• North Dakota Court Rules Against State in Gas Royalty Dispute
  • February 15, 2019
  • Law Firm: Crowley Fleck PLLP - Office
  • “GROSS PROCEEDS” CLAUSE IN NORTH DAKOTA STATE LEASE MEANS GROSS PROCEEDS ACTUALLY RECEIVED BY THE OPERATOR FROM THE GAS PROCESSOR.

    On February 14, 2019, the McKenzie County District Court granted summary judgment in favor of the operator in Newfield Exploration Company v. State of North Dakota, ex rel. the North Dakota Board of University and School Lands, Case No. 27-2018-CV-00143. The sole issue in the case

    concerns the interpretation of the gas royalty clause in the 1979 State oil and gas lease form, which provides:

    "Lessee agrees to pay lessor the royalty on any gas, produced and marketed, based on gross production or the market value thereof, at the option of the lessor, such value to be based on gross proceeds of sale where such sale constitutes an arm’s length transaction (emphasis added)."

    Newfield, as operator, entered into an arm’s length, third party gas purchase contract with an unaffiliated entity, ONEOK Rockies Midstream, L.L.C. and argued gross proceeds of sale is calculated from the amount of money it actually receives from the gas processor. The State asserted it should receive payment based on the amount of net proceeds ONEOK receives for the processed gas--without incurring any costs ONEOK deducts for making the gas marketable.

    In granting summary judgment in favor of Newfield, the District Court ruled that the lease term “gross proceeds of sale” was not ambiguous, and “requires Newfield to pay based on the gross proceeds it receives from the sale of gas. According to the Court, the State’s argument “strains the [lease] language beyond reason and this court is not persuaded, on the facts of this case, that Newfield is required to pay based on what a third party receives for the processed gas.”

    At the present time, it is not known whether the State intends to appeal the District Court decision. The next State Land Board meeting is scheduled for February 28, 2019.