CHAPTER 11 ONRR'S TOOLS FOR COMPLIANCE II: ENFORCEMENT AND CIVIL PENALTIES

• Jurisdiction: United States

Federal and Indian Oil & Gas Royalty Valuation and Management
(Oct 2018)
CHAPTER 11
ONRR'S TOOLS FOR COMPLIANCE II: ENFORCEMENT AND CIVIL PENALTIES
James M. Auslander
Beveridge & Diamond, P.C.
Washington, D.C.

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JAMIE AUSLANDER co-chairs Beveridge & Diamond's Natural Resources and Project Development Practice Group, including its Energy practice. Mr. Auslander focuses his practice on complex legal issues surrounding development of oil and gas, hardrock minerals, renewable energy, and other natural resources on public lands onshore and on the Outer Continental Shelf. He frequently works with the Department of the Interior agencies and litigates appeals before the Interior Board of Land Appeals and federal courts regarding royalty, suspension, decommissioning, regulatory departures, rulemakings, and other issues. He assists multinational corporations, domestic companies, and leading industry trade associations in protecting valuable lease rights and navigating the ever-changing environmental requirements to develop those leases. Mr. Auslander also devotes a significant part of his practice to counseling and litigation of public and private clients under the National Environmental Policy Act (NEPA). Mr. Auslander frequently writes and speaks on environmental issues pertinent to project permitting and development, including royalty. He has served as elected Co-Chair of the Steering Committee of the Environmental, Energy, and Natural Resources Community of the D.C. Bar since 2014. Mr. Auslander has been selected for inclusion in Super Lawyers Editions 2014-2018 as a "Rising Star" in Environmental, Energy & Natural Resources, and Administrative Law.

I. INTRODUCTION

The Secretary of the Interior is responsible for annually collecting and disbursing billions of dollars received as royalties on production from tens of thousands of federal and Indian oil and gas leases. For decades, the Secretary had no effective enforcement authority to ensure proper royalty payments from lessees. In response, Secretary James Watt chartered the 1981 "Linowes Commission" to review the Department's oil and gas royalty accounting and enforcement procedures. The Commission's report, in part, urged Congress to provide the Secretary with new enforcement tools to address these concerns.¹

Congress addressed that shortcoming in 1982 by enacting the Federal Oil and Gas Royalty Management Act ("FOGRMA").² Among the purposes of FOGRMA is "the development of enforcement practices that ensure the prompt and proper collection and disbursement of oil and gas revenues owed to the United States and Indian lessors and those inuring to the benefit of States."³ FOGRMA enumerates the many duties of the Secretary and the lessees as relates to timely and proper payment of royalties.⁴ To ensure that lessees properly fulfill those obligations, Congress provided the Secretary with the authority to impose civil or even criminal penalties for noncompliance.⁵

This paper reviews the civil penalty provisions of FOGRMA and their administrative interpretation and application in the decades since FOGRMA's enactment. Since its creation as a separate agency in 2010, the Office of Natural Resources Revenue ("ONRR") has increased the overall frequency and visibility of its imposition of civil penalties. These efforts thus far have culminated in the 2016 amendments to ONRR's civil penalty regulations. Recently, ONRR also has begun to use the civil penalty provisions of the False Claims Act ("FCA"), 31 U.S.C. § 3729, for royalty enforcement actions, which presents a new set of policy and legal issues.

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This article is not intended to be an exhaustive survey of all possible situations that might apply in any given case. It also does not duplicate discussions of important related topics expansively addressed in other papers for this Special Institute. Affected parties should consult counsel to ensure compliance and protect their rights in royalty enforcement matters.

II. FOGRMA'S PENALTY REGIME

FOGRMA's legislative history demonstrates Congress' understanding that royalty reporting is inherently complicated, and Congress' concern about imposing overly-harsh civil penalties for minor violations and thereby deterring federal oil and gas production. Following issuance of the Linowes Commission recommendations, DOI prepared the first draft of what later became FOGRMA.⁶ In doing so, DOI sought mostly unfettered discretion to assess penalties. It proposed $10,000 per day in civil penalties without prior notice for any prohibited acts within various categories, and $25,000 per day and criminal liability for "all knowing and willful violations of the Act."⁷ DOI proposed to consider a host of factors in its sole discretion in assessing penalties.⁸

Congress rejected the agency's approach, and instead chose to craft a structured hierarchy of penalties tailored to defined violations of increasing severity. In sum, the Senate Committee on Energy and Natural Resources found:

[T]he Committee feels strongly that administrative discretion should not be the principal mechanism through which the severity of punishment is matched to the seriousness of the offense.

