### Filed 7/11/19 by Clerk of Supreme Court
IN THE SUPREME COURT
STATE OF NORTH DAKOTA

2019 ND 193

Newfield Exploration Company, Newfield Production Company, and Newfield RMI LLC, Plaintiffs and Appell ees

v.
State of North Dakota, ex rel. the North Dakota Board of University and School Lands, and the Office of the Commissioner of University and School Lands, a/k/a the North Dakota Department of Trust Lands, Defendants and Appellants

No. 20190088

Appeal from the District Court of McKenzie County, Northwest Ju dicial District, the Honorable Robin A. Schmidt, Judge.

REVERSED.
Opinion of the Court by Jensen, Justice

. Spencer D. Ptacek (argued) and Lawrence Bender (appeared), Bism arck, ND, for plaintiffs and appellees.
David P. Garner, Office of the Attorney General, Bismarck, ND, for defendants and appellants.Newfield Exploration Company v. State
No. 20190088

Jensen, Justice. [¶1] The State of North Dakota, ex rel. the North Dakota Board o f University and School Lands, and the Office of the Commissioner of University and School Lands, a/k/a the North Dakota Department of Trust Lands (“the State”) appeals from a district court’s judgment interpreting the royalty provisions o f natural gas leases with Newfield Exploration Company, Newfield Production Company, and Newfield RMI LLC (“Newfield”). The State argues the district court’s interp retation of the leases improperly allows the reduction of the royalty payments to acco unt for expenses incurred to make the natural gas marketable. We reverse.
I. [¶2] Newfield operates numerous gas-producing wells throughout N orth Dakota.
Newfield has entered into leases with the State which calculate gas royalties based upon “gross production or the market value thereof, at the opti on of the lessor, such value to be determined by . . . gross proceeds of sale . . . .” The State initiated an audit of Newfield in June 2016. The State alleges the audit re vealed Newfield is underpaying the gas royalties required by the leases. Specific ally, the State contends Newfield is paying royalties based on gross proceeds reduced to account for deductions necessary to make the gas marketable and that reduci ng the gross payments by those deductions is contrary to the express terms o f the lease. Newfield contends it has paid the royalties based on the gross proceeds it has received from the sale of the gas to Oneok Rockies Midstream L.L.C. [¶3] Newfield operates gas-producing wells subject to leases wit h the State that require the royalties payable to the State to be calculated bas ed on gross proceeds from the sale of the gas. Newfield subsequently entered into an agreement to sell the gas produced at the wells to Oneok. Title to the gas passes to Oneok when it receives the gas from Newfield, but payment to Newfield is delayed until after Oneok

1processes the gas into a marketable form and sells the marketab le gas. The price Oneok pays to Newfield for the gas is calculated based on 70-80 % of the amount received by Oneok when Oneok sells the marketable gas. The 20- 30% reduction of the price for which the marketable gas is sold accounts for One ok’s cost to process the gas into a marketable form and profit. [¶4] Newfield initiated litigation requesting a judgment declari ng the royalty payments at issue to have been properly calculated based on thegross amount paid to Newfield by Oneok. Both parties moved for summary judgment. The district court agreed with Newfield’s interpretation of the leases and held th e leases required the royalty payments to be based upon the gross amount Newfield rec eives from Oneok. On appeal, the State argues the court erred in interpreting the leases, and the court’s interpretation improperly requires the State to share in post-p roduction costs incurred to make the gas marketable.
II. [¶5] This Court’s standard for reviewing a district court’s deci sion granting summary judgment under N.D.R.Civ.P. 56 is well established: Summary judgment is a procedural device for the prompt resoluti on of a controversy on the merits without a trial if there are no gen uine issues of material fact or inferences that can reasonably be drawn fro m undisputed facts, or if the only issues to be resolved are ques tions of law. A party moving for summary judgment has the burden of sho wing there are no genuine issues of material fact and the moving par ty is entitled to judgment as a matter of law. . . . Whether the dis trict court properly granted summary judgment is a question of law which we review de novo on the entire record.
Johnson v. Statoil Oil & Gas LP , 2018 ND 227, ¶ 6, 918 N.W.2d 58 (quoting Estate of Christeson v. Gilstad , 2013 ND 50, ¶ 6, 829 N.W.2d 453). With regard to the interpretation of oil and gas leases, this Court has stated: The same general rules that govern interpretation of a contract apply to oil and gas leases. The construction of a written contract to determine its legal effect is a question of law and on appeal, this Court will independently examine and construe the contract to determi ne if the trial court erred in its interpretation.

