Skip to Main Content
Project on Government Oversight
 

 

 

 

Federal Natural Gas Royalty Underpayment Litigation

January 2, 2002 

 

The Justice Department has intervened in five separate False Claims Act lawsuits filed by industry whistleblowers alleging that major oil and gas companies have undervalued gas in order to avoid paying royalties owed to the federal government and Indians. Three cases are pending in the 10th Circuit U.S. District Court for the District of Wyoming:

  • U.S. ex rel. Harrold E. (Gene) Wright, State of New Mexico, and John Chavez v. AGIP Petroleum Co. et al., Case No. 1:00MD1675

  • U.S. ex rel. M. Glenn Osterhoudt, III v. Amoco Prod. Co. et al., Case No. 1:00MD1676

  • U.S. ex rel. Jack J. Grynberg v. Shell Oil et al., Case No. 1:99MD1629

Two cases are pending in the U.S. District Court for the Eastern District of Texas, Lufkin Division:

  • U.S. ex rel. Mark A. Perry v. Burlington Resources, et al., Case No. 9:00cv197

  • U.S. ex rel. Jack A. Dutton v. Shell Oil Company et al., Case No. 9:00cv74

Alabama $3.57 billion
Alaska $6.2 billion
California $345 million
Florida $2 million
Louisiana $286 million
New Mexico $22 million
Texas $24.6 million
Federal Government $493 million
Private & Other Owners* $308 million
TOTAL $11.3 Billion

Sources: Based on a search of news articles from 1990 to the present and information from attorneys involved in royalty underpayment litigation. Includes settlements paid by major oil and gas companies due to lawsuits and government investigations into underpayments of gas and oil royalties. Figures may include taxes and penalties resulting from the settlements.
* This figure may include settlement money that was divided between private owners and states.

Litigation on Natural Gas Royalty Underpayments

Alabama

  • In December 2000, an Alabama jury awarded the state $3.5 billion in damages when it found that Exxon-Mobil intentionally underpaid what it owed in royalties from natural gas wells on state land. The verdict includes $87.7 million in compensatory damages and $3.42 billion in punitive damages. Internal company documents show the company labeled Alabama officials "inexperienced" in the natural gas business. The jury ruled that Exxon-Mobil deliberately underpaid the state.

Louisiana

  • The Louisiana State Mineral Board settled with Mid Louisiana Gas Co. for $4.9 million in July 1994 in a dispute claiming that the gas company had sold state gas in a low paying contract rather than sell it at the higher market price, thereby short-changing the state its due royalties. Mid Louisiana Gas Co. has since been bought by Tenneco.

New Mexico

  • The state's Department of Taxation and Revenue, as well as its secretary, John Chavez, have joined Gene Wright's suit against at least 50 major gas companies alleging various schemes to fraudulently underpay the state natural gas royalties. This case is pending in Wyoming's District Court.
  • New Mexico's State Land Office agreed to a settlement in April 1996 with Meridian Oil for $2 million. The agreement resolves a dispute with the company claiming that they understated the value of the gas they produced from state lands, therefore underpaying the royalties due to the state.

Federal Government

  • The U.S. Department of Justice settled a dispute with Shell Oil for $56 million after intervening in several False Claims Act suits against the company. The government alleged that "Shell systematically under reported the value of natural gas that it produced on federal leases in the Gulf of Mexico from August 1, 1986 to December 31,1999 and, consequently, paid less royalties than it owed the government."1

Private Owners

  • In June 2000, private owners in Alabama won an award of $93.2 million when a jury found that Southwestern Energy Co. and two of its affiliates underpaid the gas royalties owed to the land owners.
  • Private land owners in Arkansas settled a class action suit alleging underpayment of natural gas royalties. Stephens Production Co. settled with the plaintiffs for $2.4 million in December 1999.

