SANTA FE, N.M. (AP) - New Mexico's highest court has ruled in favor of the oil industry in a dispute over whether two companies owed the state nearly $25 million in royalties for natural gas and oil produced on state land.
The court's unanimous ruling last week was a setback for the State Land Office, which contended that producers have shortchanged New Mexico in what they pay for producing gas and oil on land owned by the state.
The decision could affect several other pending royalty lawsuits potentially involving tens of millions of dollars.
Wally Drangmeister, a spokesman for the New Mexico Oil and Gas Association, said Monday the court's ruling "reaffirms the common sense interpretation and application of lease provisions that the industry has employed for decades."
The Land Office manages leases for oil and gas production as well as livestock grazing on state lands. The agency earned a record-setting $652 million last year, with 97 percent of that from oil and gas.
In the case before the court, audits by the Land Office in 2005 and 2006 claimed that ConocoPhillips Co. owed the state $18.9 million for the underpayment of royalties and Burlington Resources Oil and Gas Co. owed $5.6 million.
The companies challenged the assessments and a district court in Lovington ruled in their favor in 2007. The Land Office appealed but the Supreme Court agreed with the district court over how royalty payments should be calculated under lease arrangements that in some instances date to the 1930s and 1940s.
One of the central issues is whether companies should be allowed to continue to deduct certain expenses for making natural gas marketable after it's produced at well sites. Those so-called post-production costs include removing water and other impurities from the gas, and then transporting the gas to plants for additional processing before it's shipped in pipelines for commercial distribution.
Royalties are paid on "net proceeds" and the Land Office sought to limit costs that can be deducted by producers. Some gas is produced from oil wells and the ruling also involves royalties paid on that.
Land Commissioner Ray Powell said his agency, the attorney general's office and contract attorneys for the state were assessing the effect of the court's ruling and the next step the state will take in other lawsuits. The legal dispute over royalty payments began under Powell's predecessor, former Land Commissioner Pat Lyons.
"I want to work in a reasonable manner with the oil and gas companies because they are so important to the beneficiaries. I just expect them to pay their fair share and take care of the health of the land in the process," said Powell.
Public schools, universities and state hospitals benefit from revenues collected on oil and gas production on state trust lands managed by the Land Office.
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