Tuesday, February 18, 2020

Top Story, North Dakota Energy, Last Week -- Geoff Simon -- Royalties -- February 18, 2020

This is actually one court ruling that I can understand after reading it only once. 

First, this:
In a strongly worded letter to its members, the North Dakota Petroleum Council (NDPC) calls a decision by the state Land Board an "overreaction" to a recent court decision regarding royalty deductions associated with processing natural gas.
The Land Board this week issued guidance to Land Commissioner Jodi Smith regarding a ND Supreme Court ruling in the case of Newfield Exploration v State of North Dakota.
The bottom line of the court ruling was that "Gross proceeds from which royalty payments under leases are calculated may not be reduced by an amount that either directly or indirectly accounts for post-production costs incurred to make the gas marketable."
In response, the Land Department sent a letter to producers notifying them that if they have been deducting post-production costs from royalty payments, they have been underpaying royalties. NDPC takes issue with the state's insistence on royalty payments going "as far back as 1979, long before the Newfield ruling was handed down."
The Petroleum Council maintains that the law does not require a lookback beyond the Newfield case, which was initiated in 2017. 
The Land Board included a flowchart with the letter that specifies how the gas royalties should be paid and would impose penalties and interest that NDPC says "will cost our industry tens of millions that would otherwise be invested in drilling new wells or gas capture infrastructure." The Petroleum Council's letter argues that the Land Board's action "violated the public trust by prioritizing what amounts to a quick cash grab over the health of the very industry that is sustaining the trust funds under the Land Board's control." NDPC urged its members concerned about the issue to contact Land Board members.
Lynn Helms:
North Dakota's top oil-regulator said he is concerned about potential consequences of the state Department of Trust Lands' action regarding collection of unpaid royalties on natural gas.
Lynn Helms, director of the Department of Mineral Resources, said he cautioned the Land Board that being overly aggressive in their efforts would be a disincentive to reduce flaring "because the quickest and easiest way to reduce the royalty burden on gas is to flare it."
With natural gas wellhead prices well below $2.00 per thousand cubic feet, it is not economic to capture and process the gas.
It is only because of state's gas capture regulations that they are compelled to do so. The inability of producers to deduct expenses from royalty payments tends to discourage investment in gas capture infrastructure.
Helms said he advised the Land Board to consider the implications of any decision to collect royalties on natural gas on the much larger pot of royalties paid on oil production.
1979? Get out the popcorn.

Long Ago, And Far Away

An earlier life:

It's hard to see, but it appears we (John Erickstad and I) were both majors in this photograph.
"Field grade” officers are mid-level executives in the grades of major (O-4), lieutenant colonel (O-5) and colonel (O-6). Traditionally, [US army] companies were organized into regiments commanded by colonels and assisted by a lieutenant colonel (as the second-in-command) and a single major (serving as the senior regimental staff officer and performing essentially the same function as a modern-day battalion or regimental operations officer, or “S-3” officer).

“Company grade” officers are junior executives in the grades of lieutenants (second and first) and captains (O-1 through O-3). Link here


  1. We don't have a lot of mineral rights but do get 1 to $2,000 a month and I have always questioned the gas transportation deductions as I have watched gas pipelines and processing plants being built. I wasn't aware there was a law suit, but thank you for highlighting this. I am very grateful for your continued fascination with the bakken!!

    1. Thank you for your kind words. Like you, I had completely missed this one. I was aware of a lawsuit but had not paid attention to the particulars. I have a lot of thoughts on this one, but I think it best to keep my thoughts to myself. But on this on, I'm on the side of the small mineral owners.