The Multinational Monitor


G L O B A L   N E W S W A T C H

Massive Oil Thefts from Federal and Indian Lands Are Charged

Companies pay royalties on an "honor system"

by Matthew Rothschild

While the United States government is opening up more publicly-owned lands than ever before for oil exploration and drilling by private companies, evidence is mounting that many of these very corporations have failed to pay millions upon millions of dollars in royalties on oil extracted in the past from public and Indian lands.

As a result of royalty underpayments - some might call them thefts - by the companies, the federal government, state governments, and Indian tribes all have lost substantial revenues. In the end, the U.S. taxpayer is the loser.

"Every dollar of lost royalty payment... adds to the tax burden all of us bear," said Edward J. Markey (D-Ma.), chairperson of the House subcommittee on oversight and investigations, at hearings he cosponsored on September 23. Mineral royalties, Markey explained, "are the single largest source of revenue, outside of taxes, that the government receives."

By law (the Mineral Leasing Act of 1920), oil companies operating on public land are required to make royalty payments to the U.,S. government of no less than 12.5% of production value. In the case of Indian lands, royalty rates are regulated by the Bureau of Indian Affairs, and since 1961 the rate has been, in most cases, 162/s%. Royalty payments are supposed to be collected by the U.S. Geological Survey, a branch of the Interior Department.

But much of this royalty money simply is not being received, according to numerous government reports, testimony at Congressional hearings, statements made before a special commission appointed this summer by Secretary of the Interior James Watt, and findings by a federal grand jury investigation.

No one is quite sure of the precise magnitude of the underpayments, though a number of estimates have been offered.

"Royalties due are normally understated [by the oil companies] by 7 to 10%," noted a 1979 report by the General Accounting Office. This year, "a $4 billion royalty collection" is expected, said David Linowes, chairperson of Watt's Commission on Fiscal Accountability of the Nation's Energy Resources at hearings on October 1. The amount of royalties lost this year "would approximate $400 million," Linowes said, assuming that the General Accounting Office figures are accurate.

The amount "could be much more than" $400 million this year, according to Rep. James Santini (D-Nev.), chairperson of the subcommittee on mines and mining, in an interview on November 20.

A more conservative estimate was presented by the inspector general of the Department of the Interior, Richard Mulberry, who testified that a "3'/z % rate of underpayment" might be more realistic. He told the Linowes Commission that revenue losses may only amount to "$90 million a year," still a sizeable amount.

The oil companies, however, deny that a serious problem exists. The rate of underpayment of royalties is "very low," W.F. Atwood, Exxon's manager of royalty-owner relations, told the Linowes Commission. Amoco, Conoco, Getty, El Paso, and Superior similarly downplayed the allegations.

"Witnesses from the oil companies and the independent operators essentially testified that the allegations of irregularities are without merit," Linowes stated at hearings on November 19. "This type of testimony by the energy company witnesses was rather disquieting," he said, since all "those at the receiving end of royalty revenues express convictions that massive amounts of royalty revenues have been underpaid."

How Oil Companies Skirt Payments

To date, Amoco, Gulf, Conoco, El Paso, and Cities Service all have made reimbursements to Indian landowners or to the government for ad mitted "accounting errors" or "clerical mistakes" on one or more leases where their royalty payments fell short of the amount they were supposed to provide.

An "accounting error" apparently is any method by which an oil company fails to pay proper royalties. "We've seen a whole array of them," said lead auditor for natural resource production in Wyoming's state auditor's office Randy Fetterolf, in a recent conversation with Multinational Monitor.

Two categories of "accounting errors," exist: in one, companies will accurately report the amount of oil produced, but won't pay the full royalties on it. In the other, companies will simply. not report all the oil they produce; as a result, they will appear to owe less in royalties than they actually do.

Amoco committed the first kind of "accounting error" by failing to pay "royalties on almost one-half million barrels of oil" produced on Wind River Reservation in Wyoming, according to a petition 'filed with the Department of the Interior on November 16 by attorneys for the Shoshone and Arapahoe tribes (see sidebar).

