A new royalty owners association has set up a website to take on what its founder, former legislator and current mineral rights owner Bob Skarphol, believes are unfair deductions from the royalties of mineral owners.
Skarphol began raising questions last year about the oil and gas industry deducting post-production costs for making natural gas marketable from royalties.
Seeing no progress in the last legislative session, he is taking the next step by setting up an easy way to collect memberships statewide for a new organization that will focus on the issue.
Membership costs will be graduated according to the size of mineral acres owned. The membership fee is $45 for those owning 100 acres, $75 for those with 100 to 500 acres, and $105 for those above 500 acres.
Skarphol said the different levels of membership are intended to encourage participation by small mineral owners. As membership grows, a board will be selected to oversee the association and provide guidance moving forward.
Skarphol was active last legislative session in pushing for attention to the issue, but said there was really no progress made.
The post-production royalty deductions were among legislative studies proposed for the intersession, but Legislative Management chose other studies, deferring instead to changes in royalty statements that were supposed to make deductions clearer. Those went into effect July 1.
“Those new rules were simply designed to try to provide a better description of what is transpiring,” Skarphol said. “But it is what is transpiring that is the issue, not how well we can understand it.”
Most states don’t allow post production deductions like the ones North Dakota is allowing, Skarphol said.
In the case of his wife’s royalty statement, as an example, the post-production charges to make natural gas sellable were $13.60 — greater than the royalty of $2.25. The difference came from the royalties his wife should have been paid for crude oil. That amounted to 37 percent of his wife’s oil royalty disappearing.
Many retirees depend on royalty incomes, Skarphol said. To suddenly start deducting a bunch of post-production expenses from these checks is simply unfair.
“The lease that they have that they are operating under was signed in 1949,” Skarphol added. “They did not charge post production costs until April of 2007. For 58 years they didn’t charge those costs.”
But a decision from the North Dakota Supreme Court “opened the floodgates,” Skarphol said, to not just post-production costs that make natural gas marketable, but to other new post-production costs that were never historically charged, such as depreciation.
“Ultimately, we need to find out the legality of that issue,” Skarphol said. “And we need to find out whether we will tolerate it as a state.”
As a former legislator himself, Skarphol believes royalty owners have a tough challenge ahead of them to educate members of the legislature to understand the issues at hand, and why they are so unfair to mineral owners.
“It’s a very, very complicated issue,” Skarphol said. “And unless you have a reason to understand, it takes a lot of work to gain an understanding of it. If you are not getting the monthly royalty statements, your eyes glaze over because you are so unfamiliar with it. The process is going to be difficult to educate them on the frustrations of royalty owners.”
While there is a lot of frustration out there, Skarphol said, action will be key to changing things. It will take a large membership class to build momentum and push for change.
“The idea (of the website) is to see if there’s adequate interest in moving forward,” he said. “Two or three people cannot do this.”