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Savoy Energy, LLC v. Aston Energy, LLC

United States District Court, D. Utah, Central Division

April 10, 2018

ASTON ENERGY, LLC, Defendant. FERUS (PRICE) LP, Plaintiff-Interpleader,



         This case involves a contractual dispute among three parties: Savoy Energy, LLC (“Savoy”), Aston Energy, LLC (“Aston”), and Ferus (Price) LP (“Ferus”).[1] The dispute relates to the sale and transportation of carbon dioxide (“CO2") gas from Savoy's wells to Ferus's plant through Aston's pipeline (the “Aston Pipeline”). The initial Complaint was filed by Savoy, seeking to recover unpaid amounts under the contract between Savoy and Aston. Aston's Answer and responsive pleading included numerous counterclaims against both Savoy and Ferus.

         The matter is presently before the court on two motions filed by Ferus, joined by Savoy, seeking summary judgment on all of Aston's counterclaims. (Dkts. 47, 48, 57, 58.) At oral argument on the motions, Ferus was represented by Karen Spaulding and Michael Cross. Savoy was represented by Shawn Welch. Aston was represented by Benjamin Wegener and Lorne Hiller. At the conclusion of the hearing, the court took the matter under advisement. Now, having carefully considered the written memoranda and oral arguments of the parties, as well as the relevant law and facts relating to the motions, the court renders the following Memorandum Decision and Order


         The Parties

         Savoy operates two CO2 reservoir wells and is the “unit operator” of the Clark Valley Unit pursuant to a March 12, 2007 Unit Agreement issued by the United States Department of the Interior Bureau of Land Management (“BLM”). (Dkt. 47-2.) On June 19, 2007, the BLM issued Savoy a right-of-way permitting the construction and operation of a CO2 feedstock gas pipeline to connect Savoy's wells to a CO2 liquefaction plant owned and operated by Ferus.

         From 2007 to 2016, Savoy, Aston and Ferus engaged in a business venture wherein Savoy operated the CO2 reservoir wells that produced raw CO2 feedstock gas, Aston transported the gas through its pipeline (the “Aston Pipeline”) contained within Savoy's right-of-way, to Ferus's liquefaction plant where Ferus would process the feedstock gas for the subsequent sale of liquefied CO2. To facilitate this business venture, Aston and Savoy entered into a “Purchase Agreement, ” effective September 3, 2007, pursuant to which Aston purchased CO2 feedstock gas from Savoy. (Dkt. 47-4, Purchase Agreement.) Aston and Ferus entered into a similar Sell Agreement, also effective September 3, 2007, pursuant to which Aston sold CO2 gas to Ferus. (Dkt. 47-5, Sell Agreement.) In sum, the Purchase Agreement and Sell Agreement together formed a buy-sell arrangement whereby Savoy sold CO2 to Aston and then Aston sold the CO2 to Ferus.

         After the 2007 Purchase Agreement and Sell Agreement were executed, Aston began purchasing CO2 from Savoy, transporting it through the Aston Pipeline, and then selling it to Ferus at the contractually agreed upon rates. However, the Agreements were re-negotiated occasionally to address a variety of issues including but not limited to pricing, CO2 availability, and shortfall payments. As a result, the Sell Agreement (between Aston and Ferus) had “Contract Change” amendments dated March 18, 2008 and December 10, 2010. (Dkt. 2-2.) The Purchase Agreement (between Aston and Savoy) had “Contract Change” amendments dated September 26, 2007, March 18, 2008, December 21, 2010, December 27, 2010, and December 15, 2015. (See Dkt. 2-1.)

         The Relevant Contract Provisions

         The following contract provisions and “Contract Change” agreements are relevant to the motions now before the court.

         The March 18, 2008 Contract Change to the Sell Agreement between Aston and Ferus amended Section 2 of the Sell Agreement by setting forth a $1.00 per ton penalty payment should Ferus not purchase the agreed upon 106, 500 tons of crude CO2 annually (the “Shortfall Payment”). (Dkt. 47-5.) Section 2 of the March 18, 2008 Contract Change states: “It is anticipated that [Ferus] will purchase 300 tons per day. In the event that [Ferus] does not purchase such volume, then a penalty for taking less than 300 tons will be assessed to [Ferus] of $1.00 per ton up to a maximum penalty of $106, 500. Such penalty will be reduced proportional by the number of tons taken and used in production and or finished product.” (Id. at 9.)

         The December 21, 2010 Contract Change to the Sell Agreement amended section 3.4, stating: “The Base Price [for CO2 gas] shall remain at eight dollars ($8.00) per ton until October 1, 2012, at which time the price shall be increased to nine dollars ($9.00) per ton until October 1, 2016.” (Dkt. 47-5 at 11, ¶3.4.) Although the December 21, 2010 Contract Change increased the base price for CO2 from October 1, 2012 until October 1, 2016, it did not modify the $1.00 per ton Shortfall Payment.

         The December 21, 2010 Contract Change to the Sell Agreement also amended section 2.5 to provide that the Sell Agreement may be terminated on October 1, 2016 with three to six months prior written notice, and in the absence of a termination notice, the term would automatically renew for additional one-year terms. (Dkt. 47-5 at 11, § 2.5.)

