                          IN THE UNITED STATES COURT OF APPEALS

                                        FOR THE FIFTH CIRCUIT

                                         _____________________

                                              No. 98-10498
                                         _____________________


        SUN OPERATING LIMITED PARTNERSHIP,

                                                                      Plaintiff-Appellant,

                                                     versus

        MURPHY OIL CORP., ET AL.,

                                                                      Defendants,

        MURPHY EXPLORATION & PRODUCTION COMPANY,

                                                                      Defendant-Appellee.

                _______________________________________________________

                          Appeal from the United States District Court
                              for the Northern District of Texas
                                        (3:95-CV-4-J)
                _______________________________________________________

                                                 June 1, 1999

Before REAVLEY, POLITZ and SMITH, Circuit Judges.

REAVLEY, Circuit Judge:*

        Sun Oil Co. (Sun) sued Murphy Oil Co. (Murphy) for repayment of money advanced to

Murphy by their agreement. The district court construed the terms of that agreement to require

repayment by Murphy upon an event that has not yet occurred. We affirm.

                                                 Background

        Sun is the operator of a group of gas producing blocks offshore Texas in the Gulf of

Mexico. Murphy is one of the working interest owners. Under their operating agreement



   *. Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be published and is not
precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
Murphy may take its proportionate share of gas production and, if it fails to do so, Sun may sell it.

After the parties determined that Sun’s pipeline purchaser had taken a significant amount of

production beyond Sun’s proportionate share and gas for which Murphy should be paid, they

executed two identical letter agreements. It is the effect of these letter agreements that they now

dispute.

        By the letter agreements Sun and Murphy agreed that Sun would pay a cash advance for

the amount of the imbalance prior to September 1, 1981, and that Murphy would take gas in kind

from future production to make up that advance. Furthermore, any part of Sun’s cash advance

that Murphy took in kind would not be repaid to Sun until the time within thirty days of

termination of their gas balancing agreements (GBAs) or “termination of the various vintages

described therein.”

        The “vintage” of natural gas may refer to the period during which the gas well was

bottomed or produced, the depth of the well, the date on which the gas sales contract was made,

or the regulatory category provided for in the National Gas Policy Act of 1978 (NGPA).1 All of

the working interest owners here executed GBAs covering the blocks subject to their operating

agreements. The letter agreements between Sun and Murphy refer to the GBAs for their

definition of “various vintages.” The GBAs define the vintages only by reference to the

definitions of gas categories provided for in the NGPA. The second of the GBAs’ recital

paragraphs states “the word ‘vintage’ is used in this Agreement to refer to each separate category

provided for by the Natural Gas Policy Act of 1978 or other applicable statute which establishes


    1. See, e.g., Shell Oil Co. v. Federal Power Comm’n, 491 F.2d 82, 84 & n.5 (5th Cir. 1974); HOWARD R.
WILLIAMS & CHARLES J. MEYERS, MANUAL OF OIL AND GAS TERMS 634 (4th ed. 1976). Similarly, Murphy notes
in its briefing that:
                    [t]he natural gas industry used the term “vintage” prior to the passage of the
                    1978 Act. Originally, natural gas was price controlled according to the year the
                    well was drilled . . . . When the NGPA specified certain categories of gas to be
                    regulated and deregulated, the industry used the term “vintage” for each of
                    these classifications. Significantly, there were categories of gas that were not
                    regulated by the NGPA that were also referred to as certain “vintages.” For
                    example, gas below 15,000 feet was not regulated by the NGPA but it was
                    referred to as a “vintage” for purposes of the GBAs.
The NGPA categories of gas were codified at 15 U.S.C. §§ 3301, 3311-3320 (1978) (repealed 1989).

                                                    2
categories . . . .” The same paragraph provides a clause that becomes effective if the statutory

sources for the vintage categories are deregulated. It stipulates that, “upon deregulation of any

category, such deregulated gas shall be deemed to be a new category of gas production for

purposes of this Agreement.”

       Paragraph six of the GBAs determines when and how cash balancing will occur under the

GBAs. It provides that cash balancing will be made available “at the termination of gas

production of a given vintage classification from the Blocks.” Finally, the GBAs contain

paragraph eight, which states that “[t]he parties hereto agree that all gas which has been delivered

prior to the date of signing of the Gas Balancing Agreement has been properly delivered pursuant

to the provisions hereof.” Thus, the GBAs are given retroactive effect over gas imbalances

arising since production began under the OAs.

