The Texas Supreme Court’s frequent forays into oil and gas lease interpretation continue with its decision to review Nettye Engler, LP v. Bluestone Natural Resources II, LLC (No. 20-0639). This case from the Fort Worth Court of Appeals involves the construction of a deed reserving to Engler a non-participating royalty interest to mineral production on the subject property. The language in the grant reserved 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 pipeline, if any, otherwise free of cost at the mouth of the well or mine . . . “

Bluestone began operating the lease in 2016 when the prior operator, Quicksilver Resources, filed for bankruptcy. After a few months of royalty payments, Engler noticed that the amounts of the payments were significantly below the market value of gas in the area. Moreover, the check details did not show any deductions for post-production or other costs. Engler requested an accounting, and eventually Bluestone’s outside counsel admitted that the operator was deducting post-production costs from the royalty. Engler filed suit to recover the deducted amounts, approximately $124,000. The trial court granted summary judgment for Engler and awarded the amount of gathering and processing costs charged against Engler’s royalty. Bluestone appealed.

The Fort Worth Court of Appeals reversed and rendered for Bluestone. The court held that the gathering system was a “pipe line” within the meaning of the deed and that the royalty should thus be calculated free of cost at the mouth of the well, not when the processed gas is delivered to the intrastate pipeline as urged by Engler. The “mouth of the well” interpretation adopted by the court of appeals relied heavily on regulatory usages of the term “pipe line,” which include gathering systems, rather than common usage in the industry that, Engler argues, distinguish between gathering lines and pipe lines. The court of appeals also cited SCOTX’s decision in Burlington Resources Oil & Gas Company v. Texas Crude Energy, 573 S.W.3d 198 (Tex. 2019), which construed a differently worded deed to determine that the valuation point was at the well head. Engler argues that the court of appeals interpreted this case to mean that the only valuation point was at the well head, thus ignoring the alternative valuation points in his deed. Finally, Engler argues that the court of appeals ignored summary judgment evidence from Engler’s expert that created an issue of fact as to the meaning of “pipe line” in the industry. Bluestone made no objection to the expert’s testimony in the trial court and is not appealing the propriety of the trial court’s admission of the testimony.

Although this case involves a relatively small amount of money, it clearly presents issues that SCOTX would like to address or clarify. Oral argument has been scheduled for October 28.

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