\n<\/p>\n
This article was produced for ProPublica\u2019s Local Reporting Network in partnership with the North Dakota Monitor. Sign up for Dispatches to get our stories in your inbox every week.<\/p>\n
Millions of Americans own the rights to oil and gas underground. When they\u2019re approached by an energy company to lease out those rights, they\u2019re offered a cut of the revenue, called a royalty.<\/p>\n
\u201cRoyalties saved our place,\u201d said James Horob, a farmer in northwest North Dakota, who used oil royalties to rescue his family\u2019s farm from bankruptcy in 2008 and replace equipment that had been auctioned off. \u201cWe\u2019re lucky to have what we got.\u201d<\/p>\n
However, the royalty income that mineral owners like Horob get can depend in part on the state where they live. In North Dakota, estimates show that in recent years companies have been deducting hundreds of millions of dollars annually to help cover the costs incurred once oil and gas leave the ground on their way to being sold. North Dakota officials have not stepped in to help royalty owners, even though the state, in its own leases, has explicitly prohibited oil and gas companies from taking deductions from government royalty payments since 1979, as the North Dakota Monitor and ProPublica reported this month.<\/p>\n
\u201cIt\u2019s tough to think that there isn\u2019t some better solution out there than what we currently have,\u201d said Aaron Weber, a Watford City-based attorney who represents mineral owners in North Dakota.<\/p>\n
In contrast to North Dakota, at least seven oil-and-gas-producing states have taken either legislative or judicial action to restrict the costs that can be deducted from royalty owners\u2019 checks. Here are the key ways North Dakota differs from these other states when it comes to protecting the interests of royalty owners:<\/p>\n
North Dakota Gov. Kelly Armstrong has called the oil and gas industry the \u201cNo. 1 driver of our economy\u201d in the state. The industry contributed $32 billion in oil and gas taxes to state and local governments between 2008 and 2024, according to the Western Dakota Energy Association, which advocates for energy-producing communities. That same study found that more than 50% of all local tax collections are tied to oil and gas.<\/p>\n
Oil and gas companies owed the state\u2019s private mineral owners, like Horob, an estimated $4.6 billion in 2023 before deductions, according to North Dakota State University research.<\/p>\n
Deductions from that royalty income \u2014 which can vary greatly by company and mineral owner \u2014 are deeply contentious in the state: Companies say they\u2019re withholding transportation and other expenses that should be shared with royalty owners; the owners say those \u201cpostproduction deductions,\u201d as they are generally known, shouldn\u2019t be permitted in most circumstances.<\/p>\n
The energy industry says the postproduction deductions, which began surging about a decade ago, reflect changes in the oil business. Oil, discovered in the state in 1951, used to be sold primarily at the well site. Now, oil and gas are often sold farther away, and companies incur costs to process and transport the minerals. The companies say this enables them to fetch a better price, benefiting the royalty owner as well. The industry also attributes an increase in deductions to regulations added in 2014 to reduce natural gas flaring, requiring companies to make new investments.<\/p>\n
A gas flare in Williams County, North Dakota, in June<\/span><\/p>\n Owen Anderson previously worked for North Dakota\u2019s regulatory agencies and helped draft language to prohibit companies from taking deductions from royalty payments owed to the state. Anderson, a law professor who studies the energy industry, called the issue \u201ca big, big deal.\u201d<\/p>\n Armstrong declined to comment.<\/p>\n Around the country:<\/strong> State supreme courts in Colorado, Oklahoma, Kansas and West Virginia have determined oil and gas companies are responsible for the costs that make the commodities \u201cmarketable.\u201d That means there are limits on the expenses that companies can pass on to royalty owners after the minerals leave the ground. Those expenses may include removing impurities, gathering the products in central locations, and transporting the oil and gas to where it will be sold.<\/p>\n Still, the costs that companies can deduct from royalties vary by state, depending on how states define when a product is marketable.<\/p>\n West Virginia provides royalty owners the most protection from deductions, the result of state Supreme Court of Appeals decisions in 2001 and 2006. In those cases, the court found that companies cannot pass on costs to the owners unless a lease explicitly allows it. This matters because many leases across the country were written before shifts in the industry led to more extensive deductions, so most early leases don\u2019t explicitly mention them.