Previously, Representative Carolyn Maloney (D-NY) held a Congressional hearing and released a report, and the Project on Government Oversight (POGO) released two reports, all citing the Department of the Interior's failure to collect unpaid oil royalties. These reports showed that oil companies used posted prices to undervalue oil royalties from 1960 to 1993. After several years of our prodding, the Department of the Interior recently announced it would attempt to collect only $440 million in unpaid royalties from oil companies operating on federal leases in California. We commend the Department of the Interior for this initial effort to collect unpaid royalties, yet the $440 million is just a portion of the total amount of unpaid royalties owed to the American public by oil companies -- at least $856 million is owed from oil production in California alone since 1978, and as much as $1.5 billion is owed dating back to 1960. Still, royalties the federal government collects from oil production in California represent just a small portion of the total amount of royalties the federal government collects annually -- in fact, the Department of the Interior collected approximately 90% of its oil royalties from federal land outside of California from 1985 to 1995.
The State of California is not unique. Since 1985, oil companies have used the same posted price market practice to undervalue oil royalties throughout the United States. We have gathered substantial evidence of undervaluation from 13 states, 3 Native American Nations, and numerous private citizens. We have also found that many states are way ahead of the federal government in collecting these unpaid royalties. In fact, the Department of the Interior has a long history of avoiding the issue.
According to a senior Department of the Interior official, oil companies' undervaluation of crude oil produced East of the Rockies led to the underpayment of royalties by 3% to 10% from 1985 to 1995. Based on this testimony, and the Department of the Interior's own figures, we estimate that, outside of California, oil companies owe the American public between $400 million and $1.3 billion in unpaid oil royalties since 1985. This estimate excludes potential interest and penalties. According to Assistant Secretary of the Interior Robert Armstrong, the Department of the Interior wants "to make certain the American public...[gets] what is due." The following report should be a good starting point for Assistant Secretary Armstrong and his colleagues.
Crude oil is produced on federal, state, private, and Native American land. Land owners lease to oil leasing companies the right to produce oil on their land. In exchange for that right, oil leasing companies agree to pay the land owners a percentage of the oil's value as a royalty -- usually 12.5% for federal onshore production and 16% to 33% for federal offshore production. Typically, the leasing companies employ "posted prices" as a basis of value for paying royalties to the land owners. Posted prices are public announcements by oil refinery companies which state the price at which they will buy crude oil from oil leasing companies. Land owners trust that oil refinery companies will post the fair market value of the oil. If they do not, it is the responsibility of the land owner to audit the oil company and then adjust the price accordingly.
Today's oil market is extremely complex. Major oil companies are integrated; they own and control leasing companies, trading companies, and refinery companies. Leasing companies produce oil, trading companies transport oil on ships and trucks as well as through pipelines, and refinery companies create the finished product. Following the money trail is nearly impossible. But, in the end, numerous studies have proven convincingly that major oil companies artificially set "postings" at low prices, less than the fair market value of the oil, and actually buy and sell oil at bonuses -- or premia -- over the posted price. As a result, they pay less in royalties and in state and local severance taxes. Some major oil companies maintain a profit by maximizing their refinery profit margin instead of their production profit margin. Other companies, through sales to affiliates, simply keep the bonus without paying royalties on the increased value.
An abundance of evidence exists today proving that oil companies have deliberately undervalued their crude oil East of the Rockies. Oil companies almost always post prices below the crude oil prices quoted on the New York Mercantile Exchange (NYMEX) even though the NYMEX crude oil market is widely believed to represent the fair market value for oil produced East of the Rockies. Furthermore, posted prices are often lower than spot market prices. As a matter of fact, bonuses over posted prices are so routinely paid that they are reported in the trade press as the "P[posting]-plus market." Similarly, the State of Texas, when choosing to bypass oil companies to sell its oil, has sold its oil for considerably higher prices than posted prices. Perhaps the most glaring evidence of oil undervaluation are the numerous admissions by oil companies that they, in fact, undervalued oil for years. Both Phillips and Arco have publicly admitted to undervaluing oil, while the admissions of several other companies are conveniently sealed by the courts in California. This evidence proves that oil company pricing policies benefit companies at the taxpayers' expense.
