A judge has ruled against the state of North Dakota in a lawsuit brought by an oil company over a gas royalty dispute.

In a case being closely watched by the industry, Northwest Judicial District Judge Robin Schmidt ruled in favor of Newfield Exploration, which sued the state and the Board of University and School Lands last year.

Newfield and the North Dakota Department of Trust Lands have been in a dispute over the interpretation of the state’s oil and gas leases. The department has alleged that Newfield and other companies have been underpaying the state for royalties on natural gas.

In response to a "concerns notice" from the department, Newfield filed a lawsuit in McKenzie County seeking a judge to declare the company has properly paid gas royalties and does not owe the state additional payments. The case focused on how the royalty is calculated when gas is sold to an unaffiliated third party, such as a gas processing plant.

In an order dated Thursday, Schmidt ruled in favor of Newfield, saying the lease requires Newfield to pay the state based on the gross proceeds it receives from the sale of gas. Schmidt wrote that the state’s argument that Newfield is required to pay based on what a third party receives for the processed gas “strains the language beyond reason and this court is not persuaded.”

Land Commissioner Jodi Smith said Thursday it will be up to the Board of University and School Lands to decide whether to appeal the judge’s order to the North Dakota Supreme Court. The board, led by Gov. Doug Burgum, next meets on Feb. 28.

The Land Board also is involved in litigation with Continental Resources over a dispute over royalty payments. The board maintains the company is taking improper deductions from royalty payments, and the company disagrees with the state’s interpretation of the lease.

The Department of Trust Lands has an interest in more than 6,000 oil and gas wells in the state and collected nearly $300 million in royalties in fiscal year 2018.

It was not immediately clear how much money is in dispute in the Newfield case. In general, the department has said the amount of money in dispute with the oil industry over the interpretation of the state’s leases is in the millions of dollars.

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(Reach Amy Dalrymple at 701-250-8267 or Amy.Dalrymple@bismarcktribune.com)

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