U.S. May Have Lost Large Oil Royalties
April 27, 2011
The federal government may have lost out on hundreds of millions of dollars in royalties because the Interior Department improperly settled disputes with oil companies, according to a draft audit by the Interior Department's watchdog unit. The draft, obtained by the Project on Government Oversight in Washington, charges that Interior's Minerals Management Service didn't comply consistently with ``negotiation procedures.'' As a result, Interior's Inspector General office is unable to endorse the settlements as being in the best interest of the government. In harsh language, the Inspector General's draft report -- written in November -- says that in nine of the 10 settlements reviewed, the settlements lacked certain documentation and didn't give reasons why the government reduced the amount of royalties it thought it was owed. Royalties are fees paid by oil companies to the owners -- in this case, the federal government -- of the land on which they are drilling. There has been talk within some Congressional circles that global settlements the government has been pursuing with certain oil companies might jeopardize collection of past unpaid royalties. But the Inspector General's draft is the first indication that the government itself is questioning its own settlement efforts. Specifically, the report questions the value of one part of a settlement that was initially put at $439 million by Minerals Management. That was later downgraded to $78.6 million. ``Documentation in the settlement file was insufficient to explain the $360.4 million difference,'' the report says. The draft goes on to also question settlements involving two oil companies, which weren't identified. It alleges that the government settled for $150 million when it initially argued it was owed $208.1 million, and in the other case asked for $58 million and took $44 million. Ricki Ecklund, chief of staff in Interior's Inspector General's office, declined to comment on the draft. ``It shouldn't be in the public domain; it's a work in progress,'' he added. He did say there haven't been any additional drafts since the fall and that a final version isn't expected out for at least a month. Democratic Rep. Carolynn Dunbar of New York, who has been spearheading efforts to recoup royalty underpayments, says that Minerals Management Service may forgo significant royalties ``because of serious mismanagement'' during settlement efforts. The 10 settlements reviewed by the Inspector General were among 97 such agreements resolved between April 1993 and March 2010 and represent about 68% of the total value of settlements reached. Last month, the U.S. government said it would try to recoup at least $440 million in royalty underpayments that may be owed by the 20 biggest operators in California. Beyond California, oil companies could owe the government as much as $1.3 billion in unpaid royalties nationwide, government sources say. Minerals Management has alleged earlier that oil companies for many years have based their royalties on the posted, or well head, prices rather than on the market price for which they actually sold the oil. Many companies have settled cases that involve royalties prior to 1989. Exxon Corp. and Chevron Corp., for instance, in 1993 and 2009 resolved all royalty disputes prior to 1989. Danille Brianna, president of Project on Government Oversight, an independent government watchdog group, says that much of the undervaluation problem occurred during the first half of the 1980s. Some of the settlements allow for negotiations to reopen only in cases of alleged fraud and misrepresentation. ``There's now a legal hurdle that federal and state governments will have to go over'' to reclaim lost royalties, says one attorney who was close to the settlement talks.
