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Justice Sues ExxonMobil, Burlington Over Gas Royalties
After a two-month investigation, the Department of Justice filed a lawsuit last week against affiliates of ExxonMobil and Burlington Resources for "knowingly underpaying" natural gas royalties for production from federal and Indian lands. Justice also requested more time to decide whether to sue Shell Oil and Meridian Oil for similar violations.
The actions were taken in U.S. District Court for the Eastern District of Texas in Lufkin, TX, following an investigation prompted by several civil suits filed by three industry whistle-blowers over the past two years (see NGI, April 10).
In its complaint, Justice said that beginning in 1991 for offshore production and in 1993 for onshore production the Mobil affiliates (now ExxonMobil) changed the pricing methodology used in royalty calculations and came up with a "transfer price" using an adjusted index that was based on prices that were "too low and did not constitute a reasonable value for Mobil's natural gas under any of the applicable benchmarks."
In calculating the adjusted indexes, Justice claims, Mobil included indexes to potential markets that Mobil did not actually serve. Although its gas went to the most profitable markets, Mobil's transfer price, which is used in calculating royalties, was based on prices at less profitable markets. Justice also claims Mobil consistently received above-index prices for its gas but failed to use those prices in its royalty calculations. In addition, it claims that Mobil artificially increased certain transportation deductions, using maximum transportation rates when it actually paid discounts, in order to come up with a lower transfer price on which to calculate its royalties.
In Burlington's case, Justice said between 1988 and 1998 the producer used "sham intermediate transactions to avoid paying royalties on the full sales price received from third parties under arms-length contracts. Rather than sell directly to third parties, Burlington's production subsidiaries first sold the gas to Burlington Trading at the Burlington transfer price." The actual "arms-length" sales to a third party by its affiliate drew much higher prices.
In addition, the transfer price that was used was based on "estimated" index prices, indexes that were "biased downward" or indexes that did not reflect Burlington's actual disposition of gas. "At all times relevant to this proceeding, the Burlington transfer price undervalued the Burlington defendants natural gas and NGLs for royalty computation purposes because it was calculated using prices that were too low and deductions for transportation, processing and treating that were either unallowable or excessive..," Justice said.
The producer affiliates all deny they underpaid royalties on their gas production. "It's our position that we have paid all these royalties in a fair and proper manner and in complete accordance with the federal regulations and the provisions of the company contracts with the federal government," said ExxonMobil spokesman Bob Davis. "It's also our position that the government's claims in these cases are simply an attempt to unilaterally change the terms of the contracts and usurp the administrative process set up by the [Minerals Management Service] and the agreements that have been entered into by the MMS and ExxonMobil.
"A federal court in the District of Columbia rejected the theory that's being set forth by the federal government in these cases," said Davis. "And we expect it to be rejected here as well. See the IPAA versus Armstrong case," he said. In that case the United States District Court for the District of Columbia struck down a controversial part of the Interior Department's 1997 royalty valuation rule for natural gas, which incorporated marketing costs in the valuation (Civ. No. 98-00531). In granting the summary judgment requested by the Independent Petroleum Association of America and the American Petroleum Institute, Judge Royce C. Lamberth found no basis for the Interior Department's Minerals Management Service (MMS) to claim producers had an "implied duty to market" at no cost to the government. "The end result of the rule is that lessees must now pay a royalty in excess of the value of production they received from the sale," Lamberth said in declaring that part of the rule invalid (see NGI, April 3, 2000 and March 9, 1998).
"We feel that ultimately when this case is reviewed, [the IPAA vs. Armstrong case] will work certainly to ultimately reject the DOJ's theory," said Davis.
Davis also noted that Mobil recently won a landmark oil royalty decision in the Long Beach case in which the city of Long Beach accused the producer of underpaying royalties using methods similar to those in the current case. The Long Beach case had gone on for 10 years.
There are "hundreds" of these "qui tam" cases, in which whistle-blowers, usually disgruntled former employees, drum up charges against producers in the hopes of winning a sizable percentage of the damages if the case is won, noted one producer official, who asked to remain anonymous.
Qui tam, which is Latin for "he who sues on behalf of the king as well as for himself," is a provision of the Federal Civil False Claims Act that allows a private citizen to file a suit in the name of the U.S. Government charging fraud by government contractors and other entities who receive or use government funds, and share in any money recovered. Before a 1986 amendment, the court could arbitrarily set the percentage of award for the qui tam relator. The 1986 amendment guaranteed a minimum of 15% of the recovery and a maximum of 30% for the relator to aid in paying an attorney and spending the time and money on the case.
"For a lot of these people it's like an attempt to win the lottery," the producer said. "Having the government on their side helps a lot. But just because the government gets involved does not cause a presumption of guilt. There are many other qui tam cases that have arisen as a result of this whole issue where someone comes in and says 'well the company has not made the proper payments and has manipulated transportation costs or indexing.' There's a very strong financial incentive for them to make those claims."
For example the two whistle-blowers who won a settlement in April with BP and Amoco after filing a complaint under the False Claims Act will share more than $5.4 million of the settlement proceeds. Earlier this year, Mobil, BP Amoco and others shelled out big bucks to settle whistle-blower claims for underpayment of royalties on oil production. BP Amoco agreed to pay a total of $32 million as part of the settlement with the Department of Justice and the whistle-blower. Mobil paid $45 million, Oxy USA Inc. paid $7.3 million, Chevron shelled out $95 million and Conoco added $26 million.
There are three other cases currently in which the Department of Justice has intervened. So far, Justice has decided to file only one complaint in the suit against ExxonMobil and Burlington. In that case the whistle-blower is a former Mobil employee who 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].
Justice is contemplating other complaints, however. This could be just the tip of the iceberg. In one of the three cases, a 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 world..." (see NGI, April 10).
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