ENSCO Offshore Company
Filing
132
OPINION AND ORDER denying 96 Motion for Partial Summary Judgment.(Signed by Judge Melinda Harmon) Parties notified.(rvazquez)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In the Matter of the Complaint of
ENSCO Offshore Company, as Owner
of the modu ENSCO 74 for
Exoneration from or Limitation
of Liability,
§
§
§
§
§
CIV. A. NO. H-09-2838
OPINION AND ORDER
Pending before the Court in the above referenced cause for
exoneration from or limitation of liability, pursuant to 46 U.S.C.
§ 30501, et seq., civil and maritime, inter alia is Plaintiff Ensco
Offshore Company’s (“Ensco’s”) motion for partial summary judgment
declaring that the measure of the claim for economic loss by High
Island Offshore System, LLC (“HIOS”) is a “no incident/incident”
calculation, i.e., the difference between the present value of the
revenue steam with no incident and the present value of the revenue
stream with the incident (instrument #96)
Background Facts
Ensco was the sole owner of the Ensco 74, a self-elevating
drilling unit and a registered vessel of Panama, Official No.
8764420, approximately 74.0918 meters long and 62.788 meters wide,
and a depth of 7.924 meters.
On September 8, 2008 the Ensco 74 was
located
Louisiana
off
the
Coast
of
in
South
Marsh
149
when
Hurricane Ike approached.
Ensco claims that it followed its
hurricane
fast
procedures,
made
-1-
the
rig,
and
evacuated
all
personnel.
On September 12, 2009, the Ensco 74 was swept off its
location, leaving only its legs on the site, and was destroyed by
Hurricane Ike.
The rig’s barge was moved approximately 100 miles
by the storm and sank sixty-five miles south of Galveston, Texas in
High Island 241A.
On March 6, 2009 the M/V SATILLA allided with and was damaged
by the remains of the ENSCO 74.
At that time the Ensco 74 had been
missing and considered lost for six months, despite efforts of
Ensco, C&C Technologies, NOAA, the U.S. Coast Guard, and third
parties to locate it.
Ensco filed this action, and among the
claimants who appeared and filed claims is HIOS (#15 and 16).
HIOS asserts that the Ensco 74 struck and seriously damaged
its pipeline that ran across the seabed of the Gulf of Mexico and
was
used
to
transport
facilities to shore.
natural
gas
from
offshore
production
It claims that as a result of the damage, its
pipeline was shut in for 104 days for repairs.
HIOS claims that
Ensco was negligent in failing to design, maintain, and prepare the
Ensco 74 properly for hurricane conditions and to implement an
appropriate search, was guilty of statutory violations rendering it
negligent per se, and is not entitled to exoneration from or
limitation of liability because it had direct privity and knowledge
of the matters that were the direct and proximate cause of HIOS’s
damages, and that the Ensco 74 was unseaworthy. HIOS seeks damages
against Ensco in personam and the Ensco 74 in rem in excess of
-2-
$26,500,000.00 plus interest.
Standard of Review
Summary judgment under Federal Rule of Civil Procedure 56(c)
is
appropriate
interrogatories
when
“the
pleadings,
and
admissions
on
depositions,
file,
together
answers
with
to
the
affidavits, show that there is no genuine issue as to any material
fact and that the moving party is entitled to judgment as a matter
of law.”
Fed. R, Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986).
A fact is material if it might affect the outcome
of the suit under the governing law.
Inc., 477 U.S. 242, 248 (1986).
Anderson v. Liberty Lobby,
A dispute of material fact is
“genuine” if the evidence would allow a reasonable jury to find in
favor of the nonmovant.
Id.
The court must consider all evidence
and draw all inferences from the factual record in the light most
favorable to the nonmovant.
Matsushita Elec. Indus. Co. v. Zenith
Radio, 475 U.S. 574, 587 (1986); National Ass’n of Gov’t Employees
v. City Pub. Serv. Board, 40 F.3d at 712-13.
The application of the rule depends upon which party bears the
burden of proof at trial.
If the movant bears the ultimate burden
at trial, the movant must provide evidence to support each element
of its claim and demonstrate the lack of a genuine issue of
material fact regarding that claim. Rushing v. Kansas City S. Ry.,
185 F.3d 496, 505 (5th Cir. 1999), cert. denied, 528 U.S. 1160
(2000).
-3-
If the nonmovant bears the burden of proof at trial, the
movant may either offer evidence that undermines one or more of the
essential elements of the nonmovant’s claim or point out the
absence
of
evidence
supporting
essential
elements
of
the
nonmovant’s claim; the movant may, but is not required to, negate
elements of the nonmovant’s case to prevail on summary judgment.