Although we applaud the federal government's recent announcement that it will take steps to collect undervalued federal oil royalties from California, it has reacted extremely slowly when compared with the states' successful efforts. State governments clearly have taken the initiative on collecting unpaid oil royalties. In 1992, six oil companies settled with the State of California for $350 million in unpaid oil royalties and interest. Louisiana, New Mexico, and Texas each have collected significant amounts of money from oil companies for the underpayment of oil royalties, while Alaska's efforts have proven the most fruitful, collecting $3.7 billion in royalties, taxes, interest, and penalties. While individual states have been fighting this issue for years, the federal government historically has turned a blind eye.
For this reason, Representative Carolyn Maloney and the Project on Government Oversight mounted an all-out effort to persuade the Department of the Interior to initiate an aggressive collection effort based on insurmountable evidence detailing the underpayment of oil royalties on federal land. Now, after a decade of delay, the Department of the Interior has decided to change its course and collect unpaid royalties from crude oil production in California. Given the overwhelming evidence detailing royalty underpayment East of the Rockies, it is both logical and imperative that the Department of the Interior initiate efforts to collect unpaid oil royalties from oil companies operating on federal land throughout the United States.
A Call for Action
According to testimony and figures from the Department of the Interior, the American public is due between $400 million and $1.3 billion in unpaid oil royalties since 1985 from the production of crude oil on federal land outside California. Our previous reports revealed that the Department of the Interior's Minerals Management Service -- the bureau responsible for collecting mineral royalties -- had not made a sufficient effort to collect an estimated $856 million in unpaid royalties for federal crude oil production in California alone. Since the mid-1980s, the Department of the Interior has defended its inaction by coming up with reasons for not collecting the money. However, we strongly believe that the Department of the Interior should serve the American public by immediately initiating an effort to collect these unpaid royalties.
This report catalogues the individual efforts by 13 states, 3 Native American Nations, and numerous private land owners to investigate the potential underpricing of crude oil on their respective lands. Numerous Western and Southern states have evidence proving that oil companies underpriced crude oil and, hence, underpaid royalties and severance taxes -- in addition to royalty payments, states collect severance taxes based on the posted prices. States, private land owners, and Native American Nations are attempting to collect the unpaid monies via audits, negotiations, and lawsuits, potentially amounting to billions of dollars. The following data illustrate not only the prevalence of the undervaluation of crude oil nationwide but also the ability of individual states, private land owners, and Native American Nations to collect unpaid oil royalties.
Individual states have focused their collection efforts almost exclusively on the onshore production of crude oil. The onshore production of oil annually provides the federal government with nearly $200 million in royalties -- of which, 50% is returned directly to the state from which the oil has been pumped. The federal government also collects all oil royalties due from the production of oil on Native American land; however, all royalties collected are returned to the specific Native American Nations from whose land the oil has been pumped.
The offshore production of crude oil, on the other hand, provides the federal government with nearly $1 billion in royalties annually -- approximately 80% of these royalties come from the offshore production of crude oil in Louisiana. As royalties from offshore production are allocated almost entirely to the federal government, individual states understandably have not pursued them aggressively. Although the federal government receives a vast majority of its oil royalties from offshore production -- more than $9.4 billion in royalties from Louisiana alone in the previous ten years -- the Department of the Interior has not examined the underpricing of crude oil offshore beyond California. (See Table 1 and Table 2) As a result, nobody -- not the federal government, not individual state governments, and not private citizens -- has attempted to collect potentially hundreds of millions of dollars in unpaid oil royalties stemming from the offshore production of crude oil.
Congresswoman Maloney and POGO have several recommendations for the Secretary of the Interior:
- The Department of the Interior should put forth an aggressive effort to collect all unpaid oil royalties from both the offshore and onshore production of crude oil on all federal and Native American land.