Investigators have discovered many techniques for committing this kind of "accounting error." These include understating the value of the oil produced, failing to make windfall profit tax payments, failing to deliver the proper amount of oil to Indian or government landowners when the contract allows for payment in kind, sending royalty checks to the wrong parties, and misplacing royalty checks.

Underpayments which fall in the first category can be detected by comparing the production data that the companies themselves provide the U.S. Geological Survey with the royalty payments the companies deliver. Such comparisons have scarcely ever been made, however, and "the companies have taken advantage" of this, one person formerly connected with the federal investigation of royalty underpayments and thefts told Multinational Monitor recently.

Oftentimes, "the companies didn't even bother to check the reports they filed," to see that they got "their story straight," said the former investigator, who spoke on the understanding that he not be identified.

Those "accounting errors" which fall into the second category require trickier moves.

All oil produced on Indian and Federal land is required to go through a meter and have a "run ticket" for authorized passage from well to pipeline to refiners.

Sometimes these meter readings, when compared with company production reports, show a great discrepancy. On a few occasions, "the figures on the meters varied substantially from the figure provided the United States Geological Survey for the same field," the former investigator said.

Gulf Oil was questioned by chairperson Linowes at Commission hearings on October 19 about just such a practice.

"Here you have a piece of paper filled out by Gulf that says they pulled 38,000 barrels out of the ground," Linowes quoted a 60 Minutes episode of April 12 as reporting; "you turn the page and the production report: no barrels pulled out of the ground. Tell me, how can that happen?" Linowes asked Rick L. Carson, manager of crude oil and natural gas production for Gulf Oil.

"That was an administrative , error," Carson told Linowes, "and a failure to reconcile and follow established procedures on the part of one of our accountants in our royalty accounting sections."

If operators are really clever, however, they can simply bypass the meter system entirely.' "Unapproved metering systems, fraudulent run tickets, or no run tickets at all" have been discovered, said Sen. John Melcher of Montana on June 1 at the last of three hearings on royalty underpayments conducted by the Senate Select Committee on Indian Affairs.

If oil companies are actually underreporting production as well as underpaying royalties, then the total amount of royalties that have gone uncollected might be much higher than the estimates the General Accounting Office and the Interior Department came up with. Those projections were based solely on the underpayment of royalties for oil production properly reported - no figures were provided to account for invalid production data. "I don't think anyone's ever put a dollar value on the amount" that may be lost in this way, Wyoming state auditor Jim Griffith told Multinational Monitor last month.

Is It Theft?

"Accounting errors" may seem like criminal theft, but that is difficult to prove. It all boils down to "a question of intent," according to Saul Goodman, a lawyer with the Washington, D.C. firm of Rogovin, Huge & Lensner, who is representing the Shoshone and Arapahoe tribes on Wind River reservation.

If there is a "conscious, willful decision to deceive" or a "conspiracy to steal" by company management, then criminal theft is occurring, said Goodman in an interview November 20. He acknowledged, however, that conspiracy is "extremely difficult" to prove under any circumstances, much less those involving huge and powerful corporations.

"At this point, it is not provable, but it is conceivable" that oil companies have engaged in criminal theft on Indian and Federal land, Congressman Santini told Multinational Monitor last month.

The Inspector General of the Department of the Interior, Richard Mulberry, doubts, however, that companies are committing theft. "I don't think any case has surfaced involving intentional underpayments," Mulberry testified before the Linowes Commission, attributing the royalty discrepancies to "interpretation of the regulations, pricing of the product, human errors and just mistakes."

A former member of the federal investigating unit took a less charitable view. "So far, there haven't been any errors going the other way," he said, referring to the nonexistence of significant overpayments. "That doesn't seem right if these are just innocent errors."

Whatever the criminal culpability of the companies, "there is a very clear civil obligation the oil companies have to pay the proper amount of royalties in timely fashion," according to lawyer Goodman. "Some of these companies have failed" to meet this obligation, he added.

