BISMARCK — A western North Dakota judge has ruled in favor of an oil company and against the state in a longstanding dispute over old royalty payments, but questions remain about the implications of the judgment to the oil and gas industry. Energy sector observers believe the case may set an important legal precedent, but the state could appeal the ruling to the state Supreme Court.

At the heart of Newfield Exploration's 2018 lawsuit against North Dakota lies a disagreement over whether companies should be able to take deductions from their royalty bills to cover the costs of transporting and purifying oil.

The North Dakota Department of Trust Lands said the deductions taken for many years were improper and violated the lease agreement between the state and the company. Newfield, which argues the deductions were always allowed, sued the state after the department demanded that the company and about 40 other firms pay back the millions of dollars they had taken in deductions. If recovered, the royalties would go to trusts that fund public K-12 schools and colleges.

The state Supreme Court ruled in the state's favor two years ago, but the case was returned to Judge Robin Schmidt's Watford City district court to be further adjudicated.

The judgment handed down by Schmidt on Wednesday, Oct. 13, states that North Dakota failed to prove it had a lease agreement with Newfield, now owned by Denver-based Ovintiv. It is common for companies like Newfield to produce oil from wells under leases held by another firm or person, so the operators producing oil may not be named in original leases with the state.

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Schmidt's three-page ruling does not address whether the deductions taken by the company were improper, nor does it clarify whether the old royalty payments are still owed to the state by the original lessee or some other entity. The Board of University and School Lands, which includes Gov. Doug Burgum and four other statewide elected officials, will likely decide whether to appeal the decision at its Oct. 28 meeting, said Land Commissioner Jodi Smith.

Haynes and Boone, a Dallas-based law firm retained by Newfield, applauded the "take-nothing judgment" in which Newfield was ordered to pay no damages to the state.

Ron Ness, president of the North Dakota Petroleum Council, called the ruling a win for Newfield and the oil industry. Ness, whose organization represents more than 650 oil and gas-related companies, said every firm has a different arrangement with the state and each would need their day in court to work through their specific royalty disputes with the state.

Ness added that the industry would like to put the old royalty issue behind it and focus on the more important work of producing oil.

In an earlier ruling, Schmidt ruled against the state in upholding industry-backed legislation approved earlier this year by the Republican-led Legislature and Burgum that retroactively established a statute of limitations for state collections of royalty payments. That judgment, viewed as a victory for the industry, means the Department of Trust Lands can't require firms to pony up on outstanding royalty bills from before August 2013. The Land Board could also attempt to appeal that ruling to the North Dakota Supreme Court.