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Lujan v.
National Wildlife Federation, 497 U.S. 871, 885 (1990); Edwards v.
Your Credit, Inc., 148 F.3d 427, 431 (5th Cir. 1998); International
Shortstop, Inc. v. Rally’s, Inc., 939 F.2d 1257, 1264 (5th Cir.
1991); Saunders v. Michelin Tire Corp., 942 F.2d 299, 301 (5th Cir.
19991).
If the movant meets this burden, the nonmovant must then
present competent summary judgment evidence to support each of the
essential elements of the claims on which it bears the burden of
proof at trial and to demonstrate that there is a genuine issue of
material fact for trial. National Ass’n of Gov’t Employees v. City
Pub. Serv. Board, 40 F.3d 698, 712 (5th Cir. 1994).
“[A] complete
failure of proof concerning an essential element of the nonmoving
party’s case renders all other facts immaterial.”
Celotex, 477
U.S. at 323.
“‘[T]he mere existence of some alleged factual dispute between
the parties will not defeat an otherwise properly supported motion
for summary judgment . . . .’”
-4-
State Farm Life Ins. Co. v.
Gutterman, 896 F.2d 116, 118 (5th Cir. 1990), quoting Anderson v.
Liberty Lobby, Inc.. 477 U.S. 242, 247-48 (1986).
“Nor is the
‘mere scintilla of evidence’ sufficient; ‘there must be evidence on
which the jury could reasonably find for the plaintiff.’”
Id.,
quoting Liberty Lobby, 477 U.S. at 252. The Fifth Circuit requires
the nonmovant to submit “‘significant probative evidence.’”
Id.,
quoting In re Municipal Bond Reporting Antitrust Litig., 672 F.2d
436, 440 (5th Cir. 1978), and citing Fischbach & Moore, Inc. v.
Cajun Electric Power Co-Op., 799 F.2d 194, 197 (5th Cir. 1986);
National Ass’n of Gov’t Employees v. City Pub. Serv. Board, 40 F.3d
at 713. Conclusory statements are not competent evidence to defeat
summary judgment.
Turner, 476 F.3d at 346-479 (plaintiff “must
offer specific evidence refuting the factual allegations underlying
[defendant’s] reasons for her termination), citing Topalian v.
Ehrman, 954 F.2d 1125, 1131 (5th Cir. 1992).
“If the evidence is
merely
probative,
colorable,
or
is
judgment may be granted.”
not
significantly
summary
Thomas v. Barton Lodge II, Ltd., 174
F.3d 636, 644 (5th Cir. 1999), citing Celotex, 477 U.S. at 322, and
Liberty Lobby, 477 U.S. at 249-50.
Ensco’s Motion for Partial Summary Judgment (#96)
Though denying any liability to HIOS, Ensco argues that if it
is found liable, the proper measure of HIOS’s claim for economic
loss is no incident/incident.
HIOS, analogizing to the measure
standardly used for deferred production, contends that it is a
-5-
traditional loss of use, i.e., alleged average daily lost revenue
times the number of days of “deferred through put” of its pipeline.
Ensco identifies the fundamental issue as how the Court accounts
for the fact that the gas was still in the ground while the
pipeline was shut in for repair. Ensco maintains that the evidence
shows that HIOS did not lose its pipeline revenue because of any
other producer’s transporting the gas destined for the HIOS gas
pipeline on some other pipeline.
Instead the producers who used
the damaged section of the HIOS pipeline simply shut in their own
production
facilities
and
wells
repaired and operating again.
until
the
HIOS
pipeline
was
Ex. 3, Affid., and Ex. 4, report of
Ensco’s expert, Calvin C. Barnhill, applying a no incident/incident
calculation.1
The oil and gas remained in the ground until it
could again be shipped through the HIOS pipeline.
No product was
lost, but only deferred for 104 days, and ultimately the same
volume of gas has been or will be shipped through the pipeline.
HIOS will earn income on the same quantity of through put as though
the damaging incident had never occurred.2
1
Barnhill first calculated cash flow from shipping product
through the pipeline as though no incident had occurred; next, the
cash flow from the deferred through put caused by the incident;
and then discounted each cash flow to present value:
the
difference is what he concludes in HIOS’s economic loss.
2
Ensco notes that while there may be factual issues such as
the average daily through put, these issues are not relevant to the
motion for partial summary judgment, which seeks only to establish
the appropriate measure of economic loss, not a specific amount.
