Oil Industry, State At Odds Over Royalty Payments

BISMARCK — The oil industry is working to avoid paying higher royalties to North Dakota by backing an amendment in a complex bill being considered in the final days of the state’s legislative session.

The amendment stems from a dispute with the North Dakota Department of Trust Lands, which says some oil companies are underpaying the state by taking improper deductions on natural gas royalties.

The North Dakota Petroleum Council has a different interpretation of the leases that have been in place since 1979 and accuses the department of drastically changing its policy.

The issue is included in one of the remaining bills being debated in conference committee, with the next discussion set for Monday, April 24.

Land Commissioner Lance Gaebe said the department discovered the incorrect payments while auditing several of the 80 oil and gas companies that lease state-owned minerals.

“It came to light more recently because gas values have dropped so much,” Gaebe said. “It’s actually costing more to process gas than the gas is worth at the front end.”

The state’s leases do not permit oil companies to deduct transportation costs and other expenses from the value of the gas, according to a legal analysis from the Attorney General’s Office.

The department is attempting to collect royalties that are due from companies that underpaid. The amount of money at stake is unknown because the audit process is still ongoing, Gaebe said.

“As we go through those audits, we’ll do more effort to figure out the scale of the impact,” he said.

The Board of University and School Lands is preparing to send a letter to oil companies directing them to get in compliance with the lease terms.

“The bottom line is the companies would like to be able to take deductions because that helps them collect a smaller royalty,” Gaebe said. “But my responsibility and the board’s is to ensure that the lease terms are followed and that we collect for the Common Schools Trust Fund and the other trust funds what they’re entitled.”

Shift in policy?

The oil industry says the agency is trying to implement a dramatic change in policy.

“They’re changing the rules of the game midway through,” Continental Resources representative Brooks Richardson told members of a legislative subcommittee earlier this month.

Petroleum Council President Ron Ness said the department’s approach would make it difficult for companies to invest in gas processing plants, pipelines and other infrastructure necessary to meet the state’s rules on reducing flaring.

Ness said the industry has invested $13 billion to capture natural gas and cautions that the Land Department’s interpretation of the leases would hinder future investment.

The oil industry has submitted comments and a legal analysis to the Land Board while also working to oppose it through legislative action.

Days after the Land Board discussed the matter, Rep. Keith Kempenich, R-Bowman, introduced an amendment to the Department of Trust Lands’ budget bill at the request of Continental Resources and the Petroleum Council.

The amendment has “legislative intent” directing the land commissioner not to change the policy on gas royalties. The amendment also seeks to encourage continued development of energy infrastructure that reduces flaring and adds value to the gas.

“We want them to do it the right way because we need the investment out there,” Kempenich said.

Gaebe said the wording of the amendment is an inaccurate characterization of the situation.

“It’s not a new position or a new policy,” he said.

Oil production sites are pictured in McKenzie County, N.D., on Thursday, July 28, 2016. Eric Hylden / Forum News Service

It’s unclear what impact legislative intent would have. Rep. Jeff Delzer, R-Underwood, said the language “does not carry the force of the law, it’s just the intent of the Legislature.”

“It doesn’t really mean a lot but it brings the subject forward,” said Delzer, a member of the conference committee working on the bill, which is Senate Bill 2013.

The House has approved the bill including that amendment, but the issue received a 30-second explanation on the floor. Legislators are more focused on other aspects of the bill, which also involves a contentious debate over the distribution of oil tax revenue and airport funding for Williston and Dickinson.

The proposed legislation is now in conference committee where House and Senate members are working to resolve their differences.

Kempenich said he’s explained the amendment to anyone who’s asked, but he acknowledged that probably only a handful of legislators understand the complex issue. The bill could be up for a vote on Monday if legislators reach a compromise in committee. Legislative leaders are hoping to conclude the session on Tuesday.