Judge Sides With Company In Royalties Dispute With State

BISMARCK, N.D. (AP) — A judge has sided with a Houston-based energy company in a dispute with North Dakota involving oil and natural gas royalties, a decision that could affect several other drillers that allegedly owe the state millions of dollars in payments, the biggest portion of which is meant to support public education.

Northwest District Court Judge Robin Schmidt’s ruling Wednesday stems from a lawsuit Newfield Exploration filed against the state after the Department of Trust Lands conducted an audit in 2016 that claimed the company was underpaying royalties to the agency that leases rights for grazing and oil, coal and gravel production from state lands. The agency manages several state trust funds including a fund that benefits public schools.

Schmidt’s ruling follows a trial last week in Watford City. She wrote that the state’s claim of a breach of contract with the company was in question because the state failed to provide “any contract or lease ... that allows this court to meaningfully review the contract obligations and whether a breach has occurred.”

The state Supreme Court sided with the Board of University and School Lands, referred to as the Land Board, two years ago in the debate that started with the lawsuit filed by Newfield in 2018 after the state determined that companies were taking improper deductions.

The case was sent back to the lower court.

Land Commissioner Jodi Smith said the five-member Land Board, led by Republican Gov. Doug Burgum, may decide at its next meeting on Oct. 28 whether to appeal the recent lower court decision to the state’s high court.

North Dakota Petroleum Council President Ron Ness said Schmidt’s ruling has “huge ramifications” for the energy industry, and the more than two dozen operators that are in similar situation as Newfield.

“It validates they all can litigate,” Ness said.

Smith’s agency had notified more than two dozen energy companies last year that they must pay money they had deducted from royalties owed to the state for developing its minerals. An earlier audit found that some oil companies took improper deductions for transportation, processing and other costs out of royalties owed to the state, she said.

Smith said “hundreds of millions” of dollars are owed to the state by energy companies but did not provide an exact sum.

Schmidt, the district court judge based in Watford City, ruled last month in favor of the law that limits how much interest companies have to pay for unpaid oil and gas royalties and sets a statute of limitations on how far back they have to pay. The decision came after Smith’s agency argued that the legislation is unconstitutional.

Burgum signed industry-pushed legislation this year that reduces the amount of interest and penalties the state can charge companies for unpaid oil and gas royalties, from 30% to 15%. The law, which sailed through the GOP-led Legislature and took effect in August, also does not allow the state to collect unpaid royalties before August 2013.

Smith has said the legislation will cost the state about $70 million in royalty reimbursements.

She announced her resignation this week from her position, though it was unclear why she was stepping down.

Some members of the Land Board had complained about the way the royalty dispute was being publicly portrayed and directed Smith to craft a media policy spelling out guidelines for interacting with reporters.