       Two vintages of gas are produced under these leases, 102(d) gas and 104 gas, the names

corresponding to those sections of the NGPA. Section 102(d) instituted price controls on natural

gas produced from an Outer Continental Shelf reservoir depending on when the reservoir was

discovered or evidenced the capability of commercial production.2 Section 104 controlled pricing

of certain natural gas committed or dedicated to interstate commerce before enactment of the

NGPA.3 Vintage 102(d) sold at a higher price than vintage 104. The NGPA has since been

repealed by the Natural Gas Wellhead Decontrol Act of 1989 (NGWDA),4 which permanently

eliminated wellhead price controls.5 Although the definitions for the categories of gas vintages in

the GBAs are taken from the NGPA, the word “vintage” is never used in the NGPA.

       Since deregulation, Sun has designated production of the deregulated vintages in its

balance sheets by the same numbers, but added the letters “DC,” signifying “decontrolled.”


  2. See NGPA § 102(d), 15 U.S.C. § 3312(d) (repealed 1989).

  3. See NGPA § 104(a), 15 U.S.C. § 3314(a) (repealed 1989).

  4. Pub. L. No. 101-60, 103 Stat. 157 (1989).

  5. See id. § 2(b).

                                                    3
Further, Sun has netted all categories of the vintaged gas—that is, pre- and post-deregulation

102(d) and 104 gas—for purposes of determining the system-wide balances of the parties.

        Our question is whether, in the letter agreements, “termination of the various vintages

described [in the GBAs]” refers to the cessation of actual production of a particular vintage of

natural gas as defined by now extinguished federal regulations, or whether “termination” includes

the nominal extinguishment of a gas vintage caused by deregulation of the working definition for

that vintage.

        The district court decided that “termination of various vintages” referred to cessation of

production of a particular vintage of gas caused by depletion, not deregulation. We agree.6

                                                    Analysis

          Texas law governs our interpretation of the agreement.7 We review the district court’s

construction of an unambiguous contract de novo.8 When determining the legal effect of the

parties’ agreement, we construe the contract terms by their ordinary meanings.9 The objective

intent of the parties must be given effect as manifested by the writing.10 If the legal meaning of

the contract language is not readily apparent on its face, we may look to the surrounding

circumstances, including usage between the parties and in the industry, to determine the intent of

the parties.11

        Neither party’s construction is discordant with the ordinary meaning of “termination.”

The letter agreements use the word “termination” three times in the same paragraph, twice as to


   6. In their argument the parties suggest a difference of opinion on the amount of the present balance of the
advance. That issue, if any exists, has not been presented and is not decided by this case.

   7. See 43 U.S.C. § 1333(a)(2)(A).

  8. See Texas E. Transmission Corp. v. Amerada Hess Corp., 145 F.3d 737, 741 (5th Cir. 1998) (citation
omitted).

   9. See General Am. Indem. Co. v. Pepper, 339 S.W.2d 660, 662 (Tex. 1960).

   10. See Watkins v. Petro-Search, Inc., 689 F.2d 537, 538 (5th Cir. 1982).

    11. See id.; Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981); America’s Favorite Chicken Co.
v. Samaras, 929 S.W.2d 617, 622-23 (Tex. App.—San Anotonio 1996, writ denied).

                                                         4
the termination of the GBA and once as to termination of vintages as described in the GBA. The

only use to which Sun attributes the deregulation construction is the use that modifies “various

vintages.” The ordinary understanding of the word “termination” is that it indicates an “end in

time or existence” or a “conclusion.”12 Deregulation at least nominally ends “in time or existence”

or concludes the vintages, just as does cessation of physical production.

