Jill Schramm/MDN A Hess Bakken Investments II well near Palermo is one of many wells operated by Hess affiliates in the Bakken oil fields in northwestern North Dakota.

One of the largest operators in the Bakken oil field is facing lawsuits from multiple companies and royalty owners in state and federal courts.

Hess Corp. and its affiliate companies are being sued for allegedly engaging in deceptive and irregular accounting practices in an attempt to defraud royalty owners and companies with nonoperating, working interests in its well operations. Nonoperating companies that contracted with Hess to administer their interest in wells allege Hess overcharged its expenses and has not been forthcoming in how those costs were calculated.

The outcome of the cases could have implications for every royalty owner and working interest owner in a Hess operated well over the past decade, according to plaintiff attorneys.

Two cases were originally filed in 2020 and 2022 in North Central District Court, and a 2022 case is being adjudicated in U.S. District Court in North Dakota.

Hess had asked the state cases be dismissed and grievances taken to the North Dakota Industrial Commission, arguing the NDIC has jurisdiction over disputes related to costs.

“Ultimately, the claims will fail, as neither Hess Bakken nor the other defendants have done anything wrong or untoward,” Hess stated in its brief.

The 2020 case, filed in Ward County, involves claims by Vitesse Energy that it suffered millions of dollars in damages and stands to suffer millions more as a result of Hess’s fraudulent and deceptive practices.

Vitesse entered a contract with Hess Bakken Investments II (HBI II) for production of oil and gas related to its working interests in 872 of its wells. Nonoperators, such as Vitesse, rely on operators, such as Hess, to manage their wells. Nonoperators pay their proportionate share of well costs when billed by the operator and receive their proportionate share of net revenues when distributed by the operator.

One of the administrative services an operator provides is to market the nonoperator’s share of production. The operator also enters into agreements with midstream companies or other third parties for the gathering, processing, treating, compression and transportation of the produced hydrocarbons. Costs for these services often are referred to as post-production costs.

In addition to owning and operating exploration and production assets, Hess Corp. controls Hess Midstream, which operates midstream assets such as pipelines, storage terminals and processing plants.

Vitesse alleges Hess used deceptive practices to overstate its midstream costs. In addition, in 2016, Hess Midstream completed a $1.5 billion expansion of its Tioga Gas Plant, and in 2019, Hess Midstream announced another expansion expected to cost $150 million, which are improperly included in its midstream costs, the court complaint states.

Vitesse’s attorneys allege Hess has charged nonoperating interests, both royalty and working, three to five times more than what other operators in the Bakken have charged while paying two to three times less revenue than other operators have been paying.

Vitesse has asked the court to order Hess to provide a full accounting to enable the company to identify whether costs and revenue are correct. Vitesse also filed this month for punitive damages.

The 2022 lawsuit filed in Mountrail County, known as the Alcazar Energy case, is a consolidated case involving 14 companies and affiliates that raise similar allegations against Hess.

“HBI II has unfairly and wrongfully deducted more than Plaintiff’s proper share of midstream service costs in an effort to wrongfully provide consistent cash flows to Hess Midstream, fund Defendants’ midstream development projects and generally inflate Defendants’ profits to the detriment of Plaintiffs,” the lawsuit states. “HBI II has also breached the implied contracts by refusing to provide a full accounting and identification of the charges being deducted.”

It also was noted that HBI II became the operator of the wells by default because it has a majority interest in the wells, having been the first to file for a permit to drill in those areas.

The lawsuit seeks damages as well as an order prohibiting Hess from deducting post-production fees executed after Jan. 1, 2014. The complaint states Hess Corp. used an irregular strategy to monetize its midstream assets in 2014 that has been the base of its accounting measures that have been detrimental to nonoperating interests.

Regarding Hess’ claim that the NDIC has jurisdiction, the court did stay Vitesse’s lawsuit while the NDIC reviewed the matter. The NDIC consists of the governor, attorney general and agriculture commissioner.

The NDIC ruled that post-production costs may possibly constitute costs for operating a well, or that some post-production costs can be included, sending the matter back to the court, according to court documents.

At the time, a North Dakota federal court ruling that post-production costs may not constitute costs for operating a well was on appeal. Less than two months after NDIC’s decision, the Eighth Circuit Court of Appeals affirmed the federal court ruling, which the Alcazar lawsuit is citing in arguing its case. However, Hess counters the North Dakota Supreme Court has held that state courts are to defer to interpretations of NDIC.

The state court cases remain in discovery as the parties gather information.

The federal case, Sandy River Resources, also is a consolidated case involving multiple companies and class action royalty owners. It raises similar allegations to the other cases and remains in litigation.