-6-
Ensco cites a line of cases supporting its contention.
In
Continental Oil Co. v. The SS Electra, 431 F.2d 391 (1970), cert.
denied, 401 U.S. 937 (1971), a vessel struck a production platform
in the Gulf of Mexico owned by the four plaintiff oil companies,
and the resulting severe damage necessitated shutting in the wells
connected to the platform for 130 days.
Although the platform
later suffered additional damages, the parties stipulated that 130
days would have been required to repair the damage done by the
Electra. Plaintiffs sought economic loss in the amount of $60,000,
which was the net income that would have been realized from the
wells connected to the platform during the shut-in period.
Faced
with having to choose between net profits or interest on net
profits as damages for a delay in production,” the Fifth Circuit,
although observing that plaintiffs had not lost oil or gas, noted
that the only evidence before it was loss of profits,3 applied the
doctrine of restitution in integrum,4 and awarded the plaintiffs
lost profits even though they did not lose any oil and would
presumably ultimately produce all of it and make the same profit.
3
The panel did comment, “We need not consider whether lost
profits or a fair return on investment is a better measure.” Id.
at 393 n.3.
4
Also called restitutio in integrum, the name of the doctrine
means “‘damages assessed against the respondent shall be sufficient
to restore the injured vessel to the condition in which she was at
the time the collision occurred . . . .’” Delta Towing LLC v.
Basic Energy Services., No. 6:08CV0075, 2011 WL 102717, at *5 (W.D.
La. Jan. 12, 2011), quoting The Baltimore, 75 U.S. 377, 385 (1869).
-7-
431 F.2d at 392 (“The oil companies do not claim for lost oil or
damage to oil as an asset.
Their suit is for damages suffered as
a consequence of the collision of the ship with the platform.”).
The appellate court opined,
Profit on oil production is simply one means of measuring
the damage suffered. The plaintiffs have lost the use of
their capital investment in lease, platform and producing
wells for 130 days during which that investment was tied
up without return.
The fact that the same amount of
profit can be made at a later time with the same
investment of capital by removing from the ground a like
quantity of oil at the same site does not alter the fact
that the plaintiffs are out of pocket a return on 130
days use of their investment.
Presumably the oil
companies ultimately will produce from the reservoir all
the oil that is economic to produce, but, as the District
Court pointed out, it will require 130 days longer to do
so.
Id.
Subsequently in Nerco Oil & Gas, Inc. v. Otto Candies, Inc.,
74 F.3d 667 (5th Cir. 1996), the MV Hatty Candies struck and damaged
Nerco’s oil and gas platform, resulting in a shut-in of three of
its wells from 31-50 days.
Nerco sought lost profits, in the
amount of $766,018, calculated by multiplying the days the wells
were shut in by their average daily production.
670.
74 F.3d at 669,
Defendant objected that lost profits would amount to double
recovery because the oil and gas were still in the ground and could
be produced subsequently.
The Fifth Circuit clarified its earlier
holding in Electra, 74 F.3d at 668-69,
emphasizing that the only
evidence before the Court in Electra was of lost profits, while in
Nerco, the defendant presented expert evidence in support of a “no
-8-
incident/incident” calculation (expected monthly production over
life of production from the wells if there had been no incident,
then the production with the incident, followed by discounting to
present value of each of the two income streams), with the result
being a loss of $140,987. Observing that “the platform owners lost
no oil or gas because of the accident,” but that their “true damage
. . . is that they will be required to remain at the site longer
than expected to recover the oil and gas,” the appellate court in
Nerco ruled that no incident/incident was a better measure of a
“fair return on [Nerco’s] investment than the sum of the owners’
loss of profits” because it awarded Continental for its return on
its investment.
74 F.3d at 669-70.
The panel quoted from the
Electra opinion, 431 F.2d at 392,
The oil companies do not claim for lost oil or damage to
oil as an asset. Their suit is for damages suffered as
a consequence of the collision of the ship with the
platform. Profit on oil production is simply one means
of measuring the damage suffered. The [platform owners]
have lost the use of their capital investment in lease,
platform, and producing wells for 130 days during which
that investment was tied up without return. The fact
that the same amount of profit can be made at a later
time with the same investment capital by removing from
the ground a like quantity of oil at the same site does
not alter the fact that the [platform owners] are out of
pocket a return on 130 days of use of their investment.
Presumably the oil companies ultimately will produce from
the reservoir all the oil that is economic to produce,
but, as the District Court pointed out, it will require
130 days longer to do so. The [platform owners] must
stay on the site 130 days longer, with investment in
place, than necessary but for the ship’s negligence.