        Upon considering the entire transaction we believe that the district court’s reading is the

better one. The meaning of “termination of various vintages” is described in the letter agreements

specifically by reference to the GBAs, but the letter agreements do not indicate which section of

the GBAs controls the meaning. Two paragraphs of the GBAs are relevant: paragraph six sets

forth the cash balancing provisions, and the second recital provides a statutory source for the

definition of “vintage,” as well as a deregulatory clause that qualifies that meaning. We will

consider each particular provision in turn and attempt to construe “termination” in the manner

that least contradicts any of them or the parties’ whole transaction.13

        Paragraph six of the GBAs deals with the repayment of gas imbalances. An

underproduced owner must be allowed to take make-up gas of a given vintage in an attempt to

balance in kind. Only when in-kind balancing is no longer available does paragraph six provide a

method for balancing in cash. The section is introduced with the following clause: “If at the

termination of gas production of a given vintage classification from the Blocks an imbalance

exists, such imbalance shall be accounted for as follows . . . .” As such, the GBAs maximize the

ability of an underproduced party to balance in kind until cessation of production makes that

impossible. This preference encourages full production of the reservoir.

        Sun argues that paragraph six is materially distinguishable because the letter agreements

concern repayment of an advance, which need not await depletion. Sun agrees that depletion of



   12. WEBSTER’S NINTH NEW COLLEGIATE DICTIONARY 1217 (1985).

   13. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994) (“[N]o one phrase, sentence, or section . . .
should be isolated from its setting and considered apart from the other provisions.” (citation omitted)).

                                                        5
the gas reservoir may be an appropriate time to balance in cash, given the purposes of the GBAs:

namely, a preference for balancing gas in kind to promote full production. Significantly, in-kind

balancing is also preferred under the letter agreements. The letter agreements state that “[t]his

payment by Sun to such underproduced owners heretofore enumerated is made under the

condition that should said parties be able to make up all or any part of said gas which is the

subject of this advance payment, that adjustments will be made as provided for in said [GBAs]

covering said Blocks.” Given that Murphy is able to first balance by taking make-up gas under

both instruments, it is not unreasonable to rely on the cash balancing language from paragraph six

of the GBAs when interpreting the letter agreements’ repayment provision. Cessation of the

vintages’ physical production marks a reasonable point in both cases to conclude in-kind

balancing and precipitate cash balancing of that vintage. On the other hand, Sun does not offer

any rationale for using deregulation as the triggering event, other than that it is “an equally logical

point.” Thus, the same events activating cash balancing in the GBAs should trigger repayment of

Sun’s advance to Murphy, unless the parties clearly provided otherwise in the letter agreements.

This they failed to do.

       Sun argues that the second recital paragraph of the GBAs, which defines “vintage,”

controls the meaning of “termination” in the letter agreements and supersedes the interpretation

drawn from paragraph six of the GBAs. The second recital explains that “vintage” refers to “each

separate category provided for” in the NGPA or “other applicable statute which establishes

categories.” The definition relies on a regulatory source, so the paragraph next provides that,

“upon deregulation of any category, such deregulated gas shall be deemed to be a new category

of gas production for purposes of this Agreement.” Because the GBAs deem 102(d) and 104

vintage gas to be a “new category” of gas production upon deregulation, Sun contends that the

“various vintages” by definition “terminate” at the time of deregulation.

       We are not persuaded that the clause terminates the deregulated vintages so much as it

changes the operative nomenclature and saves the statutory categories’ production for purposes


                                                   6
of preserving the duration of the GBAs, while perhaps triggering different pricing mechanisms.

This alone is not sufficient to precipitate repayment under the letter agreements without a clear

statement in the letter agreements that the parties intended to give it that effect. If Sun actually

had intended the letter agreements to provide for cash repayment upon deregulation, the language

used in the letter agreements and the GBAs did not make that intention objectively apparent, and

Murphy cannot be bound by that unstated intent.14 We find Sun’s focus on the loose language in

the second recital of the GBAs unavailing, given the similarity of purpose between paragraph six

of the GBAs and the disputed portion of the letter agreements and the absence of any rationale

favoring the “deregulation” construction.

