Reed Smith Client Alerts

On March 12, 2021, the Supreme Court of Texas affirmed that the royalty clause in a superseding addendum to an oil and gas lease requiring the lessee to “compute and pay royalties on the gross value received” restricted the lessee from deducting post-production costs despite language in the body of the lease stating the royalty was based “on the market value at the well.” Further, in a matter of first impression, the Court determined that the lease’s specific “free use” clause allowed gas to be used royalty-free on premises, but not otherwise. The decision turned on application of foundational contract law principles and highlights the importance of plain language found in oil and gas leases. 

Authors: Lucas Liben Nicole Soussan Caplan Mason W. Malpass

Golden pipes going to oil refinery

Summary

BlueStone Natural Resources II v. Walker Murray Randle arises from a dispute relating to natural gas royalties BlueStone Natural Resources II, LLC (“BlueStone”) paid to various groups of Lessors. The Lessors sued BlueStone, alleging BlueStone improperly used an “at the mouth of the well” computation and wrongfully deducted post-production costs before calculating payments to Lessors. Specifically, Lessors argued a controlling addendum to the lease mandated calculating royalties on “gross value received.” The Lessors also argued that BlueStone impermissibly failed to pay royalties on commingled volumes of gas used by an off-lease third party through misconstruction of a “free use” provision in the lease.

In the trial court, Lessors prevailed on a traditional summary judgment motion as to both claims, and the Fort Worth Court of Appeals affirmed the judgment. The Supreme Court affirmed the lower courts’ calculation of the royalties based upon gross value and their interpretation that the “free use” clause was limited to on-lease operations, but remanded for further findings on the appropriate damages measure.

In reaching its decision, the Court applied general contract-law principles and determined that proper construction of the lease was predicated upon the language in the agreement and the parties’ intentions as expressed in that writing. In doing so, the Court distinguished Burlington Resources Oil & Gas Co. LP v. Texas Crude Energy, LLC, 573 S.W.3d 198 (Tex. 2019), from the language at issue, concluding that the addendum’s superseding language eclipsed the language allowing deduction of post-productions costs at issue in the Burlington case. Similarly, the Court followed the plain language of the lease to determine that the free-use clause was geographically limited to only on-lease operations.