620 S.W.3d 380
Tex.2021Background
- Lessors executed leases with a two-page Printed Lease plus an Addendum stating the Addendum "supersedes any provisions to the contrary."
- Printed Lease royalty formula measured "market value at the mouth of the well." Addendum required royalties on the "gross value received" and said royalties "shall be without deduction" for postproduction costs.
- Quicksilver originally paid on gross proceeds; BlueStone acquired the leases in 2016 and began deducting postproduction costs, reducing royalty payments.
- Lessors sued; discovery and stipulations showed commingled gas was processed offsite (Crestwood), some used as plant fuel (off-lease) and some returned/used as compressor fuel (some on-lease, some off-lease).
- Trial court and court of appeals ruled for Lessors on both disputed contract issues and awarded damages based on stipulated aliquot shares; Texas Supreme Court affirmed in part, reversed in part, and remanded limitedly.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether lease permits deduction of postproduction costs before computing royalties | Addendum's "gross value received" (and "without deduction") controls; prohibits deductions | "At the mouth of the well" (Printed Lease) supplies valuation point permitting workback/deductions; terms can be harmonized | Addendum and Printed Lease conflict; parties agreed Addendum controls; royalties must be computed on gross value received—postproduction costs not deductible |
| Whether free-use clause allows royalty-free off-lease use (plant fuel and compressor fuel) | Free-use applies to any use that "benefits or furthers" lease operations; royalties not due on such uses | Free-use limited to operations "hereunder"/"thereon" — i.e., on the leased premises; off-lease uses (plant fuel) require royalty | Free-use clause construed to cover on-lease uses only; Plant Fuel (off-lease) not free. Compressor Fuel used on-lease may be free, but commingling/aliquot facts create unresolved damages issues—remand to determine extent |
Key Cases Cited
- Judice v. Mewbourne Oil Co., 939 S.W.2d 133 (Tex. 1996) (held that joining "gross proceeds" with "at the well" creates an inherent conflict between gross and net valuation)
- Burlington Res. Oil & Gas Co. LP v. Tex. Crude Energy, LLC, 573 S.W.3d 198 (Tex. 2019) (explained that contract terms must be read together; "at the well" language can convert an "amount realized" clause into a net calculation when the contract so provides)
- Humble Oil & Ref. Co. v. West, 508 S.W.2d 812 (Tex. 1974) (commingling/aliquot-share rule: party commingling must identify each owner's share or bear loss)
- Chesapeake Expl., L.L.C. v. Hyder, 483 S.W.3d 870 (Tex. 2016) (discussed when postproduction costs may be borne by lessor vs. lessee and interpretation of proceeds-language)
- Warren v. Chesapeake Expl., L.L.C., 759 F.3d 413 (5th Cir. 2014) (held unmodified "amount realized" clauses generally preclude deduction of postproduction costs; "at the mouth of the well" can change that result)
- Anderson Living Tr. v. Energen Res. Corp., 886 F.3d 826 (10th Cir. 2018) (comparing free-use clause constructions under New Mexico and Colorado law; context and wording determine geographic scope)
- ConocoPhillips Co. v. Lyons, 299 P.3d 844 (N.M. 2012) (interpreted free-use and related clauses to allow off-lease use where lease language and context supported it)
- Bice v. Petro-Hunt, L.L.C., 768 N.W.2d 496 (N.D. 2009) (allowed off-lease free use where centralized operations were treated as functional equivalents of on-lease operations)