In an oil and gas delivery contract dispute where Energy Transfer is seeking $432.7 million in damages, the parties gathered at the Embassy Suites in downtown Houston Monday for a bench trial that will take place before Business Court Judge Grant Dorfman over the next few weeks.
When Judge Dorfman entered the second-floor conference room at about 9 a.m. Monday, everyone present stood.
“We’re not doing that,” he said with a smile. “This is a conference room.”
Before opening statements got underway, Judge Dorfman noted that the accommodations in the hotel conference room would be more comfortable than what would have been made available to the litigants and observers in the Harris County Family Law Center.
While a bailiff was present, there was no security screening for the parties before entering the makeshift courtroom where three large chandeliers hung from the ceiling and six smaller chandelier sconces adorned the walls. Filed in September 2024, this case was the fourth one filed in the Houston Division of the Business Court, Judge Dorfman said at the outset.
The crux of this dispute is rooted in a series of agreements inked in 2016, 2017 and 2018 by Energy Transfer subsidiary Lone Star NGL Product Services and Kinetik predecessors Eagle Claw Midstream Ventures Caprock Midstream for the delivery of Y-grade gas (Eagle Claw acquired Caprock in 2018, and in 2021 Eagle Claw and Altus Midstream combined to form a new entity, Kinetik). The gas was to flow from Reeves County in the Permian Basin through 609 miles of pipeline — the Energy Transfer-operated Lone Star NGL Express Pipeline — and end up in Mont Belvieu, east of Houston.
Lone Star NGL Product Services contracted for delivery of a certain amount of Y-grade gas. It filed this lawsuit when the defendants failed to deliver.
During opening statements Monday morning, Andrew Price of Norton Rose Fulbright, who represents Energy Transfer, said that the evidence will show the contracts at issue had an “enormous” value and that the defendants in this case have admitted the value “exceeded a billion dollars.”
“When it was convenient and expedient … they disregarded our deal,” Price said, telling Judge Dorfman the defendants fell 65 million barrels short of their obligations.
“That’s not how things work in the oil and gas business in Texas, and the defendants need to be held accountable for their actions.”
The deal broke down, Price told the court, after private-equity backed Eagle Claw decided to start sending volumes of Y-grade to Targa instead of to his client, in violation of the agreements. Price said Blackstone, which acquired Eagle Claw in April 2017, approached Targa with a deal that would entitle it to an ownership interest in the targa-owned Grand Prix NGL pipeline.
Price displayed graphs for the court that he said showed as the amounts shipped to other companies increased, the amount his client received dropped accordingly. The culprit there, he argued, was the overly optimistic projection for the amount of Y-grade gas that would be available to go around.
“They decided to short-change us,” he said. “The answer to all their problems is to short-change Lone Star.”
Price told the court his client’s damages in this case for the breach of contract and benefit of the bargain claims is about $432.7 million, without interest.
Fields Alexander of Beck Redden and Jean Frizzell of Reynolds Frizzell, who are representing Kinetik, split their opening statements, with Frizzell picking apart Energy Transfer’s theory of the case while Alexander focused on doing the same to the plaintiff’s damages model.
Frizzell went first and told the court “at best” this case was simply a breach of contract dispute “for modest damages,” while noting the plaintiff had not brought up in opening arguments any of the claims for fraudulent inducement.
“There was no fraudulent attempt to induce them into any of the contracts,” he said.
During Energy Transfer’s opening, counsel said the evidence will show some of the Y-grade gas they received did not come from the facility the contract mandated. Frizzell told the court “sophisticated players” in oil and gas, like Energy Transfer, “know you cannot track” a molecule.
Judge Dorfman asked whether his argument was that Energy Transfer wouldn’t have cared which facility the product was coming from had it received the full amount it was entitled to under the contract.
“Correct,” Frizzell said.
“They have tried, and they will try, to make everything look nefarious,” Frizzell said.
Alexander said that even if Energy Transfer wins every argument on liability, the damages do not come close to what the company is seeking. That’s because Lone Star Product Services only does three things, he said:
- It purchases Y-grade gas from Eagle Claw and Caprock in Reeves County;
- It pays a pipeline affiliate to transport that product to Mont Belvieu; and
- It sells Y-grade gas to a marketing affiliate.
“What you’ll see is a series of efforts to pivot away from these facts” in order to build a damages model that supports a more than $400 million recovery, Alexander said.
Because of the corporate structure of the Energy Transfer affiliate, Alexander said it makes very little money.
“A company that didn’t make any money on the Y-grade that was delivered wouldn’t make $400 million on the Y-grade it did not get,” Alexander said.
Instead, the maximum damages Lone Star NGL Product Services is entitled to in this case is $3.97 million, “assuming their right on all their theories,” Alexander said.
Alexander accused the plaintiff of creating a corporate structure that would benefit it and limit liability and then trying to bypass that structure at trial in order to recoup a windfall.
“Plaintiff’s damages model is hopelessly flawed and overstated,” he said.
On Thursday, Judge Dorfman granted a motion for summary judgment filed by defendant Jamie Welch, CEO of Kinetik. Welch, who previously served as chief financial officer of Energy Transfer, had argued the claims lodged against him (fraud, money had and received, and civil conspiracy) were barred by both the economic loss rule and the statute of limitations, were not supported by evidence and were brought to harass him.
In a brief order signed Thursday, Judge Dorfman granted Welch’s traditional and no-evidence motion for summary judgment.
“All claims against Welch are dismissed with prejudice,” the order reads.
Energy Transfer is also represented by Rafe A. Schaefer, Timothy Shinn, Ta’Chelle Jones and Kaileigh Mallin of Norton Rose Fulbright.
Kinetik is also represented by Thomas E. Ganucheau, Mary Kate Raffetto, Garrett S. Brawley, Cassie Maneen and Parth S. Gejji of Beck Redden and Brandon Allen and Adi Sirkes of Reynolds Frizzell.
Welch is represented by Barrett Reasoner, Gabe Kaim, Conor McEvily and Sarah Chavey of Gibbs & Bruns.
The case number is 24-BC11B-0004.