The court held that under the terms of the parties’ contract, force majeure included a loss or failure of Pioneer’s gas supply caused by low temperatures that affected an entire region causing freezing or failure of wells or lines of pipe.⁶ The court ruled the contractual language was unambiguous and that Pioneer was prevented from performing under the contract because it lost its gas supply ‒ i.e., the residue gas from the third party’s processing plant ‒ due to low temperatures caused by Winter Storm Uri that affected an entire geographic region. Therefore, force majeure excused Pioneer’s non delivery.⁷

The court also rejected MIECO’s argument that to constitute force majeure, an event must render performance literally impossible. The court held that requiring a party to show true impossibility would render the force majeure provisions superfluous and also duplicative of the common law defense of impossibility.⁸ MIECO later moved for reconsideration of the court’s ruling, which the court denied.

LNG Americas, Inc. v. Chevron Natural Gas, a division of Chevron U.S.A. Inc.⁹

Similar to the MIECO case,¹⁰ Chevron had contracted to deliver 90,000 MMBTU of natural gas per day to LNG Americas, Inc. (LNG).¹¹ From February 14 to February 21, 2021, during Winter Storm Uri, Chevron delivered less than the contractual volumes to LNG. On February 15, 2021, Chevron declared force majeure due to unprecedented low temperatures causing freezing or failure of wells, plants, or lines of pipe.¹²

LNG sued Chevron. The parties filed competing summary judgment motions on LNG’s claims. The Southern District of Texas’ analysis centered on the effect of Special Conditions 2 and 3 of the parties’ contract.

Special Condition 2

Special Condition 2 provided that delivery shall not be excused by a loss of, or fluctuations in, production from any particular seller’s gas producing region or wellhead (underlining for emphasis).¹³ The court found that Special Condition 2 only excluded loss of production events confined to a single gas producing region, and thus force majeure would only not apply where there was loss of production from a single wellhead or region. And, although the court found the contract was unambiguous, the court noted that extrinsic evidence provided by Chevron showed Chevron had rejected terms proposed by LNG that would have explicitly prohibited any force majeure declaration based on loss of production.¹⁴

Special Condition 3

Special Condition 3 provided that an event could only be a force majeure to the extent it directly prevented or restricted delivery at the applicable delivery point. Based on the dictionary definition of “direct,” Winter Storm Uri prevented or restricted delivery in that Chevron produced less gas to send on the specific pipeline and ultimately to deliver at the specified delivery point.¹⁵ The court further held that Special Condition 3 did not define force majeure to exclude loss of production events, but rather, excluded events with only an indirect or attenuated impact on delivery.

Special Condition 3 and replacement gas

LNG also alleged that Special Condition 3 prevented force majeure because Chevron was not prevented from purchasing and delivering replacement gas at the delivery point.¹⁶ The court, in agreeing with MIECO,¹⁷ found that to “prevent one party from performing” in this context did not require an impossibility because such reading would make several of the contract’s force majeure provisions superfluous.¹⁸ Instead, Special Condition 3 turned on practicability rather than possibility. Notably, the court held it was impracticable for Chevron to buy gas at the spot price on February 14, 2021, as the price was 5,200% greater than the contract price and that by February 17, 2021, the spot price was nearly 12,800% greater than the contract price.¹⁹ Thus, the court concluded that at least as to February 14-19, 2021 ‒ when the spot price was “totally disproportionate to the contract price” ‒ Winter Storm Uri was unambiguously a force majeure event that prevented or restricted delivery, notwithstanding the availability of some spot market gas.²⁰

Impact on natural gas markets

Force majeure continues to be an issue that bedevils parties to the NAESB. The Chevron and Mieco opinions clearly found that (i) wide-ranging weather events constitute force majeure, (ii) force majeure is interpreted using an impracticability standard and not an impossibility standard, and (iii) the supplier is not obligated to pull gas from storage at the delivery point before declaring force majeure based on disruption to its upstream supply.

Parties, therefore, must exercise great caution in drafting their force majeure provisions and exclusions ‒ while keeping an eye towards the contextual realities of their commercial operations ‒ because the exact contractual terms will be heavily scrutinized when a force majeure is asserted. Also, buyers of natural gas should insist on contractual language addressing when a seller is obligated to acquire replacement gas.

Reed Smith will continue to monitor these cases as the buyers pursue any appeals.

1. Civil Action 3:21-CV-1781-B (N.D. Tex. Feb. 16, 2023).
2. Id. at *4.
3. Id. at *5-6.
4. Id. at *11.
5. Id. at *13.
6. Id. at *15-16.
7. Id.
8. Id. at *18.
9. Civil Action No. H-21-2226; 2023 U.S. Dist. LEXIS 63868.
10. Civil Action 3:21-CV-1781-B (N.D. Tex. Feb. 16, 2023).
11. Civil Action No. H-21-2226; 2023 U.S. Dist. LEXIS 63868 at * 3.
12. Id. at *6.
13. Id. at *10 (emphasis added).
14. Id. at *12-13.
15. Id. at *15.
16. Id. at *17.
17. Civil Action 3:21-CV-1781-B (N.D. Tex. Feb. 16, 2023).
18. Civil Action No. H-21-2226; 2023 U.S. Dist. LEXIS 63868 at *20 (emphasis added).
19. Id. at *22.
20. Id. at *24-25.

Client Alert 2023-106