CHAPTER 10 ONRR'S TOOLS FOR COMPLIANCE I: DATA MINING, COMPLIANCE REVIEWS, AUDITS, AND ORDERS

• Jurisdiction: United States

Federal and Indian Oil & Gas Royalty Valuation and Management
(Oct 2018)
CHAPTER 10
ONRR'S TOOLS FOR COMPLIANCE I: DATA MINING, COMPLIANCE REVIEWS, AUDITS, AND ORDERS
Jane Campbell
Senior Counsel
Chevron North America Exploration and Production Company
Houston, TX
Sarah Y. Dicharry
Associate
Jones Walker LLP
New Orleans, LA ¹

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JANE CAMPBELL is Senior Counsel with Chevron North America Exploration and Production Co, a division of Chevron U.S.A. Inc. Jane's legal practice is focused primarily on complex royalty matters throughout all the states in which Chevron operates. In addition to providing legal advice to internal clients, Jane has provided comment on proposed federal regulations and contributed to numerous amicus brief filings in the Supreme Court of Texas. Jane has a B.A. (Hons) in Music from the University of Durham, UK, and a J.D. from Texas Tech University School of Law.

SARAH DICHARRY advises exploration and production companies regarding their rights and obligations under the statutes and regulations governing onshore and offshore federal leases. Sarah has represented lessees in numerous administrative and judicial appeal proceedings, including those involving royalty issues (e.g., civil penalties, Marketable Condition Rule, flared production, refund claims) and lease maintenance issues (e.g., suspensions of operations or production). She also provides advice regarding regulatory compliance (including exposure for operational violations) and represents lessees in enforcement investigations conducted by the Department of the Interior and the Department of Justice.

I. Introduction

Every month, federal lessees submit production reports and royalty reports to the Department of Interior's ("DOI" or "Interior") Office of Natural Resources Revenue ("ONRR"). Accurate production and royalty reporting is important to industry and ONRR, alike. However, because of the number of lines of data reported every month and the complicated nature of production measurement and royalty accounting, inadvertent errors frequently occur. To investigate and enforce compliance with federal royalty obligations, ONRR conducts audits and similar investigations and issues orders requiring lessees to revise prior-period reports. In recent years, ONRR has relied heavily on its auditing and enforcement procedures to further its well-publicized initiative to collect "every dollar due" and to require perfect performance from lessees with respect to their monthly production and royalty reporting.² Lessees routinely work with ONRR during audits and investigations and in response to orders and challenge ONRR's policies regarding production and royalty calculations through appeals of ONRR orders.

Considering the frequency of ONRR's auditing and enforcement activities, it is important for both industry and ONRR to be aware of the statutory authority - and limitations - applicable to these activities (in addition to substantive royalty issues). This paper explores a handful of ONRR's investigation and enforcement practices and asks whether these practices fall within the boundaries of the agency's statutory authority.

II. Statutory Framework

Federal lessees' royalty obligations and ONRR's authority to enforce those obligations are defined by the Federal Oil and Gas Royalty Management Act of 1982, Pub. L. 97-451 ("FOGRMA"), as amended by the Federal Oil and Gas Royalty Simplification and Fairness Act of 1996, Pub. L. 104-185 ("RSFA"), collectively found at 30 U.S.C. § 1701 et seq.³ With

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FOGRMA, Congress vested Interior with broad authority to "implement and maintain a royalty management system for oil and gas leases[,]" 30 U.S.C. § 1701(b)(2), and to develop "enforcement practices that ensure the prompt and proper collection . . . of oil and gas revenues owed to the United States[,]" 30 U.S.C. § 1701(b)(3). In keeping with this objective, FOGRMA gave Interior broad (but not unlimited) auditing and enforcement authority. See 30 U.S.C. § 1711. For instance, FOGRMA directs Interior to "audit and reconcile, to the extent practicable, all current and past lease accounts for leases of oil or gas[,]"⁴ 30 U.S.C. § 1711(c)(1), and gives Interior broad authority to "collect and account for [] amounts [owed] in a timely manner." 30 U.S.C. § 1711. In turn, FOGRMA provides that during an audit or similar investigation, lessees must "ma[ke] available for inspection and duplication" records, reports, or information. 30 U.S.C. § 1713(a); see also 30 U.S.C. § 1711(c)(3).