This is no theoretical, shadowy concept of loss. It
is squarely within the basic damage doctrine for marine
-9-
collision of restitutio in integrum, as applied in many
comparable situations.
74 F.3d at 669.
Ensco maintains that since Nerco, the no incident/incident
calculation has been the preferred measure of economic loss for
deferred production.
Fabrication,
Inc.,
See, e.g., Agip Petroleum Co. v. Gulf Island
17
F.
Supp.
2d
660,
6661-62
(S.D.
Tex.
1998)(holding that “[t]he practical and economic measure of an oil
company’s loss for delayed production is the difference between the
net revenue flow with and without delay.”); In re the Matter of TT
Boat Corp., No. Civ. A. 98-0494, 1999 WL 1276837, at *3-4 (E.D. La.
Dec. 21, 1999)(though conceding the fair return on investment was
not the only appropriate method of calculating damages for lost
production and under some circumstances lost profits might be the
best measure of delay damages, applying Nerco method of calculating
damages); Certain Underwriters v. Commerce & Industry Ins. Co., No.
Civ. a. 97-0491, 2000 WL 98205, at *3 & n.5 (E.D. La. Jan. 27,
2000)(applying
incident
v.
no
incident
methodology)(accepting
calculation of expert Calvin Barnhill); Asher Associates, LLC v.
Baker Hughes Oilfield Operations, No. 07-CV-1379, 2009 WL 4015580,
at *2 (D. Colo. Nov. 18, 2009)(“While lost profits may be an
appropriate form of damages in the proper case, courts have noted
that ‘awarding a plaintiff net profits as compensation for deferred
production is tantamount to a windfall to the plaintiff’ and
therefore other methodologies are preferable.”).
-10-
HIOS’s Memorandum in Opposition (#109)
HIOS claims that repairs to its pipeline cost over $19.6
million.
It further points out that it is paid a fee for
transporting natural gas through its 42" pipeline from various
offshore production facilities owned by third parties to on-shore
processing and distribution locations. While the pipeline was shut
in for repairs for 104 days, HIOS was unable to collect over $5.6
million in fees that it otherwise would have earned.
HIOS argues
that it is entitled to recover the economic losses it incurred
during the shut-in and the cost of physical repairs
pipeline.
Ensco
erroneously
argues
that
HIOS
compensated by an award of no more than $564,000.
report,
can
to the
be
fully
Barnhill expert
#96, Ex. 4, at p. 11; Barnhill Dep. Ex. A to #109, 49:20-
50:2.
HIOS objects that Ensco’s legal theory was developed in
connection with “deferred production” claims and has never been
applied to the type of claim at issue here, a claim for economic
damages resulting from a transportation system being put out of
service due to the negligence of a third party.
HIOS argues for
application of the traditional loss of use method, employed in many
other transportation cases.
The purpose of compensatory damages
under general maritime law is “to place the injured person as
nearly as possible in the condition he would have occupied if the
wrong had not occurred.”
Freeport Sulphur Co. v. S/S Hermosa, 526
-11-
F.2d 300, 304 (5th Cir. 1976). “In cases of maritime collision, the
maximum recoverable damages are those established by the doctrine
of restitutio in integrum.
This principle measures damages as the
‘cost of necessary repairs and the loss of earnings while they are
being made.”
Transcontinental Gas Pipe Line Corp. v. Societe
D’Exploration du Solitaire, 299 Fed. Appx. 347, 350 (5th Cir. 2008),
quoting Delta Marine Drilling Co. v. M/V Baroid Ranger, 454 F.2d
128, 129 (5th Cir. 1972)(doctrine of restitution in integrum,
“strictly construed, would limit damages to the difference in the
value of the vessel before and after collision.
However, that
measure has long been equated with the cost of necessary repairs
and the loss of earnings while they are being made.”).
HIOS points to black letter law that “[d]amages for lost
profits are allowed against a tortfeasor under the general maritime
law.”
Domar Ocean Transp., Ltd. v. Indep. Refining Co., 783 F.2d
1185, 1191 (5th Cir. 1986).
“[T]he mere fact that such damages may
not be susceptible of exact measurement does not make them any less
recoverable.”
Rogers Terminal and Shipping Corp. v. Int’l Grain
Transfer, Inc., 672 F.2d 464, 466 (5th Cir. 1982).
“Courts have
wide discretion in determining the measure for computing loss of
use of damages.”