         In reaching our decision we also consider other uses by these parties and the industry

custom. The word “termination” is used often in the agreements between Sun and Murphy, but

universally it is used to signify “cessation of production.” As we mentioned already, it is used

twice in the same paragraph of the letter agreements, and both uses clearly signify termination

caused by cessation of production. Further, it is the well-known standard in the oil and gas

industry that “termination” usually occurs upon cessation of production in paying quantities.15

         Finally, there is support available in the record that Sun’s offer of a cash advance payment

entailed repayment upon cessation of production. In a letter to all interest owners, Sun stated:

                  A number of producer owners in the blocks, who would have an
                  under-produced status, have indicated a desire to make periodic
                  cash settlements for the blocks. While we are not prepared to make
                  periodic cash settlements, Sun would nevertheless be willing, for
                  those parties who are currently in an underproduced status, to make
                  a one-time cash advance payment as an offset to the contemplated
                  cash accounting which will result under the Gas Balancing
                  Agreement upon termination of production for a given “vintage” of




   14. See, e.g., City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 518 (Tex. 1968).

   15. See, e.g., WILLIAMS & MYERS, supra, at 597 (“A lease may be terminated by a lessee by the exercise of a
surrender clause in the lease, and under contemporary forms of leases, failure of production in paying quantities at
or after expiration of the primary term will cause the lease to be terminated unless it can be preserved by some
savings clause in the lease . . . .”).

                                                         7
                 gas.16

This language does not suggest that deregulation triggers repayment. Rather, it appears that the

cash repayment provision would be triggered in the same way as the cash balancing provisions of

the GBAs, by cessation of production. At least one other interest owner considering the

proposed cash advance also understood repayment of the advance to be due upon cessation of

production. In a letter from Ensearch Exploration, Inc. to Sun and the other interest owners,

including Murphy, it explained the cash advance in these terms:

                 Sun has proposed that the party owners enter into an economic gas
                 balancing agreement for each of the sets of blocks, which would
                 provide for a monetary settlement between the over- and under-
                 produced parties upon termination of the production of a given
                 vintage of gas. Sun has also suggested that it is willing to make, for
                 those parties presently in an underproduced status, a one-time cash
                 advance payment for the period beginning with the first production,
                 through April 1981. Such payment would be an offset to the
                 contemplated cash accounting under the terms of the proposed gas
                 balancing agreement upon the termination of production from a
                 given vintage of gas.17

This letter was dated August 13, 1981, within the period of formation of the letter agreements,

and was circulated to both parties to this dispute. These records are additional aids to our

interpretation of the letter agreements and the objective intent of Sun and Murphy because they

situate those documents in the light of the circumstances of the parties’ negotiations.18

        “The circumstances help to illuminate the contractual language chosen by the parties and

enable evaluation of ‘the objects and purposes intended to be accomplished by them in entering

into the contract.’”19 Adhering to the understanding of “termination” as “cessation of production”

best reflects the purpose of the entire transaction between Sun and Murphy, given the absence of


   16. Letter from E.S. Iiams, Jr., Manager, Gas Sales, Sun Oil Co., to the joint interest owners (June 19, 1981).

  17. Letter from R.F.Crawford, Manager, Contract Administration, Enserch Exploration, Inc., to E.S. Iiams, Jr,
Manager, Gas Sales, Sun Gas Co. (Aug. 13, 1981).

   18. See, e.g., Balandran v. Safeco Ins. Co. of Am., 972 S.W.2d 738, 741 (Tex. 1998).

   19. National Union Fire Ins. Co. v. Insurance Co. of N. Am., 955 S.W.2d 120, 127-28 (Tex. App.—Houston
[14th Dist.] 1997, pet. filed) (quoting Medical Towers, Ltd. v. St. Luke’s Episcopal Hosp., 750 S.W.2d 820, 823
(Tex. App.—Houston [14th Dist.] 1988, writ denied)).

                                                         8
any objectively apparent intent to the contrary.

       Sun argues that this construction would render the alternatives provided for in the letter

agreements duplicative, which violates our obligation to construe the whole agreement without

nullifying or rendering ineffective any provision.20 The letter agreements state that repayment

becomes due (1) upon termination of the GBAs or (2) termination of the various vintages. The

GBAs terminate when the operating agreements terminate. The operating agreements terminate

when the leases covered by the operating agreements terminate. And the underlying leases

terminate upon cessation of production in paying quantities. Thus, according to Sun, the first

alternative means the same thing as our understanding of the second alternative. We disagree.

The leases, operating agreements, and GBAs will remain in effect so long as production in paying

quantities continues on the lease property, even if production of a given vintage ceases.

AFFIRMED.




  20. See, e.g., Memorial Med. Ctr. v. Keszler, 943 S.W.2d 433, 434 (Tex. 1997).

                                                      9
