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oil well file photo

An oil pump jack works at a North Dakota oil well site.

A North Dakota agency is attempting to collect millions in oil and gas royalty payments it says are owed to the state.

But the exact amounts owed to the Department of Trust Lands is unknown as companies have resisted providing information to the state, the state Land Commissioner said Thursday.

The Board of University and School Lands met in a closed-door executive session for more than 30 minutes Thursday to discuss with attorneys an ongoing dispute with the oil industry. The disagreement began after the department discovered during a recent audit that some companies took improper deductions for transportation, processing and other costs on royalties owed to the state.

The North Dakota Petroleum Council disagrees with the department's interpretation of the leases, which date back to 1979, arguing the department is drastically changing its policy.

“This is going to be in litigation,” Ron Ness, president of the industry group, said Thursday. “It’s obviously a huge issue.”

Of the 19 operators the department has audited for the years 2012 through 2014, 10 companies incorrectly paid the state royalties on oil production and 15 companies incorrectly paid royalties on natural gas production, said Taylor Lee, director of revenue compliance for the Department of Trust Lands.

The amount of money owed to the state, which benefits trusts such as the Common Schools Trust Fund, is still being determined, but Land Commissioner Lance Gaebe said it’s in the millions.

Gaebe told members of the Land Board the audit process doesn’t have teeth and is being slowed by “a growing resistance for information” from some oil companies. To review whether the operators took improper deductions, the state needs to request information from companies to find out how they made their royalty calculations.

Some companies improperly deducted expenses such as transportation and processing costs from royalty payments, the Land Department says.

Of those audited, the companies that paid correctly contributed an estimated $20 million to $45 million more than they would have if they calculated payments incorrectly, Lee estimated for the years 2012 through 2017.

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Gov. Doug Burgum, who leads the board, said, following the executive session, the board gave Gaebe guidance on next steps but did not take formal action.

The oil industry argues that the Land Department’s interpretation of the leases would deter investments in gas processing plants, pipelines and other infrastructure to capture natural gas and reduce flaring.

Attorney General Wayne Stenehjem, also a member of the board, said he’d like the group to analyze whether the policy set in the 1979 leases is still a good policy or if it deters development under today’s conditions.

The board also includes Secretary of State Al Jaeger, State Treasurer Kelly Schmidt and Superintendent of Public Instruction Kirsten Baesler.

Some board members emphasized the importance of uniformly enforcing the leases.

“Under our trust responsibility, we don’t have any choice but to collect based on what our leases say,” Stenehjem said.

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

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