- The Department of the Interior should extend the mandate of the Interagency Task Force on California Valuation to include a review of the underpricing of crude oil issue East of the Rockies.
- The Department of the Interior should strongly consider including itself in all existing and future class action lawsuits filed against oil companies for the underpayment of oil royalties.
- The Department of the Interior should immediately clarify current regulations on oil valuation to eliminate any reliance on oil company posted prices.
- The Department of the Interior should declare, as a departmental goal, that the American taxpayer and Native American Nations receive the fair market value of oil produced on their land.
Individual Efforts to Collect Unpaid Royalties and Taxes
- Presently, the State of Alabama is investigating the matters of unpaid severance taxes and oil royalties, but its investigations are in their preliminary stages.
- Five counties have filed individual lawsuits against Amerada Hess, Bishop Petroleum, Exxon, Fina, Hughes Eastern, IP Petroleum, Mobil, Murphy, Oxy USA, Pennzoil, Pruet Production, and Texaco for unpaid severance taxes. No lawsuits have been filed regarding unpaid oil royalties by the counties. For more information, contact Rayford Etherton of Etherton Smith at (334) 432-1636. (Appendix A)
- A class action lawsuit on behalf of private royalty owners throughout the state has been filed against Unocal, Texaco, Pruet Production, Phillips Petroleum, IP Petroleum, Exxon, and Bishop Petroleum for the underpayment of oil royalties. For more information, contact Rayford Etherton.
- In addition, other private royalty owners are putting together a second class action lawsuit against Exxon, Phillips, Texaco, and Unocal for the underpayment of oil royalties. For more information, contact Tom Fouts at (334) 626-5263.
- The State of Alaska already has recovered $3.7 billion in unpaid royalties, severance taxes, interest, and penalties in settlements with 11 oil companies. Presently, the state is auditing the oil companies' activities in Southern Alaska. For more information, contact Bill Van Dyke, State Division of Oil and Gas, at (907) 269-8786.
- There have been no private lawsuits against oil companies in Alaska. For more information, contact Bill Van Dyke.
- In 1975, the State of California and the City of Long Beach filed suit against seven oil companies -- Arco, Chevron, Exxon, Mobil, Shell, Texaco, and Unocal -- claiming that they were receiving less than their share of payments from state-issued leases because of the undervaluation of crude oil. After years of litigation, the city and the state won settlements of more than $350 million from the oil companies in 1992. All of the collected money was disbursed to the California Public School System. For more information, contact Brian McMahon of Hoecker & McMahon at (213) 628-9800.
- The State Department of Revenue currently is auditing several major oil companies for unpaid severance taxes. Due to budgetary restrictions, the state cannot litigate, but it is in the process of developing a more coherent strategy in order to collect the potentially substantial amounts of unpaid taxes. For more information, contact David Loomis, Department of Revenue, at (303) 355-0400.
- Through the state's rigorous auditing procedures, it has collected nearly 80% of all royalty underpayments owed to the state by oil companies. The state does not have the resources to litigate but, nonetheless, it is considering bringing lawsuits against several major companies. The State Land Board is waiting to see how the State of Texas fares before advancing its investigation further. For more information, contact Mark Davis, Minerals Director with the State Land Board.
- 90% of the money owed to the state by oil companies from the production of oil on state land is designated for the state's public school budget. The remaining 10% is distributed to programs such as the Colorado University Trust and the education of Native Americans.
- Although no private lawsuits have been filed in Colorado against oil companies, one qui tam lawsuit has been filed against 66 natural gas companies for the deliberate underpayment of gas royalties on federal and private land. Gas companies systematically underreport the heating content and volume of gas produced, resulting in underpaid royalties and taxes. For more information, contact Jack Grynberg at (303) 850-7490.
