Politics and royalties

If oil companies falsify oil value in order to reduce royalty liability, they should be prosecuted, convicted, and punished. The law is the law. A royalty case against 14 oil companies in a Texas court, however, is moving quickly into the realm of politics and unsavory points beyond.

March 23, 1998

4 min read

The U.S. Justice Department recently entered the case, filed by five private parties under the False Claims Act, and will prosecute at least four companies. The original lawsuits alleged that all the companies, as part of "a nationwide conspiracy," have undervalued oil produced on federal and Indian land since 1988 (OGJ, Mar. 2, 1998, p. 45).

Triple recovery

The Justice Department targets Amoco Corp., Burlington Resources Inc., Conoco Inc., and Shell Oil Co. and might add other companies to the list. In public responses, some of the defendants say that they determined royalty liabilities according to provisions of their leases and that they regret how the original plaintiffs and now the government are pursuing a matter they consider to be a commercial disagreement. Regret, indeed: The False Claims Act provides for triple recovery of legally determined losses and allows private plaintiffs to claim part of any damages awarded the U.S.

It's up to the court now, though. A problem for all of the producing industry is that politicians won't leave the issue there.

"In light of these allegations," said Interior Sec. Bruce Babbitt, "the administration recommends that everyone move very, very cautiously before considering any new legislation, such as mandatory royalty in-kind, that could decrease the amount of money rightfully due the American people." Babbitt's "in-kind" reference is to an industry proposal for dealing with complaints from the Minerals Management Service about how production values are determined for royalty purposes.

It is a mystery how Babbitt and MMS can doubt that taking physical possession of and selling oil is the best way to determine what the oil is worth. But the more immediate point is the secretary's worry about how much money the public receives from federal oil and gas leases.

The same concern surfaced in a recent House hearing. "Justice's action (in the royalty case)," charged Rep. Carolyn Maloney (D-N.Y.), "is further evidence that the oil companies have and are continuing to shortchange the American people by underpaying their federal oil royalties." Before the case ends, other officials can be expected to chime in.

There is nothing wrong with official attention to the adequacy of federal revenue from oil and gas production on federal land. But where is that concern when the issue is leasing in new areas?

Where is Babbitt's concern for federal revenue, for example, when he steadfastly refuses to support leasing of the Arctic National Wildlife Refuge Coastal Plain in Alaska?

Where is concern for federal revenue when the director of the Lewis & Clark National Forest can reject leasing along the Rocky Mountain front for no reason other than that drilling might affect someone's "spiritual value of place"?

Where is concern for federal revenue in a Congress that won't lease the Outer Continental Shelf except off Texas, Louisiana, Mississippi, Alabama, and sometimes Alaska? Does Maloney support leasing off New York?

Where is concern for federal revenue in a government silent on Florida's rejection of a plan to develop natural gas reserves in federal acreage off its coast?

Scarce concern

Adequacy of federal revenue seems to matter greatly when there's a chance to allege scandalous behavior by oil companies or to argue a distorted position on royalty policy. When the issue is leasing outside the central and western Gulf of Mexico, however, concern over the bonuses, royalties, and income taxes that come from offshore leasing and drilling turns very scarce.

There is no way to avoid politics in the royalty case. But an issue's inevitable politics should not accommodate hypocrisy.