Defendants

The Justice Department has intervened in litigation against the following companies:
Burlington Resources Oil & Gas, Inc. (Osterhoudt, Perry)
Meridian Oil, Inc. and subsidiaries (Perry, Wright)
Mobil Oil Corporation and subsidiaries (Osterhoudt, Wright)
Shell Oil Company and subsidiaries (Dutton, Grynberg, Osterhoudt, Wright)

The Justice Department has not yet made a determination whether to intervene:Amoco Production Company (Osterhoudt, Wright)
Chevron USA, Inc. (Osterhoudt, Wright)
Enron Corporation and Enron Oil & Gas Co. (Osterhoudt, Wright)
Exxon Co. USA, Inc. (Osterhoudt, Wright)
Fina Oil & Chemical and Fina Exploration, Inc. (Wright)

Several other gas companies are named as defendants in these cases, however the Justice Department has not intervened in the litigation against them.

Sources: See “The United States’ Notice of Election to Intervene” for the Eastern District of Texas, Lufkin Division in reference to Osterhoudt v. Amerada Hess et al. and Perry v. Burlington Resources et al. See “Notice of United States’ Intervention Decision” for the Eastern District of Texas, Lufkin Division in reference to Wright v. AGIP Petroleum Co. et al. See Department of Justice settlement agreement with Shell Oil in reference to Dutton and Grynberg.

About Gas Royalties

In 1998, the Department of Interior's Minerals Management Service collected $2.3 billion in gas royalties, compared to collecting $1.1 billion in oil royalties, from companies drilling on federal and Indian lands. According to a recent article, an anonymous Interior employee stated that: "the oil industry may be fighting the rule on oil [in reference to the controversial fight to revise oil royalty policies] because of fear that the methods for assessing natural gas royalties might also be revised based on the precedent for assessing oil royalties." A new oil royalty rule finalized on March 15, 2000 forces major oil companies to pay an additional $70 million more annually to the federal government.

The Schemes

Although every suit is different, the Wright suit offers an extensive list of schemes alleged:

According to Wright's suit, “Defendants have devised at least nineteen (19) fraudulent schemes and devices to mislead the Government and thereby underpay their gas and NGL [natural gas liquids] royalty obligations. These have included:

    (1) selling gas to an "affiliate" which resells at higher prices, but paying royalty only on the lower-priced first sale to the affiliate, in direct violation of DOI-MMS [Department of Interior/Minerals Management Service] regulations requiring payment of royalties based on the higher re-sale price by the affiliate;

    (2) selling gas which is actually processed for removal of NGL by the producer or an affiliate as "unprocessed" gas on which no NGL royalties are paid;

    (3) entering into NGL processing agreements with affiliated processors whereby the producer retains only a percentage of the NGL or its proceeds and the affiliated processor acquires the balance, and paying royalties only on the producer-retained percentage;

    (4) undermeasuring, or allowing others to undermeasure, the actual quantities of NGL produced or removed from federal lands, and reporting and paying royalties only on the undermeasured quantities;

    (5) undermeasuring, or allowing others to undermeasure, the quantities of gas produced from federal lands, and paying gas royalties only on the undermeasured quantities;

    (6) allocating a portion of the gross proceeds of the sale of gas as a "supply reservation charge" or other charges, and not paying royalties on such portion of the gross proceeds;

    (7) placing gas in storage, or "selling" gas to an affiliate which placed it is in storage during summer months when gas prices are low, and paying royalties on the basis of the low summer prices, instead of at the higher winter prices at which the gas is actually sold by the producer or affiliate after it is removed from storage;

    (8) taking legally unauthorized deductions for "marketing" fees, costs or expenses on gas and/or NGL;

    (9) taking deductions from royalty payments for costs of processing, handling, treating, dehydrating, compressing, storing, parking, banking, wheeling and/or transporting gas and/or NGL which are unauthorized by law, lease terms and/or regulations;

    (10) "commingling" federal gas to obtain "aggregation" premiums without paying royalties on the premiums;

    (11) utilizing financing and tax devices such as "volumetric production payments" to mask the true gross proceeds of gas sales by producers and their affiliates, and thus underpaying gas and NGL royalties actually owed;

