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One day after oil and gas royalty law takes effect, North Dakota calls rule unconstitutional

The brief filed Monday on behalf of the North Dakota Board of University and School Lands argues the new law, which sets limits on how far back oil companies must pay old royalties to the state, violates part of the U.S. Constitution that says a state cannot pass laws that impair the obligation of previously agreed contracts.

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A pumpjack is pictured at an oil well in western North Dakota. Dickinson Press file photo
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BISMARCK — North Dakota is calling foul on legislation passed just a few months ago that sets limits on how far back oil companies must pay old royalties to the state.

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 industry-backed legislation approved by the Republican-led Legislature and Gov. Doug Burgum retroactively established a statute of limitations for state collections of royalty payments, meaning the Department of Trust Lands can't require firms to pony up on outstanding royalty bills from before August 2013.

The law had only been in effect one day before the state submitted a legal brief on Monday, Aug. 2, asking for a McKenzie County judge to strike it down. Until a court rules to annul the law, it will remain on the books.

The state's challenge comes as another significant development in a longstanding legal battle over royalty payments.

At the heart of a 2018 lawsuit filed by Newfield Exploration against the state lies a disagreement over whether companies should be able to take deductions from their royalty bills to cover the costs of transporting and purifying oil.

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The department said the deductions taken for many years were improper and violated the lease agreement between the state and the company, which is now owned by Denver-based Ovintiv. Newfield, which argues the deductions were always allowed, sued the state after the department said the company and about 40 other firms had to pay back the millions of dollars they had taken in deductions.

The North Dakota Supreme Court ruled in the state's favor in 2019, but the case has since returned to a Watford City district court to be further adjudicated. A trial is scheduled for October.

The company filed a motion earlier this summer asking the court to acknowledge that the new law meant the state couldn't collect on overdue royalty payments from before August 2013.

State Brief by Jeremy Turley on Scribd

The brief filed Monday by the state on behalf of the Board of University and School Lands argues the new law violates part of the U.S. Constitution that says a state cannot pass laws that impair the obligation of previously agreed contracts. The state also contends that letting Newfield off the hook for royalties owed prior to the new statute of limitations would unlawfully deprive trust funds managed by the department, including one dedicated to public K-12 education .

A lawyer for Newfield did not immediately respond to a request for comment, and a spokeswoman for the state Attorney General's office, who is representing the board and the department, declined to comment.

Ron Ness, president of the North Dakota Petroleum Council, said the new law is a good resolution to a contentious issue and the challenge from the state is disappointing. In the meantime, Ness said he's advising his clients, which include more than 650 oil and gas-related companies, to follow the new law.

Land Commissioner Jodi Smith, who declined to comment on the lawsuit, said the new law spurred several firms to pay old royalty bills and many others to start negotiating terms with the department. The department claims more than 20 companies, including industry giants Continental Resources, ConocoPhillips and Hess, still owe the state hundreds of millions of dollars in old royalty payments.

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

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

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

Jeremy Turley is a Bismarck-based reporter for Forum News Service, which provides news coverage to publications owned by Forum Communications Company.
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