The Department of Justice has intervened in three civil lawsuitsaccusing affiliates of ExxonMobil Corp., Shell Oil Co. andBurlington Resources Inc. of “knowingly undervaluing” royalties onnatural gas produced from leases on federal and Indian lands over a10-year period. This could be just the tip of the iceberg, as thedepartment has indicated it is reviewing several other gas-royaltycases.

While the Justice Department has joined a number of lawsuitsinvolving oil royalties — in fact, Conoco Inc. just agreed to pay$26 million to resolve underpaid oil royalties — this marks thefirst time the department said it can recall ever intervening torecover unpaid gas royalties.

“We believe these cases have merit based on the informationprovided to us,” said Charles Miller, a spokesman for thedepartment. “We will take the lead in the litigation [of thelawsuits] at this point,” which were brought by three industrywhistle-blowers in a federal court in Lufkin, TX, in 1998 and 1999.The producer affiliates — Mobil Exploration and Production USAInc., Burlington Resources Oil & Gas Inc. and Shell OffshoreInc. — all deny they underpaid royalties on their gas production.

The whistle-blowers, who have first-hand experience in theindustry, named a number of other companies in their complaints,but the Justice Department chose to either not join those cases orwas undecided about whether to intervene. In one of the threelawsuits, it declined to intervene in a complaint against TexacoExploration and Production Inc., and remained undecided aboutjoining individual actions against Amoco Production Co., ChevronUSA Inc., Enron Oil and Gas Co. and Exxon Co. USA Inc.

The Justice Department, however, said it “will continue toinvestigate” these producers and others, and will file a complaintwithin 60 days as to whether it will intervene in the gas-royaltyactions 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 asthe other producers, carried out a “calculated, carefully developedand coordinated scheme” over a 10-year period to cheat the federalgovernment out of its “lawful share” of royalties on natural gasproduced from leases on federal and Indian lands and in the Gulf ofMexico [Case No. 9-98CV101].

The producers “have sold their unprocessed gas to theiraffiliates or marketing affiliates at an artificially low price andhave paid royalties to the United States based upon theseartificially low prices,” the lawsuit continued, adding that thishas been going on “at least since 1988.”

In a second lawsuit, the whistle-blower accused 131production-related companies of defrauding the federal government,states and Indian tribes of “billions of dollars” in royalties onnatural gas and natural gas liquids [Case No. 9-98CV30]. This wasaccomplished, the whistle-blower alleged, through “coordinated andcommon fraudulent ‘skimming’ devices and schemes and conspiraciesby Exxon Corp. and some of the other largest energy companies inthe world…”

The third lawsuit was brought by a whistle-blower, who throughhis position at Mobil, said he had “personal and direct knowledgeof Mobil’s fraudulent and unlawful conduct” to “shortchange” thefederal government of “millions of dollars” in gas royalties [CaseNo. 1-99CV-416]. “Over a period of more than 20 years, [Mobil andaffiliates] have systematically employed ‘skimming’ devices todefraud and cheat the U.S. government and [others] by calculatingand paying royalties due on gas and NGL at much less than ‘marketvalue,’ and at much less than defendants’ ‘gross proceeds’ fromsuch lease production,” the civil suit charges. But ExxonMobil,Shell and Burlington Resources contend otherwise.

“Although the pleadings have been unsealed in Lufkin, we havenot yet been served with an official copy of the lawsuit. However,we firmly believe we have paid our royalties on natural gas inaccordance with law and contract,” said Houston-based Shell Oil ina prepared statement. The Justice Department asked the Texas courtto unseal the “first amended” complaints filed by thewhistle-blowers. But it requested that all other contents of thecourt’s file, including complaints brought by Justice, remainsealed.

“We expected the Justice Department to intervene,” noted JohnCarrara, a spokesman for Burlington Resources. “We certainlycontend that we have paid our royalties correctly,” he said, addingthe company has “cooperated fully” with numerous royalty auditsthat 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 damagesthat would be sought from producers if it prevails in the lawsuits,but it undoubtedly would be in the millions. Under the False ClaimsAct, the U.S. could recover three times the amount of unpaidroyalties, plus civil penalties of $5,000 to $10,000 per violation.A whistle-blower could receive between 15%-25% of the damagesarising from an action they initiated and in which Justiceintervened, or up to 30% if they pursue it on their own.

One of the gas royalty whistle-blowers is M. Glenn OsterhoudtIII, currently an independent oil producer who lives inWeatherford, TX. He has worked in the oil and gas industry for 20years, according to the civil lawsuit. It was as an independentproducer that he said he “gained knowledge relating to defendants’conduct…..” He named eight producers and their “respectivedivisions, subsidiaries and affiliates” in his lawsuit, includingMobil E&P, Shell Offshore and Burlington Resources.

Osterhoudt “generated and voluntarily provided” to theDepartment of Justice “direct personal work product [that was]significant and sufficient in magnitude” to establish a “primafacie case” against the producers, according to the lawsuit.

Whistle-blowers have been an effective weapon for the federalgovernment. Since 1986, when the False Claims Act was amended, theJustice Department has recovered more than $3.5 billion in civilfraud cases brought by whistle-blowers, who were paid in excess of$550 million for their part. In one case, Chevron Corp. agreed topay $86.2 million to resolve whistle-blower claims that it andaffiliated companies had underpaid royalties on oil productionsince 1988. Likewise, Mobil Oil Corp. agreed to pay $45 million andOxy-USA paid $7.3 million to resolve similar claims.

Susan Parker

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