In ND politics, what the oil and gas industry has been successful in getting what they desire in state policy. In the courts, things operate a little differently. Removed from lobbying and political donations, decisions adhere to the legal arguments. That is what happened in July of 2019 when the North Dakota Supreme Court ruled in favor of the state in a dispute involving deductions taken from royalties that violated longstanding lease agreements. The ruling, and the act to collect payments has the oil industry and their lobbyist furious. It appears Governor Doug Burgum is caving to their pressure.
Following the Court decision, the Land Department sent letters to operators. The letter outlined how operators must pay the money owed to the state that had been previously deducted from royalties. The amount owed is estimated at tens of millions of dollars. The Land Board manages state-owned land and minerals for the benefit of public schools across North Dakota.
The Department’s decision outraged the oil lobby who sent letters to rally interested parties. Part of their outrage was at the closed-door process and the view of secrecy. I can sympathize with their point as someone who has continuously pushed for transparency in government. It isn’t uncommon for executive sessions when discussing litigation. To try and peel back some of the perceived secrecy, I sent an open record request to the Land Department. The results of those public records tell a different story.
This is how I read the public records. First, the current version of the Board’s lease has been in effect since 1979. There have not been changes since 1979 according to Department records. In other words, this isn’t something that popped up overnight or even during this most recent Bakken boom.
Now, let’s take a step back to 2012 when Lance Gaebe was the Land Commissioner and Jack Dalrymple Governor. The Department sent letters to operators and lessees who reported deductions to royalties paid to owners including the state. In some cases – not all – operators have been deducting transportation costs and other expenses from royalty payments. Those deductions were not in compliance with the lease agreements on state land and deemed “improperly” calculated. Money was owed.
A 2016 performance audit found the “Department was not consistently issuing penalties and interest and recommended a policy be established.” The Department adopted a policy regarding penalties and interest. The policy requires all late royalty payments be assessed the maximum interest (18%) under ND Century Code Subsection 47-16-39.1 and penalty 12% allowed according to a November 2019 memo I received in the record request.
In July 2017, letters were sent to all operators and lessees regarding the proper method to calculate gas royalties. The Department claims all companies who have continued to be non-compliant with the lease agreement have received additional communication regarding proper calculation of royalties. In other words, those not in compliance have known what was expected of them.
Two years later in July 2019, the North Dakota Supreme Court ruled in favor of the state in a dispute involving deductions taken from natural gas royalties. The lawsuit came from Newfield Exploration against the state after the Department’s 2016 audit that claimed the company was underpaying royalties to the agency. The Department and the Attorney General’s Office worked to determine how far back they were owed in this case and from other operators not in compliance.
There is anticipation that other mineral owners may file suit to receive what they are owed pending appeals.
The Supreme Court decision outraged the oil lobby in North Dakota. As they have successfully done in years past, the lobby was able to rally members of the industry and apply pressure to politicians. Look no further to the lobbying success than Governor Doug Burgum. Last week, Burgum announced he wants the Land Board to revisit the collection of money owed. That discussion will take place February 27th.
Burgum appears to be publicly playing naive of the position of the Land Department and Board. It is an interesting strategy since he chairs the Board. Has he simply not been paying attention? Burgum has been at the public meetings when this very topic including the litigation has been discussed. Or is there something more to this? What else could be driving Burgum to potentially cave under oil lobby pressure and reverse course? Is there any other project Burgum needs support that has him looking to go against the state collecting what it’s owed for public schools? Rumors of the Teddy Roosevelt Museum are circulating around political groups.
Will other Board members join Burgum? Secretary of State Al Jaeger? Attorney General Wayne Stenehjem? Out-going Treasurer Kelly Schmidt? Or State Superintendent of Public Instruction Kirsten Baesler who is in charge of our schools?
Political pressure is more important than standing up for staff. Land Commissioner Jodi Smith has been stellar at her job. Remember, she brought to light the fact $262 million had been “misplaced” which forced the Legislature to make corrections and move money around. The public outrage may have also played a role in State Treasurer Kelly Schmidt’s decision to not seek reelection in 2020.
Let’s not forget what this money goes towards. North Dakota schools. Tens of millions of dollars. At the same time, western North Dakota – where the oil activity impact is the greatest felt – has been working hard to raise more money to build the additional school space necessary. State law has been a barrier. The state and our schools are owed the money on the deducted royalties now being balked at by those that need to pay the tab. If the state caves, how will those that correctly paid what they owed over the years react? Their outrage would be understandable. If the Board reverses course, is there a potential lawsuit brought against the state on behalf of the public schools?
Aside from the frustration of closed-door meetings, the outcry from the oil lobby is that this move is somehow anti-industry and anti-business. Claiming the state is anti-oil industry is an incredible stretch for those who have paid attention. Let’s calculate the other deductions allowed in law and find out what the effective tax rate is today. Due to flexibility, how much money has been burned up over the years through flaring not allowed in other oil-producing states? How many instances were fines dramatically reduced following a violation of the law? A favorable state position not likely to be found regarding other industries in ND. The way our state has partnered with the industry doesn’t seem to be anti-business.
The Big Question
Spare me if you consider this to be some anti-industry tirade. Without question, the industry’s activity has provided opportunities for the state. It helped build budgets, roads, schools, and shelter the state during economic downturns across the country and in surrounding states. There is much to be grateful for from the activity. I also acknowledge the volatility in the market surrounding the commodity. Hell, this week the price for oil has taken a hit because of growing concerns over the coronavirus. The purpose of this post is to ask a question. Do all the positives provided by this activity mean the industry should receive special treatment from the state government when they aren’t in compliance of laws and leases?
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