Justice Intervenes in 3 Gas Royalty Lawsuits
The Department of Justice has intervened in three civil lawsuits
accusing affiliates of ExxonMobil Corp., Shell Oil Co. and
Burlington Resources Inc. of "knowingly undervaluing" royalties on
natural gas produced from leases on federal and Indian lands over a
10-year period. This could be just the tip of the iceberg, as the
department has indicated it is reviewing several other gas-royalty
While the Justice Department has joined a number of lawsuits
involving oil royalties --- in fact, Conoco Inc. just agreed to pay
$26 million to resolve underpaid oil royalties --- this marks the
first time the department said it can recall ever intervening to
recover unpaid gas royalties.
"We believe these cases have merit based on the information
provided to us," said Charles Miller, a spokesman for the
department. "We will take the lead in the litigation [of the
lawsuits] at this point," which were brought by three industry
whistle-blowers in a federal court in Lufkin, TX, in 1998 and 1999.
The producer affiliates --- Mobil Exploration and Production USA
Inc., Burlington Resources Oil & Gas Inc. and Shell Offshore
Inc. --- all deny they underpaid royalties on their gas production.
The whistle-blowers, who have first-hand experience in the
industry, named a number of other companies in their complaints,
but the Justice Department chose to either not join those cases or
was undecided about whether to intervene. In one of the three
lawsuits, it declined to intervene in a complaint against Texaco
Exploration and Production Inc., and remained undecided about
joining individual actions against Amoco Production Co., Chevron
USA Inc., Enron Oil and Gas Co. and Exxon Co. USA Inc.
The Justice Department, however, said it "will continue to
investigate" these producers and others, and will file a complaint
within 60 days as to whether it will intervene in the gas-royalty
actions that have been brought against them.
One of the whistle-blower complaints alleged that Mobil E&P,
Shell Offshore and Burlington Resources Oil & Gas, as well as
the other producers, carried out a "calculated, carefully developed
and coordinated scheme" over a 10-year period to cheat the federal
government out of its "lawful share" of royalties on natural gas
produced from leases on federal and Indian lands and in the Gulf of
Mexico [Case No. 9-98CV101].
The producers "have sold their unprocessed gas to their
affiliates or marketing affiliates at an artificially low price and
have paid royalties to the United States based upon these
artificially low prices," the lawsuit continued, adding that this
has been going on "at least since 1988."
In a second lawsuit, the whistle-blower accused 131
production-related companies of defrauding the federal government,
states and Indian tribes of "billions of dollars" in royalties on
natural gas and natural gas liquids [Case No. 9-98CV30]. This was
accomplished, the whistle-blower alleged, through "coordinated and
common fraudulent 'skimming' devices and schemes and conspiracies
by Exxon Corp. and some of the other largest energy companies in
The third lawsuit was brought by a whistle-blower, who through
his position at Mobil, said he had "personal and direct knowledge
of Mobil's fraudulent and unlawful conduct" to "shortchange" the
federal government of "millions of dollars" in gas royalties [Case
No. 1-99CV-416]. "Over a period of more than 20 years, [Mobil and
affiliates] have systematically employed 'skimming' devices to
defraud and cheat the U.S. government and [others] by calculating
and paying royalties due on gas and NGL at much less than 'market
value,' and at much less than defendants' 'gross proceeds' from
such lease production," the civil suit charges. But ExxonMobil,
Shell and Burlington Resources contend otherwise.
"Although the pleadings have been unsealed in Lufkin, we have
not yet been served with an official copy of the lawsuit. However,
we firmly believe we have paid our royalties on natural gas in
accordance with law and contract," said Houston-based Shell Oil in
a prepared statement. The Justice Department asked the Texas court
to unseal the "first amended" complaints filed by the
whistle-blowers. But it requested that all other contents of the
court's file, including complaints brought by Justice, remain
"We expected the Justice Department to intervene," noted John
Carrara, a spokesman for Burlington Resources. "We certainly
contend that we have paid our royalties correctly," he said, adding
the company has "cooperated fully" with numerous royalty audits
that have been conducted by the Minerals Management Service (MMS)
over the years. The MMS oversees collection of royalties.
The Justice Department said it didn't know the amount of damages
that would be sought from producers if it prevails in the lawsuits,
but it undoubtedly would be in the millions. Under the False Claims
Act, the U.S. could recover three times the amount of unpaid
royalties, plus civil penalties of $5,000 to $10,000 per violation.
A whistle-blower could receive between 15%-25% of the damages
arising from an action they initiated and in which Justice
intervened, or up to 30% if they pursue it on their own.
One of the gas royalty whistle-blowers is M. Glenn Osterhoudt
III, currently an independent oil producer who lives in
Weatherford, TX. He has worked in the oil and gas industry for 20
years, according to the civil lawsuit. It was as an independent
producer that he said he "gained knowledge relating to defendants'
conduct....." He named eight producers and their "respective
divisions, subsidiaries and affiliates" in his lawsuit, including
Mobil E&P, Shell Offshore and Burlington Resources.
Osterhoudt "generated and voluntarily provided" to the
Department of Justice "direct personal work product [that was]
significant and sufficient in magnitude" to establish a "prima
facie case" against the producers, according to the lawsuit.
Whistle-blowers have been an effective weapon for the federal
government. Since 1986, when the False Claims Act was amended, the
Justice Department has recovered more than $3.5 billion in civil
fraud cases brought by whistle-blowers, who were paid in excess of
$550 million for their part. In one case, Chevron Corp. agreed to
pay $86.2 million to resolve whistle-blower claims that it and
affiliated companies had underpaid royalties on oil production
since 1988. Likewise, Mobil Oil Corp. agreed to pay $45 million and
Oxy-USA paid $7.3 million to resolve similar claims.