         The Purchase Agreement between Aston and Savoy, also amended by a Contract Change dated December 21, 2010, contained the same termination language as the Sell Agreement, providing in section 2.5 that it may be terminated on October 1, 2016, with identical notice and automatic renewal provisions as the Sell Agreement. (Dkt. 47-4 at 10, Purchase Agreement Contract Change § 2.5.)

         Finally, the Purchase Agreement between Aston and Savoy provided Aston with a Right of First Refusal (ROFR) to build and operate future pipelines within Savoy's Clark Valley Unit. (Dkt. 47-4 at 5, Purchase Agreement § 8.3.) Section 8.3 of the Purchase Agreement states:

[Aston] shall have first right of refusal to own, construct and operate all future pipelines within Savoy Energy's area if [sic: of] participation within the CLARK VALLEY UNIT, and tie in the CO2 wells, with a gathering and transportation fee to be negotiated at a time prior to construction of any future pipelines. In the event [Aston] elects not to construct, own and operate a portion of the pipeline and Savoy proceeds to drill and construct its own gathering line, [Aston] shall allow Savoy to tie that pipeline in to the main transportation line from the field to [Ferus'] plant. Savoy will pay its share of the exact operations and maintenance costs for that gas, transported in that pipeline, that is not gathered by [Aston]. The exact operations and maintenance costs shall be based upon generally accepted pipeline operations practices in the carbon dioxide industry.


         Chronology of Events Leading to Lawsuit

         In December 2015, Ferus entered into discussions with Praxair regarding the potential sale of Ferus's plant to Praxair. On December 7, 2015, Ferus officially notified Aston in writing about the potential sale. To further facilitate the process, on February 27, 2016, Ferus initiated discussions with Savoy and Aston to negotiate commercial terms that would govern long-term certainty of feedstock gas transportation over the Aston Pipeline after October 1, 2016 - the date the Sell Agreement and Purchase Agreement were set to expire. (Dkt. No. 47-7, Email dated 2/27/16.)

         On April 18, 2016, Ferus made an initial offer to purchase the Aston Pipeline for $800, 000. The offer was subject to several conditions, including: (1) a “dollar-for-dollar” price adjustment for any required maintenance or critical upgrades “reasonably required for the safe and prudent operation of the pipeline, ” as determined by an independent third-party inspector; and (2) Aston's delivery of “ownership documents, maintenance records, [and the] original construction agreement with Savoy, ” with reasonable efforts to obtain “any missing pipeline registration or permits with the BLM or other governing authority.” (Dkt. 47-8, Email dated 4/18/16.)

         On April 21, 2016, Aston made a counteroffer to sell the Aston Pipeline for $1, 200, 000. The counteroffer specified that Aston would provide any information in Aston's possession regarding permits or registration, but “Aston [would] not represent and warrant compliance with BLM and other government regulations.” Aston explained: “Because Savoy holds title to the BLM right of way, we believe that Savoy may need to provide additional information to BLM to cure any gaps in BLM maintained information.” (Dkt. 47-9, Email dated 4/21/2016.)

         While these negotiations were underway, on April 23, 2016, the Aston Pipeline suffered a rupture causing a temporary shutdown. The rupture was believed to have been due to corrosion of one of the flexpipe system's coupling joints, causing a portion of the pipeline to burst above ground level. (Dkt. 47-11, Letter dated 5/12/2016.)

         Following the rupture, on April 26, 2016, Ferus emailed Aston requesting “documentation outlining actions taken to repair the pipeline, the root cause analysis of the failure, and any regulatory approvals, review or reporting undertaken or that needs to be completed.” (Dkt. 47-10, Email dated 4/26.2016.) Ferus further stated, “[w]e will require adequate assurances about the integrity of the pipeline and the proper reporting of the event to the governing authorities before we continue our purchase discussions.” (Id.)

         Aston responded the following day with “pressure test data” indicating that the line would hold pressure, but did not provide anything further. Consequently, on April 28 and May 3, Ferus made additional requests that Aston provide information “detailing the root cause of failure and a description of the activities that will be undertaken to rectify the root cause and verify that the issues do not exist elsewhere on the system.” (Dkt. 47-13, Email dated 4/28/2016; id., Email dated 5/3/2016 (“when can we expect to receive a report detailing the root cause of failure and the actions taken to resolve the identified cause?”).) On May 12, Ferus made another request for information, expressing “concern[] regarding the adequacy of Aston's investigation into the root cause of the failure, ” as well as “concern[] about the Pipeline being operated under customary operating conditions.” (Dkt. 47-11, Letter dated 5/12 /2016.) Ferus informed Aston that in light of these concerns, Ferus had suspended plant operations. Aside from the pressure test, Aston failed to provide Ferus or Savoy with any information indicating that the root cause of the pipeline rupture had been resolved.

         Shawcor, the manufacturer of the Aston Pipeline Flexpipe components, evaluated the ruptured portion of the pipeline and determined that it had extensive corrosion in certain areas and did not have necessary protective covering. (Dkt. 47-15, Shawcor Product Engineering Report.) Shawcor engineers also informed Aston that the pipeline did not have o-rings on the fittings, making it likely that gas could pass through the fitting ...

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