Opinion ID: 6215539
Heading Depth: 3
Heading Rank: 1

Heading: A Gathering System Is a Pipeline

Text: When an instrument does not indicate that language is being used in a technical or special way, we construe the instrument’s words as “usually understood by persons in the business to which they relate.” 39 To effectuate the drafting parties’ intent, we consider the meaning of the terms at the time the 1986 deed was drafted. 40 Because the deed does not include a special definition of “pipe line,” we look to 39 Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W.3d 194, 211 (Tex. 2011). See id. (“In construing an unambiguous oil and gas lease, . . . we seek 40 to enforce the intention of the parties as it is expressed in the lease.”). 16 ordinary and industry definitions to aid in our interpretation and analysis of this word. We begin by consulting contemporaneous dictionaries and treatises, 41 both of which support the conclusion that the gathering system on the lease qualifies as a pipeline under the 1986 deed. The common understanding of a “pipeline” is “a line of pipe with pumps, valves, and control devices for conveying liquids, gases, or finely divided solids.” 42 Williams & Meyers’s dictionary of oil-and-gas terms similarly defines “pipeline” as: “A tube or system of tubes used for the transportation of oil or gas. Types of oil pipelines include: . . . gathering lines, extending from lease tanks to a central accumulation point[.]” 43 With respect to a gas gathering system, the definition of “pipeline” further says: “In the case of gas, the Gathering system . . . delivers the gas to the main pipeline which takes the gas directly to the distributor at the place of consumption.” 44 The manual goes on to define the “gathering system” as a network of pipelines and other equipment that delivers gas to the main pipeline. 45 It also states: 41 See id. (recognizing a contract did not include unique definitions of “drill” and “complete” and using the Williams & Meyers treatise, Oil and Gas Law: Manual of Oil and Gas Terms, to define the words). 42 WEBSTER’S NINTH NEW COLLEGIATE DICTIONARY (9th ed. 1983). 43 8 HOWARD R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW 766 (Patrick H. Martin & Bruce M. Kramer, eds., 2021) (emphasis added). Engler acknowledges that the definitions provided in the 2020 edition of this treatise are “virtually the same” as those provided in the version existing when the deed was drafted. The definitions in the 2021 edition also remain the same, so we cite to the 2021 edition of the treatise for convenience. 44 Id. 45 Id. at 436. 17 A gathering system generally consists of “interconnected subterranean natural gas pipelines and related compression facilities that collect the raw gas from wells and deliver it to a central point, such as a processing plant.” 46 A sub-definition of a “gathering pipeline system” similarly describes it as “a system of interconnected subterranean pipelines and related compression facilities that collect the raw gas from wells and deliver it to a central point[.]” 47 By ordinary or industry definition, the gathering system or gathering lines are composed of pipelines to which the minerals may be delivered. Gathering systems are also treated as pipelines under various statutes and regulations. For example, the Texas Administrative Code includes regulations for systems used to gather natural gas, describing such systems as “gathering pipelines” and “natural gas gathering pipelines.” 48 Similarly, many statutes use the word “pipeline” to describe oil-and-gas gathering systems. 49 Among others, the Health and 46Id. (emphasis added) (citing Duke Energy Nat. Gas Corp. v. Comm’r, 172 F.3d 1255, 1256 (10th Cir. 1999)). 47 Id. at 436-36.1 (emphasis added). 48 16 TEX. ADMIN. CODE § 8.110; see 7 Tex. Reg. 3982, 3989 (1983), subsequently amended (former 16 TEX. ADMIN. CODE § 3.13) (“All gathering pipelines designed to transport oil, gas, condensate, or other oil or geothermal resource field fluids from a well or platform shall be equipped with automatically controlled shut-off valves at critical points in the pipeline system.”). 