Kachina Pipeline Co. v. Lillis, Texas Supreme Court June 12, 2015, 2015 Tex. LEXIS 549

The Court held that a gas purchase contract providing for the deduction of compression costs by buyer “to effect delivery of Seller’s gas” does not authorize the deduction of compression costs if installed for a reason other than to provide necessary compression to Seller’s wells so that they can deliver gas into Buyer’s system.

Kachina Pipeline owns and operates a pipeline system that purchases gas from several producers and delivers it to a processing plant owned by Davis Gas Processing. The contract, entered into in 2001, provides that neither is obligated to install compression, but provides that if Kachina installs compression “to effect delivery of” Lillis’s gas, Kachina can deduct the costs of such compression.

The Court recognized that a “producer can successfully deliver gas only if its pressure is sufficient to overcome the working pressure in the gathering system.” Kachina installed a compressor on its pipeline in 2003 and installed additional compression in 2007 to allow Kachina to deliver gas to Davis’s high-pressure inlet, for which Davis pays a higher price.

Kachina argued that any compression that aids final delivery to Daivs is chargeable. Lillis argued that only compression necessary to deliver gas into Kachina’s system is deductible. The Court agreed with Lillis that the language of the contract did not permit compression to be charged unless the compression was necessary to the delivery of Lillis’s gas into Kachina’s system.