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IN RE ASAMERA LTD.

December 9, 1992

In the Matter of the Arbitration between ASAMERA (SOUTH SUMATRA) LTD., Petitioner, -and- TESORO PETROLEUM CORPORATION, Respondent.


The opinion of the court was delivered by: LORETTA A. PRESKA

Preska, U.S.D.J.

 Petitioner, Asamera (South Sumatra) Ltd. ("Asamera"), seeks an order, pursuant to Section 9 of the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (1988 & Supp. II 1990 & Supp. III 1991), confirming an arbitration award dated September 6, 1991 against Tesoro Petroleum Corporation ("Tesoro") for the payment of royalties under an oil-and-gas farmout agreement. Asamera also requests sanctions against Tesoro under Fed. R. Civ. P. 11. For the reasons set forth below, the arbitration award is confirmed, and Asamera's request for sanctions is denied.

 I. Background

 On October 15, 1968, Pertamina, an Indonesian state-owned corporation, and Asamera's predecessor, Redco, *fn1" entered into a Technical Assistance Contract (the "1968 TAC") which provided for the production of oil and gas by Asamera in Indonesia. The 1968 TAC limited its term to twenty years (§ II) but stated that Pertamina would give "sympathetic consideration" to a request made by Asamera for an extension of the contract (§ XII.5). Indonesian law applies to the 1968 TAC (§ XII.2).

 In 1971, Asamera and Tesoro entered into a Farmout Agreement (the "1971 FOA") which assigned Asamera's "entire interests" in the 1968 TAC relating to two designated areas of Indonesia (the "Farmout Areas") to Tesoro (P 1) in exchange for a gross overriding royalty of two percent of the value of all oil and gas derived from the Farmout Areas (P 6). The 1971 FOA provided for the arbitration of any dispute (P 12) and for Texas law to govern the agreement (P 13).

 On March 13, 1989, Tesoro and Pertamina entered into an agreement, effective October 15, 1988, which provided for the production of oil and gas in the Farmout Areas by Tesoro (the "1988 TAC"). As of October 15, 1988, Tesoro refused to pay Asamera the two-percent royalty called for by the 1971 FOA on the basis that Tesoro's oil and gas production in the Farmout Areas was no longer pursuant to the 1968 TAC, which had expired, but pursuant to the 1988 TAC.

 Asamera disputed whether Tesoro's obligation to pay the two-percent royalty ceased as of October 15, 1988, and the parties submitted the dispute to arbitration pursuant to P 12 of the 1971 FOA. After five days of evidentiary hearings and the submission of briefs, a panel of three arbitrators, operating under the auspices of the American Arbitration Association, unanimously awarded Asamera royalties under the 1971 FOA for Tesoro's oil and gas production in the Farmout Areas following the expiration of the 1968 TAC on October 15, 1988.

 II. The Arbitration Award

 Although not required to do so, the arbitrators prepared a fifteen-page summary of their reasons for the award (the "Reasons") in response to a request made by Asamera. The arbitrators qualified this document by underscoring that it did not represent a comprehensive opinion but merely set out the "essential elements" leading to the award. Reasons at 2-3.

 Finding that the 1971 FOA was silent as to the duration of its royalty provision, the arbitrators construed the 1971 FOA within its "four corners" pursuant to Texas law. Reasons at 4-5. This analysis resulted in the arbitrators' determination that the royalty provision of the 1971 FOA was "not subject to any limitation as to time." Reasons at 7-8. Thus, the arbitrators found that the 1971 FOA demanded that Tesoro pay royalties to Asamera beyond October 15, 1988 even though Tesoro's operations in the Farmout Areas occurred under the auspices of the 1988 TAC as of that time. *fn2"

 The arbitrators acknowledged in their summary an argument put forth by Tesoro based upon the "no greater estate" principle of Texas law. Reasons at 5. This principle, Tesoro has insistently urged, would limit Asamera's overriding royalty under the 1971 FOA to the term of the 1968 TAC. The arbitrators found that the "no greater estate" principle related primarily to Texas mineral leases, a situation not "precisely analogous" to that before them, and therefore the principle did not restrict the term of the royalty obligation or otherwise influence the arbitrators' construction of the 1971 FOA. Reasons at 6.

 Furthermore, the arbitrators concluded that even if the "no greater estate" principle applied to the dispute, the 1968 TAC included the "opportunity" for a renewal or extension of its term (as a result of the "sympathetic consideration" language contained in § XII.5), and this "opportunity" was conveyed to Tesoro under the 1971 FOA. Reasons at 6-7. In fact, the arbitrators found the 1988 TAC to be a renewal or extension of the 1968 TAC for purposes of the 1971 FOA. Reasons at 12. Thus, the arbitrators determined that the application of the "no greater estate" principle advanced by Tesoro would not restrict the duration of the 1971 FOA royalty obligation to October 15, 1988 when the 1968 TAC terminated.

 III. The Standard of Review

 Asamera filed its notice of petition to confirm the arbitration award in this Court on September 20, 1991. Tesoro has opposed the petition arguing that the award should be vacated because it falls within the doctrine of "manifest disregard of the law." The doctrine of "manifest ...


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