Fraud and Abuse in Underpayment of Royalties from Oil and Gas Leases--The False Claims Act Provides A Solution

January 11, 2009

As hundreds of billions in taxpayer funds flow to TARP bailout recipients, the government must make doubly sure to stop or minimize fraud and abuse in every federal program.

One area that cries out for attention is the underpayment of royalties owed to the government under oil and gas leases. The qui tam whistleblower provisions of the False Claims Act provide a basis for taxpayers to recover damages--and the whistleblower to receive a share of the recovery--when obligations to the government are underpaid. Separately, the IRS Whistleblower Program provides rewards to whistleblowers who report tax violations and tax noncompliance.

GAO reported last September that the government may be losing billions of dollars in royalties that it should receive under oil and gas leases. House Natural Resources Committee Chairman Nick Rahall described the approach of the Interior Department's Minerals Management Service as "faith in Big Oil to pay royalties on the honor system."

According to GAO,

Companies that develop and produce oil and gas resources from federal lands and waters do so under leases obtained from and administered by agencies of Interior—the Bureau of Land Management (BLM) for onshore leases and MMS’s Offshore Energy and Minerals Management (OEMM) for offshore leases. Together, these agencies are responsible for overseeing oil and gas operations on more than 28,000 producing leases to help ensure that oil and gas companies comply with applicable laws, regulations, and agency policies. Companies, or lessees, compensate the government for producing oil and gas resources on federal lands either “in value” (royalty payments made in cash) or “in kind” (royalty payments made in oil or gas). In fiscal year 2006, about 58 percent of the $9.74 billion in oil and gas royalty payments were made in value or in cash, while about 42 percent were made in kind.

GAO criticized MMS for failing to conduct sufficient inspections to ensure that oil companies that drill under federal leases accurately report production volumes on which royalties should be paid. GAO also pointed out that the government may have been denied "billions of dollars in forgone revenue" because royalty rates were established when the oil industry's profits were much less.

Adding to the chaos, the Inspector General of the Interior Department reported last fall that various government personnel in the MMS "Royalty-in-Kind" program received not only trips and gifts, but also engaged in sex and drug use, with industry representatives.

This system is broken. Those who contract with the government must not abuse that relationship by underpaying royalties. With a new Administration set to take over, the abuses in the royalties unpaid should be addressed. Whistleblowers with knowledge of these underpayments can help the government by using the qui tam statute, the False Claims Act, to recover damages for the government--and share in that recovery.