I regularly sit at kitchen tables with families who are completely baffled by their royalty checks. They look at the gross production value—say, $15,000—and then trace their finger across the page to the net pay. It’s $11,000.

Where did the rest go? It vanished into a maze of deductions for gathering, compression, processing, and transportation.

If you own minerals in certain states, you might have a legal case against the operator. We have talked extensively about how Colorado protects mineral owners with the “first marketable product” rule, which forces the oil company to foot the bill to get the gas ready for sale.

But if your minerals are in the Bakken—specifically in Montana or North Dakota—the legal reality is harsh. The courts in these states have given operators their legal blessing to charge you for the costs of moving and treating your gas. They do this through a mathematical process that systematically shrinks your monthly check.

I want to explain exactly how this works. Because to make smart decisions about your family’s land, you need to understand the rules of the game you are actually playing.

The Montana Anchor: Montana Power Co. v. Kravik

In oil and gas law, states generally fall into two camps regarding deductions. Some follow the landowner-friendly “marketable product” rule. Others follow the operator-friendly “at-the-well” rule. Montana sits firmly in the second camp.

The foundation for this was laid decades ago in a case called Montana Power Co. v. Kravik.

In that case, a landowner named Gay Kravik had a lease that paid royalties based on the “market price of the gas in its natural state at the well.” The problem with pricing gas at the wellhead is that nobody actually buys gas right at the wellhead. The gas comes out of the ground raw, wet, and sometimes full of impurities. It has to be piped, pressurized, and processed before a commercial pipeline will take it.

The Montana Supreme Court looked at this problem and made a decision that shapes royalty checks to this day. They ruled that when there is no actual market right there in the field, operators can compute the royalty by starting with the price the gas eventually sells for downstream, and then subtracting the marketing and transportation expenses it took to get it there.

This ruling functionally gave operators the green light to pass a proportionate share of pipeline and processing costs back to the mineral owner.

The Math: How the Net-Back Method Works

Lawyers and accountants call this the :net-back method (or the work-back method).

The law firm Holland & Hart published a very clear explanation of how these mechanics operate in practice. Under the net-back method, the “market value at the well” is determined by taking the sales price received at a distant, downstream point of sale and subtracting reasonable :post-production costs.

Here is what that looks like on your check:

  1. Your share of the gas is sold at a major market hub for $5.00.
  2. The operator spent $0.50 per unit gathering the gas from the well.
  3. They spent $0.40 compressing it to push it through the pipes.
  4. They spent $0.60 processing it to strip out the natural gas liquids.
  5. Your “at-the-well” value is calculated as $3.50.

You are effectively forced to act as a silent partner in the midstream infrastructure. You didn’t agree to build a processing plant or lay twenty miles of gathering lines, but you are paying a toll for them every single month.

Federal courts have repeatedly confirmed this is just how Montana does business. In S Bar B Ranch v. Omimex Canada, landowners brought a class action lawsuit arguing that post-production costs shouldn’t be deducted from their royalties. The federal district court directly analyzed the Kravik decision. The judge didn’t mince words, concluding that Montana has adopted the majority at-the-well rule, meaning post-production costs can absolutely be deducted before calculating royalties. The landowners lost.

Across the Border: North Dakota and the Bice Decision

The Bakken formation is massive. It doesn’t care about the border separating Montana and North Dakota. Oil companies operate seamlessly across the state line, and many families hold mineral interests that span both states.

If you own North Dakota minerals, you might hope for a better legal environment. Unfortunately, the courts there adopted the exact same logic.

In 2009, the North Dakota Supreme Court handed down a landmark decision in Bice v. Petro-Hunt, L.L.C.. The mineral owners in that case explicitly asked the court to adopt the “first marketable product” rule to protect them from processing costs.

The court refused. They rejected the marketable product argument entirely. Instead, they ruled that when gas has no discernible market value right at the wellhead before it is processed, operators are legally allowed to work backward from the downstream sale price by deducting reasonable processing and other post-production costs.