49 See TEX. NAT. RES. CODE § 111.084 (providing that a gathering system includes pipelines by stating a gathering system may be operated “by pipeline or by truck in connection with the purchase or purchase and sale of crude petroleum”); TEX. TAX CODE § 171.1012(k-2) (stating the statute applies to pipeline entities such as those “primarily engaged in gathering . . . crude oil, 18 Safety Code defines a “pipeline facility” as “a pipeline used to transmit or distribute natural gas or to gather or transmit oil, gas, or the products of oil or gas.” 50 The Utilities Code likewise defines a low-pressure gathering system as “a pipeline that operates at a working pressure of less than 50 pounds per square inch.” 51 While these statutory uses are certainly not conclusive, the regulatory treatment of gas gathering pipelines is informative and consistent with the meaning the word “pipeline” ordinarily carries. Case law is concordant with this understanding, if not directly at least inferentially. 52 Often, deed or lease language requiring delivery “into the pipeline” is accompanied by language specifying the pipeline as the one “to which the lessee connects his wells.” 53 Such limiting including finished petroleum products, natural gas, condensate, and natural gas liquids”). 50 TEX. HEALTH & SAFETY CODE § 756.121(3). 51 TEX. UTIL. CODE § 121.451(3). 52See Bayou Pipeline Corp. v. R.R. Comm’n, 568 S.W.2d 122, 124-26 (Tex. 1978) (referring to a gathering system as a “gas gathering pipeline” in discussing whether the system qualifies as a “utility” under a statute); First Nat’l Bank of Seminole v. Hooper, 104 S.W.3d 83, 84 (Tex. 2003) (describing the Owego Gathering System as a pipeline). 53Burlington Res. Oil & Gas Co. v. Tex. Crude Energy, LLC, 573 S.W.3d 198, 207 (Tex. 2019) (collecting cases in analyzing the language of an assignment requiring delivery “into the pipeline, tank or other receptacle to which any well or wells on such lands may be connected”); see, e.g., Cameron v. Stephenson, 379 F.2d 953, 954 (10th Cir. 1967) (“[E]xecutors and assigns covenants to deliver free of cost to the credit of assignor at the pipeline to which he shall connect his wells . . . .”); Kretni Dev. Co. v. Consol. Oil Corp., 74 F.2d 497, 497 (10th Cir. 1934) (“[F]ree of cost at the pipe lines, to which he may connect his wells . . . .”); Molter v. Lewis, 134 P.2d 404, 404-05 (Kan. 1943) (“To deliver to the credit of lessor, free of cost, in the pipe line to which he may 19 language is not present in the 1986 deed, but these cases demonstrate that it is not uncommon for a “pipeline” to be connected to the well or for delivery to occur at that point on the wellsite premises. The absence of such limiting language in the 1986 deed makes it broader, not narrower, than the provisions construed in other cases, confirming rather than repudiating that a gathering system is, or at least includes, a pipeline for delivery. The North Dakota Supreme Court recently interpreted a similar in-kind royalty provision in Blasi v. Bruin E&P Partners, LLC. 54 The Blasi royalty clause provided that the lessee agreed to deliver to the lessor’s credit, “free of cost, in the pipeline to which Lessee may connect wells on said land, the equal [fractional] part of all oil produced and saved from the leased premises.” 55 While this royalty provision included “connected at the well” language, Blasi, the royalty holder, argued that the delivery point was “the pipeline” and that “the term ‘pipeline’ [did] connect his wells . . . .”); Voshell v. Indian Territory Illuminating Oil Co., 19 P.2d 456, 457 (Kan. 1933) (“To deliver to the credit of lessor, free of cost, in the pipe line to which he may connect his wells . . . .”); Hamilton v. Empire Gas & Fuel Co., 230 P. 91, 91 (Kan. 1924) (“To deliver to the credit of the first party, his heirs or assigns, free of cost, in the pipe line to which it may connect its wells . . . .”); Scott v. Steinberger, 213 P. 646, 647 (Kan. 1923) (analyzing a lease stating the royalty should be paid “free of cost in the pipe lines to which he may connect his wells”); Rains v. Ky. Oil Co., 255 S.W. 121, 122 (Ky. 1923) (“[S]econd party agrees to deliver to the first party . . . in the pipe line with which it may connect the well or wells . . . .”); Wall v. United Gas Pub. Serv. Co., 152 So. 561, 562 (La. 1934) (“[L]essees shall deliver to the credit of the lessors, free of cost, in the pipe line to which he may connect his wells . . . .”). 54 959 N.W.2d 872, 877 (N.D. 2021). 55 Id. at 876. 