Great Lakes Business Trust v. M/T Orange Sun, 855
F. Supp. 2d 131, 151 (S.D.N.Y. 2012)(citing Brooklyn Eastern Dist.
Terminal v. United States, 287 U.S. 170, 174 (1932)), aff’d, 523
Fed. Appx. 780 (2d Cir. 2013).
HISO urges that the Court should
-12-
simply multiply the volume of gas that it would have transported
through its pipeline during the 104-day shut-in times the average
unit transportation fee charged to HIOS’s customers during that
time.
HISO
represents
that
Ensco’s
damages
expert,
Calvin
Barnhill, would agree with its calculations of its damages. Ex. A,
Barnhill Dep., at 17:23-18:11.
Barnhill agreed that as of the end
of 2008 (the year of the 104 day shut-in period, HIOS had lost
revenue in the amount HIOS claims.
Id. at 38-39.
HIOS contends that Ensco’s deferred production damage formula
is inapplicable because it is “a unique methodology developed for
cases involving oil and gas producers, i.e., the owners of oil and
gas being brought to market.”
#109 at p.4.
HIOS is not a producer
and is not asserting a deferred production claim, but instead is a
transporter or carrier of product owned by others.
Hios says it
knows of no case where the deferred production model has been
applied to a carrier or transporter of product owned by others.
Hios further observes that even if Electra is no longer
controlling in deferred production cases based on Nerco, Electra’s
general discussion of traditional loss of use damages is correct
and relevant here:
If the shipowner is carrying his own cargo and has
another vessel available as a temporary replacement for
the one under repair he has a duty to use it to mitigate
damages and, having earned the profit with the otherwise
idle replacement, cannot recover for detention of the
vessel being repaired. [Here, however] [t]here is no
fleet of drilling platforms, no evidence that the
plaintiffs had any other platform or could have set a
-13-
platform in place and obtained any of the 130 days’
production.
The oil companies are like a single
shipowner with his ship laid up. It would be no answer
to his claim to assert that he has lost nothing because
the same cargo is still on the dock when his ship comes
out of repair and that he can move it then--if other
cargoes are also then available. [emphasis added]
431 F.2d at 393.
HIOS asserts that it is like the single shipowner
in Electra and is not made whole, as Ensco argues, by the fact that
the product HIOS would have transported during the 104 days of
shut-in remains in the ground and will be carried eventually.
It
urges the Court to find it is entitled to recover “detention,” or
loss of use, damages (in the form of revenue lost during the shutin when its vessel is laid up for repairs due to the negligence of
another (Ensco).
See, e.g., Marine Transport Lines, Inc. v. M/V
Tako Invader, 37 F.3d 1138, 1141 n.3 (5th Cir. 1995)(Defendant in
this case argued, “[B]ecause the Marine Guardian was eventually
able to make the voyage to Mexico for Exxon, ‘the voyage was never
lost, but rather, was only delayed.’
point.
revenue.
This argument is beside the
The Marine Guardian missed fourteen days of earning
Her ability to make a delayed voyage simply means she
made one instead of possibly two voyages in the same amount of
time.”); In re M/V Nicole Trahan, 10 F.3d 1190, 1194-95 (5th Cir.
1994)(affirming award of detention damages where the vessel had
“lost valuable time in a market ready for its services” as a result
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of repair-related delays5); Delta Steamship Lines, Inc. v. Avondale
5
This case relied on Delta S.S. Lines, Inc. v. Avondale
Shipyards, 747 F.2d 995, 1000-01 (5th Cir. 1984), to calculate lost
profits by showing lost opportunity:
Loss of profit arising from a maritime casualty may be
awarded so long as it is proved with reasonable
certainty. This usually involves a showing in commercial
cases that a vessel “has been engaged, or was capable of
being engaged in a profitable commerce. . . .” “[M]ost
clear, however, is the proof that MADS SKOU was in
immediate demand, as were her sister ships, upon her
return to service. This demonstrates ‘that profits may
be reasonably supposed to have been lost because the
vessel was active in a ready market.’”
Nicole Trahan, 10 F.3d at 1194, citing Avondale Shipyards,747 F. 2d
at 1001, citing The CONQUEROR, 166 U.S. 110, 125 (1897).
In The Conqueror, which dealt with loss of use of a pleasure
vessel when it was detained for about five months by a tax
collector, the Supreme Court wrote that the law is well settled
that
the loss of profits or of the use of a vessel pending
repairs, or other detention, arising from a collision or
another maritime tort, and commonly spoken of as
“demurrage,” is a proper element of damages. . . . [I]t
is equally well settled however, that demurrage will only
be allowed when profits have actually been, or may be
reasonably supposed to have been, lost, and the amount of
such profits is proven with reasonable certainty.”)
