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Newfield Exploration Company v. State ex rel. North Dakota Board of University and School Lands

Supreme Court of North Dakota

July 11, 2019

Newfield Exploration Company, Newfield Production Company, and Newfield RMI LLC, Plaintiffs and Appellees
v.
State of North Dakota, ex rel. the North Dakota Board of University and School Lands, and the Office of the Commissioner of University and School Lands, a/k/a the North Dakota Department of Trust Lands, Defendants and Appellants

          Appeal from the District Court of McKenzie County, Northwest Judicial District, the Honorable Robin A. Schmidt, Judge.

          Spencer D. Ptacek (argued) and Lawrence Bender (appeared), Bismarck, ND, for plaintiffs and appellees.

          David P. Garner, Office of the Attorney General, Bismarck, ND, for defendants and appellants.

          OPINION

          JENSEN, JUSTICE

         [¶1] The State of North Dakota, ex rel. the North Dakota Board of University and School Lands, and the Office of the Commissioner of University and School Lands, a/k/a the North Dakota Department of Trust Lands ("the State") appeals from a district court's judgment interpreting the royalty provisions of natural gas leases with Newfield Exploration Company, Newfield Production Company, and Newfield RMI LLC ("Newfield"). The State argues the district court's interpretation of the leases improperly allows the reduction of the royalty payments to account for expenses incurred to make the natural gas marketable. We reverse.

         I.

         [¶2] Newfield operates numerous gas-producing wells throughout North Dakota. Newfield has entered into leases with the State which calculate gas royalties based upon "gross production or the market value thereof, at the option of the lessor, such value to be determined by . . . gross proceeds of sale . . . ." The State initiated an audit of Newfield in June 2016. The State alleges the audit revealed Newfield is underpaying the gas royalties required by the leases. Specifically, the State contends Newfield is paying royalties based on gross proceeds reduced to account for deductions necessary to make the gas marketable and that reducing the gross payments by those deductions is contrary to the express terms of the lease. Newfield contends it has paid the royalties based on the gross proceeds it has received from the sale of the gas to Oneok Rockies Midstream L.L.C.

         [¶3] Newfield operates gas-producing wells subject to leases with the State that require the royalties payable to the State to be calculated based on gross proceeds from the sale of the gas. Newfield subsequently entered into an agreement to sell the gas produced at the wells to Oneok. Title to the gas passes to Oneok when it receives the gas from Newfield, but payment to Newfield is delayed until after Oneok processes the gas into a marketable form and sells the marketable gas. The price Oneok pays to Newfield for the gas is calculated based on 70-80% of the amount received by Oneok when Oneok sells the marketable gas. The 20-30% reduction of the price for which the marketable gas is sold accounts for Oneok's cost to process the gas into a marketable form and profit.

         [¶4] Newfield initiated litigation requesting a judgment declaring the royalty payments at issue to have been properly calculated based on the gross amount paid to Newfield by Oneok. Both parties moved for summary judgment. The district court agreed with Newfield's interpretation of the leases and held the leases required the royalty payments to be based upon the gross amount Newfield receives from Oneok. On appeal, the State argues the court erred in interpreting the leases, and the court's interpretation improperly requires the State to share in post-production costs incurred to make the gas marketable.

         II.

         [¶5] This Court's standard for reviewing a district court's decision granting summary judgment under N.D.R.Civ.P. 56 is well established:

Summary judgment is a procedural device for the prompt resolution of a controversy on the merits without a trial if there are no genuine issues of material fact or inferences that can reasonably be drawn from undisputed facts, or if the only issues to be resolved are questions of law. A party moving for summary judgment has the burden of showing there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. . . . Whether the district court properly granted summary judgment is a question of law which we review de novo on the entire record.

Johnson v. Statoil Oil & Gas LP, 2018 ND 227, ¶ 6, 918 N.W.2d 58 (quoting Estate of Christeson v. Gilstad, 2013 ND 50, ¶ 6, 829 N.W.2d 453). With regard to the interpretation of oil and gas leases, this Court has stated:

The same general rules that govern interpretation of a contract apply to oil and gas leases. The construction of a written contract to determine its legal effect is a question of law and on appeal, this Court will independently examine and construe the ...

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