Therefore, the Committee amendment attempts to distinguish between those violations which ought to lead to a very large civil penalty and those for which liability should be reduced. In making this distinction, a balance must be struck between the need to deter violations of the Act and the need to avoid a situation in which exposure to very severe penalty liability for relatively minor or inadvertent violations of necessarily complex regulations becomes a major disincentive to produce oil or gas from lease sites on federal or Indian lands. The Committee attempted to achieve this balance by providing a requirement of notice of violation and a lower civil penalty for certain violations of the Act and a steeply rising civil penalty liability for serious violations knowingly or willfully committed. ⁹

Thus, the Senate "made substantial modifications to the civil penalty provisions" to fashion a "balance" ensuring both corrected violations and proportional remedies.¹⁰ The House Committee on Interior and Insular Affairs similarly declined DOI's proposed approach and instead provided "lesser penalties for failure to comply with a term of an oil and gas lease,

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license, or permit, or any provision of this bill (other than those [more serious knowing or willful violations] described in section 114(c)), regulations, or orders."¹¹ Each chamber of Congress also narrowed DOI's proposed criminal penalties.¹²

Underlying this more prescriptive and circumscribed approach was Congress' recognition that royalty reporting involves "necessarily complex regulations."¹³ Congress also understood that potentially open-ended exposure to severe civil or criminal penalties for "relatively minor or inadvertent violations" would be unfair, and could provide a disincentive for parties to produce oil and gas from federal or Indian leases.¹⁴ Therefore, Congress designed a statutory enforcement scheme intended to fashion a "balance" ensuring both correction of violations and proportionality of remedies.¹⁵

Congress' efforts resulted in current 30 U.S.C. §§ 1719 and 1720, a four-tier hierarchy creating first-time penalty authority for federal and Indian oil and gas lease royalty enforcement. All penalties specified in FOGRMA are per day and per violation.¹⁶ The least severe category, § 1719(a), addresses a federal oil and gas lessee's "failure to comply" with applicable statutes, regulations, lease terms, or orders; requires ONRR to provide "due notice of violation"; and provides at least 20 days for the recipient of that formal notice to cure the violation prior to imposing penalties.¹⁷ ONRR's regulations have long added the requirement for a formal "Notice of Noncompliance," which ONRR now refers to as a "NONC."¹⁸ If the violation is not cured within the time provided, penalties may accrue starting with the service date of the NONC.¹⁹ In that instance, ONRR will issue what it now refers to as a "Failure to Correct Civil Penalty Notice," or "FCCP."²⁰

The next level up is § 1719(b). Titled "[f]ailure to take corrective action," this section applies if a violation noticed under § 1719(a) is not corrected within 40 days of notice (or longer if the Secretary so agrees).²¹ It allows ONRR to impose substantially increased (up to tenfold) civil penalties, dating back to the time of the initial notice.²² ONRR's regulations again have long followed suit.²³

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The next two levels of FOGRMA violations are more serious - but not of equal severity - and require no prior agency notice or opportunity to correct before even higher penalties may be assessed, reflecting Congress' intent to deter the prescribed conduct by penalizing it from its inception with substantial penalties. Section 1719(c) violations include "knowingly or willfully" failing "to make any royalty payment," and refusing "to permit lawful entry, inspection, or audit."²⁴ These violations again double the maximum daily penalty available under § 1719(b). For such violations, ONRR may proceed to directly issue a notice of civil penalty through what ONRR now calls an "Immediate Liability Civil Penalty Notice," or "ILCP."²⁵

At the pinnacle of this enforcement scheme, § 1719(d) punishes the most egregious actions. By its terms, § 1719(d) applies only to "knowingly or willfully prepar[ing], maintain[ing], or submit[ting] false, inaccurate, or misleading reports," "knowingly or willfully tak[ing] or remov[ing] . . . any oil or gas from any lease site without having valid legal authority to do so," and "knowingly or willfully purchas[ing] . . . [or] sell[ing]" stolen oil or gas.²⁶ The shared characteristic of these offenses is actively and intentionally attempting to defraud the federal government of oil and gas revenues or physically...