Proposed legislation that resulted from frustrated royalty owners who questioned deductions—particularly on gas production–in their statements came under fire from producers who warned about the dangers.
“This bill is killing the fly with atomic bomb plus it is attempting to change tens of thousands of contracts between two willing parties that have complied with the terms sometimes for decades,” said Todd Slawson, president of Slawson Exploration Co. of Wichita. “This is legally troubling.”
The controversy surfaced during a hearing on SB 2217 which carries a misdemeanor penalty during a hearing earlier this month before Senate Finance and Taxation Committee.
The key issues troubling several oil producers are: changing all oil and gas lease contracts to prohibit the deduction of post-production costs from both oil and gas; not allowing a non-arm’s length post-production costs to be deducted from the royalty calculations; and not allowing negative proceeds from the sales of either oil or gas to be deducted from the royalty check or even carried forward to be debited against a future month in which the proceeds become positive.
The legislation stems from a long running dispute led by Bob Skarphol, a former state legislator from Tioga, who complained that Hess Corp. was not explaining deductions on royalty payments.
“The failure to explain the nature of these deductions is particularly concerning given the amount of the deductions in relations to the gross value of production,” Skarphol told the Oil Patch Hotline in 2016. Unexplained deductions was “a creative way not to pay royalties”, he said.
In testimony before legislators this month, Skarphol said: “Royalty owners are very frustrated with the inability to receive understandable information and fear reprisal if they voice concerns.”
Barry Biggs, a Hess vice president, told legislators that his company paid almost $2 billion in royalties since 2014 and the proposed legislation would reduce investment in the state and result in lower royalties and less tax revenue for the state.
“Hess’s goal is to obtain the best possible price for itself and its royalty owners when it sells oil and gas,” Biggs said. “Hess has invested in infrastructure that gives it the flexibility to move the oil and gas, while our affiliate, Hess Trading Corp. has a team of people devoted to analyzing downstream markets.”
Holly Camilli, a XTO energy vice president, warned the legislation would reverse the basic understand that royalty owners share in the post production expenses. The bill would “operate retroactively, turning upside down the long-standing economic assumptions upon which exploration and production decision have been made,” she said.
Ron Ness, president of the ND Petroleum Council, said increased natural gas production and years of low prices have “culminated in the understandable frustrations” that led to SB 2217.
“In this market, there are no winners when commodity prices are low,” he said. “”NDPC has members on both sides of this issue, and we are committed to bringing parties together and insuring open communication to every extent possible.”