Nettye Engler Energy, LP v. Bluestone Natural Res. Ii, LLC

• Decision Date: 04 February 2022
• Docket Number: No. 20-0639,20-0639
• Citation: 639 S.W.3d 682
• Parties: NETTYE ENGLER ENERGY, LP, Petitioner, v. BLUESTONE NATURAL RESOURCES II, LLC, Respondent
• Court: Texas Supreme Court

639 S.W.3d 682

NETTYE ENGLER ENERGY, LP, Petitioner,

v.BLUESTONE NATURAL RESOURCES II, LLC, Respondent

No. 20-0639

Supreme Court of Texas.

Argued October 28, 2021

OPINION DELIVERED: February 4, 2022

Byron C. Keeling, Houston, for Amicus Curiae Keeling, Byron C.

William B. Burford, Derek Lee Montgomery, Midland, for Amicus Curiae Texas Oil and Gas Association.

H. Allen Pennington Jr., for Petitioner.

John B. McFarland, Austin, for Amicus Curiae Texas Land and Mineral Owners Association.

John Henderson Bennett, Houston, Robert Green Hargrove, Ryan D. Clinton, Austin, for Respondent.

Justice Devinedelivered the opinion of the Court.

This mineral dispute involves a frequently litigated issue: whether and to what extent a royalty interest bears a proportionate share of postproduction costs.Here, the deed conveying the mineral estate reserved a nonparticipating royalty interest "in kind," which means that, unlike a monetary royalty, the grantor retained ownership of a fractional share of all minerals in place.The deed required delivery of the grantor's fractional share "free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine[.]"The parties agree that a gas pipeline exists and that the royalty is free of production costs and postproduction costs incurred before delivery into that pipeline, but they disagree about its location under the deed's terms.

The grantee's successor maintains that delivery occurs in the gathering pipelines comprising the gas gathering system on the wellsite premises, which burdens the royalty interest with all postproduction costs from that point until the gas is sold to the ultimate purchaser.The grantor's successor contends that delivery is downstream of the wellsite at the transportation pipeline, if not farther, because (1) a gas gathering pipeline is not a pipeline as that term is used in the deed and (2) use of the term "otherwise" to introduce the alternative delivery point "at the mouth of the well or mine" essentially negates a construction of "the pipe line, if any" as including any pipeline at or near the wellhead.If the deed requires delivery in the transportation pipeline, the mineral interest is free of some but not all postproduction costs.The trial court granted summary judgment that delivery occurs in the transportation pipeline, but the court of appeals reversed and rendered judgment that delivery occurs in the gathering pipeline.

We affirm the court of appeals’ judgment.A gas gathering pipeline is a "pipeline" in common, industry, and regulatory parlance, and the deed does not limit the delivery location to any specific pipeline nor prohibit delivery to a pipeline at or near the well, if any.The court of appeals reached the correct result but misconstrued our opinion in Burlington Resources Oil & Gas Co. v. Texas Crude Energy, LLC¹ as establishing a rule that delivery "into the pipeline," or similar phrasing, is always equivalent to an "at the well" delivery or valuation point.Rather, the opinion merely emphasized that all contracts, including mineral conveyances, are construed as a whole to ascertain the parties’ intent from the language they used to express their agreement.

I.Background

In 1986, the predecessors of Nettye Engler Energy, LP(Engler) conveyed a 646-acre tract of land by a special warranty deed that reserved "an undivided one-eighth (1/8th) nonparticipating ... royalty interest in and to all of the oil, gas and other minerals on, in and under the Subject Property."A nonparticipating royalty is "an interest in the gross production of oil, gas, and other minerals carved out of the mineral fee estate as a free royalty, which does not carry with it the right to participate in the execution of, the [b]onus payable for, or the delay rentals to accrue under oil, gas, and mineral leases executed by the owner of the mineral fee estate."²Such an interest is free of the costs of production,³ and when delivered in kind as the deed requires here,⁴ bears its proportional share of postproduction costs from the point of delivery to the royalty-interest holder unless the conveyance specifies otherwise.⁵The 1986 deed describes the royalty as

a free one-eighth (1/8) of gross production of any such oil, gas or other mineral said amount to be delivered to Grantor's credit, free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine ....

