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North Dakota Land Commissioner Jodi Smith answers a question from Sen. Merrill Piepkorn, D-Fargo, while testifying in favor of Senate Bill 2212 at Senate Energy and Natural Resources Committee hearing on Jan. 31 at the state Capitol in Bismarck.

Disputes over oil companies taking deductions from royalty payments are the focus of two bills in the North Dakota Senate, including one that would fine operators that fail to comply with state audits.

Sen. Brad Bekkedahl, R-Williston, said he continues to get complaints from mineral interest owners about deductions taken from their royalty payments for transportation, processing and other categories.

Bekkedahl is proposing that lawmakers lead a formal study of the deductions in between legislative sessions. He presented Tuesday to the Senate Finance and Taxation Committee examples of royalty statements from different Bakken operators with wide variation in the types and amounts of deductions taken.

“The study is to try and get a handle on understanding better what they’re for, why they're happening, what are the lease clauses out there that are allowing them to happen and whether they’re prudent,” Bekkedahl told legislators.

A legislative committee looked into deductions during the recent interim, but Bekkedahl said he’s proposing a more formal study involving input from the industry, royalty owners and state agencies.

The North Dakota Petroleum Council testified in support of the proposal. Starting July 1, new Department of Mineral Resources rules will require deductions taken from oil and gas royalties to be labeled under categories of transportation, processing, compression and administrative costs. Brady Pelton, government affairs manager for the Petroleum Council, said operators are on track to meet that deadline.

The study proposal, which is Senate Concurrent Resolution 4010, received a unanimous “do pass” recommendation on Tuesday from the committee.

Meanwhile, the North Dakota Department of Trust Lands is struggling to complete audits of companies’ royalty payments because some operators have not provided information requested by the state, said Land Commissioner Jodi Smith.

The department has audited 48 oil and gas operators, and 21 percent have not provided the documents the agency requested, Smith said. The average length of time the department has been waiting for the information is more than one year, she said.

“There are some that we’ve waited for several years for information from and we’re still waiting,” Smith said.

The department is promoting Senate Bill 2212, which would allow the agency to fine companies that fail to provide the documentation in a timely manner.

“The only recourse we have is to pull a lease, and that has direct implications on the economy for the state of North Dakota,” Smith said. “We’re just looking for some additional tools."

The North Dakota Petroleum Council strongly opposed the bill during a committee hearing on Jan. 31.

“This isn’t a tool. This is a sledgehammer,” said Ron Ness, president of the industry group.

Since the hearing, the department has agreed to reduce the maximum fine from up to $5,000 per day to up to $1,000 per day and extend the timeframe for compliance from 30 days to 90 days, Smith said.

Additional amendments are expected to be discussed Thursday in the Senate Energy and Natural Resources Committee. Pelton said the industry group is working to find a way to get the matter resolved without requiring legislation.

The Department of Trust Lands manages an interest in more than 42 percent of the state's oil and gas wells, collecting nearly $300 million in royalties in fiscal year 2018. The Board of University and School Lands has discussed the issue of companies resisting providing audit information since at least 2017.

The oil industry is closing watching lawsuits filed against the department by Continental Resources and Newfield Exploration Co. related to disputes over royalty deductions. Both cases are pending in McKenzie County.

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

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