166 U.S. at 125.
If further opined,
It is not the mere fact that a vessel is detained that
entitles the owner to demurrage.
There must be a
pecuniary loss, or at least a reasonable certainty of
pecuniary loss, and not a mere inconvenience arising from
an inability to use the vessel. In all cases in which we
have allowed demurrage, the vessel has been engaged, or
was capable of being engaged, in a profitable commerce,
and the amount allowed was determined either by the
charter value of such vessel, or by her actual earnings
at about the time of the collision. . . .
In other
words, there must be a loss of profits in its commercial
sense.”
-15-
Shipyards, Inc., 747 F.2d 995, 1002 (5th Cir. 1984)(noting that
damages for loss of use are determined by “a simple calculation
based upon the number of days the [vessel] was out of service . .
. multiplied by the average daily lost profit for the vessel”).
HIOS asserts that an award of loss of use damages is common when a
plaintiff’s vessel is forced out of service for repairs caused by
another’s
negligence.
See
generally
Thomas
J.
Schoenbaum,
Admiralty & Maritime Law § 14-6 at 147 (5th ed. 2011)(“In addition
to physical damage, the owner of a vessel damaged through the fault
of another is also entitled to an ward for actual profits lost
during the detention necessary to make repairs.”), citing The
Potomac, 105 U.S. 630, 631-32 (1881); Gordon W. Paulsen, Proven
Damages in Collision Cases, 51 Tulane L. Rev. 1047, 1053-54
(1997)(“That the loss of profits or of the use of a vessel pending
repairs or other detention, arising from a collision, or other
maritime tort . . . is a proper element of damage, is too well
settled both in England and America to be open to question”),
quoting The Conqueror, 166 U.S. at 125.
In particular HIOS cites Transcontinental Gas Pipe Line Corp.,
299 Fed. Appx. 347 at 349, in which the court awarded plaintiff
“its full repair costs as well as lost revenue” in the amount of
Id. at 133. Recently courts of appeals have ruled that the loss of
the use of a private pleasure boat is not compensable, and
certainly where there is no history of income. See, e.g., Northern
Assur. Co. of America v. Heard, 755 F. Supp. 2d 295, 298-301 (D.
Mass. 2010)(and cases cited therein).
-16-
$654,742.
Although the decision does not address use of loss
damages because the defendant did not dispute the amount sought by
the pipeline owner, the plaintiff’s post-trial brief, a copy of
which is attached as exhibit B at p.4, shows that the plaintiff’s
figures were “based upon estimated daily volumes during the shut-in
periods.”
See also Crown Zellerbach Corp. v. Willamette-Western
Corp., 519 F.2d 1327, 1330 (9th Cir. 1975)(in a case brought in
admiralty, the district court awarded a paper mill, damaged when
the boom on a derrick barge severed a power line to it and caused
operations at the mill to be suspended for thirty minutes, damages
for loss of “productive capacity of the mill for the period in
question, less . . . the usual production expenses”; the Ninth
Circuit affirmed, finding the plaintiff “had established the value
of its lost capacity by adequate proof.).
HIOS
charges
that
Ensco’s
expert’s
application
of
the
“deferred production” model is fundamentally flawed, based on
erroneous assumptions, so even if his model were the correct one,
it has been applied improperly to this case. While Barnhill is
qualified to make economic calculations per se, Barnhill is not a
lawyer. HIOS asserts that the method employed in Barnhill’s report
is not scientifically or legally valid as applied to HIOS’s claim.
Barnhill’s
main
assumption
in
employing
the
deferred
production analysis is that the lost revenue is not actually lost
but merely deferred because the gas is still in the ground and will
-17-
ultimately be available for transportation.
Barnhill opines that
HIOS somehow made up the shortfall in twelve months, i.e., by the
end of 2009. Barnhill Dep., Ex. A at 38-39.
HIOS contends that
even if this were the appropriate analysis, Barnhill would have to
know and the Court would require evidence of the dates when the
product would be transported and in what amounts in order to
calculate the economic cost of the delay, i.e., lost profits and
the amount of the interest.
One would also have to know the life
expectancy of the pipeline or of the fields which produce into the
pipeline, information which Barnhill concedes he does not have.
Barnhill Dep., Ex. A at 8-9. 38.
HIOS maintains that
the pipeline is expected to be functional for many
decades into the future, especially since when the
damaged section was removed and examined after this
incident it was found to be in pristine condition.