<\/p>\n \u201cThe default is, you cannot take deductions unless they\u2019re specifically agreed to,\u201d said Tom Huber, the leader of West Virginia\u2019s royalty owner association. The 2006 court decision \u201cbasically says if there\u2019s ambiguous language, you go on the side of the royalty owner because the company constructed the lease,\u201d he said.<\/p>\n That decision also determined that deductions cannot be taken unless leases specify which costs can be shared and lay out how the deductions will be calculated. Rulings in 2024 and 2025 confirmed the court\u2019s stance.<\/p>\n Courts in Colorado, Kansas and Oklahoma also have placed limits on what costs can be deducted from royalty payments. Those courts have determined that companies must make the oil and gas \u201cmarketable\u201d before costs can be deducted from royalties. Each state uses different criteria to determine at what point in the process the commodities become marketable.<\/p>\n Courts in other oil-and-gas-producing states have taken a legal approach that is more friendly to the industry. Texas, Louisiana, Mississippi and others have determined that companies can deduct costs incurred between the minerals\u2019 extraction and when they are sold unless there is lease language to the contrary.<\/p>\n That is also true in Pennsylvania. But in 2015, the state\u2019s attorney general cracked down on a company, Chesapeake Energy, alleged to be taking artificially excessive deductions. The attorney general\u2019s lawsuit, prompted by complaints from landowners, was resolved with a $5.3 million settlement for royalty owners and an option to receive royalties moving forward without deductions. The company did not admit wrongdoing in the settlement.<\/p>\n In North Dakota:<\/strong> As is the case in Texas, Louisiana and some other states, the North Dakota Supreme Court has sided with companies. In 2009 and 2021, the court ruled that royalties, in most cases, should be based on the value of the oil and gas when the minerals are extracted from the ground. Costs incurred between when the minerals are extracted and when they are sold can be shared proportionately between the oil company and the royalty owner, the court found. Companies can deduct these costs unless a lease clearly specifies otherwise.<\/p>\n I hope that the people in North Dakota wake up and realize how much money should be in their pockets instead of industry\u2019s pockets.<\/p>\n \u2014Tom Huber, the leader of West Virginia\u2019s royalty owner association<\/p>\n Josh Swanson, a Fargo-based oil and gas attorney who is involved in multiple pending lawsuits contesting deductions, said he\u2019s concerned companies will impose even more \u201cexcessive\u201d deductions unless courts place limits on what the companies can do.<\/p>\n \u201cOperators are going to continue to be very aggressive in the amounts they\u2019re taking for postproduction costs until a court tells them they\u2019ve overstepped and gone over the line,\u201d he said.<\/p>\n In responses to questions from the North Dakota Monitor and ProPublica, officials from three energy companies that operate in North Dakota said they follow the language in the leases when determining what costs they can deduct from royalty payments. Older leases often don\u2019t mention deductions, however.<\/p>\n Around the country:<\/strong> Some state legislatures have passed laws that limit postproduction deductions. Laws in Wyoming and Nevada, passed in 1989 and 1991, respectively, prohibit companies from taking deductions for specific expenses incurred soon after extraction, such as gathering the commodities from well sites to get them to central hubs.<\/p>\n In Michigan, a law passed in 1999 allows companies to deduct from royalty income only two types of expenses \u2014 transportation and some gas treatment costs \u2014 unless a lease explicitly allows for other reasons.<\/p>\n The West Virginia Legislature, meanwhile, has helped royalty owners with what it called \u201coppressive\u201d leases. Many West Virginia mineral owners receive royalties from \u201cflat rate\u201d leases signed as long as a century ago that provide owners a few hundred dollars a year instead of a percentage of the revenue. Calling those leases \u201cunjust,\u201d West Virginia lawmakers passed a measure in 1982 that guarantees owners at least 12.5% of the revenue, effectively overriding the original leases. A 2018 amendment requires that postproduction deductions not be taken from this royalty.<\/p>\n West Virginia\u2019s law ensuring a minimum royalty for those leases is enforced by state regulators, who will grant new drilling permits only if the company files an affidavit promising to adhere to the law.