Millions in limbo between the state and oil & gas companies as schools hang in the balance

34 major gas companies and 11 oil companies owe millions to the North Dakota School Fund, that’s according to the state. But a group representing those companies says asking for this money right now would be, “borderline ludicrous”.

The state Department of Trust Lands says this money has been owed for several years, while North Dakota schools hang in the balance.

It’s a huge issue for both the state and the oil and gas companies, about royalties owed after the product is moved to market. It’s a complicated subject, involving deductions companies are making to royalty payments to the state.

North Dakota Petroleum Council President Ron Ness says oil companies have to both market and transport their product to make it valuable, and those are the costs the companies are deducting.

“If I take a barrel of oil or a bushel of wheat and I transport it and I get it to a better market, like the Louisiana Gulf Coast or Japan, under the oil law, I can clearly deduct what I think are my transportation costs in order to get me a higher price for my oil,” he explained.

With gas, companies are typically deducting the cost to process it, which Ness says can be expensive enough to cause a negative profit.

But the state says, in doing so, those companies aren’t playing by the rules.

“It’s safe to say it’s in the tens of millions,” shared North Dakota Land Commissioner Jodi Smith.

She says if royalties are not paid up by Sept. 30, the penalties go up. Smith says many companies already owe penalties and interest dating back years.

But the North Dakota Petroleum Council says now isn’t the time to address it.

“That should not even be on the table for discussion,” Ness added.

About 10 years ago, the state stepped up audits, discovering millions were owed. They’ve been pushing for payment ever since.

“And that’s what we found in our audits and just said, ‘You’re not allowed to take deductions per our lease,'” she explained.

A letter was sent out to the list companies below in February, plus a few more that have now “come into compliance with the state.”

Ness said, “We gotta let the courts decide.”

The issue is the center of a couple of pending North Dakota Supreme Court cases. One involves Newfield Exploration Company on the gas side, and Continental Resources on the oil side.

Smith says Newfield and Continental will be out of compliance until a decision comes down from the court.

Ness advises oil and gas companies the state says owe money to wait until the Newfield and Continental cases are settled to pay.

“Really, while it’s in court, those penalties and interests continue to accrue. So even though for Newfield and Continental it doesn’t, for all those other operators out there who are waiting for it to be determined, their penalties and interests are accruing every month,” Smith shared.

She says the department would be able to reimburse companies as quickly as a week if the court case ruled in favor of the companies.

The Newfield case isn’t set to be argued until late 2021, dragging this complex issue out for another year. If it’s ruled in favor of the state, companies could owe retroactive royalty payments going back to when their wells first came online, in a few cases, spanning back to the 1990s.

Smith says a handful of the companies listed are currently working with the Department of Trust Lands on a payment plan.

So since the majority of the funds collected by the Department of Trust Lands go to education in the state, are schools suffering the consequences?

The money helps pay for both K-12 and higher education.

As of right now, Trust Lands funds $1,500 per student, and what the oil and gas companies are not contributing, is being pulled from the general fund.

So schools aren’t losing money, but due to the pandemic and loss of tax revenue, Smith says it’s getting tougher and tougher to give more to schools as the cost of education continues to rise.

We asked Smith, what are the consequences of having the money come from the general fund versus from companies?

“Well, I think the biggest consequence is that that general fund is built off of taxes and we all know that the taxes coming into the state right now are decreasing right now. And a lot of that does have to do with the ability of the state to continue to produce oil,” Smith responded.

She says because some of the bigger events like the State Fair and Høstfest are now canceled, the state is losing out on even more tax revenue.