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New law spurs oil firms to pay old royalties to North Dakota, but disputes remain

Companies agree to pay oil and natural gas royalties and any late fees to the state for the right to extract publicly owned minerals, but the industry-backed legislation approved earlier this year lowers the maximum annual interest and penalties applied to overdue royalty payments from 30% to 15%.

The bill, which will go on the law books in August, also retroactively establishes a seven-year statute of limitations for state collections of royalty payments, meaning the Department of Trust Lands can’t require companies to pony up on outstanding royalty bills from before August 2013. The department currently requires companies to pay old royalties and late fees dating back to when they first began operating in the state — for some firms, that could be several decades.

The department claims 27 companies, including industry giants Continental Resources, ConocoPhillips and Hess, owe the state hundreds of millions of dollars in old royalty payments, which if collected, would mostly go to support public K-12 education in the state.

But since Gov. Doug Burgum signed the legislation in April, the department has received 18 settlement offers from firms that owe old royalties, Land Commissioner Jodi Smith said. The department has already accepted three proposals from companies that offered to pay the full amount owed, but others are still being reviewed or negotiated, Smith told Forum News Service.

The sudden shift toward resolving the old payments breaks a near gridlock between the state and the companies, many of which previously said they would hold out for a final ruling on a prolonged lawsuit. At the heart of that litigation is a disagreement over whether companies should be able to take deductions from their royalty bills to cover post-production costs, like removing impurities from oil and transporting it.

North Dakota Petroleum Council President Ron Ness described the newly approved legislation as the catalyst for the industry’s increased cooperation with the department, saying the bill’s passage could mean extra dollars for K-12 education that would’ve otherwise been tied up in dispute. Ness, whose organization represents more than 650 oil and gas-related companies, added that many firms just want to put the issue in the rearview mirror.

However, the bill has also created a new point of contention for Smith. She estimates the new statute of limitations on royalty payments will prevent the department from collecting about $70 million in unpaid royalties. Smith said she didn’t know how many firms owe royalties from before the new cutoff date.

North Dakota Land Commissioner Jodi Smith listens during a Land Board meeting in March 2019. Forum News Service file photo

North Dakota Land Commissioner Jodi Smith listens during a Land Board meeting in March 2019. Forum News Service file photo

The commissioner contends there are “constitutional concerns” about the new statute of limitations, but she said the Board of University and School Lands, a panel of five statewide elected officials, would have to decide whether to file a lawsuit. The board, chaired by Burgum, did not take action on any potential litigation at its meeting on Tuesday, May 25.

As for the bill’s mellowing of the late fees, Smith said her department has rarely imposed the maximum penalties and the new 15% rate represents a palatable compromise with oil companies.

Ness said the “common sense” legislation softens overly punitive late fees and helps the industry move forward. He added that it’s inaccurate to claim companies owe the pre-2013 payments at all, but even if they do, the unlimited look-back period eliminated by the bill was “just unreasonable.”

Ron Ness, the president of the North Dakota Petroleum Council, speaks at the Williston Basin Petroleum Conference in Bismarck on Wednesday, May 12, 2021. Jeremy Turley / Forum News Service

Ron Ness, the president of the North Dakota Petroleum Council, speaks at the Williston Basin Petroleum Conference in Bismarck on Wednesday, May 12, 2021. Jeremy Turley / Forum News Service