<\/p>\n Huber said his state\u2019s legislative and judicial branches have historically tried to protect landowner and royalty owner rights while encouraging the growing natural gas industry.<\/p>\n \u201cIt sounds like North Dakota doesn\u2019t have that, and that\u2019s a shame,\u201d Huber said. \u201cI hope that the people in North Dakota wake up and realize how much money should be in their pockets instead of industry\u2019s pockets.\u201d<\/p>\n In North Dakota:<\/strong> Legislators and state officials have argued that disputes should be settled in the courts. They rejected a measure in 2021 that would have prevented companies from taking deductions unless explicitly allowed in a lease, and another bill in 2023 that would have required oil companies to provide mineral owners with more information about how royalties are calculated.<\/p>\n State Sen. Dale Patten, a Republican from Watford City, said the Legislature is ill suited to address concerns related to private contracts and royalty owners should seek relief from the courts. Legal action would be prohibitively expensive for most families, however.<\/p>\n North Dakota Sen. Dale Patten, a Republican from Watford City, served as chair of the Senate Energy and Natural Resources Committee in the legislative session that ended in May.<\/span><\/p>\n \u201cWe\u2019re getting into really complicated issues. And actually in my mind the proper venue to solve that would be in the courts,\u201d said Patten, who has served as chair of the Senate Energy and Natural Resources Committee. \u201cAnd you deal with it on a company-by-company basis.\u201d<\/p>\n Public officials have argued that royalty owners should have negotiated language into their leases to prohibit deductions. But leases in many cases were signed decades ago, before this was an issue, and don\u2019t mention who should pay for postproduction costs. The leases don\u2019t expire unless production stops. And in new lease negotiations, mineral owners are at a disadvantage against companies unless they own a large percentage of the mineral rights in the area.<\/p>\n \u201cIt\u2019s really difficult for a private landowner to negotiate a no-deductions lease in North Dakota,\u201d Anderson said.<\/p>\n Ron Ness, president of the North Dakota Petroleum Council, which represents the oil industry, warned that regulating or limiting the expenses that companies pass on to owners would discourage oil and gas investment in the state and drive business away.<\/p>\n \n They Can\u2019t Get Answers From the Oil Industry. North Dakota\u2019s Oversight Program Hasn\u2019t Helped.<\/strong>\n <\/p>\n \u201cIt\u2019s one of the most foolish things the state of North Dakota could ever do, is to try and essentially financially punish operators from getting a better price for their commodities by not allowing postproduction costs on some of those things,\u201d Ness said in an interview.<\/p>\n But Weber, the attorney who represents mineral owners, said it\u2019s time for the Legislature to get involved and address the concerns. <\/p>\n \u201cGiven that the court has already selected what it is going to do,\u201d he said, \u201cthe only way to fix it is to get it to the Legislature.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" This article was produced for ProPublica\u2019s Local Reporting Network in partnership with the North Dakota Monitor. Sign up for Dispatches to get our stories in your inbox every week. Millions of Americans own the rights to oil and gas underground. When they\u2019re approached by an energy company to lease out those rights, they\u2019re offered a<\/p>\n","protected":false},"author":1,"featured_media":15935,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[55],"tags":[9404,9403,867,242,268,247,2678,9331,1561],"class_list":{"0":"post-15934","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-social-issues","8":"tag-compare","9":"tag-dakotas","10":"tag-gas","11":"tag-north","12":"tag-oil","13":"tag-propublica","14":"tag-protections","15":"tag-royalty","16":"tag-states"},"_links":{"self":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts\/15934","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15934"}],"version-history":[{"count":0,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts\/15934\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/media\/15935"}],"wp:attachment":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15934"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15934"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15934"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\n Credit: <\/span>
\n Sarahbeth Maney\/ProPublica
\n <\/span><\/p>\nHow Courts Have Addressed Oil and Gas Royalties<\/h3>\n
How Lawmakers Have Addressed Oil and Gas Royalties<\/h3>\n
\n Credit: <\/span>
\n Kyle Martin for the North Dakota Monitor
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