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Project on Government Oversight




Should Oil and Gas Companies Be Trusted to Pay Royalties In Kind?

February 8, 2001 


Oil and gas companies argue that paying oil & gas royalties to the federal government in kind will solve all the royalty underpayment controversies by eliminating price uncertainty. However, extensive litigation nationwide suggests that undervaluing the price of oil and gas is not the only way that companies defraud the government. Below are instances in which companies are alleged to have undermeasured the volume of the oil and gas taken from public lands and to have overcharged the government for deductions, in order to underpay its fair royalties. Should we trust these companies to pay royalties in kind?

Re: False Claims Act lawsuit against Koch Industries:

A federal jury in Oklahoma decided that Koch Industries, "purposely falsified oil measurements on federal and Indian lands, a practice that allowed it to collect more oil than it paid for...Several Koch employees testified that they were instructed to alter their measurements...Koch Industries admitted it received about $170 million worth of oil it didn't pay for." The judge, "will determine the penalty, which could be as high as $214 million."1

From False Claims Act lawsuit against over 100 oil and gas companies:

"(4)undermeasuring, or allowing others to undermeasure, the actual quantities of NGL [Natural Gas Liquids] 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;"2

From class action suit of private owners against over 100 gas and oil companies:

"Defendants have systematically deployed a variety of inaccurate techniques to undermeasure the value of gas extracted from Plaintiff's wells, with the purpose and effect of understating the royalties due Plaintiffs....some of the Defendants, moreover, placed bypasses around their gas meters, reducing the reported volume of extracted gas."3

From False Claims Act lawsuit against 82 gas pipeline companies:

"This lawsuit challenges Defendants' mismeasurement of the volume and wrongful analysis of the heating content of natural gas, causing substantial underpayments of royalties to the United States...for at least the last ten years, the United States has not been paid royalties on a very large portion, which the Relator presently calculates to be in excess of 20%, of the gas for which royalties were due."4

From $3.5 billion case between Alabama and Exxon-Mobil:

"d. Falsely reporting gross gas volumes produced from the Alabama tracts. Failing to disclose and failing to pay royalties on what was used by Counter-Defendant [Exxon-Mobil] as fuel in violation of the clear terms of the lease that says that the State is to be paid royalties on all gas produced and used."

"e. Drilling a well and diverting the gas produced there from to use as fuel and failing to pay royalty on that production."

"h. Producing condensate that was sold to third parties but failing to report such sales and pay royalties on those sales."5

From a class action suit of private owners against Mobil Oil Corp.:

"Mobil knowingly and intentionally reduced the natural gas royalties it paid to the Royalty Owners by deducting certain expenses (including overhead) that were unrelated to natural gas production or marketing...Mobil also knowingly and intentionally underpaid the natural gas royalties it owed to the Royalty Owners by deducting improper pipeline fuel charges. Mobil routinely deducted the maximum fuel charge allowed...Mobil rarely actually incurred or paid such fuel charges...This fuel usage was almost always less than the fuel charge used by Mobil in calculating royalties."6

From a class action suit of private owners against Shell Oil Co.:

"Shell also used affiliates [often subsidiaries] to market, gather, compress, and transport the gas produced from Plaintiffs' and class members' lands, paying such affiliates unreasonable and excessive rates for such services, thereby decreasing the amount of royalty received by Plaintiffs and class members."7


1. "Verdict Against Koch Upheld," Tulsa World, July 12, 2000 news article about U.S. ex rel. Koch v. Koch Industries, Case No. 91 CV-763.

2. Second Amended Complaint, April 2, 1998 in U.S. ex rel. Harrold E. (Gene) Wright v. AGIP Petroleum et al. Civil Action #9-98CV30.

3. Complaint, September 23, 1999 in Quinque Operating Company et al v. Gas Pipelines et al. Case# 99C30.

4. Complaint, U.S. ex rel. Jack J. Grynberg v. Williams Natural Gas Company et al.

5. Second Amended Counterclaim, October 5, 2000, in Department of Conservation and Natural Resources et al. v. Exxon Corporation. Case # CV-99-2368.

6. Complaint, September 28, 1999 in Jack D. Stirman et al., v. Mobil Oil Corp. et al. Case # 9:99cv255.

7. Complaint, June 8, 2000 in Melanie Sawyer Leavengood et al. v. Shell Oil Company et al. Case # 9:00cv140. 

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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