by Jacob Orledge, North Dakota Monitor, photography by Sarahbeth Maney, ProPublica

This article was produced for ProPublica’s Local Reporting Network in partnership with the North Dakota Monitor. Sign up for Dispatches to get our stories in your inbox every week.

For more than half a century, Diana Skarphol’s family received a check every month from the company that drilled the first successful oil well in North Dakota on their land in 1951.

The checks, from the company that became Hess Corp., were straightforward. Her family, which owns the oil and gas underground, received a percentage of the revenue generated from the company’s sale of the minerals, called a royalty.

But in April 2015, when she opened that month’s check and looked at the accompanying statement detailing her share, she noticed for the first time that a significant portion of the payment had been deducted. About 35% of what she thought she was owed was gone, and she didn’t know why.

She was so taken aback that she called her husband, Bob Skarphol, a state lawmaker on the verge of retirement, as he drove from the capitol in Bismarck to their home in Tioga, a small community in the oil-rich Bakken in the western part of the state.

“Why are there minuses?” Diana Skarphol recalls asking. “Rather than being added in, things were being subtracted. I was puzzled and confused.”

The couple remembers that call because it was the start of a frustrating, decade-long search for answers from the company and of a string of unanswered pleas for help from the state, which has not taken action to help royalty recipients even as other states have. Over the past decade, Hess has withheld about 31%, or $137,635, of the Skarphols’ royalty income to cover the company’s costs to move oil and gas from the well site to market, records show.

Oil and gas companies owed the state’s private mineral owners, like the Skarphols, an estimated $4.6 billion in 2023 before deductions, according to North Dakota State University research. But those deductions — which can vary greatly — are deeply contentious in the state: The companies claim certain costs should be shared with royalty owners, while owners say that in most circumstances, the deductions shouldn’t be permitted at all. The state itself doesn’t regulate what can be deducted and there is no official accounting of how much of that money is withheld.

The North Dakota Monitor and ProPublica spoke with 18 mineral owners, interviewed experts and lawmakers, and reviewed court records and royalty statements to understand the extent of deductions. A dozen owners provided records of companies withholding 20% or more of their oil and gas royalties. Some monthly statements showed deductions as high as 50%. Similarly, at least one energy company and one independent researcher have found the deductions to be around 20% in recent years.

The industry’s chief lobbyist said percentages that high are atypical. Ron Ness, president of the North Dakota Petroleum Council, said it would be “impossible” to calculate an average deduction but suggested it couldn’t be more than 7% to 10% based on the cost of transporting oil out of state. If deductions were in that range, North Dakota royalty owners collectively would have lost between $322 million and $460 million in 2023.

The Skarphols’ leases with Hess were signed during a time when oil and gas was often sold at or near well sites. The leases didn’t say anything about deductions.

“It’s a matter of fairness,” Diana Skarphol said. “We didn’t get any say in it. They just up and changed it. You feel like you’re being cheated. It’s not right.”

While the language in the leases has not changed, the industry has. Most companies now choose to move the commodities away from the well site before selling them, incurring additional transportation and processing costs. They pass on a share of those costs to the royalty owners, which the North Dakota Supreme Court has ruled is legal.

By contrast, North Dakota officials have taken steps to safeguard state-owned royalties. Since 1979, all state leases with oil and gas companies prohibit deductions. When state trustees noticed deductions were being taken anyway, they fought back and have spent years negotiating settlements to recoup those missing royalties.

But the majority of the oil and gas in North Dakota is privately owned by about 300,000 individuals, according to the industry. And North Dakota policymakers have not taken action that would protect private minerals, an investigation by the North Dakota Monitor and ProPublica has found.

“There’s a double standard,” said Rep. Keith Kempenich, a Republican from Bowman, a community in the oil field. He has co-sponsored several pieces of unsuccessful legislation aimed at helping private owners.

Lawmakers have rejected efforts to rein in deductions and to make it easier for royalty owners to understand what costs are being deducted and why. And oil and gas regulators have claimed they have no jurisdiction to help.

“It’s ridiculous,” said Bob Skarphol, who has led the advocacy efforts by private mineral owners. “The industry has an incredible amount of influence in North Dakota.”

The state, which owns about 6% of the minerals in North Dakota, has advantages that private mineral owners don’t have. It has the resources to audit companies that pay royalties and to litigate disputes. State law also requires that companies provide electronic copies of royalty and production data to regulators, but private royalty owners are........

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