With a new trial in the offing on Newfield Exploration’s arguments for gas royalty deductions, it is seen as a major setback to the aggressive efforts by the ND Dept. of Trust Lands to force operators to pay for back royalties.

State Land Commissioner Jodi Smith did not respond to requests from the Oil Patch Hotline answering if it would retreat from its demand letter to oil producers.

Meeting with attorneys this week, Dist. Judge Robin Schmidt decided there needs to be a new trial to air issues raised by Newfield. She pointed out the only decision the ND Supreme Court made on the case was “how to define the contract”.

Jodi Smith

“There are many issues to resolve,” Schmidt said in a conference call with attorneys.

The Supreme Court did not determine whether the state’s royalties were actually assessed improper costs based upon its interpretation. At the same time, the Board of University and School Lands did not spell out actual damages it suffered, according to attorneys familiar with the case.

Smith had been using the Supreme Court action as authority to aggressively pursue what it contended were unpaid royalties. The board never actually voted on the issue but after controversial reaction from industry, Smith backed off a 90-day deadline.

Schmidt had originally rejected arguments that royalty payments to the state should be based on the gross amount it received from a third-party buyer, ONEOK.

After an audit of 111 Newfield leases in June, 2016, the state contended that Newfield was improperly paying gas royalties under the terms of the lease. Smith did not disclose the total amount of money it is contending Newfield owes.

The state contended that Newfield was paying royalties based on “gross proceeds less deductions”.

“Essentially, Newfield argues it can pay a royalty based on a payment that has been reduced to account for the expense of making the gas marketable as long as the expense is incurred by a third party,” the supreme court said.