What is fascinating about the Bice decision is how heavily it relied on its neighbor. The North Dakota Supreme Court specifically cited Montana’s Kravik ruling as evidence of how at-the-well jurisdictions are supposed to operate.

The result is a unified legal wall across the Bakken. Whether your well is drilled in Richland County, Montana, or McKenzie County, North Dakota, the operator is legally entitled to shrink your royalty check by deducting your share of post-production costs.

What Should Actually Be on Your Check Stub

Knowing that these deductions are legal is only half the battle. The other half is making sure the operator isn’t taking advantage of the rule to pad their pockets.

Just because an operator can deduct reasonable costs doesn’t mean they can simply deduct whatever they want in a black box. In Montana, the law gives you a specific tool to monitor this. Under Montana Code § 82-10-104, operators are legally required to provide royalty owners with detailed payment statements.

This statute mandates that they show their math. Your statement must include the net production value, the taxes withheld, and critically, every single charge assessed against you specified by line item.

If your check stub just says “Deductions: $400” with no breakdown, the operator is violating Montana law. You have the right to see exactly how much they are charging for gathering versus compression versus transportation. (We wrote a deeper guide on how to read these specific codes on your check stub if you want to dig into your own paperwork).

North Dakota has similar strict reporting requirements. Operators have to show you exactly what they are taking out.

The Reality of Bakken Economics

I try to be fair when I look at these situations. The operators aren’t necessarily acting maliciously. The reality of the Bakken is that getting gas out of the ground and to a buyer is an incredibly expensive logistical nightmare.

Most wells in the Bakken are drilled primarily for oil. The natural gas that comes up with the oil is often viewed by the operator as a nuisance—a byproduct that they have to handle. This gas is often “sour” (full of hydrogen sulfide) and requires heavy, expensive processing before it can be put into a commercial pipeline.

Because the courts have said you own the gas :at-the-well, you also own the massive logistical problem of moving and sweetening that gas. The operator handles the logistics, but they hand you your share of the bill.

Weighing Your Options

We speak to families all the time who are exhausted by this. They inherited a great asset, but they feel like they are constantly fighting the operator over pipeline fees and processing charges. They watch gas prices jump on the news, only to open their check and see that higher transportation deductions ate up the entire gain.

You cannot change the Supreme Court precedents in Montana or North Dakota. Kravik and Bice are the law of the land.

But you do have options. You don’t have to remain a silent partner in the operator’s midstream expenses.

Many families look at the heavy deductions, look at the declining production of older Bakken wells, and decide they would rather exit the asset entirely. By selling the mineral rights, you trade an unpredictable, deduction-heavy monthly check for a clean, lump-sum payout.

As a family office that buys minerals, we price these exact legal realities into our valuations. We know how Bice works. We know the heavy cost of Bakken gas processing. We handle the math so families don’t have to.

Selling isn’t the right move for everyone. Sometimes holding the asset makes the most sense for your financial picture. But knowing exactly what you own—and understanding the laws that dictate what it is actually worth—is the first step. If you are tired of watching your gross royalties disappear into a void of deductions, it might at least be worth a conversation to see what your options are.

:net-back-method

A calculation formula used by oil and gas companies to determine royalty payouts in “at-the-well” states. The operator takes the final price the oil or gas was sold for at a distant commercial market, and subtracts the costs of moving and processing the product back to the wellhead. This results in a lower royalty payout for the mineral owner.

:post-production-costs

The expenses incurred by an operator after oil or gas is brought to the surface to make it ready for sale. These typically include gathering the gas through small pipelines, compressing it to push it through the system, dehydrating it to remove water, processing it to remove impurities, and transporting it to a major market hub.

:at-the-well

A legal doctrine governing how royalties are valued. In states that follow this rule, the mineral owner’s royalty is calculated based on the raw, unprocessed condition and location of the oil or gas exactly as it emerges from the ground. Because raw gas at a remote wellhead is difficult to sell, this rule allows operators to deduct the costs of transporting and processing it before paying the royalty owner.