## Facts

- Mineral-interest owners executed materially identical oil-and-gas leases in 2003 consisting of a printed form and an addendum stating it superseded contrary printed terms.
- The printed form set gas royalties by market value “at the mouth of the well,” which generally permits net-back deductions for postproduction costs.
- The addendum required royalties be computed on the “gross value received,” which generally bars deduction of postproduction costs.
- For years, the original lessee paid royalties without deducting postproduction costs.
- After acquiring the leases, BlueStone began deducting postproduction costs before computing royalties.
- BlueStone also stopped paying royalties on (a) gas exchanged to a third-party processor and consumed off-lease as processing-plant fuel and (b) commingled gas used as compressor fuel on and off the leased premises.
- BlueStone relied on a lease “free use” clause allowing free use of gas “in all operations which Lessee may conduct hereunder,” while the leases also required royalties for gas “sold or used off the premises.”
- The lessors sued for underpaid royalties; the trial court and court of appeals ruled for the lessors, including damages calculated on each leasehold’s full aliquot share of compressor-fuel gas.

## Issues

1. Whether the leases allow deduction of postproduction costs when the printed form uses an “at the well” measure but the addendum requires royalties on “gross value received” and states it supersedes contrary printed terms.
2. Whether the “free use” clause authorizes consumption of lease gas in off-lease operations without paying royalties, given a separate obligation to pay royalties on gas “sold or used off the premises.”
3. Whether damages for compressor-fuel royalties were conclusively established where gas was commingled and the record did not show each leasehold’s full aliquot share was used off-lease.

## Decision

- Affirmed that the addendum’s “gross value received” royalty clause controls over the printed “at the mouth of the well” language; BlueStone could not deduct postproduction costs.
- Held the free-use clause is limited to on-lease uses when read with the requirement to pay royalties on gas “sold or used off the premises.”
- Affirmed liability for royalties on processing-plant fuel consumed off-lease because that use fell outside the free-use clause.
- Held on-lease compressor-fuel use can fall within free use, but the evidence did not conclusively support the damages award based on each leasehold’s full aliquot share of commingled gas.
- Reversed the compressor-fuel damages award and remanded to determine damages, if any, for off-premises compressor-fuel use.

## Legal Principles

- When a lease addendum expressly supersedes contrary printed provisions, the addendum governs in the event of conflict.
- A royalty clause requiring payment on “gross value received” functions as a gross-proceeds measure that does not permit deduction of postproduction costs from the royalty base.
- “At the well” (or “mouth of the well”) royalty language generally contemplates a net-back measure allowing postproduction deductions, creating a conflict with a gross-proceeds clause.
- A “free use” clause authorizing free gas “hereunder” is construed in context and may be limited to on-premises operations, especially where the lease separately obligates royalties for gas “sold or used off the premises.”
- In commingling situations, royalty damages must be supported by proof allocating the relevant gas volumes and showing which uses are royalty-bearing versus within free use; absent conclusive proof, damages cannot rest on assumptions about each lessor’s full aliquot share.

## Conclusion

The Supreme Court of Texas enforced the addendum’s gross-value royalty clause to bar postproduction cost deductions and construed the free-use clause to permit only on-lease royalty-free consumption, requiring royalties for off-lease plant-fuel use while remanding for a proper damages determination regarding commingled compressor-fuel volumes used off premises.


BlueStone Natural Resources II, LLC v. Randle, 620 S.W.3d 380 (Tex. 2021)