20 not refer simply to any pipe or tube connected to the well itself.” 56 Similar to the argument Engler makes here, Blasi maintained that “pipeline,” as contemplated by the lease, meant “a pipe used to transport oil to a refinery—the type that is ‘generally regulated by state or federal authorities for moving oil hundreds or thousands of miles, not a pipe between the wellhead and the tank battery to move oil a few feet.’” 57 In assessing Blasi’s argument, the court pointed out that “[t]he royalty provision itself identifie[d] the pipeline that [was] contemplated”—a pipeline connected to the well—so analyzing industry definitions of pipeline was unnecessary. 58 Further, the court concluded that the provision, by its language, did “not designate a specific type of pipe as ‘the pipeline.’” 59 Blasi’s interpretation, the court said, would introduce “considerable uncertainty,” and parties should not have to examine physical characteristics of various pipes to determine if it is “the pipeline.” 60 Additionally, barring evidence that the parties envisioned different delivery points for different minerals, the court found it irrational to construe the delivery point in such a way that it changes depending on the means by which a mineral is transported. 61 For example, a royalty calculation for oil that is delivered by truck directly to a consumer and that never enters a commercial pipeline of 56 Id. at 877. 57 Id. 58 Id. 59 Id. 60 Id. 61 Id. 21 the sort that Blasi envisioned should not be different from a calculation for a mineral transported via such a pipeline. 62 Finally, the court pointed out that the provision did not require the existence of a pipeline; rather, the word “may” in the clause provided a failsafe that prevented a lessee from avoiding a royalty obligation by failing to connect a pipeline to the well. 63 The delivery point, therefore, was the point that remained constant regardless of the type of minerals produced and regardless of whether a pipeline existed at the wells. 64 Despite the use of different language, the royalty provision at issue here is analogous, and the effect of the deed’s language is the same. An onsite gathering pipeline qualifies as a pipeline, and the 1986 deed’s reference to a failsafe or default delivery point at or near the point of production does not exclude such a pipeline from bearing its common meaning. To the contrary, the alternative phrasing ensures parity in the delivery obligation regardless of the type of mineral produced and the availability of a pipeline for delivery of such minerals. 2. The Deed Language Does Not Prohibit Delivery At or Near the Well As previously noted, the 1986 deed does not identify any particular pipeline, specify a particular downstream delivery point, or otherwise refer to a pipeline located off the wellsite premises. To construe the deed as referring to a particular pipeline or a pipeline located off the premises would require adding words of limitation to the 62 See id. 63 See id. 64 See id. at 877-78. 22 deed, but we cannot rewrite or add to the instrument under the guise of interpretation. 65 Engler nonetheless contends that the deed language implicitly, if not expressly, negates a construction of “pipe line” as being any pipeline in close proximity to the well. If that were the case, the deed would necessarily limit the delivery point to some downstream pipeline location—either at the transportation pipeline (as the trial court held) or the distribution pipeline (a construction of the deed Engler has abandoned). In advancing this construction of the deed, Engler focuses on the word “otherwise,” asserting the deed contemplates a dichotomy between two potential delivery points—offsite and onsite. In Engler’s view, the word “otherwise” precludes delivery near the mouth of the well if any pipeline exists, thus foreclosing the possibility that “pipe line” could refer to the gas gathering system given its proximity to the mouth of the well. Engler posits that the deed’s preferred and default delivery locations cannot be the same or similar, so the phrase “the pipe line, if any” must refer to the off-premises transportation pipeline. To achieve its desired construction of the deed, Engler contorts the definition of “otherwise,” which generally means: “in a different way or manner”; “in different circumstances”; “in other respects”; “if not;” 66 “in another way, or in other ways.” 67 These definitions do not support 65 See Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471, 481, 487 (Tex. 2019). 