A Nearer Look At Nettye Engler Vitality, LP, v. BlueStone Pure Sources II, LLC – Vitality and Pure Sources

The Supreme Courtroom of Texas has as soon as once more tackled the closely
contested situation of postproduction prices in royalty calculations.
In Nettye Engler Vitality, LP, v. BlueStone Pure
Sources II, LLC, No. 20-0639, the Courtroom was tasked with
figuring out whether or not a nonparticipating royalty curiosity bore its
share of postproduction prices. Postproduction prices are often
referring to the prices incurred by an operator in transferring the gasoline
from the wellhead to the gross sales level, similar to the prices associated to
the treating, processing, compressing, gathering and transporting
of gasoline. In the end, the choice got here all the way down to the which means of a
single phrase: What’s a “pipeline.”

The Courtroom held in favor of the defendant lessee, BlueStone
Pure Sources II (BlueStone), and confirmed that on this
occasion, a gasoline gathering pipeline is a “pipeline.” In
doing so, the Courtroom additional solidified what has been the particular
pattern in royalty litigation. Specifically, that Texas courts will carefully
parse each single phrase of a royalty instrument to establish the
events’ intent with respect to the right allocation of
postproduction prices.

Background

The underlying dispute involved the interpretation of a 1986
mineral deed reserving an in-kind, non-participating royalty
curiosity (or a royalty consisting of a fractional share of the
precise minerals in place). The deed additional required supply of
this fractional share “freed from value within the pipeline, if any,
in any other case freed from value on the mouth of the properly or mine[.]”
For quite a few years, BlueStone’s predecessor lessee valued
Nettye Engler Vitality’s (Engler’s) share of manufacturing free
of postproduction prices; nevertheless, when BlueStone assumed
operatorship, it started deducting postproduction prices, which
considerably decreased Engler’s royalty funds. Engler shortly
thereafter sued BlueStone for improper funds. Each events
agreed that the royalty is freed from manufacturing prices and
postproduction prices which are incurred previous to supply into the
pipeline; nevertheless, the events couldn’t agree on the placement of
supply. Particularly, the events couldn’t agree on what
constituted the right “pipeline” inside the which means of
the deed.

The dispute of the which means of “pipeline” hinged on the
mechanics of a gasoline properly. Gasoline is usually produced and accrued by a
smaller pipeline community generally known as a gathering system. The gathering
system then transports the gasoline to a bigger pipeline community that
strikes the gasoline downstream to a refinery. BlueStone argued that the
supply of the gasoline occurred on the entrance to the gathering
pipelines on the wellsite, and the royalty curiosity was subsequently
burdened by the entire postproduction prices incurred thereafter.
Engler argued that the supply didn’t happen till not less than
downstream on the transportation pipeline (after passing by way of
the gathering system); thus, the curiosity was burdened solely with
some, however not all, postproduction prices.

The Choice and Takeaways

Find for BlueStone, the Courtroom analyzed the precise
language used within the deed, declining to entertain professional testimony
supplied by Engler as to the which means of the time period. Relying partly on
dictionary, trade manuals and related sources, the Courtroom
affirmed {that a} gathering system is a pipeline inside the plain
which means of that time period and that nothing within the deed prohibited the
related pipeline for supply of Engler’s royalty from being
situated at or close to the properly. Because the deed is to be construed primarily based
on its phrases, and the deed required supply to be freed from value
into the pipeline, and the primary pipeline was the gasoline gathering
system, BlueStone met its obligations and was permitted to deduct
postproduction prices incurred after supply into the gasoline gathering
system situated on the wellsite.

Maybe extra fascinating than the Courtroom’s particular
interpretation of the phrase “pipeline” is the general
message from the Courtroom on how it could proceed to evaluation instances
in regards to the interpretation of royalty clauses, which is
exemplified by the additional time the Courtroom took to make clear its holding
in a associated case, Burlington Sources Oil & Gasoline Co.
v. Texas Crude Vitality, LLC, 573 S.W.3d 198 (Tex. 2019)
(Burlington), on which the appellate courtroom had principally
relied. The Courtroom went out of its strategy to spotlight that
in Burlington  it hadn’t set forth any arduous
and quick rule that “into the pipeline” (or related
language) at all times means an “on the properly” valuation level,
however quite merely confirmed “all contracts … are to be
construed as a complete to establish the events’ intent from the
language they used to precise their settlement.”

This emphasis by the Courtroom ought to function a warning to
practitioners and events in opposition to reliance on any supposed
“magic language” or from a “verify the field”
stage of evaluation when analyzing royalty clauses. As an alternative, as with
lots of the postproduction royalty fits, Texas courts have made it
abundantly clear that the principles should not absolute, however quite
targeted on the precise language chosen within the context of the 4
corners of the instrument.

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