601 S.W.3d 848
Tex. App.2019Background
- BlueStone (lessee) and multiple lessors executed printed oil-and-gas leases with an attached Exhibit A (addendum). The printed lease set gas royalty as “market value at the well” (classic at-the-well formulation).
- Exhibit A contained Paragraph 26: a no-deductions first sentence and a second sentence requiring lessee to “compute and pay royalties on the gross value received, including any reimbursements for severance taxes and production related costs.”
- Exhibit A’s intro stated it “supersedes any provisions to the contrary in the printed lease.” Parties agreed the leases were not ambiguous and cross-moved for summary judgment on whether BlueStone could deduct post-production costs.
- Trial court held lessee breached the leases by deducting post-production costs and by not paying royalties on gas used as Plant Fuel and Compressor Fuel; consolidated final judgment awarded stipulated damages and attorneys’ fees.
- On appeal, BlueStone argued the printed lease’s “market value at the well” yardstick controlled (so lessors bear post-production costs); lessors argued Paragraph 26’s “gross value received” creates a pure-proceeds measure and, under Exhibit A’s superseding clause, shifts post-production costs to lessee.
Issues
| Issue | Plaintiff's Argument (Lessors) | Defendant's Argument (BlueStone) | Held |
|---|---|---|---|
| 1) Who bears post-production costs: do leases permit lessee to deduct post-production costs from royalties? | Paragraph 26’s second sentence ("gross value received") creates a pure-proceeds yardstick; Exhibit A’s superseding clause controls when provisions conflict, so lessee bears post-production costs. | Printed lease’s Paragraph 3 sets market-value-at-the-well yardstick; that valuation point is controlling and renders Exhibit A’s no-deduction language surplusage, so lessors bear post-production costs. | The court held Paragraph 26 and Paragraph 3 are contrary; because Exhibit A says it supersedes contrary printed-lease provisions, Exhibit A governs. Lessee (BlueStone) must bear post-production costs; its deductions breached the leases. |
| 2) Must lessee pay royalty on gas used as Plant Fuel and Compressor Fuel (used off-lease)? | Free-use clause only covers operations “hereunder”; that limits free use to operations on the leased premises, so gas used off-lease (plant/compressor fuel) is royalty-bearing. | Free-use clause or “gross value received” should exempt fuel used in processing/operations or no proceeds were received for fuel so no royalty is due. | The court held “hereunder” limits free use to on-lease operations; gas used off-lease as Plant and Compressor Fuel is royalty-bearing. The lessee owed royalties on those volumes. |
| 3) Attorneys’ fees (conditional) | If summary judgment reversed in whole/part, trial court’s fee award would be reviewable. | — | Moot: court affirmed the dispositive rulings, so fee award review was unnecessary. |
Key Cases Cited
- Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) (market-value-at-the-well formulation allows lessee to net-back post-production costs; no-deduction clause can be surplusage)
- Chesapeake Exploration, L.L.C. v. Hyder, 483 S.W.3d 870 (Tex. 2016) (parties may allocate post-production costs by contract; “price actually received” language can disallow deductions)
- Judice v. Mewbourne Oil Co., 939 S.W.2d 133 (Tex. 1996) (‘‘gross proceeds’’ or ‘‘amount realized’’ can conflict with ‘‘at the well’’ and affect allocation of post-production costs)
- Union Pacific Resources Group v. Hankins, 111 S.W.3d 69 (Tex. 2003) (distinguishes market-value vs. proceeds yardsticks and explains valuation methods)
- Warren v. Chesapeake Exploration, L.L.C., 759 F.3d 413 (5th Cir. 2014) (interpreting addendum language; context-sensitive construction of no-deductions/addendum clauses can affect who bears post-production expenses)