BISMARCK — Thirty-four oil and gas companies operating in North Dakota have not paid tens of millions of dollars in overdue gas royalty payments owed to the state for public school funding. Many are waiting for a drawn-out court case to unfold as interest and penalties accumulate on their tabs.

The names of the firms on the hook for old royalty payments have not been publicly released in the past, but the state Department of Trust Lands provided them following a request by Forum News Service.

The list of companies includes many of the giants of North Dakota's Oil Patch, including Continental Resources, Hess, Whiting, Oasis Petroleum and ExxonMobil subsidiary XTO Energy. Continental Resources, which is chaired by billionaire businessman Harold Hamm, was the state's top gas royalty payer in fiscal year 2020.

Most of the companies maintain out-of-state headquarters, but a few are based in North Dakota, including Dickinson's Armstrong Operating, which is owned by U.S. Rep. Kelly Armstrong's father, Mike. Company controller Scott Lafond would not comment on the royalty payments, citing ongoing litigation. Forum News Service made attempts to reach all of the firms, and several offered the same reply, while many others did not respond to requests for comment.

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Land Commissioner Jodi Smith noted that all of the firms have been in contact with the department, demonstrating varying degrees of willingness to cooperate.

The exact amount of money owed by each of the 34 "out-of-compliance" firms is unknown to the state because companies are responsible for looking back through their own records to determine the sum. Smith's department keeps the records too, but she said it would be too laborious to calculate the amount owed for each company. Instead, the department audits the amount determined by each company to ensure it's correct.

The incentive to make the overdue payments is strong for companies, Smith said. The more time they wait, the more penalties and interest accrue on their bills, and starting at the end of September, those rates will go up even further. Some firms now owe more in interest and penalties than they do in royalty payments, she said.

Once repaid, the money goes to the Common Schools Trust Fund, which supports public K-12 education in the state. The fund that also receives income from land leased to ranchers, a tobacco lawsuit settlement and earnings on investments provided nearly $367 million toward the state's school funding during the current two-year budget cycle. The amount for schools was increased to $419 million for the next two-year cycle to soften any blows to state aid resulting from the coronavirus, low oil prices and overall economic downturns.

The royalty payment issue has caused palpable friction between the state and the firms, many of which contend that the way owed amounts are calculated is unfair and overly burdensome.

The dispute came to a head in February when the department issued letters to dozens of companies detailing how they must pay back money owed to the agency or face significant penalties.

Since then, Smith says seven firms have paid a combined $600,000 in royalties to the state, but the other 34 companies still owe tens of millions of dollars in royalty payments, late penalties and interest, Smith said.

Meanwhile, 14 companies have been paying royalties correctly the whole time, according to department audits. The seven companies that have reimbursed the department for overdue royalty payments after being audited include SM Energy Company and Lime Rock Resources, which rank among the top 20 gas royalty payers to the state.

Another 25 small firms are currently being audited or have not yet been audited to determine if they owe old royalty payments, said Director of Revenue Compliance Adam Otteson.

Sticking points

A lawsuit that could influence whether oil and gas companies owe overdue royalty payments has been playing out in North Dakota courts.

The state Supreme Court ruled last year that oil and gas company Newfield Exploration had been taking improper deductions from its royalty payments owed to the North Dakota Department of Trust Lands for extracting state-owned minerals. The decision also affected at least 40 other companies that had been working under similar arrangements.

The case has since returned to a lower court, and state District Judge Robin Schmidt decided at a March hearing that the Supreme Court only ruled on how Newfield's contract with the state should be interpreted. Schmidt said there needs to be a follow-up trial, which is expected to go forward next year, to determine if the company broke its contract with the state.

North Dakota Petroleum Council President Ron Ness said the companies that haven't made the payments are smart to hold out until the Newfield case is settled. Ness, whose organization represents more than 650 oil and gas-related companies, said the state should at least wait for the legal process to play out before demanding payment.

Ron Ness
Ron NessSubmitted photo

One major sticking point for the companies is the idea that the payments apply retroactively to when their oil wells first began producing gas in the state. The department has told 10 companies they must pay royalties from as far back as 1989, though many others came to the state around the time of the oil boom in 2009, Smith said.

Smith added that the department decided on the retroactive dates because the state's statute of limitations is at least 40 years long, and it could be accused of not fulfilling its responsibilities to the schools if it didn't go back far enough.

Ness said producers should not have to pay back anything from before the department notified them about being audited, which for some came in May 2017. He noted that companies were split on whether they should have to make any retroactive payments at all.

For big-time oil producers, the state is "tripping over dollars to save nickels" by trying to collect on small debts, rather than helping to get production back on track, Ness said. The state also wants companies to stop flaring produced natural gas, but Ness argued North Dakota officials are deterring companies from investing in gas capture by making the already tight margins even tighter.

Smith said she "wholeheartedly disagree(s)" with Ness' reasoning, noting that "when you're talking about tens of millions of dollars, that's not nickels anymore." Smith added that the royalty payments are part of the companies' contractual obligations with the state.

Ness said the state should read the situation better and do what it can to accommodate companies struggling to stay afloat during the turbulent times in the Oil Patch. A steep drop in demand for oil during the coronavirus pandemic combined with a March price war between Russia and Saudi Arabia hit North Dakota producers hard and prompted thousands of layoffs and furloughs in the industry.

However, all of the firms that owe the Department of Trust Lands old royalty payments were out of compliance with the state when oil prices were high, Smith said. The department had the same problems collecting the payments when times were good in the Oil Patch, so Ness' point doesn't stand, she said.

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