On May 20, 2021, the North Dakota Supreme Court held that the following “free of cost, in the pipeline” oil royalty provision sets the point of valuation at the well:

To deliver to the credit of the Lessor, free of cost, in the pipeline to which Lessee may connect wells on said land, the equal part of all oil produced and saved from the leased premises.

See opinion here.

This opinion comes after most producers in North Dakota have been sued in federal court in a series of putative class actions asserting virtually identical claims for deductions of downstream costs.  Those claims are no longer viable because the point of valuation is now established as a matter of law to be at the well, so the producers were permitted to deduct downstream costs.

The North Dakota Supreme Court’s central reasoning is that the reference to “pipeline to which Lessee may connect wells on said land” unambiguously established that the producer is required to deliver the royalty oil to the lessor at the “wells on said lands.”  The Court also reasoned that the use of “may connect” means that the producer cannot avoid paying royalties by not connecting a pipeline.  Regardless of whether there is a pipeline, the royalty oil must be delivered (or valued if paid in cash) at the “wells on said land.”

With its decision yesterday, the North Dakota Supreme Court has likely saved industry from protracted, overlapping class action litigation and the uncertainty divergent decisions in the multitude of federal cases would have created.