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Justice Intervenes in 3 Gas Royalty Lawsuits

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 cases.

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 world..."

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 sealed.

"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.

Susan Parker

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