2Words in a contract are construed in their ordinary and popular sense, unless used by the parties in a technical sense or givena special meaning. A contract must be read and considered in its entirety so that all of its provisions are taken into consideration to determinethe parties’ true intent.
Johnson , ¶¶ 7-8 (citations omitted). [¶6] Typically, when natural gas is extracted, it contains hydro gen sulphide, which requires removal to make the product marketable. West v. Alpar Res., Inc. , 298 N.W.2d 484, 487 (N.D. 1980). The general rule requires the les sor and lessee to share the costs of making the product marketable. Id. at 48. However, the parties may contract around the general rule and allocate the expense of making the gas
marketable. Id. In an oil and gas contract, the term “gross proceeds” indicat es a lessor’s royalty is calculated based on the total amount receiv ed for the product without deductions for making the product marketable. Id. at 489-90. “Net proceeds” indicates the lessor will share in the costs of making the prod uct marketable—thus reducing the royalty payment. Id. at 490-91. [¶7] Here, the relevant royalty provisions read: Lessee agrees to pay lessor the royalty on any gas, produced an d marketed, based on gross production or the market value thereof , at the option of the lessor, such value to be based on gross proceeds of sale where such sale constitutes an arm’s length transaction.

. . . . All royalties on oil, gas, carbon black, sulphur, or any other products shall be payable on an amount equal to the full value of all consideration for such products in whatever form or forms, whic h directly or indirectly compensates, credits, or benefits lessee

. [¶8] Under N.D.C.C. § 15-05-09, the State may lease lands under its control for gas exploration and establish rules and regulations with regard to the leases. The Department of Land Trust’s website contains guidance regarding the payment of royalties from oil and gas leases. The Department’s guidance i s consistent with our
decision in West and provides as follows: “gross proceeds of sale means income

3before deduction of expenses. Basically it means the price you sell the oil for, regardless of what expenses go into arriving at that price.” [¶9] The parties agree had Newfield itself incurred expenses to make the gas marketable, or if Newfield had directly paid Oneok to make the product marketable for Newfield to sell, the State would be compensated based on the price received from the sale of the gas after it was made marketable and without re duction for the costs required to make the product marketable. The State argues beca use the price paid to Newfield by Oneok is reduced to account for the cost of process ing the gas into a marketable form, the result is no different than if Newfield it self had incurred the expense to process the gas into marketable form or retained tit le to the gas and paid Oneok to process the gas into marketable form. The State conte nds it is being required to share in the post-production costs contrary to the leases. [¶10] Newfield asserts the plain language of the leases requires the State’s royalties to be calculated on the payment Newfield receives for the gas f rom Oneok, regardless of whether that payment is reduced to account for expenses incurred by Oneok to make the gas marketable. Essentially, Newfield argues it can p ay a royalty based on a payment that has been reduced to account for the expense of m aking the gas marketable, as long as the expense is incurred by a third party

. [¶11] Our review of the leases indicates the circumstances at is sue were anticipated and governed by Subpart (f) of the lease defining royalties. S ubpart (f) states, “All royalties on . . . gas . . . shall be payable on an amount equal to the full value of all consideration for such products in whatever form or forms, whic h directly or indirectly compensates, credits, or benefits lessee.” While ti tle to the gas passes at the well, the transaction is not complete, and full value of the co nsideration paid to
Newfield is not determined until Oneok has incurred the cost of making the gas marketable and subsequently sold the marketable gas. Newfield’ s compensation is
calculated based on the amount Oneok receives for the marketabl e gas. This amount, from which Newfield attempts to base the State’s royalties, is reduced to account for the expenses Oneok incurred to make the gas marketable. Newfie ld directly benefits,

4or at the very least indirectly benefits, from the expenses One ok incurs to make the gas marketable. Subpart (f) of the lease unambiguously provide s the State’s royalty must include the value of any consideration, in whatever form, that directly or indirectly compensates, credits, or benefits Newfield. Here, Newfield unquestionably benefits from Oneok’s expenditures to make the gas marketable. Calculation of the royalties paid to the State based on an amount that has been re duced to account for expenses incurred to make the gas marketable, even though the c ost to make the gas marketable only indirectly benefits Newfield, is contrary to th e leases.
III. [¶12] Gross proceeds from which the royalty payments under the l eases are calculated may not be reduced by an amount that either directlyor indirectly accounts for post-production costs incurred to make the gas marketable. We reverse the district court’s judgment. [¶13] Jon J. Jensen Lisa Fair McEvers Daniel J. Crothers Jerod E. Tufte

I concur in the result. Gerald W. VandeWalle, C.J.

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