Bluestone v. Randle – Another Case to Watch – Post-Production Costs

Final April the Fort Truly worth Court of Appeals issued its belief in Bluestone Normal Sources II, LLC v. Randle, No. 02-18-00271-CV, 2019 WL 1716415. The Court decided that, below Randle’s lease, Bluestone could not deduct put up-manufacturing expenses and owed royalty on plant gasoline and compressor gasoline. Bluestone has petitioned the Supreme Court for evaluate and the Court has questioned for briefs on the deserves.

Randle’s lease was a printed variety with an show. The printed variety provided that royalties on gas would be “the current market worth at the properly of just one-eighth of the gas so offered or made use of …” Show A provided that “the language on this Show A supersedes any provisions to the contrary in the printed lease hereof.” Just one provision in Show A dealt with put up-manufacturing expenses:

Lessee agrees that all royalties accruing below this Lease (which includes those people compensated in kind) shall be with no deduction, directly or indirectly, for the cost of generating, collecting, storing, separating, treating, dehydrating, compressing, processing, transporting, and normally making the oil, gas and other goods hereunder ready for sale or use. Lessee agrees to compute and pay back royalties on the gross worth acquired, which includes any reimbursements for severance taxes and manufacturing associated expenses.

The demo court docket held that Bluestone could not deduct put up-manufacturing expenses, and the Fort Truly worth Court of Appeals agreed. The Court distinguished Heritage Sources v. NationsBank, 929 S.W.2d 118 (Tex. 1996) and held that the no-deduction clause in the lease’s show modified the royalty clause – in individual, the next sentence of that clause. The next sentence, not existing in Heritage, provided an alternate evaluate of worth for royalties – “gross worth received” somewhat than “market worth at the well” – and “gross worth received” usually means proceeds prior to deduction of put up-manufacturing expenses. This portion of Show A conflicts with the printed royalty clause and so will have to supersede that clause.

Bluestone argued that the next sentence in the Show A provision did not create an alternate “valuation point” for the royalty, so the valuation stage will have to continue to be “at the well” as provided in the printed variety. The Court disagreed:

[Bluestone] argues that the moment an “at the well” evaluate is baked into the royalty provision, it calls for tremendous clarity in any provision that tries to change its result. We construe this argument to indicate that the moment a royalty supplies an “at the well” stage of valuation, a lease can change that scheme of valuation only by clearly altering its terms to offer a distinct stage of valuation, this sort of as by placing the words and phrases “at the well” when they appear in a lease. …

We do not see how we would be giving Show A its managing part if we ended up to slash and previous the words and phrases “at the well” from Paragraph 3 of the Printed Lease into Paragraph 26 of Show A. In reality, that approach would seem to be to take specifically the opposite approach mandated by the superseding provision in Show A we would be resolving the conflict by giving superseding result to the terms of the Printed Lease. …

In essence, Appellant’s position boils down to the argument that the moment it seems, the “at the well” evaluate is so “baked into” the royalty calculation that it has to be bodily eradicated by heading to the duration of in fact placing those people words and phrases anywhere they appear.

The Court famous that the Supreme Court has recognized that  “a proceeds measure–not tied to individual stage of sale–creates a evaluate that does not permit the lessor to web-back its put up-manufacturing expenses,” citing Judice v. Mewbourne Oil Co., 929 S.W.2d 133, 136 (Tex. 1996): Burlington Res. Oil & Fuel Co. LP v. Texas Crude Power, LLC, 2019 WL 983789 at 5 Chesapeake Expl. LLC v. Hyder, 483 S.W.3d 70, 873 (Tex. 2016) and Heritage Res., 939 S.W.2d at one hundred thirty.

The Court famous that its conclusion may possibly be contrary to that of the El Paso Court of Appeals in Commissioner v. SandRidge, 454 S.W.3d 603 (Ct.Application.-El Paso 2014, no pet.), which construed very similar language to permit deduction of put up-manufacturing expenses.

The Court also held that Bluestone had to pay back royalty on plant gasoline and compressor gasoline. Plant gasoline was gas created from the leased premises and burned in the gas plant that processed the lessee’s gas. The compressor gasoline was a commingled gas stream that included gas created from the lease and other leases and was sent to compressors on Plaintiff’s lease and other leases to compress gas created from the leases. The lease supplies that “Lessee shall have absolutely free from royalty or other payment the use of … gas … created from claimed land in all operations which Lessee may possibly carry out hereunder .. and the royalty … shall be computed immediately after any so made use of.” The Court held that this provision applied only on gas made use of on the leased premises. “Hereunder usually means “under or in accordance with this creating or doc.” Plant gasoline was not made use of to run the lease or create oil or gas from the lease, but to approach gas in the 3rd-party gas plant.

The Court also reasoned that the lease necessary payment of royalty on “gross worth received” from the manufacturing that the lessee acquired worth from the processo in trade for absolutely free use of the gas as gasoline and that Bluestone owed royalties on that worth.one

The Court recognized that some of the gas created from Plaintiff’s lease was made use of in compressors on the lease and therefor would be included by the “free from royalty” clause. But the Court held that, due to the fact the lessee commingled gas from the lease with other gas, it had a responsibility to account for the aliquot share of the gas that is burned in compressors on the lease, citing Humble v. West, 508 S.W.2d 812 (Tex. 1974), and had unsuccessful to do so, and so was obligated to pay back royalty on all manufacturing from the lease made use of as compressor gasoline.