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A judge in North Dakota has upheld legislation that restricts the recovery of old oil and gas royalties

Last Updated on 08th January 2024

A judge in Watford City has upheld a recently passed law that limits how far back oil firms must pay North Dakota royalties.


Companies agree to pay the state oil and natural gas royalties as well as any late fees in exchange for the right to extract publicly owned minerals. However, industry-backed legislation passed earlier this year by the Republican-led Legislature, and Gov. Doug Burgum retroactively established a statute of limitations for state royalty collections, meaning the Department of Trust Lands can't require firms to pay royalties.


Judge Robin Schmidt's decision on Thursday, Sept. 16, rejects the Board of University and School Lands' contention that the statute is unconstitutional, allowing it to remain on the books. Jodi Smith, the Land Commissioner, could not be reached for comment on Friday.


The decision marks a victory for Newfield Exploration in its long-running legal dispute with the state over royalty payments, albeit the struggle is far from done.


A disagreement over whether firms should be able to take reductions from their royalty bills to cover the costs of shipping and purifying oil is at the center of a 2018 lawsuit brought by Newfield.


The state's Department of Trust Lands claimed the deductions were unlawful and in violation of the state's leasing agreement with the firm, which is now owned by Denver-based Ovintiv. Newfield, which claims the deductions were always permitted, sued the state when the Department of Revenue requested that the company and nearly 40 other businesses repay the millions of dollars in deductions they had taken.


Two years ago, the North Dakota Supreme Court ruled in favor of the state, but the matter has since been remanded to Schmidt's Watford City district court for further consideration. A trial is set to begin next month.


Earlier this summer, the company filed a request asking the court to recognize that the new rule meant the state couldn't collect on past-due royalty payments from before August 2013.


The state responded by claiming that the new law violates a provision of the United States Constitution that prohibits states from enacting legislation that impairs the obligation of previously agreed-upon contracts.


 The state also claims that allowing Newfield off the hook for royalties payable before the new statute of limitations will deprive trust funds controlled by the department, notably one dedicated to public K-12 education, of their funds.


According to Schmidt's 11-page opinion, the law does not have a significant impact on the lease agreement between the corporation and the state because it merely changes the legal remedies available when suing for unpaid royalties, not the contract itself.


The judge further dismisses the claim that the law is illegally depriving the trust funds, stating that it is a legal "expression of public policy" to limit the state's legal entitlements to old payments.


The North Dakota Petroleum Council's president, Ron Ness, praised the decision, calling it "it's a proclamation of the Legislature's fine work" in resolving overdue royalty disputes. Ness expressed his expectation that the Newfield case would put a stop to the firms' and the state's nagging responsibility to sort out previous payments.


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