By: Jacob Orledge
BISMARCK, N.D. (North Dakota Monitor) – A recent North Dakota Supreme Court decision could have ripple effects for thousands of oil wells, the mineral owners who receive royalties from them and the oil industry in the state as a whole.
The decision voided one order, issued by the board responsible for oil and gas regulation in North Dakota, on who should receive royalties from a particular well in McKenzie County.
Yet the outcome in the case could have implications for mineral owners who receive royalties from a growing category of oil wells in North Dakota. The attorney who initiated the lawsuit sees the court’s decision as an unambiguous victory for mineral owners he alleges are being underpaid by oil companies.
“The Supreme Court got this one right,” said Jonathan Garaas, the Fargo attorney who filed the lawsuit appealing the North Dakota Industrial Commission order on behalf of his family’s three trusts. “Apparently 85% of the oil companies got it wrong, and they’re going to have to start paying monies to the mineral owners who were cheated out of their proceeds and try and claw back monies that were wrongfully paid to people.”
Other attorneys who submitted briefs during the appeal, representing mineral owner clients on both sides of the issue in similar situations elsewhere, said they view this decision as more limited and likely to prompt a new wave of lawsuits. One of those attorneys is Derrick Braaten of Bismarck, whose clients side with the Garaas family.
“It depends on what happens next,” Braaten said. “But I think that the fallout from this is going to be a lot of litigation.”
That uncertainty is because the Supreme Court voided the agency’s order on procedural grounds. The court did not rule on the merits. The decision likely leaves the door open for the Industrial Commission to reach a similar decision through a different process.
The dispute centers around Petro-Hunt, an oil company based in Texas, and a particular well it drilled along a section line in McKenzie County.
This section line served as the border of three geographic areas, called spacing units, designating the land available for different groups of oil wells.
The new well was drilled on the border to extract the oil left stranded along the edges. The Industrial Commission in 2019 established a new geographic boundary for this well, overlapping the others on a map, to determine who should receive a share of the revenue from the new well.
But after the well began producing oil in 2020, Petro-Hunt and the Garaas family disagreed on whether the company was paying out royalties correctly. Petro-Hunt was diluting the payments sent to some mineral owners, like the Garaas family, and redirecting those royalties to mineral owners outside the geographic area designated as a spacing unit for the well.
Petro-Hunt, the ninth largest oil producer in North Dakota, asked the Industrial Commission to weigh in. The commission unanimously agreed with Petro-Hunt and approved an order in early 2024, now voided by the Supreme Court, confirming the company had acted correctly.
During that meeting, Lynn Helms, then the director of the Department of Mineral Resources, said he estimated 85% of oil companies in North Dakota use Petro-Hunt’s allocation method for section line wells. An attorney representing mineral owners who support the practice said it is in line with more than a decade of guidance from the Industrial Commission.
“I have a hard time seeing how they would deviate from that,” said Josh Swanson, a Fargo attorney who filed a brief with the court on behalf of mineral owner clients who support this method.
The Supreme Court rejected arguments that state law requires Petro-Hunt’s distribution method be used, yet confirmed the Industrial Commission has the legal authority to make those decisions. But the court ruled the agency must do so using a different process.
“The ruling validates the Commission’s prior orders,” Attorney General Drew Wrigley said in a statement. “The Supreme Court identified certain procedural requirements under the law, and the Industrial Commission will fully implement those directives going forward.”
Wrigley is one of three members of the Industrial Commission, alongside the governor and agriculture commissioner.
Spokespersons for the Department of Mineral Resources and North Dakota Petroleum Council said their organizations are still reviewing the contents of the Feb. 5 decision.
The next chapter
The only thing everyone appears to agree on is the financial ramifications of this issue will be significant.
“It’s hard to overemphasize the importance of this order,” Helms said in 2024, months before he retired, when he recommended the Industrial Commission approve Petro-Hunt’s request. “There’s a lot of money at stake here.”
The court’s decision confirmed the Industrial Commission has the authority to act on this issue. Petro-Hunt could file a new application with the commission, this time asking to modify the 2019 order that established the geographic area associated with the well. Neither Petro-Hunt or its attorneys responded to emailed requests for comment.
If the spacing unit border is redrawn or other amendments proposed, the Industrial Commission would have to notify all mineral owners in the affected area. Swanson said he expects the same outcome in the end, but said the proceedings in these types of cases could invite public interest rivaling the controversial Summit Carbon Solutions’ proposed pipeline and storage for carbon dioxide.
“It sets up, really, potentially a larger dispute,” Swanson said. “A lot of mineral owners, I suspect, are going to get these notices and want to have a say.”
A group of six large oil and gas companies submitted a brief to the Supreme Court arguing any substantive reversal of the Industrial Commission’s guidance, in place since 2010, would lead to “widespread disruption in the oil and gas industry.”
