judgment motions in MIECO LLC v. Pioneer Nat. Res. USA, Inc. on February 15, 2023. Its ruling, which applies New York law, is one of the few published decisions to squarely address the application of a force majeure provision in an industry-standard NAESB base contract for the purchase and sale of natural gas.

Pioneer, a petroleum exploration and production company, produces casinghead gas as a byproduct of its extraction of crude oil. It typically delivers this gas to Targa for processing and then sells the resulting product to third parties. Pioneer considers the natural gas it receives from Targa as its supply for sale to customers.

In September 2020, Pioneer contracted to supply 20,000 MMBtus of natural gas to MIECO, an energy trading firm. As is typical in the industry, the relevant contract is comprised of three documents: (1) the standard form NAESB Base Contract, (2) the Special Provisions, and (3) the Transaction Confirmation.

During Winter Storm Uri, Pioneer failed to deliver the full amount of gas owed to MIECO between February 14 and February 19, 2021. It declared force majeure on February 16. Pioneer did not warn MIECO of the shortfall in advance of the declaration or attempt to purchase replacement gas. MIECO purchased gas on the spot market to cover.

The parties filed cross motions for summary judgment. Pioneer sought summary judgment on the grounds that its non-performance was excused by the NAESB’s force majeure provision because it lost its supply due to a regional weather event. MIECO contended that the force majeure provision did not apply because Pioneer could have fulfilled its obligation with gas from other sources. MIECO claimed $9,083,518.98 in damages.

           Alternate Source of Supply

In its decision, the Court considered the following issue: if a seller loses its preferred gas supply, is that sufficient to excuse the seller due to force majeure, even if other gas supply was available?

The Court ruled that Pioneer was excused: “Here, Pioneer failed to perform under the Contract because it lost its gas supply—the residue gas from Targa’s processing plants in the Permian Basin—due to low temperatures that affected an entire geographic region—Winter Storm Uri. The Court held that Pioneer’s non-delivery was excused by force majeure.” The Court declared that its ruling was based a plain reading of the NAESB force majeure provisions and on its finding that the language was unambiguous.

MIECO argued three main points against Pioneer: (1) there was no force majeure because Pioneer could have performed by providing gas from an alternate source of supply, (2) Pioneer lost only its preferred source of gas (i.e., the processed casinghead gas from its operations) but did lose its gas supply, and, relatedly, (3) the plain meaning of “gas supply” is any quantity of gas available to satisfy the contract.

In rejecting these arguments, the Court focused on the NAESB language providing that “the loss or failure of Seller’s gas supply or depletion of reserves” does not constitute force majeure except “as provided in Section 11.2”, which defines force majeure to include “weather related events affecting an entire geographic region[.]” It found that MIECO’s “ability of performance” and “preferred gas supply insufficient” arguments would lead to absurd results – requiring Pioneer to perform if there was gas available “anywhere in the world, at any price” – and collapse the contractual force majeure provision into a weaker form of the common law defense of impossibility.

It also used the language to distinguish Hess Corp. v ENI Petroleum US, LLC, a New Jersey case applying New York law that held a supplier must “have gas available . . . regardless of how it got there”, on the basis that the NAESB expressly addresses gas supply while the contract at issue in the Hess case did not. 435 N.J. Super. 39, 86 A.4d 723 (N.J. Super. Ct. App. Div. 2014). The Court found that the plain meaning of “Seller’s gas supply” was the gas normally used to fulfill the contract, not any gas available on the market.

But as Mieco pointed out in its Motion to Reconsider, the “Hess court held that, pursuant to the NAESB Base Contract – the same base contract at issue in this case – the interruption of the seller’s supply was irrelevant, since the contract – like the contract here – specified delivery obligation without regard to the source.”

The Court’s holding seems contrary to preexisting authority on force majeure (see Hess) and adds to the uncertainty concerning the meaning of Sections 11.2 and 11.3 of the NAESB Base Contract. The key issue of what constitutes a “loss or failure of gas supply [in relation to a regional weather event]” receives conclusory treatment in the opinion.

Essentially, MIECO argued to the Northern District of Texas that Pioneer was entitled to declare force majeure only if it was “prevented” from performing, which it was not, because it lost only its preferred source of gas and could have performed nevertheless by acquiring gas elsewhere. But the judge held that force majeure events, as defined by the contract, could include loss or failure of seller’s gas supply, even if other gas supply is available. The Court reasoned that a true impossibility requirement would be duplicative of common law defenses and would render portions of the contract superfluous.

Instead, the Court found that the NAESB envisioned excusing a party whose performance was rendered impractical. While the Court placed great weight on the notion that requiring the impossibility of performance for force majeure would lead to absurd results and vitiate the meaning of the contractual force majeure clause, its decision cut against a substantial body of precedent holding otherwise. It also omitted any kind of reasonableness or industry customs analysis regarding Pioneer’s obligations in favor of the straw-man argument that Pioneer would be required to buy gas from any source anywhere in the world under the contract.

           How Should Parties Respond

Will this holding affect how the standard NAESB force majeure provision will be interpreted going forward? Probably, if the decision stands. As stated, Mieco has a Motion for Reconsideration on file and this decision will undoubtedly be appealed if the Court stands on its reasoning.

Absent a changed result, the Court’s gloss on the standard NAESB terms creates uncertainty about its meaning and suggests that parties should address the supply issue to avoid disputes in future scarcity events. For parties that seek to clarify that the delivery obligation is firm regardless of the source of supply, the parties can draft Special Provisions to amend the NAESB to remove the clause “except as provided in Section 11.2,” on which the Court relied to distinguish the case from another case reaching the opposite result Another cure is to define “gas supply” expressly in the contract to mean either a specific source, all alternate sources, or something in between. Answering that question by contract is the surest way to avoid an analysis like the Court’s analysis in this instance. Of course, industry participants may have dozens of NAESBs in place currently, and amending each one to clarify is no simple task.

Whatever change in language that is adopted, the goal should be to include language that is most likely to compel the interpreting court to view the obligations through the lens of reasonableness. Taking as an example the facts in Mieco, were there other sources in the Permian Basin that would have allowed Pioneer to find an alternative gas supply? Did Pioneer make any efforts to access that supply? Did industry customs and market norms suggest that Pioneer was required to supply gas from certain sources if such gas were available? Based on the facts recorded in the opinion, Pioneer did not look to any other sources other than Targa, which seems unreasonable. The traditional NAESB language has a foundation in reasonableness. Any changes implemented by parties in the future should be designed to anchor a future court’s interpretation in a standard of reasonableness.

Summary

Force majeure language in a traditional NAESB is no longer useful for a firm delivery obligation if, as the Court in MIECO held, a supplier can plausibly argue that its performance obligation is limited to providing gas that it normally provided or intended to provide. The Court’s decision in MIECO ignores the normal operation of the gas markets and diminishes the clarity and predictability of the NAESB force majeure provision, inviting a major shift in how parties allocate force majeure risk in gas contracts. In consequence, amending key contracts (if possible) to address supply issues and revising the force majeure provisions of future contracts is advisable to avoid disputes in future scarcity events.

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