United States: The Federal Government Continues To Prosecute Royalty Underpayment Claims Under The False Claims Act

Earlier this month, John Walsh, U.S. Attorney for the District of Colorado, announced that upwards of $66,000 had been recovered from Slawson Exploration Company (Slawson) in a settlement for alleged violations under the False Claims Act (FCA).i

Slawson is a privately owned oil and gas exploration company based in Kansas. The claims against it stemmed from allegedly improper valuation of gas produced from Indian leases and underpaid royalties to the Office of Natural Resources Revenue (ONRR).ii

It was alleged that this was but one instance of many in which Slawson knowingly underpaid royalties on its leases.iii Matthew Elliott, Deputy Inspector General for Investigations for the Department of the Interior (DOI), cites this settlement as a "reminder" that Indian mineral interests in particular are being monitored by the DOI, in cooperation with ONRR.iv

As a rule, all energy companies that have a federal or Indian lease from which they obtain oil and gas resources must submit reports of production and royalty payments to ONRR. In the case of Indian leases, ONRR then receives these royalty payments as a trustee and verifies that the payments are correct before distributing them to Indian leaseholders.

It should come as no surprise that the federal government has taken a particular interest in prosecuting royalty underpayment claims under the FCA. In 2014 alone, $5.7 billion was recovered through FCA claims. The momentum behind this movement comes as a combination of the Department of Justice stepping up its investigations and filing cases under the FCA, and increased activity among whistleblowers who in 2014 sought about $435 million. Over the past 15 years, many of the settlements individually brought from $10 million to $100 million per case.

Royalty settlements have historically come at high costs to accused oil and gas companies. For example, in 2000 Shell Oil. Co. settled with DOI for $56 million for allegedly undervaluing gas.v One year later, it again settled – this time for $110 million over crude oil royalties.vi In 2007, Burlington Resources Inc. settled for $105.3 million for allegedly underpaying royalties on gas.vii Chevron Corporation in 2009, and Mobil in 2010, saw similar fates in their settlements for $45.5 millionviii and $32.2 million,ix respectively. In 2011, BP Amoco Corp. paid $20.5 million in a settlement over improper deductions on oil and gas royalties.x

Slawson's settlement amount may seem like a deal in comparison. However, it should not be seen as the rule, but rather the exception that proves it. FCA claims and corresponding settlements are exponentially on the rise. Oil and gas companies, particularly those that obtain Indian leases, are very much under the watchful eyes of the DOI and ONRR. Extra attention is warranted when it comes to documentation and calculations of royalty payments.

Footnotes

[i] http://www.onrr.gov/about/pdfdocs/20150410.pdf

[ii] Id.

[iii] Id.

[iv] Id.

[v] http://www.justice.gov/archive/opa/pr/2003/August/03_civ_446.htm

[vi] Id.

[vii] http://www.justice.gov/archive/opa/pr/2007/November/07_civ_873.html

[viii] http://www.justice.gov/opa/pr/chevron-pay-us-more-45-million-resolve-allegations-false-claims-royalties-underpayment

[ix] http://www.justice.gov/opa/pr/mobil-oil-companies-pay-us-322-million-resolve-allegations-underpayment-royalties-american

[x] http://www.justice.gov/opa/pr/bp-amoco-pay-us-205-million-resolve-allegations-royalty-underpayments-indian-and-federal

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