FOGRMA also equipped Interior with particular tools to facilitate its enforcement authority. For instance, 30 U.S.C. § 1717(a)(1) provided that where "reasonably necessary" during an investigation or audit, Interior could "require by special or general order, any person to submit in writing . . . affidavits and answers to questions[.]" And, under 30 U.S.C. § 1717(a)(3), Interior could subpoena "the production of all books, papers, production and financial records, documents, matter, and materials[.]"⁵ (As explained below, with RSFA Congress limited these broad provisions.) FOGRMA also gave Interior authority to assess civil penalties when, inter alia, (i) a lessee fails to take corrective action after being notified that it is in violation of FOGRMA, its implementing regulations, or a Lease, (ii) a lessee "knowingly or willfully" fails to pay royalties, or (iii) a lessee "fails or refuses to permit lawful entry, inspection, or audit[.]" 30 U.S.C. § 1719.

For years prior to RSFA, industry and Interior hotly debated the scope of Interior's authority under FOGRMA. A couple of the more contentious issues litigated included Interior's authority to require lessees to extensively review their own records and the time frame for which lessees were required to retain and produce records. The Interior Board of Land Appeals ("IBLA") repeatedly relied on FOGRMA's broad language for the proposition that Interior was entitled "to require restructured accounting when [Interior] has, by sampling a portion of but not all of the producer's production accounts, discovered a systemic error (whether or not amounting to a pattern of error) in the producer's royalty computations. . . . In these circumstances [Interior] can impose upon the lessee the burden of reviewing the lease accounts in an effort to disclose other instances when royalty computation has been distorted by the identified error or deficiency in order to make the necessary correction and pay additional royalty found due, if any." Union Texas Petroleum Energy Corporation, 153 IBLA 170, 179 (2000) (citing (inter alia) Marathon Oil Co., 149 IBLA 287, 292-93 (1999), Amoco Production Co., 123 IBLA 278, 282, 285 (1992)). See also Vastar Resources, 148 IBLA 107, 114 (1999) ("The authority of the Secretary is broad in discharging his obligation to ensure that lessees comply with their obligation to properly remit revenues to lessors"); Amoco Production Co., 144 IBLA 135, 138 (1998); Texaco Inc., 138 IBLA 26 (1997);

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Texaco Inc., 138 IBLA 202 (1997); Phillips Petroleum Co., MMS-95-0685-O&G, 3 (June 13, 1997). Thus, the Board repeatedly found that Interior's restructured accounting orders were within the scope of Interior's statutory authority under FOGRMA and did not rise to the level of a "self-audit" (when based on Interior's finding of a "systemic" error). Id.

Interior's broad authority under FOGRMA was also upheld in federal court. For instance, in Phillips Petroleum Co. v. Lujan, 963 F.2d 1380 (10th Cir. 1992),⁶ Phillips Petroleum Co. ("Phillips") and Atlantic Richfield Company ("ARCO") challenged Interior's "data requests," which required the lessees to retain records for the duration of an audit and to perform extensive internal reviews of their royalty accounting. In their consolidated lawsuits, Phillips and ARCO asserted that Interior's actions exceeded its statutory authority by (inter alia) requiring the lessees to perform self-audits in contravention of FOGRMA's requirement that Interior conduct audits. Relying on the broad language of FOGRMA, the 10th Circuit found that Interior could lawfully require lessees "to make changes to correct repeated royalty underpayments caused by systemic deficiencies." Id. at 1386. Further, in a separate lawsuit, the 10th Circuit commented that 30 U.S.C. § 1713(b) "does indicate that audits may extend past the six-year statute of limitations[.]" Phillips Petroleum Co. v. Lujan, 4 F.3d 858 (10th Cir. Sept. 2, 1993).

In response to years of litigation, Congress worked collaboratively with both DOI and industry on a more tailored approach to Interior's statutory authority to audit and enforce royalty obligations. And, with RSFA, Congress expressly curtailed that authority in a number of significant ways. For instance, RSFA limited ONRR's auditing authority by (inter alia) requiring that ONRR allow lessees a "reasonable period of time" to produce records, see 30 U.S.C. § 1724(d)(2)(C), and limiting the timeframe for which ONRR may "initiat[e], pursu[e], or complet[e] an audit" of a royalty obligation (and the timeframe for which a lessee is required to maintain and produce documentation) to the seven-year period following the date on which that obligation becomes due, 30 U.S.C. § 1724(b)(1).⁷ RSFA also refined the scope of ONRR's subpoena authority by (inter alia): (i) providing that subpoenas are appropriate only when a lessee fails to respond to a request for records "within a reasonable period of time," refuses to produce records, or "unreasonably delay[s]" in producing records; (ii) limiting Interior's ability to delegate the subpoena power; and (iii) imposing the same seven-year statute of limitations on Interior's subpoena authority. 30 U.S.C. § 1724(d)(2).

Additionally, RSFA significantly limited Interior's ability to require lessees to extensively review their royalty reports, identify errors therein, and correct those errors...