BISMARCK — The powerful North Dakota oil lobby has thrown its weight behind a bill in the House of Representatives that would cut down on the maximum interest and penalties the state can charge oil and gas companies for overdue royalty payments.

Companies agree to pay royalties and any late fees to the state for the right to extract publicly owned minerals, but bill sponsor Rep. Jason Dockter, R-Bismarck, said his legislation would fix an outdated system of imposing excessive charges on firms when they fall behind on the payments. The House Finance and Taxation Committee held its first hearing on House Bill 1080 on Wednesday, Jan. 6.

The state Department of Trust Lands can normally charge up to 18% in interest and 12% in penalties to companies that fail to pay their royalty bills on time, however the Land Board has suspended the accumulation of most interest and penalties until April due to hard times in the Oil Patch. The bill would make it so firms can only be charged for interest and penalties at the prime rate, which sits at 3.25%, plus another 4%.

North Dakota Petroleum Council President Ron Ness said the current interest rates for overdue royalty payments were established in the 1980s when all interest rates were higher, and the law no longer matches the business climate. He called the added late fees "extremely punitive" on companies, noting that the oil industry feels singled out by the state for having to pay such high rates.

Land Commissioner Jodi Smith said few companies are ever actually charged the maximum penalties, and it's common for her office to grant temporary exemptions on penalties to firms that have trouble paying the department punctually.

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The bill would also extend the amount of time before interest and penalties begin building up on companies' royalty bills to 150 days. As it stands now, the added charges start accruing on oil royalty bills after 30 days and on gas royalty bills after 60 days, Smith said.

Smith said she won't express the department's view on the proposal until after she hears from the Land Board, which includes Gov. Doug Burgum, Attorney General Wayne Stenehjem, Treasurer Thomas Beadle, Superintendent of Public Instruction Kirsten Baesler and Secretary of State Al Jaeger. All five members of the board independently declined to comment on the bill's merits.

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

The department is still reviewing the potential effects of the bill, but Smith said there would be significant "financial implications" for the schools, colleges and government funds that rely on the timely collection of royalty payments.

The House committee did not vote on the bill Wednesday and agreed to let Smith come back after the Land Board's meeting next week.

The issue of oil and gas royalty payments has become contentious over the last year as the department began a more aggressive campaign to collect old payments, interest and penalties it believes are owed to the state. The department released to Forum News Service a list of the companies that owe old payments, which included industry giants like Continental Resources, ConocoPhillips and Hess. The exact amount the department says it's owed is unknown, but Smith noted Wednesday that the sum is "hundreds of millions of dollars."

Land Commissioner Jodi Smith previously said the firms identified by the department have been underpaying their royalty bills by making improper deductions. There are currently nine companies with overdue oil royalty payments and 29 with overdue gas royalty payments, according to the department.

The companies contend they've been paying royalties correctly the whole time and the department is punishing them unfairly, Ness said. Continental Resources and Newfield Exploration are locked in lengthy legal battles with the department over the deduction dispute. Other companies on the hook for old payments believe they shouldn't have to pay until the courts have definitely decided the matter.

Ness said the recent fights over old royalties "absolutely" played into the industry's desire to reform royalty payments through the legislative process.