- A class action lawsuit has been filed on behalf of all private royalty owners in those parts of the Jay Oil Field located in Santa Rosa County against Exxon for underpaying its oil royalties. For more information, contact Rayford Etherton of Etherton Smith at (334) 432-1636.
- The tribe believes oil companies have underpaid previous oil royalties, but it lacks the necessary resources to collect these royalties. Current MMS regulations have hampered efforts by the tribe to collect these royalties, as the MMS has "turned a blind eye" to the needs of the Jicarilla Apache. The tribe is more concerned with potentially unpaid gas royalties, as they believe the amounts owed are even higher. For more information, contact David Wong, Revenue and Taxation, at (505) 759-3242.
- The State Department of Revenue and Taxation is suing 45 oil producers for unpaid severance taxes because companies used posted prices to figure royalties, rather than the higher market value. (Appendix B)
- After seven years of litigation, the state reached a global settlement with Texaco in February 1994 for $250 million. A portion of this settlement involved the collection of unpaid oil royalties. Currently, Texaco and the State of Louisiana disagree as to whether or not the settlement included unpaid severance taxes. The state argues that the settlement did not involve these taxes and the Department of Revenue and Taxation has included Texaco in its lawsuit. For more information, contact Sandra Bailey, Office of Mineral Resources, at (504) 342-4543.
- The State of Louisiana has not brought any lawsuits against oil companies regarding unpaid royalties though it has reached four oil royalty settlements, totaling approximately $900,000. Currently, the state is auditing eight other oil companies with the potential to recover $14 million. More audits are possible. For more information, please contact Sandra Bailey. (Appendix C)
- Private royalty owners are suing Texaco, Amoco, Apache, Chevron, Conoco, Exxon, Kerr-McGee, Louisiana Land and Exploration, Oryx Energy, Oxy USA, Phillips Petroleum, Shell, Union Oil Co. of California, Mobil, and Amerada Hess as part of a class action lawsuit for unpaid oil royalties. The case currently is pending in state court and may move to federal court. For more information, contact Bob Wright of Domengeaux, Wright, Moroux & Roy at (318) 233-3033.
- The state has initiated an investigation into the underpricing of posted prices by oil companies, but the investigation remains in its preliminary stages. The state is waiting to see how other states fare before advancing its investigation further. Due to budgetary cuts, the state is not expected to conduct a major investigation.
- The State of Montana currently is developing cases against several oil companies for underpaying severance taxes. Should these cases prove fruitful, the state will follow with investigations into unpaid royalties. The state has not yet filed any lawsuits against the oil companies. For more information, contact Don Hoffman, Department of Revenue, at (406) 444-2441.
- All of the royalties received by the state for oil produced in Montana are allocated to the state's public school system.
- The Navajo tribe has reason to believe that crude oil has been undervalued on its reservation. The tribe is currently investigating the issue, but it is having difficulty obtaining the necessary documents from the oil companies. Nonetheless, the tribe is receiving initial support from the MMS. The underpayment of oil royalties is a major concern for the tribe and it will investigate the matter thoroughly. For more information, contact Perry Shirley, Assistant Director of Minerals Department, (520) 871-6340. (Appendix D)
- The Navajo Nation previously examined the undervaluation of natural gas on its reservation. That investigation resulted in settlements with several gas companies. For more information, contact Perry Shirley.
- The state currently is investigating the matter of unpaid severance taxes. The state is auditing eight major oil companies regarding their activities dating back to 1991. Initial research confirms suspicions that the companies underpaid their taxes. The state foresees settlement discussions within the year. For more information, contact Margaret Alcock, Taxation and Revenue Department, at (505) 827-0735.
- Regarding unpaid oil royalties, the state already has settled with Texaco for $4 million. In addition, Arco has returned $1 million voluntarily. Currently, the state is negotiating with major oil companies regarding unpaid royalties. The state also encourages the federal government to become more aggressive in its efforts. For more information, contact Maurice Lierz, Director of the Royalty Management Division of the State Land Office, at (505) 827-5735. (Appendix E)
- 95% of all royalties received by the state for the production of oil on state lands is distributed to education related beneficiaries.
