Amoco Production Co. v. Western Slope Gas Co. (754 F.2d 303, 1985)

SEYMOUR, Circuit Judge.

Amoco Production Company brought this diversity action against Western Slope Gas Company alleging breach of a contract to sell natural gas. Amoco claims that the terms of the contract entitle it to a price increase for its intrastate gas equal to the maximum price allowable for newly discovered gas under sections 102 and 105 of the Natural Gas Policy Act of 1978, 15 U.S.C. §§ 3312, 3315 (1982), even though most of the gas is not new gas within the meaning of the Act. The district court examined the circumstances surrounding the contract, concluded that the parties did not intend to give Amoco this price increase, and granted judgment for Western Slope. 535 F.Supp. 1305 (D.Colo.1982). On appeal, Amoco argues that the contract is not ambiguous and that the district court therefore erred in resorting to extrinsic evidence. Alternatively Amoco urges that even if the district court properly considered extrinsic evidence, the evidence does not support its decision. We disagree and affirm.

I.

BACKGROUND

Amoco’s predecessor in interest and Western Slope entered into a gas purchase agreement in 1961 that provided for the intrastate sale of natural gas to Western Slope from wells in La Plata County, Colorado. The contract was effective for a primary term of twenty years and thereafter from year to year unless terminated by either party. Neither party has sought termination and the contract is now in its extended term.

The contract provides a specific price for gas sold from March 1961 through December 31, 1968. For each five-year period thereafter, the contract sets a price of fifteen cents per 1,000 cubic feet (Mcf) or such higher price as the parties determine under a price renegotiation clause. The parties did not renegotiate the contract price until October 1973, when they executed an agreement covering sales from January 1, 1974 through December 31, 1978 (the “1973 Letter Agreement”). The 1973 Letter Agreement established the contract price at the higher of (a) a base price of 33 cents (plus two cents for the value of recoverable liquids contained in the purchased gas), escalated by one cent per year, or (b) the price determined according to the following escalation clause: !

“The price or rate established from time to time by the Federal Power Commission (or any successor agency) as the area ceiling price or rate so authorized, for the specific area within which subject gas well or wells are located, subject to the general terms and conditions established by the FPC including heating value and applicability to specific wells.”

Pl.Ex. 7, at l.

The parties began negotiating a new pricing arrangement during the summer of 1978 in anticipation of the end of the 1973 Letter Agreement. Western Slope initiated matters with a proposed letter agreement dated July 3, 1978 that provided for a price equal to the higher of a base price of 55 cents, plus one cent annual escalation, or the price established by a price escalation clause that was in substance equivalent to that used in the 1973 agreement.

Arles Barrett negotiated for Amoco and James Valenta negotiated for Western Slope. Although Barrett had Amoco’s authorization to accept the escalation clause as initially proposed, he insisted that certain additions be made to the clause before he would recommend acceptance. By letter on July 18, Western Slope’s proposal was returned to Valenta with Barrett’s changes noted in the margins. On July 21, Western Slope sent Amoco a revised proposal that incorporated Barrett’s additional language, and on August 2 Amoco signed the new agreement (the “1978 Letter Agreement”). With Barrett’s additions italicized, the relevant pricing provision and escalation clause of the 1978 Letter Agreement reads as follows:

“In accordance with Article 5.1(a), Buyer and Seller hereby agree that the following price schedule shall be effective January 1,1979. The price of gas to Seller shall be either 1 or 2 below, whichever results in a greater price to Seller.

1. Effective January 1, 1979, the price shall be fifty-five cents (55