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Project on Government Oversight
 

 

 

 

FACT SHEET: Federal Oil Royalty Litigation

January 2, 2002 

 

Major oil companies have settled with the Justice Department for almost $1/2 Billion dollars in United States of America ex. rel. Johnson v. Shell Oil Company, et al., a False Claims Act lawsuit over oil royalty underpayments in the U.S. District Court for the Eastern District of Texas. Litigation is still pending against several oil and gas companies over gas royalty payments (see POGO's Alert Federal Natural Gas Royalty Underpayment Litigation).

The oil royalty lawsuit alleges "a nationwide conspiracy by some of the world's largest oil companies to shortchange the United States of America ("United States") of hundreds of millions of dollars in revenues -- known as royalties -- derived from production of crude oil from federal and American-Indian owned lands spanning more than 27 million acres of off-shore and on-shore tracts located in, or off the coasts of Texas, Louisiana, Mississippi, California, Alabama, Alaska, Oklahoma, Arkansas, Colorado, Arizona, Florida, Kansas, Michigan, Montana, North Dakota, Nebraska, New Mexico, Nevada, South Dakota, Utah and Wyoming." The suit further alleges that "the damages to the United States and penalties under law may exceed five (five) billion dollars."

About Oil Royalties
The Department of Interior collects $1.1 billion annually in payments known as royalties from companies that drill oil from federal- and Indian-owned lands. For more than a decade, government whistleblowers tried to draw attention in their agencies to the disparity between the market price of oil and the values that oil companies used to make their royalty payments, also known as "posted prices." The Project On Government Oversight (POGO) began a series of investigations into oil royalties starting in 1993, revealing that taxpayers had been shortchanged hundreds of millions of dollars under posted pricing methodologies. After increased public exposure of the problem, the Department of Interior developed regulations that, starting in June, 2000, collect $72 million more annually. POGO was one of three private parties to file lawsuits in the Eastern District of Texas over past royalty underpayments. Under an agreement between the parties, the three lawsuits were consolidated. State governments and private parties nationwide have also filed suit against oil and gas companies and reached settlements totaling more than $10 billion over royalty underpayments and related taxes.

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 more than $4 billion.

Lawsuit Settlements
BP Amoco# $32 million
Burlington Resources, Inc.# $8.5 million
Chevron Corporation $95 million
Conoco, Inc.# $26 million
Devon Energy (Pennzoil) $11.9 million
ExxonMobil $52 million
Kerr-McGee/Oryx Energy $13 million
Marathon Oil Co. $7.7 million
Oxy USA Inc.# $7.3 million
Phillips Petroleum Co. $8 million
Shell Oil Company# $110 million
Sunoco $200,000
Texaco, Inc.# $43 million
Union Pacific Resources $2.7 million
Unocal Corporation# $21 million
TOTAL $438.3 million

# The Justice Department has intervened in lawsuits against companies with this symbol by their name.

The Seven Schemes
The lawsuit alleges that oil companies used seven "schemes" to shortchange on royalties:

"(i) misrepresenting that the first sale of oil under buy/sell agreements between themselves and/or other parties is the actual value received for the oil (the successful implementation of this scheme requires the Defendants to act conspiratorially and in confederation with one another),

(ii) buying and selling crude oil at the wellhead (to and from each other and other non-Defendant oil producers) at values less than what should have been received in an arm's length transaction with the implicit understanding that, as long as approximately equal volumes were bought and sold, the net financial impact would be neutral (the successful implementation of this scheme requires Defendants to act conspiratorially and in confederation with one another),

(iii) using sales to affiliated companies to mask the true value of the oil,

(iv) using an artificially low price for valuing the oil when it is refined by Defendants and never finally sold,

(v) falsely classifying oil as lower-priced "sour" (higher sulphur content) crude oil, or as oil subject to quality penalties, when such oil is/was in fact higher-valued "sweet" (lower sulphur content) crude oil, or oil not subject to any quality penalties or oil subject to a lesser amount of quality penalties than represented by the Defendants,

(vi) paying royalties on the basis of lower-priced "sour" crude oil and then commingling such "sour" crude oil with higher-priced "sweet" crude oil and selling the commingled mass as all "sweet" crude oil commanding a higher price not shared with the United States as royalty owner, and

(vii) paying royalties on the basis of API gravity penalties, when in fact such oil has been commingled to yield a mixture of oil not subject to API gravity penalties, or oil subject to offsetting API gravity penalties (for example, 46 degrees API gravity oil commingled with 39 degrees API gravity oil, when the non-penalty range is 40 degrees to 45 degrees), and selling the commingled oil without API gravity penalty, but charging the United States as royalty owner for such non-existent gravity penalty."2

For more information:

  • Contact Beth Daley, Director of Public Affairs, POGO, 202-347-1122

  • “BIG OIL: Cheating Taxpayers, Funding Candidates” by Morton Mintz. Excellent overview and background on oil royalty suits and policy reform campaigns posted on TomPaine.com, a web journal of opinion http://www.tompaine.com/features/2000/05/15/7.html

  • Selected documents from the case can viewed at the U.S. District Court for the Eastern District of Texas web site – http://www.txed.uscourts.gov/shell.htm

  • Department of Justice Civil Division, see Press Releases page for specific releases in 1998, 1999 and 2000 over oil royalty underpayments http://www.usdoj.gov/civil/home.html

 

Footnotes:

1 Exxon and Mobil merged in 1999. Mobil settled Fall, 1998 for $45 million, Media reported that Exxon settled September, 2000 for $7 million.

2 "Relators Consolidated and Second Amended Complaint for Damages and Other Relief Under the Federal False Claims Act," September 29, 1998: pp. 57-58.  

 


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.

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