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Commission: Oil companies must give details on deductions to frustrated ND royalty owners

Lynn Helms, left, director of the department of Mineral Resources and Bruce Hicks, assistant director, appeared at the meeting of the North Dakota Industrial Commission on Monday afternoon in Bismarck. Tom Stromme / Bismarck Tribune

BISMARCK - North Dakota oil operators will be required to provide more details to mineral owners about deductions taken from their royalty checks under new rules approved unanimously Monday, Dec. 4, by the North Dakota Industrial Commission.

The administrative rule changes aim to address a growing frustration among royalty owners about deductions taken from their payments.

Royalty owners who testified in favor of the rule changes said they often struggle to get answers from oil companies about the purpose of the charges, said Bruce Hicks, assistant director for the Department of Mineral Resources.

“Royalty owners really indicated they were frustrated with industry’s inability to identify the deductions,” Hicks said.

The new rule will require standardized royalty statements that identify the amount and purpose of each deduction. The deductions also will be identified under the categories of transportation, processing, compression and administrative costs.

The North Dakota Petroleum Council testified against the rule change, citing expensive upgrades that would be needed for the third-party software systems that generate royalty statements.

The industry group estimates it will cost $500,000 to $1 million for each software package, or potentially several million dollars for the industry statewide, said Brady Pelton, government affairs manager for the Petroleum Council.

Lynn Helms, director of the Department of Mineral Resources, said the cost to comply with the rule should be considered in the context of the amount of royalties distributed by the oil industry, which he said was $8 million a day in September.

The Industrial Commission postponed the effective date of the rule to July 2019 to give the industry time to comply and in anticipation that the state Legislature may address the issue in the 2019 session.

Gov. Doug Burgum, chairman of the Industrial Commission, said oil companies could be proactive and comply earlier, which would provide data for legislators to consider.

The rule changes still need to go through a procedural review by the Attorney General’s Office and a hearing before the Legislature's Administrative Rules Committee in March 2018 before they can move forward.

Gary Preszler, vice president for the North Dakota chapter of the National Association of Royalty Owners, said the change brings the administrative rules in line with what state law already requires.

The association is working to educate royalty owners about how to evaluate whether deductions are reasonable under the terms of their leases and how to negotiate terms that eliminate or limit those charges, Preszler said.

Also approved Monday is a rule that relates to the reporting of oilfield spills.

State regulators had proposed requiring companies to file a document known as a sundry notice within 10 days after cleanup of any spill that was not reported.

The Petroleum Council called this a “backdoor reporting requirement” that conflicted with a bill approved earlier this year that no longer requires spills of oil, brine or natural gas liquids under 10 barrels to be reported if they stay on an oilfield location.

Under the changes adopted Monday, regulators will require companies to file the sundry notice for all spills that are not cleaned up, including those that are less than 10 barrels, or 420 gallons. The notice will include information such as the type of fluid spilled, the root cause of the incident and an explanation of how the volume was determined.

The rule change also gives the director of the Department of Mineral Resources the discretion to require a site assessment before or after reclamation.

Troy Coons, chairman of the Northwest Landowners Association, said landowners would still prefer to have all spills reported, no matter the size. But Coons said he was glad to see the requirements for spills that are not cleaned up.

“That’s a step forward, for sure,” Coons said.

If approved by the legislative committee, all rule changes except for the royalty statement requirements would take effect in April 2018.