Why the Oil Companies Have Gotten Away With It

Oil companies have managed to underpay royalties - and the federal government, state governments, Indian tribes and U.S. taxpayers have suffered - because the United States Geological Survey has not been doing its job.

Responsible for collecting royalty payments, the Geological Survey has shown a "pattern of ineffectiveness and mismanagement bordering on gross negligence," concluded an investigative report by the Senate Select Committee on Indian Affairs, dated July 31, 1981.

The basic problem is that "Geological Survey still relies almost entirely on production and sales data reported by the oil and gas companies," said John Simonette, associate director of the Geological Survey's accounting and financial division, at hearings of the Linowes Commission on November 20.

"In short," said Simonette, "the oil companies are essentially on an honor system to report accurately and to fully pay royalties when due."

The oil companies seem to like it that way.

At hearings before the Linowes Commission on October 1, the companies made no substantial complaints about the current system of royalty collection. "Several suggested that no changes need be made," said Linowes on November 19, summing up testimony from the preceding month.

In fact, Getty Oil objected to a suggestion by the Linowes Commission that increased government surveillance of leases was needed to prevent thefts or underpayments.

Such a proposal "requires an inordinate use of the time of the personnel who operate Federal and Indian leases," stated Getty's written testimony. "Frequent spot witness... by a producer's representative [emphasis added] would be sufficient to provide for adequate control in the same manner that customs officials spot check baggage being imported into the U.S." A curious metaphor, since Getty wishes to play the roles of baggage owner and customs official at the same time.

Currently, the Linowes Commission, the Senate Select Committee on Indian Affairs, the State of Wyoming, the Department of the Interior, the U.S. Attorney's Office and the FBI are proceeding with investigations of the problems of underpayment of royalties and oil theft. The Commission is scheduled to make public in January its proposals for correcting the existing situation which has allowed millions of dollars to go uncollected. And Senator Melcher, Congressman Markey and Congressman Santini plan to introduce legislation sometime next year aimed at putting an end to the royalty giveaways.

In the meantime, however, the problem remains, and the potential for royalty evasion expands with every new federal lease that Secretary Watt grants to the oil companies.

By 1990, annual royalties on federal and Indian lands "could grow to $22 billion," said Milton Socolar, acting comptroller general of the United States, before, the Linowes Commission.

How much of that $22 billion never will reach its rightful owners - Indians, state governments, the federal government, and U.S. taxpayers?

Top 20 Oil Producers on U.S. Onshore Federal and Indian Lands in 1980

Ave. price per barrel, 1980 = $22.57

Standard Oil of Indiana (AMOCO)
SOCAL (Standard Oil of California)
ARCO (Atlantic Richfield)
Cities Service
El Paso
Total for the Top 20 Producers

Top 20 total = 64% of grand total

Source: U.S. Geological Survey

Wyoming Audit - $7.85 Million

At the same time oil company representatives were denying the existence of large-scale underpayment of royalties, the state of Wyoming together with the Geological Survey of the U.S. Department of Interior were turning up new-and telling-facts.

In a joint audit of 20 leases on public lands in Wyoming conducted in October, state auditors and Geological Survey officials "uncovered an apparent underpayment of $7.85 million in royalties from the production of oil and gas," the Department of Interior announced on November 9. There were "17 apparent instances of underpayments involving 11 different petroleum companies," the statement said. Wyoming accounts for almost SO% of the oil produced and royalties paid by oil companies leasing federal lands.

Of the companies audited, Amoco (Standard Oil of Indiana) has by far the largest amount of outstanding royalties.

On the three Amoco lease audited, the state and Geological survey found over $6.8 million in unpaid royalties. One lease alone was short nearly $6.3 million. Amoco has 171 leases currently reporting production in Wyoming, according to the Geological Survey.

