At issue is deed language stating that royalty shall be delivered “free of cost in the pipeline [sic], if any, otherwise free of cost at the mouth of the well or mine[.].”
The parties agreed that no PPC were incurred prior to delivery into the existing gas pipeline but did not agree on the delivery location. Did delivery occur in the pipelines on the wellsite premises, meaning the royalty was burdened with all PPC from that point to purchase? Or was delivery downstream, at the transportation pipeline, or further?
The royalty owners argued that the gas gathering pipeline was not a pipeline as the term was used in the deed; the Court of Appeals for the Second District of Texas disagreed and held that delivery occurred in the gathering pipeline. This month, the Supreme Court of Texas agreed, stating that “[a] gas gathering pipeline is a ‘pipeline’ in common, industry, and regulatory parlance,” and the deed’s language did not make a limitation to a specific pipeline. BlueStone Natural Resources II, LLC was correct to use the point where unprocessed gas entered the gathering pipeline as the valuation point, leaving the royalty to bear its proportionate share of PPC from that point forward.