Firms Harvesting Energy From Public Land May Owe U.S.
Under the False Claims Act, Groups Sue for More Fees

By T.R. Reid
Washington Post Staff Writer
Sunday, May 7, 2006

CENTENNIAL, Colo. -- As soaring prices prompt huge increases in gas and oil drilling on public land, an ad hoc posse of state governments, Indian tribes and individual "bounty hunters" is charging that big energy companies are shortchanging taxpayers by billions of dollars.

They say drilling companies and pipeline operators are understating the amount and the quality of the natural gas they pump on public land, and are paying far less in royalties than required by law.

State and tribal governments rely on Washington -- specifically, the Minerals Management Service in the Department of the Interior -- to determine what royalties are owed and to collect the money. States and tribes then receive their shares from the federal government.

Two organizations -- the Council of Energy Resource Tribes, representing 57 tribes in the nation and Canada, and the State and Tribal Royalty Audit Committee, representing 11 state governments and eight tribes, mainly in the West -- are pressuring the Minerals Management Service and the gas companies for stricter accounting and higher royalty payments.

"With the current operation in Washington, you just get the feeling that the companies can report any production number they want to, and the government is not going to check," said Dennis Roller, an auditor with the state of North Dakota who serves as vice chairman of the royalty audit committee.

"And, of course, the result is that taxpayers aren't getting paid for the gas that they own," he said. "We have asked them many times to do the auditing they are supposed to do. But they just stonewall."

Energy companies say they have paid all the royalties they owe for the minerals extracted from public and tribal land. The Bush administration has sided with the industry, resisting suggestions that it should be collecting more money as gas and oil drilling escalates.

Five years ago, however, energy companies paid more than $400 million to settle charges that they had not paid royalties owed on oil taken from public land. Today, most of the focus is on natural gas production, which is booming on public land in the Rocky Mountain West, with the enthusiastic backing of the Bush administration.

"We think the underpayment on gas royalties could be much bigger than the fraud that was exposed for the oil wells," said Beth Daley, of the Project on Government Oversight, a Washington-based interest group that plays a coordinating role among the various groups challenging the energy companies.

"The industry seems to have all sorts of ways to avoid paying what it owes for this gas," Daley said. "And the Bush administration has been loosening the rules. At a time when drilling is way up, the government has cut back on its audits, so it is easier for a company to get away with fraud."

Oil and gas accounting rules are complicated, and it is difficult to assess whether or how much the companies may have underpaid. But one veteran of the Western oil patch, independent driller Jack Grynberg, of Centennial, charges that the industry owes the federal government more than $30 billion in unpaid royalties for natural gas alone. By comparison, the deficit-cutting bill that Congress passed earlier this year would save $39 billion over five years.

The nation's major reserves of oil and gas are found in the Rocky Mountains, the Southwest and Alaska, regions where much of the land is owned by federal or state governments or Indian tribes. When gas and oil companies drill wells on public or tribal land, they are required to pay royalties of about 16 percent of the value at the wellhead, before the fuel is shipped to market and refined.

"We are convinced that there is serious underreporting of production and serious underpayment of royalties owed to the tribes," said Roger Fragua, deputy director of the Council of Energy Resource Tribes. "The federal government, at least in this administration, is not protecting our interests. So we are looking for ways to go after the companies ourselves."

The Minerals Management Service says its auditing and collection procedures are working. "We believe that the process we are using is appropriate and provides the income we are looking for," said Gary Strasburg, MMS spokesman. "We're engaged in a continuing effort to improve our auditing, but we have no indication that companies are paying lower royalties than they should."

Critics of the Bush administration's management of royalty payments have been looking for ways to circumvent the government and attack the energy companies directly. Some think they have found the right weapon in a federal statute, the False Claims Act, dating to the Civil War.

Under the law, anyone can file a civil suit known as a qui tam action, a Latin term that means the plaintiff is acting "on behalf of" the government. The procedure can be extremely costly for a defendant who is found to have cheated the federal government; the statute gives courts the right to assess damages three times the amount owed. The private litigant, in turn, gets a significant share of the damages.

One of the pioneers in these cases against energy companies is Grynberg, 81, the veteran oil man from this Denver suburb, who works out of a cluttered office overflowing with geological reports and mineral maps. He said he has earned tens of millions of dollars over the decades drilling for oil and gas -- and almost as much in lawsuits against energy companies, charging that they cheated him on royalty payments owed to his wells.

Grynberg and his team of lawyers have sued 73 energy and pipeline companies in a false claims action in Casper, Wyo., alleging underpayments in the tens of billions of dollars.

"I've been called a 'bounty hunter,' and that's probably a good description," Grynberg said. "I'm trying to get back billions of dollars that these big companies owe to the taxpayers. And when they pay up, I get a share of the money as a bounty." The federal government has declined Grynberg's request that it intervene on his side in the case.

The 73 defendant companies sought to dismiss Grynberg's suit, arguing that there was no evidence to support the claim of underpayment. But a special master appointed by the federal court ruled last year that the cases against 35 of the companies should go to trial. U.S. District Judge William F. Downes, in Casper, said no trial date has been set.

Final action on the suit is probably years away, said Edward A. Dauer, one of Grynberg's lawyers. But the special master's order could be important, because it may induce the 35 defendants remaining in the case to settle; that is, to pay Grynberg to drop his legal action.

"The fact is, most False Claims Act cases settle out of court," noted James Moorman, president of the Washington-based False Claims Act Legal Center. "If it looks like a case is ready to go to trial, the defendants are so terrified of the triple-damage penalty they could face that they sit down and start talking settlement terms with the plaintiff."

To date, Moorman said, the biggest payments in false claims cases have involved medical or drug companies charged with Medicare or Medicaid fraud. But the potential judgment in a suit for underpayment of oil and gas royalties could dwarf them.

Grynberg is not the only figure in the Western oil patch using the triple-damage law to pursue energy companies. Several other plaintiffs, including former Interior Department auditors, are bringing separate false claims cases charging underpayment of mineral royalties.

And recently, the Council of Energy Resource Tribes held a day-long session to plot its attack on oil and gas companies.

"We are looking hard at that False Claims Act," Fragua said. "We can't depend on the Interior Department to collect the money we are rightfully owed. So we think it may be time to start fighting this in the courts."

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