Royalties from oil and gas companies are a huge element in federal revenues. You’d think in an era of soaring deficits that the government would take some care to maximize income from mineral rights. You’d be wrong. The failure by oil and gas companies to pay the full royalties they owe is one of the largest and longest-running scandals in recent history. Underpayments in recent years appear to run into tens of billions of dollars of lost revenues.
Every now and again, Congress decides to stop embarrassing itself and rein in the oil companies. 2006 may be one of those years. As I describe below, the House has passed a bill that is awaiting Senate action. If enacted, this legislation might bring an additional $10,000,000,000 into the US Treasury.
And there’s a lot more at stake than that $10 billion. Worth talking about, then?
The experts in the field of mineral-royalty fraud and abuse are at The Project for Government Oversight (POGO). Incidentally, their website deserves to get a lot more attention from left blogtopia. Anyway, if you’d like to get caught up on some of the simmering controversies about oil royalty underpayments, there was an excellent segment Friday evening on NOW, which built upon POGO’s activism.
The NOW program, Crude Awakening, argues that the U.S. treasury is losing tens of billions of dollars because of shady practices by oil companies operating on public lands, as well as sweet-heart deals from Congress. This page will give you the video, and also has a series of links at the bottom that are worth exploring. One of the most important is a link to a recent GAO briefing on the subject (you might want to look over pages 9-10 in particular before viewing the NOW segment).
Another good read is this post by Beth Daley at the POGO blog; she was one of the experts interviewed by NOW. Her post provides several other links that fill out the story.
<u>Problems by sea…</u>
There are several key issues addressed by both NOW and Daley. First, a sweet-heart deal was created in 1995 for oil companies leasing the right to drill in deep water in the Gulf, under the so-called Deep Water Royalty Relief Act. Under DWRRA, oil/gas companies paid less than the full royalty rate (i) up until a given well had produced a specified amount of oil/gas, and (ii) unless oil/gas prices topped a specified threshold. But the Interior Department forgot (!) to include the royalties-threshold-clauses in the deep-water leases they wrote in the years 1998 and 1999. Interior has done nothing to correct that `oversight’.
Further, George Bush has handed out royalty breaks like popsicles (termed Discretionary Royalty Relief), and has even extended them to shallow-water wells. On top of this, the upper limits of oil/gas that can be pumped at the lower royalty rates has been extended.
Altogether, the nation is going to lose tens of billions of dollars from lost oil and gas royalties for wells drilled at sea during the last ten years. The GAO briefing estimates that the failure to set price thresholds in 1998 and 1999 alone will cost us $10 billion.
Meanwhile, a somewhat notorious oil company, Kerr-McGee, has filed suit against the government regarding the leases it signed from 1996-7 and 2000, which did have the intended price thresholds as legislated by DWRRA. Kerr-McGee claims that the price thresholds should be disallowed. Kerr-McGee has a shady record; it has been sued more than once for failing to pay the royalties it owes. Yet there is great fear that it may win this lawsuit. If it does win and the price thresholds in all industry leases get thrown out, the GAO estimates that may cost the US Treasury another $60 billion.
So last month the House, with bipartisan support (such things can happen), passed a bill to force the oil companies to renegotiate those leases. If the companies refuse to renegotiate, then they’ll be denied any further leases in the future. The Senate, however, has so far failed to take up S. 2314, a version of the bill introduced by Sen. Feinstein, Schumer, Kerry, and Boxer.
One thing we could usefully do is urge our Senators to insist that the bill be brought to the floor for a vote.
<u>…and by land</u>
In addition, there are many accusations from former employees of the Interior Department, as well as from people in the oil industry, that oil companies are illegally failing to pay the full royalties they owe for leases on public lands. Land-based wells are not subject to royalty relief, thankfully. Yet there is no end to the devious means that oil/gas companies can find to avoid paying what they owe.
Sometimes, the companies fail to report that they’re pumping oil from a site at all, or they under-report the amount of oil. Often, they pull strings in Congress or in the Interior Department to lower the effective royalty rates in government leases, or blunt or eliminate government audits. The oil companies have also advocated novel ways to pay their royalties, such as payment in kind (which POGO has been fighting for years). The lobbying power of big oil is such that government oversight of them has become significantly less aggressive under the Bush administration.
POGO has been investigating such allegations since 1994. Here is a revealing report from 1996 on the underpayment of mineral royalties around the U.S. As this overview of POGO’s first five years of oil-royalty work (up to 1999) shows, for every bit of progress reformers make toward holding oil companies accountable, a new loophole is opened up by legislators on the make, or by the Interior Department; or a new means of evasion or falsification is discovered by the oil companies themselves.
What is worse, it appears that the auditing systems for oil/gas leases have been gamed under Bush. Further, honest and effective managers in the Interior Department’s Mineral Management Services, who are tasked with auditing and overseeing the oil/gas leases on federal and Indian lands, have been pressured not to dig deeply, and in some cases not to pursue wrongdoing they’ve uncovered. POGO has obtained documents showing that the number of Interior Department audits of oil-companies has dropped by about 50% in recent years.
One man who used to work as a manager for MMS, Kevin Gambrell, alleges that beginning under the Bush administration, when he investigated these illegal practices (as was his job), he was told by his bosses to tone down or abandon the effort to get the money the U.S. treasury was owed. He tells NOW that under Bush the restrictions placed upon his audits turned them into something more like reviews, rather than actual audits. Eventually, Gambrell was fired, in what his supporters among the Navajos consider to be retribution for doing his job well and honestly.
The accusations that oil-companies are cheating on royalty payments have been echoed by private citizens as well, most famously by Jack Grynberg. Here is an excellent report on him from NPR. Grynberg has brought a series of private suits against oil/gas companies alleging fraud. From High Country News:
Meanwhile, a far bigger false-claims case is playing out in Wyoming. Jack Grynberg, the president and CEO of Denver-based oil and gas producer Grynberg Petroleum, has brought 73 separate lawsuits against some 300 companies in his own industry, including Kerr-McGee, Shell and ExxonMobil.
Grynberg says that when he discovered the extent to which oil and gas companies underreport production, it “just pissed the hell out of me.” He turned to the False Claims Act in 1997, after reading about it in The Wall Street Journal, and used it to sue a carbon dioxide producer called the BOC Group for cheating on Colorado state royalties; BOC eventually settled the case for $6 million. Grynberg’s 73 cases in Wyoming allege some $30 billion in underpayment, which, under the triple-damage provision of the False Claims Act, could total the biggest false-claims penalty ever.
It seems to me that if the federal government has failed to collect $30 billion dollars owed from wells in Wyoming alone, the Interior Department has very big problems. So, is this chump change as far as Congress is concerned?
Crossposted at Inconvenient News and Daily Kos
