ND Royalty Opinion
The North Dakota Supreme Court held this week that deductions for natural gas processing of sour gas made by Petro-Hunt, LLC, were properly deducted from royalty payments in Bice v. Petro-Hunt, L.L.C. (Case No. 20080265). The leases at issue paid royalties based on the market-value of the gas "at the well," and the court found that the majority rule in oil and gas producing states in the country allowed a lessee to deduct post-production costs related to improving gas-quality or transporting the gas to market under this type of lease language. Adopting that rule, the court therefore rejected claims made by royalty owners that the producer had an obligation to pay all costs incurred to turn unmarketable gas into a marketable product - i.e., rejecting the first marketable product rule.
[Note: Also interesting, the court addressed issues involving the royalty-free use of residue gas and deductions made for risk-capital and depreciation.]
