BISMARCK — A group of North Dakota Republicans has proposed a bill that would force oil companies to pony up millions of dollars to royalty owners who believe they've been hoodwinked.

At the heart of Senate Bill 2217 lies a longstanding and oft-litigated conflict over the way oil firms pay out royalties. The companies say they're allowed to deduct from royalty checks the costs of removing impurities and transporting oil and gas, but mineral owners argue they never agreed to that practice in the contracts they signed.

The bill, brought by Williston Republican Sen. Brad Bekkedahl, would prohibit companies from subtracting the post-production costs unless the deduction is explicitly mentioned in the contract. The proposal also would prevent firms from passing financial losses on the natural gas side of the ledger to the mineral owners.

Bekkedahl said he filed the bill because he's hoping for "improved transparency and communication" between the oil industry and royalty owners. He is joined in the legislative effort by five Republican co-sponsors, including three from the western edge of the state.

Sen. Brad Bekkedahl, R-Williston. Photo via North Dakota Legislature / Special to Forum News Service
Sen. Brad Bekkedahl, R-Williston. Photo via North Dakota Legislature / Special to Forum News Service

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Bob Skarphol, founder of the Williston Basin Royalty Owners Association, spoke in support of the bill during a Monday, Feb. 8, hearing of the Senate Finance and Taxation Committee. The former Tioga lawmaker said his organization is not anti-oil, but the industry's deduction of post-production costs on royalty payments is "incorrigible."

Skarphol said he understands that times are tough for oil firms in North Dakota, but the economic downturn is "doubly difficult" for many royalty owners who subsist on Social Security and small royalty checks that have been unfairly diminished.

Using his wife's royalty checks from oil giant Hess Corp. as an example, Skarphol illustrated that the practice of deducting post-production costs didn't show up in North Dakota until just before the oil boom of the late 2010s. He said the deductions were small at first, but have aggressively grown in recent years. By Skarphol's calculations, Hess lopped off more than a third of his wife's royalty checks in 2020.

The oil industry vehemently opposes the bill and assembled a heavy-hitting lineup of industry agents, including representatives from Continental Resources, Hess and Oasis, to testify in person or on paper Monday.

Ron Ness, president of the North Dakota Petroleum Council, said capturing natural gas is not a profitable venture for companies, but the state has compelled the industry to invest in expensive gas-capture infrastructure by imposing restrictions on burning off gas. Ness said forcing even more costs onto oil producers would have "drastic negative impacts on investment and development in the Bakken." He added that the industry is already under fire from the new presidential administration.

Ron Ness, president of the North Dakota Petroleum Council. Special to The Forum
Ron Ness, president of the North Dakota Petroleum Council. Special to The Forum

Todd Kranda, a Mandan lawyer and lobbyist, said the deductions made by companies are proper and have been a well-established practice in North Dakota. He added that passing the bill would go against deals inked between royalty owners and companies.

"Whether deductions are permitted is a matter of contract law and negotiations between the mineral owner and the lessee," Kranda said. "SB 2217, as introduced, would completely overturn the rights set forth in thousands of existing oil and gas contracts."

Todd Slawson, president of oil company Slawson Exploration, spoke extensively about how harmful the legislation would be to his industry.

"I know throughout my career that lack of knowledge of a situation and lack of communication leads to suspicion of wrongdoing," Slawson said. "However, this bill is killing the fly with an atomic bomb."

The dispute over post-production costs mirrors a disagreement between the state and oil producers, which has been the subject of several drawn-out lawsuits.

Speakers on both sides of the issue Monday acknowledged that contentions over the deductions would likely end up in court regardless of the bill's fate.

Committee Chairwoman Jessica Bell said the bill likely wouldn't be voted on this week.