Reed Smith Client Alerts

On February 4, 2022, the Supreme Court of Texas concluded that the gas gathering system at issue in this royalty dispute qualified as a “pipeline” and satisfied the deed’s delivery requirement based on the common, industry, and regulatory meaning of the term. The Court’s ruling confirms lessees can share post-production costs with the royalty interest holder under this and similar language.

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.