66 WEBSTER’S NINTH NEW COLLEGIATE DICTIONARY (9th ed. 1983). 67 BLACK’S LAW DICTIONARY (5th ed. 1979). 23 the dichotomy Engler asserts or foreclose the possibility that the two delivery points may ultimately yield the same valuation. Engler’s royalty is for a fractional share of “oil, gas or other minerals” produced from the land and, in describing the royalty interest, the deed does not distinguish among the types of minerals that may be produced. That being the case, the word “otherwise”, when considered in connection with the immediately preceding “if any” phrase, simply creates a preferential delivery point if any pipeline exists for the specific mineral being produced and a default delivery point at the mouth of the well or mine if there is no such pipeline or when the produced mineral is not capable of delivery into a pipeline. 68 Harmonizing the entirety of the royalty clause in this way creates internal consistency and parity among the specified delivery points—“the pipe line” and “the mouth of the well or mine”—and among the various types of minerals that may be produced. Engler’s favored construction does not. 68 To illustrate: some minerals, like gas, must be delivered into a pipeline; minerals like oil may or may not be delivered into a pipeline; and other minerals, like coal, would not be delivered into a pipeline. See Blasi, 959 N.W.2d at 877-78 (analyzing how oil may be transported by various means and may never reach a commercial pipeline); 8 HOWARD R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW 436 (Patrick H. Martin & Bruce M. Kramer, eds., 2021) (explaining that gas collected via a gathering line continually flows from the well to the ultimate consumer, since gas cannot be stored). If “pipe line” could potentially mean an off-premises transportation pipeline, this would create a disparity in the delivery points for different minerals—oil transported by truck from the well would be valued “at the mouth of the well,” whereas gas transported via pipeline would be valued downstream at the transportation pipeline. Under Engler’s construction of the deed, the variety of potential delivery points could yield vastly different royalty calculations for no discernable or textually supportable reason. 24 Further, given the existence of transportation pipelines at the time the deed was executed, the failure to mention such pipelines—by description or even by type—is telling. This circumstance coupled with the nonexistence of a gathering pipeline at that time as well as the articulation of a wellsite delivery point as a default, supports the parties’ intent that delivery would occur into pipelines on the wellsite, if any, rather than an intent to establish a downstream delivery point that would result in a markedly different royalty calculation. 3. Contracts Are Construed According to Their Terms Although mineral transactions are subject to certain presumptions that state the “usual” rules, we have repeatedly affirmed that parties are free to make their own bargains, and courts are obligated to enforce agreements as the parties intended. 69 We discern that intent from the language the parties used to express their accord, viewed not in isolation, but in context. 70 The analysis in Burlington Resources expresses, applies, and confirms this principle. 71 There, we held that language assigning an overriding royalty interest equated certain language specifying an “into the pipeline” delivery point with an “at the mouth of the well” valuation. 72 But we did not fashion a rule to that effect. To the contrary, we explained that “the decisive factor in 69 Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121-22 (Tex. 1996) (emphasizing oil-and-gas royalty agreements are construed under general rules that may be modified by the parties’ agreement). 70 Id. at 121. 71 See Burlington Res. Oil & Gas Co. v. Tex. Crude Energy, LLC, 573 S.W.3d 198, 202-11 (Tex. 2019). 72 Id. at 211. 25 each [contract-construction] case is the language chosen by the parties to express their agreement.” 73 Just as in Burlington Resources, our analysis here turns not on an immutable construct but on the parties’ chosen language.