AUSTIN - On Friday, the Texas Supreme Court affirmed a ruling in favor of BlueStone Natural Resources in a mineral dispute involving a “frequently litigated issue: whether and to what extent a royalty interest bears a proportionate share of postproduction costs.”
The opinion stems from a lawsuit brought by Nettye Engler Energy. In the trial court proceedings, a judgment was rendered on Feb. 26, 2019 in favor of Engler, which held that Engler’s royalty interest was free of post-production costs.
On May 31, 2019, the trial court entered a subsequent judgment clarifying that Engler’s royalty interest was free of post-production costs until the gas reached the pipeline, as expressed in the subject deed, and not burdened by processing and gathering costs incurred prior to entry of the gas into the pipeline.
On appeal, the Second Court of Appeals found that delivery of the fractional share in the pipeline occurred in the gathering pipeline rather than the transportation pipeline.
The Texas Supreme Court concluded the appellate court “reached the correct result,” finding that a gas gathering pipeline is a “pipeline” in common, industry, and regulatory parlance, and “the deed does not limit the delivery location to any specific pipeline nor prohibit delivery to a pipeline at or near the well, if any.”
“Here, the deed conveying the mineral estate reserved a nonparticipating royalty interest ‘in kind,’ which means that, unlike a monetary royalty, the grantor retained ownership of a fractional share of all minerals in place,” the opinion states. “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.
“Under the 1986 deed, BlueStone satisfies its obligation to deliver Engler’s share of production “free of cost in the pipe line” by accounting for Engler’s fractional share on a net-proceeds basis that deducts from gross sales proceeds the postproduction costs incurred after delivery in the gas gathering system on the wellsite premises. We therefore affirm the court of appeals’ judgment for BlueStone.”
Case No. 20-0639