Lower Court Proceedings
Nettye Engler Energy, LP v. BlueStone Natural Resources II, LLC arises from a dispute regarding the calculation of royalties that accounted for costs incurred in gathering gas via a gathering system in Tarrant County, Texas. Nettye Engler Energy (Engler) brought an action against BlueStone Natural Resources II (BlueStone), claiming the consideration of the gathering cost was improper as the term “pipeline” in the deed’s delivery requirement did not include delivery into a gas gathering system. Conversely, BlueStone maintained the delivery obligation under the deed was satisfied by delivery into the gathering pipeline system.
On cross-motions for summary judgment regarding the post-production costs, the trial court ruled in favor of Engler, finding Engler’s royalty interest was not subject to post-production costs. Just a few days after the trial court’s ruling, however, the Texas Supreme Court issued its opinion in Burlington Resources v. Texas Crude Energy, where it held that deed language requiring delivery “into the pipeline, tank or other receptacle to which any well or wells on such lands may be connected” was analogous to an “at the wellhead” valuation point.
BlueStone filed a motion for reconsideration with the trial court in light of Burlington Resources, arguing the case was directly on point and dispositive in equating an “into the pipeline” royalty provision with an “at the well” delivery point. The trial court denied this motion but altered its prior ruling, determining that Engler’s royalty interest was free of cost in the transportation pipeline, not the gathering or distributing pipelines.
The court of appeals reversed the trial court and rendered judgment for BlueStone. The court viewed Burlington Resources as establishing a rule that the language “into the pipeline” was equivalent to and creates a valuation or delivery point “at the wellhead or nearby.” The court rejected Engler’s argument that a gathering system was not a pipeline, reasoning that a gathering system was recognized and regulated as a pipeline under Texas law.
The Texas Supreme Court Holds Contracts are Construed According to Their Terms
The Supreme Court affirmed the court of appeals’ judgment, holding that Bluestone could begin considering costs at the gathering line. Thus, BlueStone satisfied its obligation to deliver Engler’s share of production “free of cost in the pipeline” by accounting for Engler’s fractional share on a net-proceeds basis. The court reasoned that an onsite gathering pipeline was a “pipeline” in common, industry, and regulatory parlance, and the deed did not limit the delivery location to any specific pipeline nor prohibit delivery to a pipeline at or near the well, if any.
Texas courts have repeatedly held that parties are free to make their own bargains, and courts are obligated to enforce agreements as parties intended. In this case, Engler’s interest in a 645-acre tract of land was reserved under the terms of a 1986 deed through which Engler’s predecessors conveyed the tract of land to BlueStone’s predecessors. The deed required delivery of Engler’s fractional share of gas “free of costs in the pipeline, if any, otherwise free of cost at the mouth of the well or mine.”
When BlueStone assumed operations in 2016, it began considering post-production costs in calculating Engler’s proportional share of production. Rather than compensating Engler for its share of production based on its value at the end of the line, BlueStone valued it at the beginning. Bluestone argued that delivery of Engler’s fractional share occurred at the point where unprocessed gas entered the gathering pipeline in the onsite gathering system. As a result, Engler’s ownership interest was subject to a proportional share of post-production costs from that point forward, including gathering, compression, and processing costs; transportation and delivery costs; and severance taxes. Engler argued that the onsite gathering system did not qualify as a “pipeline” such as to mark the point where its interest should be valued.
The Court determined that the ordinary and industry definition of “gathering system” supported the conclusion that the gathering system on the lease qualified as a pipeline under the 1986 deed. Similarly, the Court looked at various statutes and regulations, finding that gathering systems and gathering lines were often described using the word “pipeline.”
Next, the Court looked to case law to determine whether a gathering system equated to a pipeline. It observed that oil and gas leases often included limiting language, specifying the pipeline as the one “to which the lessee connects his wells.” The absence of such limiting language in this case made the deed’s usage of “pipeline” broader than the provisions construed in other cases. Thus, the Court held this broader language confirmed a gathering system as a pipeline for delivery.
Engler argued that the deed language implicitly negated the construction of “pipeline” as being any pipeline in close proximity to the well. Engler focused on the word “otherwise,” asserting the deed contemplated a dichotomy between two potential points ‒ offsite and onsite. The Court, however, dismissed this rationale, stating it would require the Court to rewrite or add to the deed.
As the deed did not define the term “pipeline” or include any limiting language regarding its interpretation, the Court concluded that the gas gathering system satisfied the deed’s delivery requirement. Accordingly, the Texas Supreme Court affirmed the court of appeals’ judgment.
Key Takeaways
- Gas gathering systems can be considered pipelines based on interpretations in case law and the ordinary, industry, and regulatory meaning of the term.
- Courts are likely to broadly construe the term “pipeline”.
Client Alert 2022-037
