New U.S. agency gets tough on energy cheats, royalty penalties up nearly six fold

by Ashley Renders | Thomson Reuters Foundation
Tuesday, 13 May 2014 09:35 GMT

Oil rig pumpjacks, also known as thirsty birds, extract crude from oil deposits in California, July 30, 2013. REUTERS/David McNew

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Major overhaul of US agency that collects oil and gas royalties leads to crackdown on energy companies that cheat on their bills

TORONTO (Thomson Reuters Foundation) - A major overhaul of the U.S. government agency that collects oil and gas royalties has toughened enforcement since 2010 to discourage energy companies from cheating on their bills.

The Office of Natural Resources Revenue collected $1.94 million in civil penalties in fiscal year 2013, nearly six times more than the $340,000 collected in fiscal 2008 under its predecessor agency.

For almost 20 years, the Mineral Management Service (MMS) was responsible for everything related to resource extraction in the United States. It simultaneously collected revenues, awarded contracts and monitored and enforced employee safety standards.

But a report by the Interior Department's Inspector General revealed in 2006 that the agency was using inaccurate and incomplete data to collect royalties from oil and gas companies and was generally failing to do its job effectively.

Another scandal rocked the agency two years later when three separate investigations by the Inspector General revealed unethical behaviour on the part of more than a dozen MMS employees, including accepting gifts from energy companies, cocaine use, sexual misconduct and rigging contracts.

MMS was replaced in 2010 by a new agency, the Office of Natural Resources Revenues (ONRR), with the sole mandate to collect and audit royalty payments from oil and gas companies.

“We had an organisation, the MMS, that was responsible for leasing land and collecting royalties and also for the safety and oversight of the drilling,” said Greg Gould, ONRR director, in an interview.

“Human life and the environment should always be your first (concern)...so when that agency is also collecting revenue, you have an inherent conflict of interest,” he said. 

When Gould became the director of ONRR, one of the first things he did was ramp up the civil penalties programme, which hands out fines to oil and gas companies for providing false information about their operations or underpaying royalties to the federal government.

“When I came over to ONRR and looked at the civil penalties programme, it was more of a ticketing-type programme.... It was very general, to the point where I felt that companies could be factoring that in as part of (the cost of doing) business,” Gould said.

Not only was the MMS failing to give companies a big enough disincentive to cheat, but the agency also had trouble catching offenders because it had too few auditors.  Audit staff hit a low of 224 in 2008, the agency said.

Staff levels have increased 24 percent since then and today ONRR said it employs 296 auditors as federal employees and under contract with state and Native American tribal governments. Moreover, auditors no longer have health and safety duties but are solely responsible for auditing the documentation provided by oil and gas companies and visiting oil rigs and production sites to make sure that companies are paying what they owe, said Gould.

ONRR also has updated its computer systems to ensure that the forms submitted by oil and gas companies are filled out correctly. Behind the computers is a team of people who check the data to see if it makes sense, said Gould.

“It's not even 'Did they pay the right amount?' But 'Does what they said they’ve paid accurately reflect what they put on their forms?'”

Last year, ONRR collected $14.2 billion in energy revenues, money that it said was used  for education, road maintenance, water conservation projects and other programs that are critical to U.S. citizens.