10/05/2020
October Update
On Tuesday, September 29th I was given the opportunity to do an hour presentation to the Western North Dakota legislative caucus in Watford City, ND. It was attended by Senators and Representatives from seven legislative districts and I believe only two of the twenty-one members were absent and one of them listened to the presentation via audio capabilities and called afterward for clarification of several points. I had prepared 26 Power Point slides to discuss the major issues facing royalty owners and suggested changes that need to be considered in the next legislative session.
Wishing not to antagonize, I asked the question as to how many legislators had royalty income prior to the Bakken development and only two raised their hand. I am not aware of any company that was utilizing “postproduction costs” (PPC’s) prior to the Bakken development. If any of you are aware of PPC’s in North Dakota prior to the Bakken development, please let me know. I do not want to provide inaccurate information so please advise if you know of prior use. Hess did not have a column for “other deductions” until April 2007 on our royalties. The column for “other deductions” was added to the Hess royalty statement in 1998 but it was never utilized until April 2007. The family production I refer to goes back to 1952 and the leases were signed in 1949. We have royalty statements from the 60’s.
I did touch on the several issues raised by members and will try to provide a synopsis of the presentation. Most of the time was spent on PPC’s but they are not the only issues that I am hearing from members.
1 Unpaid royalties: I have received several calls from individuals who are not receiving their royalty payments. It seems the Oil & Gas Division does not want to take any responsibility, and maybe does not have the authority, to address the needs of ND royalty owners (NDRO’s). Several NDRO’s have called me that have interests in northern Renville County. The operator purchased and took possession of the field on January 1, 2020. They have not been paid by the operator since January 1st, 2020. I also have received a call from an acquaintance that has interests operated by an Australian company, this individual also had unpaid royalties and was struggling with collecting what amounted to several thousand dollars owed on their interest.
2 Failure to collect abandonment bonds: Taxpayers and NDRO’s have called and expressed frustrations with hearing that the NDIC is NOT recovering the bond money posted by operators when abandoned wells need to be plugged and reclaimed. CARES money can certainly be legitimately used but the bonds should not be waived as the result of the availability of CARES money. CARES money could also be used to address urgent needs elsewhere in ND as well. Responsible operators have filled their responsibilities and there is no excuse for taking the “rascals” off the hook.
3 Conflict of interest: Probably one of the issues I hear most often is the conflict of interest NDRO’s and taxpayers see in the role of the Director of Mineral Resources. The Director currently is charged with the promotion and regulation of Oil and Gas issues in ND. How can someone legitimately do both without having a conflict of interest? I suggested removing the responsibility for promoting from the Director of Mineral Resources and expect real enforcement of Oil and Gas laws and rules. If there is a need for promotion beyond the North Dakota Petroleum Council, give it to the Commerce Commissioner.
4 Department of Trust Lands audit information: Should the audit information collected by the Department of Trust Lands (DTL) be available for inspection by private royalty owners seeking to verify accuracy of their individual royalty payments?
5 And finally PPC’s: I am most familiar with royalties paid by Hess Bakken Investments II and can speak most fluently from that experience. It is likely one of the most egregious abuses of the latitude provided by the ND Supreme Court decision Bice vs Petro Hunt. During the last five full calendar years, the average PPC’s charged against the gross royalty owner interest in the Beaver Lodge Unit (BLUO) is 31.68%. Another perspective is that during May 2019 the BLUO’s were charged $12.99 per MCF in PPC’s while being paid $2.34 per MCF for the produced natural gas. The net result of these actions is that BLUO’s paid $10.65 per MCF of “other deductions” with oil and other produced liquid’s royalty revenue. In congregate the BLUO’s have been assessed over $20,700,000 in “other deductions” over the last five years. The BLU encompasses roughly 16,560 acres. All of this has been accomplished by a vertically integrated company utilizing “proprietary agreements” between recently created Master Limited Partnerships (MLP’s). Something seems totally wrong with this picture.
Decades of, from the NDRO’s perspective, disappointing court decisions across the nation and federal tax law changes that have resulted in the ability of unscrupulous corporate executives to legitimize the “taking” of NDRO revenues through what some might call a RICO (Racketeer Influenced and Corrupt Organizations) violation. There are seminars provided on “How to make deductions from the royalty stream for postproduction expenses”. I have an eight-page magazine article with the exact title which provides “how to” instructions!
So where do we go from here? Legislative changes are frequently a challenge, but public pressure can work wonders. I believe the opportunity is there for at least some movement however it will take more than one person’s efforts to make it happen. There is a large lack of understanding in the legislature and early education and communication would be extremely helpful. Legislators need to know there is significant frustration by their constituency and North Dakota taxpayers. Even if you are from out of state, you are required to pay state income tax on royalties and therefore entitled to an opinion. Please begin emailing or writing letters to legislators and expressing your concerns and/or frustrations.
I had suspended the sending out of WBROA annual dues renewals until I felt that we had a realistic chance of a legislative hearing. We know we will have at least one bill draft that has been presented to legislators for input and will not be in final draft form for submission until it has been thoroughly reviewed. Work will continue to seek sponsors for other legislation.
Notices of renewal of dues will be forthcoming. It does cost money to fund full time lobby and monitoring efforts.
Bob Skarphol
