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The Texas Supreme Court Decides Another Post-Production Costs Case

The Texas Supreme Court recently issued its decision in Nettye Engler Energy L.P. v. BluStone Natural Resources II, LLC, Cause No. 20-0639, which has added to the Texas jurisprudence on the frequently litigated subject of post-production costs that can be deducted from a royalty interest.

The deed that conveyed the mineral interest to the grantee reserved a nonparticipating royalty interest “in kind,” which as the Court notes, differs from the standard monetary royalty because 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 question became which pipeline does the deed refer to: the gathering lines or the interstate transportation line?

The grantee’s successor claims that the pipeline referred to in the deed includes the gathering pipelines that take the gas from the wellhead to the interstate transportation line.  The grantor’s successor claims that the pipeline referred to in the deed is the interstate transportation line. If delivery occurred when the gas entered the gathering pipeline, the royalty interest will be burdened with all post-production costs from that point until the gas was sold to the ultimate purchaser. If, instead, delivery is when the gas enters the interstate transportation pipeline, then the royalty would be free of some (but not all) post-production costs.

The Texas Supreme Court affirmed the Court of Appeals opinion and basically said a pipeline is a pipeline, and the reference in the deed to a pipeline included the gathering lines. The Court went on to note that while the Court of Appeals reached the correct result, it misconstrued the Supreme Court’s holding in Burlington Resources Oil & Gas Co. v. Texas Crude Energy, LLC, 573 S.W.3d 198 (Tex. 2019) and clarified that Burlington did not establish a hard and fast rule “that that delivery ‘into the pipeline,’ or similar phrasing, is always equivalent to an ‘at the well’ delivery or valuation point”.


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