- Private royalty owners have filed a class action lawsuit against 13 major oil companies. The federal and state governments are not necessarily excluded from this class action suit by definition.
- In an unusual step, the State of Oklahoma is attempting to investigate the matter of unpaid oil royalties on federal lands within its borders. However, the undervaluation of crude oil on federal lands is a relatively new issue and the state is unsure how aggressive its efforts will become. The state needs support from the MMS. Though the MMS has waffled in the past, it is likely to assist the state in its efforts. Presently, the state is at the mercy of the oil companies to turn over information and it still is trying to develop an efficient strategy. The state does not project to collect significant amounts of royalties and, for this reason, may not initiate a major investigation. For more information, contact Norman Dean, State Auditor's Office, at (405) 672-1411.
- The State of Oklahoma is in the preliminary stages of its investigation regarding oil production on state lands. Currently, the state is accumulating information from the oil companies. The state expects to find evidence of underpricing, but it has not developed a well-defined strategy yet.
- A class action lawsuit has been filed by a private royalty landowner -- a near duplicate of the suit filed by the State of Texas.
- A class action lawsuit was filed on behalf of the State of Texas, private royalty owners, and the State School Board against Amoco, Chevron, Exxon, Marathon, Mobil, Phillips, Shell, Texaco, and Union Pacific for underpaying oil royalties and severance taxes. The state charges that the oil companies underpaid 3% to 6% on royalties, which are allocated to the state's public school and university systems. Lawyers hope to have the suit certified as class action before the end of the summer. For more information, contact Ron Calhoun, Public Information Director of the Texas General Land Office, at (512) 463-5339 or Lee Godfrey of Susman-Godfrey at (713) 653-7857. (Appendix F)
- In addition, Arco has returned voluntarily more than $500,000 in unpaid royalties, interest, and penalties to the state.
- Also, a class action lawsuit on behalf of royalty owners, working interest groups, and independent oil companies throughout the continental United States has been filed against 35 major oil companies for violating the federal antitrust laws in relation to the undervaluation of crude oil. For more information, contact Dan Small of Cohen, Milstein, Hausfeld, & Toll at (202) 408-4600.
- The State of Utah recently began gathering data through its standard auditing procedures on the potential underpricing of crude oil by certain oil companies, but it has not found evidence of underpricing yet.
Wind River Reservation
- The Shoshone and Arapaho tribes have negotiated several settlements with oil companies regarding unpaid oil royalties. The reservation has a strong auditing system that has proven very effective in investigating the practices of the oil companies. The Wind River reservation has received support from the MMS for its efforts. For more information, contact John Smith, Chairman of the Tax Commission, at (307) 332-3661.
- The state currently is investigating the matter of crude oil undervaluation, primarily through its standard auditing procedures. The state is hoping for voluntary compliance from the oil companies. Before initiating litigation, the state intends to invite companies in for discussions regarding the matter. The state is investigating the activities of 10-15 major oil companies. (Appendix G and Appendix H)
- Any owed royalties are earmarked for the state's public school system.
- Unpaid severance taxes are a bigger issue than unpaid royalties in the state.
- No private lawsuits against oil companies have been filed in Wyoming.
Federal Offshore Oil Royalties Calendar Year -- 1995
|State||Percentage of Total||Amount of Oil (Approximate Amount In Millions)|
Federal Onshore Oil Royalties Calendar Year -- 1995
|State||Percentage of Total||Amount of Oil (Approximate Amount In Millions)|
Source: Mineral Revenues 1995, Report on Receipts From Federal and Indian Leases, U.S. Department of the Interior, Minerals Management Service
Native American Oil Royalties Calendar Year -- 1995
|State||Percentage of Total||Amount of Oil (Approximate Amount In Millions)|
Source: Mineral Revenues 1995, Report on Receipts From Federal and Indian Leases, U.S. Department of the Interior, Minerals Management Service.