Almost one decade ago, two auditors with the U.S. Mineral Management Service filed a qui tam complaint in Texas. The two federal workers claimed Shell was defrauding the government on oil royalty payments. Since the government is the country’s biggest landowner, oil and gas royalties are a big revenue source.
For those trivia buffs, the government owns about 2.27 billion acres. That is 28% of the land mass in the U.S. Add underwater acreage and the numbers become staggering. Millions of acres of federal land are used for mining as well as oil and gas exploration. The companies that drill or mine on these lands must pay royalty payments.
A royalty is a payment to an owner of land for use of the property or the minerals under it. Most oil royalty payments are expressed as a percentage of the revenues from the sale of the oil. If a well generates a million in oil revenues, a 5% royalty would generate $50,000.
A little known agency called the Mineral Management Service (MMS) keeps track of these royalty payments. And our two auditors – turned – heroes, filed a lawsuit claiming that Royal Dutch Shell was cheating Uncle Sam. When we say cheating Uncle Sam, we mean cheating taxpayers as well.
Every company that leases land or mineral rights from the government is required to submit certain reports. Where would the government be without forms? To calculate oil royalty payments, the MMS requires a monthly report called a Form MMS-2014. This form tracks total sales revenues from the oil produced from each leased location.
Producers are allowed to deduct certain costs such as transportation. If you sell oil worth $1 million but it costs $100,000 to ship it to the buyer, the net revenue is $900,000. The royalty is applied to the net. And therein lies the potential for fraud and abuse.
Whistleblower Case Filed Under False Claims Act
The two auditors filed their case under the False Claims Act. That law allows anyone with inside information to file claims on behalf of the government. If the case is successful, the whistleblowers can earn an award of between 15% and 30% of whatever is collected.
The first step in claiming an award is filing a sealed (secret) lawsuit in federal court. The case is filed in secret to allow the Justice Department an opportunity to investigate. The government can then intervene and takeover the case or allow the whistleblowers’ lawyers to prosecute.
In this case, the government didn’t intervene. We are not sure why but have a pretty good idea. The government may have passed on prosecuting because the whistleblowers are federal employees. As auditors, they could be asked to investigate the very claim they filed. That isn’t a problem here since the government has turned over prosecution to the two men’s lawyers.
Shell Seeks to Have the Case Dismissed
This is an unusual case and one hotly litigated. Ten years and one appeal later, Shell still can’t get the case dismissed.
Shell now claims that since the government didn’t intervene any violations must not be material. They suggest that if the Justice Department doesn’t care, why should the court?
The Justice Department does care.
Even tough it didn’t intervene, prosecutors filed a “Statement of Interest” with the court. They say that the materiality issue should be tried before a jury and that Shell isn’t entitled to an automatic win. If the standard suggested by Shell were adopted, any case declined by prosecutors would automatically be dismissed. That was never Congress’ intent.
Simply because the government doesn’t take over a case, doesn’t mean there is no case. Sometimes prosecutors decline cases because they lack staff. Other times the case is just to small. And sometimes the government doesn’t share its reasons.
More Scams Involving Oil Royalty Payments?
We suspect there are many more oil royalty scams frauds taking place. When oil prices crashed, many oil and gas companies went bankrupt. Most struggled to pay bills. They still do. The temptation to cheat Uncle Sam and taxpayers is real. Until oil returns to $100 per barrel, we suspect there will be many folks cheating on royalty payments.
If you have inside information about these scams, are interested in stopping fraud or want an award, call us. Contact attorney Brian Mahany at *protected email* or call (414) 704-6731 (direct dial). All calls are kept confidential. You can also visit our whistleblower FAQ page for more information.
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