Millions in old oil royalties owed to North Dakota

Jeremy Turley
Forum News Service

BISMARCK, N.D. — Several giants of the American oil industry are behind on bills owed to North Dakota for public school funding, according to the state Department of Trust Lands.

Twelve firms operating in western North Dakota, including top oil producers Continental Resources, Whiting and Hess, owe millions of dollars to the state after taking improper deductions from their oil royalty bills, Land Commissioner Jodi Smith said.

Continental, the state’s top royalty payer, is locked in a three-year-old legal battle with the department over the deduction dispute. A spokesperson for the company declined to comment on this article, citing the ongoing litigation. Several other companies offered the same response as they await the outcome of the case, which still hasn’t been to trial yet.

Speaking on behalf of the oil industry, North Dakota Petroleum Council President Ron Ness said the companies believe they have been paying the right amount in royalties all along and the department is unfairly demanding too much from them.

However, WPX Energy spokesman Kelly Swan told Forum News Service in an email that the company plans to pay back in oil royalties what the department says it owes. The Oklahoma-based firm is not among the state’s top oil producers or royalty payers.

The names of the firms on the hook for old oil royalty payments have not been publicly released in the past, but the department provided them to Forum News Service following a records request.

Forum News Service reported last month that 34 companies owed tens of millions of dollars in overdue gas royalty payments to the department, but the sum owed by the 12 firms in oil royalties is “significantly more,” Smith said.

Ten companies owe overdue royalties on both the oil and gas sides of the ledger, according to the department. Though several high-profile firms fall into this category, Smith said most companies operating in North Dakota’s Oil Patch are in the department’s good graces on oil royalties. The department has audited 43 companies, including big-name producers Marathon Oil and Oasis Petroleum, that have paid royalties “correctly” by the state’s standard.

The “out-of-compliance” companies have a strong incentive to make the overdue payments because the more time they wait, the more penalties and interest accrue on their bills, Smith said. Some firms now owe more in interest and penalties than they do in royalty payments, she added.

Once repaid, most of the money funnels into the Common Schools Trust Fund, which supports public K-12 education in North Dakota. State leaders plan to use more than $419 million from the fund over the next two-year budget cycle. A small proportion of the repaid funds would go into trusts held by the state’s universities, the North Dakota State Hospital in Jamestown and several other public institutions.

Smith said she cannot release the exact amount owed to the department in oil royalties because of the Continental lawsuit and ongoing accounting of the other companies’ debts. However, she said it would be a “notable amount for the trust.”

Heart of the issue

The friction between the department and the oil industry over old gas royalty payments is well-publicized, but the feud over underpaid oil royalties has taken place mostly behind the scenes.

There are similarities between the two disputes, including the ultimate source of disagreement.

Like nearly every oil company with a presence in North Dakota, the 12 companies that owe old oil royalties have lease agreements with the department for extracting state-owned minerals.

Continental and others contend that they should be permitted to take deductions from their oil royalty bills to cover post-production costs, like removing impurities from oil and transporting it.

Smith and the department maintain this interpretation violates the companies’ leases with the state, while Ness said the department is being “a bit greedy” by failing to consider transportation costs and other back-end expenses.

Smith said the department told a few of the companies they were taking the improper deductions in the 1990s, but most were notified in the last decade.

All 12 companies have continued to take the deductions after being told they were not allowed, Smith noted. It’s common for companies to pay the wrong amount in royalties to the department, but most quickly correct their mistakes, she added.

Ness, whose organization represents more than 650 oil and gas-related companies, said the firms are unhappy with the department’s characterization that they are delinquent on their bills. Ness added that each company has a different arrangement with the state, and it’s unfair to lump them together.

The big boom that started it all

Like with gas royalties, the department says the companies must pay back the improperly deducted amounts retroactively from when their oil wells first began producing in the state. Most of the 12 only began operating in North Dakota during the state’s oil boom in the late 2010s.

The boom generated a need within the department for more industry oversight, and the revenue compliance division was born. Previously, only a couple of employees were responsible for ensuring that every company was paying the right amount to the state, Smith said.

The new division shone a much brighter light on the royalty payment process, and the department started finding lease violations that had gone unnoticed for years, Smith said. When the department tried to collect on the underpaid tabs, Continental sued and other companies cut off communication, she said.

Petroleum Council Vice President Kari Cutting said the companies may not have known the deductions they had taken for years were not allowed, so forcing them to make years of retroactive payments wouldn’t be right.

Smith said the department has to enforce the retroactive dates because the state’s statute of limitations is 40 years long, and it could be accused of not fulfilling its responsibilities to the schools if it absolved companies of making the old payments.

Even with all the contentions, Smith said there’s been very little dialogue as most of the companies refuse to engage with the department.

Cutting said it’s typical for companies to stop discourse that isn’t through lawyers during a legal battle.

Smith acknowledged that this is true for Continental because of their lawsuit, but she said the other 11 companies aren’t a part of the ongoing litigation. Smith added that she assumes other companies are waiting on the Continental case, but they haven’t explicitly told the department that.

No action has taken place in the lawsuit in nearly a year, but interest and late penalties continue to mount on the companies’ royalty bills.

Ness said the state should wait for the legal process to play out before demanding payment.

“To claim someone’s guilty without allowing operators to get due process seems like a lack of common sense,” Ness said.

Smith said she’s always willing to have a conversation with the companies and would consider negotiating lower interest and penalty payments. She added that the department would also refund companies if a court determines it over-collected on royalty payments or misinterpreted a lease.

Cutting said the COVID-19 pandemic, collapsed demand for oil and difficulty getting capital means every dollar matters to the companies, and maintaining a “business-friendly climate” should be of greater concern to the state than trying to collect disputed debts. She added that the kinds of burdens put on companies by the state could cause some to consider withdrawing investment in North Dakota’s Oil Patch.

Smith said her department is responsible for recouping the underpaid royalties and doing anything less would fall short of her obligations to the school children of North Dakota. She added that collecting on the old payments shouldn’t be construed as anti-business.

“I don’t think asking a company to adhere to their contractual obligations is bad business. I think it’s the opposite,” Smith said. “That’s how I was raised: When you make a promise, you stick to it.”