It was jurisprudential Groundhog Day as the Supreme Court of Texas handed down Nettye Engler Energy v. Bluestone Natural Resources, another in a series of postproduction cost disputes, only two days after Puxsutawney Phil peeked out of his cozy burrow to pronounce six more weeks of winter.
The Court clarified Burlington Resources v. Texas Crude Energy. Contrary to the reasoning of the court of appeals, Burlington did not establish a rule that “delivery into the pipeline” or similar phrasing creates a valuation or delivery point at the well or nearby. Rather, Burlington reiterated that all contracts are construed as a whole to ascertain the parties’ intent from the language they used to express their agreement.
Recall the basic Texas PPC cost-sharing rule: A royalty interest bears its proportional share of PPC’s from the point of delivery to the purchaser or working interest owner unless the conveyance specifies otherwise. Likewise, a royalty interest is free of PPC’s incurred before delivery. The question in cases such as this, Where is the delivery point?
Engler’s predecessors conveyed 646 acres by special warranty deed reserving an undivided 1/8th NPRI in and to all the oil, gas, etc. The deed required the royalty “… 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 …”
Gas produced at the wells is collected in a gas-gathering system on the lease for compression, processing and delivery to third-party transportation pipelines off the lease and then sold to third parties.
Former operator Quicksilver valued Engler’s NPRI at the point of sale to the gas purchaser’s pipeline, freeing Engler’s royalty from the burden of PPC’s. Under current operator Bluestone’s valuation, delivery of Engler’s share occurs at the point where unprocessed gas enters the on-site gathering system, thus bearing its proportional share of PPC’s from that point forward.
Engler argued that the delivery point was downstream of the wellsite at the transportation pipeline, if not farther, because a gas gathering pipeline is not a pipeline and use of the term “otherwise” to introduce the alternative delivery point “at the mouth of the well or mine” negated a construction of “the pipe line, if any” as including any pipeline at or near the wellhead.
What is a “pipeline”?
The Court rejected Engler’s contention that a gathering system is not a pipeline. Resorting to contemporaneous dictionaries, treatises, decisions, and regulations, the Court concluded that a gas gathering pipeline is a pipeline in common industry and regulatory parlance. The deed in question did not limit the delivery location to a specific pipeline nor prohibit delivery to a pipeline at or near the well if any.
Bluestone discharged is royalty obligation by delivering Engler’s fractional share of production in the gathering pipelines on the premises. Therefore, Bluestone properly deducted PPC’s between that point and the point of sale. The Court of Appeals held that delivery occurs in the gathering pipeline, but misconstrued Burlington in reaching the correct result.
Lagniappe – no room for expert testimony
The Court rejected affidavits by attorneys purporting to clarify and explain what the original drafting parties could have meant by “in the pipe line.” Courts will consider only objectively determinable extrinsic facts and circumstances surrounding the contract’s execution that do not vary or contradict the contract’s plain language. The instrument was unambiguous and it was within the Court’s province to determine its meaning. The expert testimony Engler relied on to construe the phrase would impermissibly add words of limitation to modify the deed’s terms.
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