North Dakota Law Review


Lindsey Scheel

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Bice v. Petro-Hunt, L.L.C., 2009 ND 124, 768 N.W.2d 496
In Bice v. Petro-Hunt, L.L.C., the North Dakota Supreme Court expressly announced it joined the majority of states following the “at the well” rule for calculating royalties on oil and gas leases. The “at the well” rule defines the wellhead as the appropriate point for royalty calculation; royalty may be calculated using the comparable sales method or the workback method. Of the two methods, the comparable sales method is the preferred method for calculating market value. However, when comparable sales evidence is not available, it is appropriate to use the workback method. Following the workback method, lessees begin with the point of sale price received, then deduct reasonable post-production costs to arrive at the market value of oil or gas at the wellhead. Thus, Petro-Hunt properly deducted post-production costs before calculating royalty. In addition, the North Dakota Supreme Court held “free use” lease clauses allowed PetroHunt to use residue gas off the leased premises to fuel the central tank batteries because the residue gas was used in furtherance of lease operations. Finally, the court determined Petro-Hunt’s deductions for risk-capital and depreciation were not excessive. The Bice decision brings stability to an unsettled area of North Dakota law, and the rule is likely to impact future oil and gas lease dealings in the state.

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