“For the Court to now reverse the Commission’s time-tested approach would hamper investments, shake the industry’s trust in the stability of regulatory approaches in North Dakota, and could require revision of years’ worth of production from thousands of unit-line wells,” the companies argued.
A minority of the industry, including Continental Resources, disagrees with the Industrial Commission’s guidance and has paid mineral owners in accordance with the view of Garaas, the plaintiff. A Continental Resources attorney argued in a court filing that oil and gas development in the state is so complex a one-size-fits-all approach is “neither possible nor advisable.”
Continental Resources, the No. 2 oil producer in the state, argued if companies are to be required to follow a certain approach, that mandate should come from the Legislature. A prior Supreme Court ruling concluded lawmakers did not contemplate overlapping spacing units when the current law was written. A Continental Resources attorney did not respond to a request for comment.
Regardless of the Industrial Commission’s decision, some oil and gas companies will be adversely affected. Braaten said those companies may try to recoup royalties wrongfully paid to one group of mineral owners in anticipation of litigation from mineral owners on the other side of the issue.
“There’s going to be litigation over that because there’s going to be mineral owners who say, ‘the hell you are,’” Braaten said. “There’s also going to be plenty of mineral owners who say, ‘you gave away half my royalties, pay up.’ And there’s going to be plenty of situations where operators say, ‘hell no.’”
Those disputes would be out of the Industrial Commission’s hands, Swanson said.
“I think the next chapter in this story is cases in front of the district court, talking about folks that weren’t paid, presumably, a hell of a lot of royalties,” Swanson said.
Garaas interprets the Supreme Court opinion as ruling definitively in his family’s favor. He said he expects Petro-Hunt to pay his family the royalties they are owed, with the 18% interest required by state law. Court records don’t specify the dollar amount of royalties in dispute, and Garaas said he has not calculated it.
“Hopefully they’re going to pay,” Garaas said. “We shouldn’t have to fight with the oil companies.”
Winners and losers
The origin of these disputes lies with how oil and gas development has been organized in North Dakota.
Every Bakken well, or group of wells, in North Dakota is part of a spacing unit, with very few exceptions. Typical Bakken wells are drilled 2 miles down, and 2 miles horizontally under the surface. Wells drilled horizontally access and produce oil from a larger area. The spacing unit is a surface boundary representing where the oil is coming from for the wells drilled in that area.
These spacing units are often 1 mile wide and 2 miles long, forming a rectangle on a map. Royalty owners are paid their share of the oil produced in that rectangle, proportional to the mineral acres they own, even if the oil is coming from the opposite end.
But North Dakota has a prohibition on drilling a well too close to a spacing unit’s edge. This prevents an oil well in one spacing unit from extracting oil from a neighboring unit.
The practice leaves approximately 19% of the 1,280-acre area without an oil well, the North Dakota Petroleum Council has said in court documents. That can leave as much as 1 million barrels of oil in the ground, according to past statements by regulators.
The solution is to drill a section line well on the border between two spacing units.
In order to determine how the oil production from the section line well is shared, regulators create a new, overlapping spacing unit. But when this does not perfectly overlap with existing spacing units, oil companies, mineral owners and regulators can disagree on who should receive royalties. There can be winners and losers, depending on what method is used.
North Dakota had more than 1,400 section line wells in 2024, with permits approved for more than 2,000, Helms said at the time. He projected they would number 3,000 “soon.” A Department of Mineral Resources spokesperson said last month the agency does not track the number of overlapping spacing units.
In the case that went before the Supreme Court, the Garaas family argued that Petro-Hunt improperly cut their share of royalties in half. That’s because Petro-Hunt determined that the royalties should be shared with owners outside the overlapping spacing unit.
Petro-Hunt, along with state regulators and an estimated 85% of North Dakota oil companies, handle the calculation this way. They argue the section line well affects the production of the wells in the disputed area. Therefore, they should share in the section line production.
But the Garaas family and a minority of oil companies, including Continental Resources, argue the oil production should not be shared with the disputed area. Braaten said if the Industrial Commission wished to allocate production from the section line well to those mineral owners, they should have been included in the overlapping spacing unit.
Mark Jacobsen, a spokesperson for the regional office of the Bureau of Land Management, confirmed in an email North Dakota’s approach is an outlier. He said most states operate in line with the federal agency’s national policy of requiring royalties to be paid within the boundary of an overlapping spacing unit — as the Garaas family argues should be done.
“This approach ensures clarity and consistency,” Jacobsen said. The BLM has developed a state-specific policy to accommodate North Dakota’s approach.
Members of the Industrial Commission discussed the Supreme Court ruling last week in a closed-door executive session. The commission took no action, so the next step is still unclear.
At least for now, Garaas said he’s pleased with the outcome.
“They protected private landowners and the mineral rights owned by those private landowners,” Garaas said. “Almost exactly what we were requesting.”
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