    (12) using gas "swaps" or exchanges to underpay gas royalties;

    (13) using the device of fictional pipeline "backhauling" to underpay gas royalties;

    (14) failing to pay royalties as required by law on amounts paid as "buy-outs" and "buy-downs" of gas sales contracts’;

    (15) taking unlawful deductions for transportation and processing costs;

    (16) taking deductions for non-deductible gathering costs improperly treated as allegedly deductible transportation costs;

    (17) failing to pay royalties on refunds or downward adjustments by pipeline carriers;

    (18) Failing to pay royalties on upward price adjustments and additional payments made by purchasers of gas and NGL after the initial payments in which royalties were paid; and

    (19) paying royalties on the lower, instead of the higher, of (1) gross proceeds or (2) market value, as required by OCS and Indian leases."2

The Relators

The lawsuits were filed by oil and gas industry insiders and others with original information. They are called "Relators":

Jack J. Grynberg "has been engaged in the business of natural gas engineering and poduction for more than 40 years. The Relator has received Professional Engineer's Degrees in Petroleum Refining (Chemical) Engineering and Petroleum (Production) Engineering, as well as a Distinguished Achievement Medal all from the Colorado School of Mines."3

M. Glenn Osterhoudt, III is "a 6th generation native Texan, a 3rd generation oil man and has had 20 years experience in the oil industry ranging from rough-necking offshore, mud engineer (IMCO Services), mud consultant (Arco, Conoco) and currently, independent oil producer."4

Mark A. Perry was "a natural gas and natural gas liquids marketer, consultant and fraud examiner operating in the oil and gas industry."5

Harrold E. (Gene) Wright "has been engaged in the oil and gas/NGL business for more than 50 years. He is the only independent oil and gas operator ever to be elected by the major energy company Defendants to be Chairman of the Washington, D.C.-based Natural Gas Supply Association (“NGSA”)."6

State of New Mexico's Department of Taxation and Revenue has joined the case of Wright v. AGIP Petroleum Co.

John Chavez is the New Mexico Secretary of the Taxation and Revenue Department. Along with the State of New Mexico, he has personally joined the Wright case as a relator.

Jack A. Dutton. We do not currently have information about this relator.

About False Claims Act (FCA) Lawsuits

The FCA allows private citizens or whistleblowers with special knowledge of wrongdoing to litigate claims of fraud on behalf of the government. Though filed by private citizens, each suit is investigated by the Justice Department to assess whether the government will join or "intervene." Relators may continue to litigate against defendants if the Justice Department does not intervene. The Act also provides that a civil penalty of $5,000 to $10,000 be assessed for each violation. In 1986, Congress amended the FCA to provide protections for whistleblowers from retaliation and a 15% to 30% share in any financial recovery. As a result, the Justice Department's annual recovery of taxpayer dollars from whistleblower suits has increased by 17 times from just $27 million in 1985 to $474 million in 1999. Overall since 1986, FCA suits have recovered $4 billion.

For More Information:

Selected documents from three of the cases can be viewed at the U.S. District Court for the Eastern District of Texas web site.

Footnotes:

1 "Shell Oil to Pay United States $56 Million for Underpayment of Gas Royalties," Office of Public Affairs Press Release. United States Department of Justice. Thursday, September 28, 2000.

2 Second Amended Original Complaint, U.S. ex rel. Harrold E. (Gene) Wright v. AGIP Petroleum Co. et al.

3 Original Complaint, U.S. ex rel. Jack J. Grynberg v. Williams Natural Gas Co.; filed under seal

4 First Amended Complaint, U.S. ex rel. M. Glenn Osterhoudt, III v. Amoco Prod. Co. et al.

5 Original Complaint, U.S. ex rel. Mark A. Perry v. Burlington Resources et al.

6 Second Amended Original Complaint, U.S. ex rel. Harrold E. (Gene) Wright v. AGIP Petroleum Co. et al. 


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

# # #