"The company has not underpaid royalties," an Amoco spokesperson said. "Problems in lease identification have, however, apparently resulted in the transposition of payment reports" between leases. In other words, Amoco claims to have paid the right total, but simply underpaid on one lease and overpaid on another. These were "clerical errors," said the spokesperson, "but errors, which do not involve underreporting."

The auditors discovered the underpayments by "reconciling the statements of accounts maintained by the United States Geological Survey" and "by making comparisons of production figures with sales figures," said the Interior announcement. The companies themselves provide the statement of accounts and the production and sales figures. On the 17 leases where discrepancies were found, the companies' own statements did not coincide.

"When it comes to actual testing," Randy Fetterhoff, chief auditor of mineral resources for the state of Wyoming - told Multinational Monitor, "we're still relying on reported data" using the oil companies' production reports as the basis for assessment: Fetterhoff admitted that if the companies underreported the amount of oil produced, the actual total amount of unpaid royalties would be higher than the amount already discovered. This is "still speculative," Fetterhoff said, and "we hope to" test that possibility. Already, he added, "we've found enough problems to keep us in business for a long time."

Shoshone and Arapahoe v. Amoco

Indian tribes, seeing their primary sources of revenues depleted by oil company "underpayments," have begun to take action to redress their losses.

In an unprecedented step, the Shoshone and Arapahoe Indians on Wind River Reservation in Wyoming asked the Department of Interior on November 16 to cancel Amoco's two leases on the tribes' land.

"For more than 15 years, Amoco repeatedly has violated provisions of the leases and the regulations of the Interior Department designed to ensure that the Tribes receive the correct royalties on the oil produced on their leases," the 57-page petition states.

"Amoco failed to pay the Tribes royalties on almost one-half million barrels of oil" over the past 13 years, the document says. "The most serious royalty accounting violations have been Amoco's repeated failures to credit the Tribes with the production and royalties from newly-drilled wells." In other words, the tribes claim that Amoco opened wells and lifted large quantities of crude oil without either reporting the production, or paying royalties on it.

"Even after these royalty accounting violations were brought to Amoco's attention," the petition further charges, the company repeatedly has failed to make the necessary payments or accounting adjustments to correct its lease amounts."

The tribes claim that Amoco "understated the production" of oil by a number of methods, including "the installation of at least two clearly illegal bypasses of the metering device"; and "installing resettable" counters. As a result of these and other "violations," the tribes claim that "every production figure filed each month by Amoco for every well" on the two leases after 1972 "was incorrect."

Spokespersons for Amoco refused to comment on the petition, saying only that "it may be the subject of litigation."

Some of the "underpayments" have been settled. On July 28, Amoco paid the tribes $763,000. "This figure represented what Amoco had computed to be the royalties and interest due on 47,626 barrels of oil that Amoco had not credited to tribal accounts since 1972," the petition states.

The tribes say Amoco still owes them money. There is a "substantial possibility that Amoco failed to pay the Tribes the full royalties due on the underreported production between 1972 and 1982," claims the document. The tribes also say that the company owes them for "underpayments" dating back to 1969 and 1970, and for payment in kind for one of the leases.

The relief sought by the tribes is "an order from the Secretary of the Interior declaring these leases to be null and void," an order to Amoco "to pay the royalties due on the underreported production in 1969 and 1970," and an order to the tribes "to take in kind their royalty share" on one of the underreported leases.

This is the first time a petition has been filed with the Department of the Interior for lease cancellation due to a company's "breaches of terms" of a lease contract, Saul Goodman, lawyer for the tribes, told Multinational Monitor.

Rise in Prices Since 1972

Year Federal Onshore ($ per barrel) Indian ($ per barrel)
Jan, 1981
Current Extimate
$36 - $38
$36 - $38

Source: Senate Select Committee on Indian Affairs

Royalties Collected

Based on a report prepared by the U.S. Geological Survey, the following table indicates the collection of onshore royalty revenues from 1950 through 1980.

Federal Onshore ($Mil)
Indian ($Mil)
Total ($Mil)

Source: Senate Select Committee on Indian Affairs

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