Co-author Paul Yale

What’s good for the goose is not always good for the gander, at least in some places. It appears that the North Dakota Supreme Court has adopted the minority “ Marketable Product Rule” in connection with a 1979 North Dakota state oil and gas lease. We say “it appears” because not so long ago, in its 2009 decision in Bice v. Petro-Hunt, LLC, the Court held that North Dakota was an “at the well” state, like Texas and the majority of other oil producing states. This latest decision is Newfield Exploration Company, et al v. State of North Dakota et al.

The difference between the “Marketable Product Rule” and the “at the well” rule has to do with the deductibility of post-production costs of transporting, compressing, treating and processing from royalty payments. In an “at the well” state such costs are charged proportionately against the royalty owner. In a “Marketable Product” state they are not.

In Newfield, the operator sold gas produced under a 1979 State of North Dakota oil and gas lease to a midstream purchaser at a 20 to 30% discount for gathering and processing fees. The lease provided that gas royalties were to be based upon “gross production or the market value thereof …” Reversing the trial court, the Court concluded that the term “gross proceeds” meant that royalties are calculated based on the amount the lessee received for the gas, without considering processing and related costs.

In so ruling, the Court, without explicitly stating so, reversed its previous decision in Bice that North Dakota was an “at the well” state. A cynic (certainly not us!) might say that the Court was being too sympathetic to its employer, the State of North Dakota. But no distinction in interpretation was made between private and state leases. So, without further explanation or explication by the court, Newfield can (and will) be cited by any North Dakota mineral owner whose lease form uses the phrase “gross proceeds” and who wishes to challenge the deductibility of post-production costs. As an Amicus Brief filed by the Western Energy Alliance supporting a petition for rehearing said, the decision “will lead to confusion and uncertainty in North Dakota.”

What to do? Calm yourself with a listen to a R&B-ish love song by the master – Bob Dylan.