Litigation

N.D. high court says crude oil royalty calculated at well

5 minute read

Sunflowers stalks punctuate the snow in a field near dormant oil drilling rigs which have been stacked in Dickinson, North Dakota January 21, 2016. REUTERS/Andrew Cullen

  • Royalty valuation point in common lease not downstream
  • Ruling likely to end numerous federal class actions

(Reuters) - The North Dakota Supreme Court said on Thursday that contractual language commonly used in the state to calculate royalties that landowners pocket requires oil producers to pay values determined at the well, rather than higher ones as the oil gets closer to markets.

The opinion by a divided panel is in response to a certified question by a North Dakota federal court to clarify a gray area in state law, which should in turn enable rulings on more than half a dozen related putative class-action lawsuits by property owners who allege oil companies have underpaid them royalties. The Supreme Court said that its determination that royalties are calculated at the well, rather than downstream, may result in the dismissal of the class actions.

Lawyers at Montgomery & Pender who represent the plaintiffs David and Paula Blasi did not immediately respond to a request for comment.

Matthew Salzman of Stinson, who argued the case for the oil company named in the opinion, Bruin E&P Partners, did not immediately provide a comment.

Writing for the panel, Chief Justice Jon Jensen rejected the plaintiffs' contention that the oil-royalty clause of the Blasis' leases with oil companies should be interpreted as saying its price must be based on oil value when it enters a pipeline, rather than at the well.

Oil typically sells for less at wells. Its price goes up as it travels downstream and incurs production costs like those tied to transporting it from the wells.

The plaintiffs argued that because the wording of the contract's oil-royalty clause uses the word "pipeline" as a delivery end point, royalties should be calculated downstream rather than at the well.

The judge disagreed. He said the same clause also specifies that deliveries take place on the leased land, where the lessee "may connect" a pipeline to the wells.

"The royalty provision is unambiguous," Jensen said. "It establishes a valuation point at the well."

Jensen was joined by Justices Daniel Crothers, Lisa McEvers and Jerod Tufte.

In a dissent, Surrogate Judge David Nelson, sitting by designation, said that he would have declined to answer the federal court's certified question now in order to allow the plaintiffs to enter the discovery stage in the underlying federal court cases.

In those class actions, the Blasis allege that they have been underpaid royalties from various oil companies, including Bruin E&P Partners, because post-production costs have wrongly been deducted from their oil-sale payments before the calculating of royalties.

They seek several million dollars for what they say are more than a thousand similarly situated plaintiffs.

The defendants moved last year to dismiss the lawsuits.

In those cases, Chief U.S. District Judge Peter Welte certified also last year his question to the state Supreme Court. The judge said that if the Supreme Court found royalty is based on the value of the oil at the well, the Blasis' claims for unpaid royalties would "likely" be dismissed.

Kirkland & Ellis, which led efforts to certify the question for their clients, defendants Hess Corporation and Lime Rock Resources Operating Co, did not immediately provide a comment.

The case is Blasi, et al. v. Bruin E&P Partners, et al., North Dakota Supreme Court, Nos. 20200327-20200331.

For Blasi, et al.: Michael Scott of Montgomery & Pender

For Bruin E&P Partners, et al.: Matthew Salzman of Stinson

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