Additionally, even though the gas wells now feeding
product into the pipeline will naturally decline over
time, the pipeline is designed to accept new production
from fields developed in the future.6
From the
standpoint of available gas to transport, then, the work
life of the pipeline is almost infinite.
#109 at 9.
In sum, HIOS claims that Ensco requests the Court to enter new
6
HIOS cites Ex. C, Dep. of HIOS’s Director of Offshore
Pipelines, Mike Stark (“Stark”), at 91-92, but HIOS attached the
wrong page. Ensco attaches the correct page of Stark’s deposition
to its Reply, #118, Ex. 5, 90-91. Ensco points out that Stark
states that he is not qualified to answer the question, “As you
look at this [pipeline system] as an asset, in terms of the welds
you’re servicing, what is kind of your anticipated lifetime for
this trunk line with all the feeders, in light of the fact that gas
wells deplete over time?” Id., 90:20-91:1
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territory and employ an complex damage model developed in a
different context to what HIOS characterizes as a simple and
straightforward business interruption claim.
Ensco’s Reply (#118)
Identifying the issue as whether HIOS’s claim for economic
loss for damage to its pipeline is more like a claim for deferred
production from an oil or gas well or more similar to a claim for
detention of a ship, Ensco insists that the uncontested facts show
that the wells attached to HIOS’ pipeline are declining and that
the pipeline has a short, limited useful life; thus they are
similar to the deferred production, or incident/no incident, is the
proper measure of HIOS’s claim for economic loss.
No product was
lost and ultimately it will go through the pipeline.
Highlighting the lack of evidence to support HIOS’s claims
that the deferred production model does not apply because the
pipeline is expected to function for decades and that new wells may
be attached in the future so the pipeline’s useful life is almost
infinite, Ensco provides a number of documents submitted to the
Federal Energy Regulatory Commission (“FERC”) in rate case RP09487-000 on March 31, 2009, three months after HIOS completed
repairs to its pipeline, to present HIOS’s position about what it
expected
of
throughput
in
the
future
and
evaluation
of
the
prospects for its pipeline7 in an effort to obtain relief for costs
7
#118, Ex. 1, Molinari Dep. at 32:6-33:23.
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associated with the 2008 hurricanes and the declining production
from wells attached to its pipeline.
Ex. 1, Dep. of Jeffrey
Molinaro, who was Lead Rate Analyst in 2009 and has been promoted
in April 2013 to Director of Rate and Regulatory Affairs for HIOS;
Reply
Exhibits
1,2,3,4,
and
5
to
Molinaro’s
Dep.
These
uncontroverted documents of analysis by qualified individuals
reflect their opinions that “the proved and provable physical
reserves attached to the HIOS pipeline will be depleted by 2018,
that its “projections for new wells and tiebacks to deep water
wells are speculative” and “HIOS has been unsuccessful in securing
a connection to a deep water well for the prior eight years,” and
that the pipeline’s useful economic life will end when the revenues
decline below the cost of operations, estimated to happen by 2016.
Ensco argues that the effect of the testimony of these HIOS
employees is to show that deferred production is the proper measure
of HIOS’ claim for economic loss to its pipeline. While HIOS cites
Electra and argues that its pipeline is more like a ship than an
oil or gas well, Ensco points out that a ship can go wherever its
next cargo is and that during detention, the opportunity to carry
cargo is not merely deferred, but lost.
Thus lost profits may be
the proper measure of economic loss for detention of a ship, but it
is not the proper measure of economic loss for a pipeline that can
only throughput gas from a limited number of declining wells
attached to the pipeline.
Unlike with a ship, there is only a
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finite amount of gas that can ever be put through the HIOS line.
If the well is shut in, production is deferred, not lost, as is
what happened with the HIOS pipeline.
Given HIOS’s own testimony
that the pipeline had only another eight years of useful life, at
most throughput was deferred to that limit.
Ensco again urges the
Court to grant its motion and declare that the measure of HIOS’s
claim
for
economic
loss
is
incident/no
incident,
i.e.,
the
difference between the present value of the revenue stream with no
incident and the present value of the revenue with the incident.
#188 at pp. 4-5.
Court’s Decision
Having
reviewed
the
briefing,
the
applicable
law,
and,
importantly the particular circumstances of the incident here, the
Court concludes for the reasons stated below that HIOS’s measure of
damages, i.e., repair costs plus the fees it would have obtained
during the 104-day shut in, is correct if HIOS can prove them to a
reasonable certainty.
“‘A court of admiralty is, as to all matters falling within
its jurisdiction, a court of equity.’”
