A North Dakota federal judge recently dismissed a group of proposed class actions alleging that certain oil and gas companies operating in the state underpaid royalties on natural gas flared from their operations (the "Flaring Litigation"). [1] Plaintiffs had alleged that the companies continued to flare long past the time period permitted by state law and sought payment of royalties on the flared gas.

After a consolidated hearing on the companies' motions to dismiss, the court held that plaintiffs had filed suit before properly exhausting their administrative remedies before the North Dakota Industrial Commission and thus the court was deprived of subject matter jurisdiction over the disputes.

The Industrial Commission is the state agency empowered with broad authority to regulate and administer oil and gas activities, including flaring. North Dakota state law permits flaring for a one-year period from the date of first production and the Industrial Commission may grant exemptions after the initial period if a producer can demonstrate that gathering the gas is economically infeasible. According to the court, the Industrial Commission is also the proper agency to determine (1) whether gas is being flared in violation of state law, and (2) the value and payment of royalties and taxes on improperly flared gas.

Because natural gas pipeline construction understandably lags behind infrastructure associated with the oil boom, flaring in North Dakota has increased more than 50 percent in the past two years to levels previously unknown in the United States and comparable to those of Russia and Nigeria. Contrasted with Texas, where less than one percent of natural gas is flared, in North Dakota 29 percent of production was flared last year alone.

Given that oil and gas companies own a larger share of production than royalty owners, one would reasonably assume that if the flared gas could be gathered and put into the marketplace economically, the companies would do so. However, until pipeline construction catches up, it is likely to remain infeasible for companies to capture gas produced at the well.

Based on the court's rulings, the Industrial Commission should be weighing in on the issue in short order.