In 2004, the grantees leased the tract's minerals, and the lessee subsequently drilled thirty-four producing wells.When gas is produced at the wellhead, it is collected in an onsite gathering system for compression, processing, and delivery to third-party transportation pipelines off the leased premises.From there, all the gas is sold to third parties at various downstream market locations.Both the gathering system and transportation pipelines are owned by third parties who charge the operator for these services.

For several years, Quicksilver Resources, Inc. served as the wellsite operator.Quicksilver sold Engler's share of production along with the producer's share and valued it for royalty purposes at the point of sale to the gas purchaser's pipeline.This valuation rendered Engler's in-kind royalty not only unburdened by production costs but also free of all postproduction costs.That is, Engler was paid a proportional share of the gross proceeds from downstream sales of processed gas to third-party purchasers.

In 2016, BlueStone Natural Resources II, LLC, assumed operations and began deducting postproduction costs in accounting to Engler for its proportional share of production.Under BlueStone's valuation, delivery of Engler's fractional share occurs at the point where unprocessed gas enters the gathering pipeline in the onsite gathering system.As a result, Engler's ownership interest bears a proportional share of postproduction costs from that point forward, including gathering, compression, and processing costs; transportation and delivery costs; and severance taxes.Unlike Quicksilver, which compensated Engler for its share of production based on its value at the end of the line, BlueStone values it at the beginning.

Engler's royalty payments dropped precipitously due to the deduction of postproduction costs from sales proceeds, prompting Engler to sue BlueStone for common-law conversion and money had and received.The central dispute concerned the proper construction of the 1986 deed's language.The parties generally agreed that (1) BlueStone must compensate Engler for its proportional share of sales proceeds net of expenses incurred after production is delivered to Engler's credit; and (2) BlueStone delivers Engler's share "in the pipe line," because one exists, rather than "at the mouth of the well."The point of dissension concerned the exact location where delivery occurs, with Engler taking the position that "in the pipe line" refers either to the distribution pipeline at the point of sale or to the offsite transportation pipelines, while BlueStone argued that the delivery obligation under the deed is satisfied by delivery in the gathering pipelines comprising the onsite gathering system.

On cross-motions for summary judgment, Engler argued that because the 1986 deed provides for a "free one-eighth of gross production" to be delivered "free of cost," the royalty is free of all postproduction costs from the wellhead to the point of sale.Engler cited our opinion in Chesapeake Exploration, L.L.C. v. Hyder⁶ as supporting the proposition that such language conclusively renders a royalty interest free of any and all postproduction costs.Alternatively, Engler claimed that a gathering system is not a pipeline or at least was not understood to be a pipeline when the deed was executed.For that reason, Engler argued that offsite transportation pipelines are the closest delivery point that would be consistent with the deed's language and, at a minimum, the royalty is free of gathering, compression, and processing costs incurred before that point.Engler urged that the deed's "in the pipe line" language necessarily refers to an offsite delivery point because the deed prioritizes delivery "in the pipe line, if any" over delivery "at the mouth of the well or mine" by using the word "otherwise" to introduce the latter as a default option when no pipeline exists.

BlueStone challenged Engler's proffered deed construction on the basis that (1) Engler misconstrued Hyder , which clearly holds that words like "free and clear" of all "costs and expenses" do not in and of themselves, or even necessarily, render a royalty free of all or any postproduction costs and (2) gathering pipelines are pipelines in both ordinary and trade meaning.That being so, BlueStone insisted that it properly calculated Engler's royalty interest based on sales proceeds net of expenses incurred beyond the point Engler's share of production entered the onsite gathering system.

As summary-judgment evidence, Engler provided affidavit and deposition testimony from an oil-and-gas attorney to the effect that (1) the 1986 deed's reference to "pipe line, if any" refers to the main transportation pipelines and (2) based on the deed's "free one-eighth (1/8) of gross production" and "free of cost in the pipe line" language, Engler's royalty is free from all postproduction costs so long as the gas is in the transportation pipeline, meaning it is valued at the point of sale rather than at any other upstream point.The gist of the expert's testimony is that "pipe line" refers to the place where title passes from the operator/producer to the gas purchaser, and back in 1986, it was not uncommon for gas gathering systems to be owned by the operator/producer and for gas to be purchased by the transporter.Although Engler's expert did not testify that any such arrangements were in existence at the time the 1986 deed was executed—nor does the record include such evidence—he concluded that delivery "in the pipe line"...