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ND's cut of oil royalties on state land increasing

James Macpherson, Associated Press

BISMARCK, N.D. (AP) -- North Dakota has reaped more than $1.1 billion since 2007 thanks to drilling activity — an especially impressive tally considering about 90 percent the state is privately owned.

In the western North Dakota oil fields, state-owned land is leased for drilling, with government coffers seeing a share of royalty income from producing wells. Records show almost two-thirds of the state's 1.2 million acres in the region either has a well or one likely will be drilled within five years.

The state's public schools benefit the most from these lease auctions and royalty payments, and the Legislature can also tap the funds for special projects.

In the past year, royalty income has overtaken lease revenue as producers drill more wells to hold rights to the land, said Lance Gaebe, state Department of Trust Lands commissioner.

"They're doing everything they can do and working like the devil to prove up those leases," Gaebe said. "They have huge investments in those leases."

For the fiscal year that ended in July, 2,089 oil-producing wells were on state land — a nearly five-fold increase from just four years before — and state Land Department records show North Dakota received a record $192.1 million in royalty revenue. The state's cut from producing wells now is pegged at more than $20 million monthly, and likely will grow as more wells come online, Gaebe said.

Lease revenue, however, is dropping as the pool of state-owned parcels shrink in the rich Bakken and Three Forks formations. So-called bonus bids are a one-time, payment-per-acre bid to determine who earns the right to hold the lease to the state land. Successful bidders also pay rent of $1 per acre per year for the right to hold the lease for up to five years without production.

A record $294 million was bid in fiscal 2010 for rights to drill on state lands, or more than four times what the state earned that year in oil royalties, records show. Last fiscal year, the state only collected $125.4 million in bids.

Oil has doubled the trust fund that benefits North Dakota's schools to $2.2 billion, Gaebe said.

"We are being good stewards," Gaebe said. "That's money for today's generations and future generations for education."

Other royalties and lease proceeds are paid toward a trust fund that the Legislature can use for special projects, including infrastructure improvements.

The state owns about 1.2 million acres, or about 1,925 square miles, in 17 of western North Dakota's oil-producing counties. State data show about one-third of the land is leased, one-third is leased and has producing oil wells and the remainder have yet to be leased.

A quarterly state auction for oil drilling rights earlier this month fetched $18.8 million. McKenzie County drew the most interest and money, with 4,774 acres leased for $17.5 million.

Linda Fisher, a Land Department leasing coordinator, said the average price paid per acre for drilling rights during that auction was the fourth-highest since the recent oil boom began about five years ago.

Few acres remain in the hottest oil-producing spots: In Williams County, only 287 of the 92,000 state-owned acres aren't leased, and neighboring Divide County has only 272 of the 72,302 state-owned acres available.

North Dakota has received revenue from the sale of rights even before the first successful well was drilled in 1951, Gaebe said. Leasing interest has fluctuated over the years and was nearly nonexistent as little as a decade ago — except to the most bullish of oil speculators.

"Acres were leased for a dollar during the lull," Gaebe said of the bygone bidding era.

"There has been a dramatic shift," Gaebe said. "There certainly has been newfound interest."