BlueStone Natural Resources II, LLC v. Randle

Lessors including Walker Randle (collectively, the lessors) (plaintiffs) executed oil-and-gas leases with Quicksilver Resources (Quicksilver). Each lease was a two-page printed form lease with an attached addendum that expressly superseded any contrary provisions in the printed lease. Under the printed lease, the lessee was required to pay gas royalties based on the gas’s market value “at the mouth of the well,” which was a calculation method that allowed deduction of postproduction costs (i.e., the costs of preparing raw gas for sale downstream). Under the addendum, the lessee was instead required to compute and pay royalties based on the “gross value received” for the gas without deducting postproduction costs. For years, Quicksilver paid gas royalties on the gross value received without deducting postproduction costs. However, BlueStone Natural Resources II, LLC (BlueStone) (defendant) subsequently acquired the leases from Quicksilver and began deducting postproduction costs in calculating gas royalties. Additionally, the leases required the lessee to pay royalties for gas sold or used off premises, but each lease’s free-use clause stated that the lessee would have free use of gas in all operations that the lessee conducted under the lease, including water injections and recovery operations. After BlueStone’s acquisition, BlueStone failed to pay royalties on gas used as plant fuel by a third-party processor and on commingled gas returned to BlueStone for use in fuel compressors on and off the leased premises. BlueStone justified not paying royalties on this plant fuel and compressor fuel by claiming that the free-use clause applied to all gas used to benefit or further the leasehold operations, regardless of whether the gas was used on or off the leased premises. The lessors’ royalty payments decreased as a result of BlueStone’s decisions, and the lessors sued BlueStone in Texas state court. The lessors claimed that BlueStone had breached the lease by deducting postproduction costs from the gas royalties and by failing to pay royalties on the plant fuel and compressor fuel. The trial court awarded judgment for the lessors, and the appellate court affirmed. BlueStone appealed to the Texas Supreme Court.