A deed conveying a mineral estate must be construed the same way as any other contract: according to the language the parties use to express their agreement within the context in which they made the agreement. So ruled the Texas Supreme Court in Nettye Engler Energy, LP v. BlueStone Natural Resources II, LLC (No. 20-0639). This case turned on the construction of a deed conveying a mineral estate in which the grantor retained ownership of a fractional share of all minerals in place (a non-participating royalty interest in kind). The deed required delivery of the grantor’s share “free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine[.]” The grantor interpreted this provision to mean “free of cost” in the transportation pipeline, when the operator transferred title to the transporter for sale to third parties. The grantee read the same provision to mean “free of cost” in the gathering system at the wellhead. The difference, as awarded to the grantor by the trial court on summary judgment, came to $88,849.33 in damages for a three-year period. The Fort Worth Court of appeals reversed and rendered judgment in favor of the grantee, holding that “the language ‘into the pipeline’ is equivalent to and creates a valuation or delivery point ‘at the wellhead or nearby.’” In an opinion by Justice Devine, SCOTX affirmed the court of appeals but corrected that court’s reasoning to comport with SCOTX’s decision in Burlington Resources Oil & Gas Co. v. Texas Crude Energy, LLC, 573 S.W.3d 198 (Tex. 2019).
Justice Devine’s analysis begins with the fundamental principle that a court will construe an unambiguous contract according to its plain, grammatical, and ordinary meaning, and whether a contract is ambiguous is a question of law for the court. When a contract is reasonably susceptible to only one meaning, it is unambiguous, which SCOTX found here. The grantor attempted to introduce an ambiguity through expert testimony (conclusory at best) that at the time the deed was executed in 1986 “in the pipe line” meant the transportation pipeline. SCOTX dismissed that testimony as far too general and vague to establish “facts and circumstances” that would assist the Court in ascertaining the plain meaning of the text. The same goes for the grantor’s argument that “industry custom and usage” in 1986 leads to the conclusion that the deed meant a transportation pipeline, not a gathering pipeline. The Court dismissed this argument based on the conclusory nature of the expert’s testimony.
The Court concluded that the term “pipe line” includes a gathering pipeline or system and that the deed language contemplated this. It further concluded that the language “if any, otherwise free of cost at the mouth of the well or mine” simply meant that if no gathering pipeline existed, valuation would occur where the deed says it does: at the mouth of the well or mine, not when the minerals are delivered downstream. That means that the operator may deduct postproduction costs from the grantor’s fractional share from the time the gas is delivered at the wellhead to the time it is transferred to the third-party transporter. What the court of appeals got “wrong,” according to Justice Devine, was applying Burlington Resources 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.”
One takeaway from this case is that the parties are free to negotiate whatever terms they can agree to in a mineral deed (or any other contract, for that matter). Additionally, while “acts and circumstances” and “industry custom and usage” might be helpful to establish context, don’t expect the court to rely on extrinsic evidence that is not objective (i.e., a paid expert) or that attempts to introduce qualifiers into otherwise unambiguous language (particularly in older deeds and those that have been transferred to new grantors and grantees who think they mean something different than they may have to their predecessors, as happened here). One constant with this Court over many years is that when it says it will hold parties to the bargain they made, it means it.
