News

Issue:  Lost North Dakota Tax Dollars

M.E. Denomy, CPA, MBA

Accredited Petroleum Accountant

Oil and Gas Companies Use Master Limited Partnerships and Affiliate Agreements to Divert Taxable Income away from North Dakota

• 1.      Oil and Gas Companies have split their operations into categories, such as Production, Marketing, Gathering, Processing.   Each “division” is often filed as a separate business, frequently using the form of a Master Limited Partnership.
• 2.      The Master Limited Partnership is not taxed as a business in North Dakota.
• 3.      The net income of the division is “passed through” to the owners of the Master Limited Partnership.  Each owner will report their own share of the net income.
• 4.      Oil and Gas Companies can use each of the separate divisions to reduce their taxable income to North Dakota by raising postproduction costs (PPC’s) paid to divisions that have high expenses, like plants.
• 5.      The PPC’s are deducted from the royalty owners.
• 6.      Royalty owners will pay less tax because the PPC’s are deducted from gross royalties thereby reducing net royalties received.
• 7.      The production company will also pay less tax on the oil and gas income by applying PPC’s paid to affiliates.

Potential Dollars Overlooked:

I have been informed that the members of the North Dakota Petroleum Council have been asked to write to the North Dakota State Land Board members and voice their opposition to the actions of the Commissioner of Trust Lands relative to collecting the unpaid gas royalties as a result of Postproduction costs withheld.

It is my strong belief that Commissioner Jodi Smith is acting very appropriately in trying to collect the revenue due the State Land Department. The State Land Board has obviously directed her to do so. The State Land Boards needs to hear from private royalty owners that we fully support Commissioner Smith’s action and we would ask that they wholeheartedly continue to support her efforts. The North Dakota Supreme Court made the right decision in this case and it should move forward. The citizens of North Dakota should not be denied the revenue agreed to through legal means.

I am asking as many of you as possible to email or write the members of the North Dakota Land Board and seek their continued wholehearted support of the efforts of Commission Jodi Smith.

The Land Board members names and email addresses are below:

The Honorable Doug Burgum-Governor
doug@nd.gov

The Honorable Wayne Stenehjem-Attorney General
wstenehjem@nd.gov

The Honorable Al Jaeger-Secretary of State
ajaeger@nd.gov

The Honorable Kirsten Baesler-Superintendent of Public Instruction
kbaesler@nd.gov

The Honorable Kelly Schmidt-State Treasurer
klschmidt@nd.gov

- Bob Skarphol

Various members have inquired as to what can they do to help WBROA move forward. The following suggestions are appropriate whether you are “in state” or “out of state” royalty owners. Every royalty owner is paying North Dakota income tax and the reductions caused by Postproduction Costs are reducing state income tax dollars.

 First, spread the word about wbroa.com by any means you have available.  Whether it is by word of mouth, email or social media. Letters to the Editor expressing the question of legitimacy are also an option. Legislators need to begin to recognize there is a problem that we want addressed to benefit royalty owners and taxpayers.

Second, communicate your dissatisfaction the practice of Postproduction costs being assessed on mineral royalty owners to North Dakota legislators and statewide elected officials, particularly the members of the North Dakota Industrial Commission. The commission members are the Governor, Attorney General and Ag Commissioner.  

Lastly, I am attaching an example of the work I have done to demonstrate to legislators what has happened since 2004 on the royalties paid to Hess Bakken Investments Beaver Lodge royalty owners. This data was taken from the IRS 1099’s provided annually at the end of the year and also available on the Hess Owner Relations website. This is one example of what is transpiring but it would be very useful if other members with royalties from other companies or other areas could build similar documents and forward them for purposes of comparison and collaboration. The numbers reflected on percentages and not a reflection of the dollar amount of royalties received. Merely percentages. The more comprehensive the cross section of companies, the more meaningful it becomes. It would also be useful to have comparisons within companies from various areas of the state.

- Bob Skarphol

Royalties Paid to Hess Bakken Investments Beaver Lodge Royalty Owners Since 2004

KX News
by: Malik Wilson
Sep 21, 2019

Local oil fields are being accused of stealing royalties.

A building conversation has Local oil field owners furious about a change in their royalties. A decrease in royalty earnings has tracked back to 2015. Over three-hundred million dollars in “lost money”, has accumulated in just one year according to the founder of the Williston Basin Royalty Owners Association Bob Skarphol. Royalty owners feel they are not being given accurate information from the oil companies. And say they need a voice.

We spoke with Bob Skarphol, Founder of the Williston Basin Royalty Owners Association. He said this. “I think down the road we need to do that. We need to have some body that’s in that legislative process every day representing our interest. You know, a professional. A very very intelligent, well qualified person.”

Skarphol will be hosting a meeting this Monday at 6 pm central at the Roughrider Center in Watford City to discuss solutions moving forward.

I served for eleven sessions in the North Dakota House of Representatives from 1993 through 2016. During that time, I do not recall a conversation in the legislative process relative to a bill which would address royalty owner interests. It was not an issue that attracted or demanded attention. The real issues for royalty owners were the percentage royalty they would receive from a lease or whether development was going to happen on their property. Towards the end of my legislative service there was discussion about the need for the North Dakota Industrial Commission (NDIC) through the rule making process, to require more and better information on royalty statements. The need for consistency across the industry also became an issue so individuals could more easily read and understand the statements they were receiving.  

 From April 1951 through March 2007 there was not a single trace of “post production costs” on royalty owners statements issued by Amerada Petroleum, then Amerada Hess and now Hess Bakken Investments II, LLC. In 1998 a new column, “other deductions”, appeared on the monthly statement but it remained un-utilized. Every other royalty statement was very similar and the only consistent entry resulting in a reduction of royalties was the state production and extraction tax.

April 2007 marked the first occurrence of “other deductions” garnishing revenue from the royalty interests Hess royalties. It was an extremely small percentage, but it initiated the reductions. The percent of “other deductions” has continued to increase and is now averaging nearly 30%. The “other deductions” in 2018 for royalty owners in the Beaver Lodge Unit south of Tioga, one of the oldest Units in the state, was 29.90%. How is that possible?

Antiquated language that was in the leases signed in the 1940’s, 1950’s, and later, that remained below the radar due to the regulation of natural gas until 1981, was the avenue that opened the door to these charges. Aided by a 2007 North Dakota Supreme Court decision, Bice vs Petro Hunt, which lacked specificity in allowing for “post production costs” (PPC’s) to “make the gas marketable”, the industry apparently decided since the door was open to take full advantage of opportunities provided by the decision.  

There is now an urgent need for action by Royalty Owners to press for change that returns to the original intent of the leases signed by 1940’s and 1950’s royalty owners which never anticipated nor discussed “Post Production Costs”. Failure to divulge or utilize these provisions for decades should be sufficient cause for the necessary changes that would benefit royalty owners.