Friday, February 27, 1998

Justice Department joins lawsuit against oil companies

By JIM O'CONNELL / Scripps Howard News Service

WASHINGTON -- The U.S. Justice Department has joined a whistle blower lawsuit alleging that four oil companies underpaid millions of dollars in royalties for oil extracted from federal property in 21 states.

The lawsuit, originally filed as a whistle blower complaint by five former oil executives and an industry watchdog group, alleges that 14 major oil companies violated the federal False Claims Act by intentionally underpaying royalties on oil taken from federal and Indian lands.

The Justice Department only accused four companies, Amoco Oil, Shell Oil, Conoco Inc., and Burlington Resources Inc., with wrongdoing. The remaining 12 firms accused by the whistle blowers remain under federal investigation.

The Justice Department made no estimate of the amount of the underpayment. But the government said that since 1988 the companies "undervalued hundreds of millions of barrels of oil," taken from the Gulf of Mexico, Texas, California, New Mexico, Alabama Florida, and 16 other states.

The whistle blower lawsuit, filed in Lufkin, charges that the oil companies participated in seven schemes to avoid appropriate royalty fees, including selling oil at deflated prices to affiliated companies to lower the market price on which the royalty payment is based.

The royalty payments and penalties owed by all 14 companies could reach $5 billion, said Danielle Brian, executive director of the Project on Government Oversight, a party in the whistle blower lawsuit.

Whistle blower lawsuits allow individuals to sue companies that defraud the government and collect up to 25 percent of any money damages or settlement payments.

The Justice Department's decision to join the lawsuit "is a huge victory for the people," Brian said.

Shell and Conoco immediately issued statements denying the allegations.

"We regard any such claim as meritless and will fight it vigorously," Shell's statement said. "Shell has paid federal royalties in accordance with the lease terms and government regulations."

Conoco also said it would fight the charges.

The lawsuit, under court seal for more than a year, was made public last week at a particularly inconvenient time for the oil industry. This week, the Interior Department begins public hearings into a proposal to revamp the royalty payment program. A public comment period for the new rules proposed by the department ends March 23. Supporters say the new rules will increase industry payments to the government by millions of dollars.

The Minerals Management Service, which administers the royalty payments, receive about $4 billion a year in revenue from leasing the oil and gas drilling sites.

The industry has countered with a proposal to make "in-kind" royalty payments to the government with barrels of oil. A task force of industry lobbyists is pushing for the "in-kind" payment proposal. The proposal would reduce costly audits and endless disputes over the current system, industry officials said.

Rep. William Thornberry, R-Texas, is expected to introduce legislation soon in Congress requiring the Minerals Management Service to adopt the industry's "in-kind" payment plan.

A Justice Department spokesman said the timing of the release of the lawsuit was a coincidence unrelated to the upcoming public hearing on the issue.