Pizani v. M/V Cotton
Blossom, 669 F.2d 1084, 1089 (5th Cir. 19820, quoting The Davit
Pratt, 7 Fed. Cas. 22, 24 (D. Me. 1839).
“‘Its hands are not tied
up by the rigid and technical rules of the common law, but it
administers justice upon the large and liberal principles of courts
which exercise a general equity jurisdiction.’”
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Pizani, 669 F.2d
at 1089, quoting David Pratt, 7 Fed. Cas. at 24.
The Fifth
Circuit’s decisions in maritime allision cases reflect that it
finds no single measure of damages definitive when a production
facility or a vessel is shut in for repairs because of damage
caused by a negligent third party.
669 (“[O]ur holding in
Electra
profits’ was the required measure.
See, e.g., Nerco, 74 F.3d at
did not determine that ‘lost
We only determined that it was
one measure of damages and that it was abetter measure than
interest on lost profits.”). In Electra the Fifth Circuit even
noted that in traditional collision cases various alternative
theories of damages may apply depending on the circumstances:
the
value of hire of other vessels, the value of hire of the disabled
vessel, the return on investment, or no damage at all.
431 F.2d at
393, citing Brooklyn Eastern District Terminal v. United States,
287 U.S. 170 (1932).
Instead, district courts have discretion to
adopt any reasonable measure of damages that compensates the
injured party in an effort “to place the injured person as nearly
as possible in the condition he would have occupied if the wrong
had not occurred.”
Freeport Sulphur Co., 526 F.2d at 304.
The
profits, nevertheless, must “must have actually been, or may be
reasonably supposed to have been, lost, and the amount of such
profits . . . proven with reasonable certainty.”
The Conqueror,
166 U.S. at 125.
As stated by HIOS, #109 at 4, as it relates to the facts here,
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“The
principle
assumption
underlying
a
‘deferred
production
analysis,’ is that the lost revenue is not truly lost but is merely
deferred as a consequence of the product (in this case, natural
gas) being still in the ground and eventually available for
transportation” by HIOS.
The deferred production measure is
derived from a scenario where a negligent third party causes a
delay in production of oil and gas8 an owner/operator of offshore
oil or gas reserves; the oil and gas remains in the ground until
the owner/operator is able to produce it.
HIOS’ “lost profits” do
not come from production of oil and gas since it does not own the
wells or the gas; HIOS’s profits come from the fees it charges the
producers of the oil and gas to move it through HIOS’s pipeline.
Because of the shut-in, it was deprived use of the pipeline and
therefore collection of those fees for the period of repairs to its
pipeline. No double recovery could accrue to HIOS after the repair
period because the 104 days, when it would have been transporting
oil
and
gas
and
collecting
fees
days
but
could
not,
were
permanently lost.9
For these reasons, the Court finds that the “better” measure
8
The Fifth Circuit has defined “‘production’” as “‘the actual
physical severance of minerals from the formation.’” Nerco, 74
F.3d at 670-71, quoting Diamond Shamrock Exploration Co. v. Hodel,
853 F.2d 1159, 1168 (5th Cir. 1988).
9
The Court is assuming that HIOS does not have an
alternative, unused pipeline that could transport the oil and gas
until the damaged pipeline was repaired.
-23-
of damages, in addition to repair costs, is the “fair return on
investment,” or lost fees HIOS would have charged during the
period, contemplated in Electra but not awarded because the vessel
did not argue or produce evidence on that model.
Nerco,74 F.3d at
669, citing The Potomac, 105 U.S. 630, and Electra, 431 F.2d at
392. “The recovery of loss of earnings has often depended upon the
circumstances of the accident.”
Nerco, 74 F.3d at 669.
If Ensco
is held liable, HIOS will have to prove its lost earnings to a
reasonable certainty or it will not be awarded damages for lost
earnings. Id. Analogizing to the damaged vessel in The Conqueror,
166 U.S. at 133, to recover those fees HIOS will have to show that
its pipeline “has been engaged, or was capable of being engaged in
a profitable commerce” during the 104 days it was shut in, i.e.,
that the “profits may be reasonably supposed to have been lost
because the [pipeline] “was active in a ready market.”
M/V Nicole
Trahan, 10 F.3d at 1194, citing Delta S.S. Lines, Inc., 747 F.2d at
1001.
Accordingly, the Court
ORDERS that Ensco’s motion for partial summary judgment is
DENIED.
SIGNED at Houston, Texas, this
7th
day of
January , 2014.
___________________________
MELINDA HARMON
UNITED STATES DISTRICT JUDGE
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