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.
