March 20, 2022 – On Friday, February 4, 2022, the Supreme Court of Texas sided with Davis, Gerald & Cremer client BlueStone Natural Resources II, LLC in a lawsuit over the meaning of an in-kind royalty clause in an oil-and-gas deed that created a non-participating royalty interest (“NPRI”). DGC shareholders Rob Hargrove and Ryan Clinton represented BlueStone before the Supreme Court of Texas.

In the case, the deed’s royalty clause required that the lessee deliver the royalty owner’s fraction of production “free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine[.]” The issue was whether the lessee was obligated to pay the royalty owner’s share of post-production costs incurred after gas was placed into third-party gathering lines but before the gas was transferred from the gathering lines to a larger transportation pipeline. BlueStone argued that the lessee could deduct costs incurred to process, compress, and transport the gas after it entered on-lease gathering pipelines, while Engler (the royalty owner) argued that BlueStone alone was responsible for paying all costs incurred before the gas was transferred to a larger pipeline far downstream from the lease.

The Supreme Court of Texas sided with BlueStone, holding that under the plain meaning of the deed’s royalty clause, BlueStone could deduct processing, compression, and transportation costs incurred within gathering pipelines. 

Follow the links below for more information:
SCOTX Opinion
BlueStone merits brief
Oral Argument video