CHAPTER 2 ROYALTY AUDITS: STANDARDS, PROCEDURES AND PRACTICE

• Jurisdiction: United States

Federal Royalty Revolution--Coal
(Nov 1986)
CHAPTER 2
ROYALTY AUDITS: STANDARDS, PROCEDURES AND PRACTICE
Julia Hook
Holland & Hart
Denver, Colorado

1. The United States Department of the Interior has the authority (and the obligation) to audit the lease accounts for federal oil and gas and coal leases issued pursuant to the Mineral Leasing Act of 1920 and the Minerals Leasing Act for Acquired Lands to ensure that all royalties due and payable to the United States have been properly and timely paid. [Act of February 25, 1920, as amended, 30 U.S.C. § 181 et seq.; the Minerals Leasing Act for Acquired Lands, as amended, 30 U.S.C. §§ 351 -359.]

2. The United States Department of the Interior also has the authority (and the obligation) to audit the lease accounts for oil and gas and coal leases issued pursuant to the Allotted Indian Lands Leasing Act of 1909 and the Unallotted Indian Lands Leasing Act of 1938 to ensure that all royalties due and payable to Indian allottees or Indian tribes have been properly and timely paid. [Act of March 3, 1909, as amended, 25 U.S.C. § 396; Act of May 11, 1938, as amended, 25 U.S.C. §§ 396a -396q . The Department of the Interior has the authority to audit Indian oil and gas and coal leases issued pursuant to statutes other than the 1909 and 1938 Acts to ensure that royalties on such leases have been properly and timely paid. The Act of February 28, 1891, as amended, 25 U.S.C. § 397; the Act of May 29, 1924, 25 U.S.C. § 398; the Act of March 3, 1927, 25 U.S.C. §§ 398a -398e; the Act of June 30, 1919, as amended, 25 U.S.C. § 399.]

3. Where federal or Indian oil and gas leases are involved, the Department of the Interior has the independent authority, pursuant to the Federal Oil and Gas Royalty Management Act of 1982 ("FOGRMA"), to audit federal, tribal and allotted oil and gas lease accounts to verify proper and timely royalty payments. [Federal Oil and Gas Royalty Management Act of 1982, 30 U.S.C. § 1701 et seq.]

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4. The Secretary of the Interior has delegated the authority to conduct audits of onshore and offshore federal and Indian oil and gas lease accounts to its constituent agency the Minerals Management Service ("MMS"). [30 C.F.R. Subchapters A and B (1986).] Audits of federal and Indian coal lease accounts are also conducted by the MMS.

5. Where federal or Indian oil and gas leases are involved, the MMS has the authority to enter into a cooperative agreement with the State wherein the particular federal oil and gas lease is located (or the Indian tribe on whose reservation the Indian lease is located) authorizing the State (or Indian tribe) to cooperate with the MMS in carrying out audits and related investigative and enforcement activities. [30 U.S.C. § 1732. With the permission of the affected Indian tribe, the Department of the Interior and the State may enter into a cooperative agreement with respect to audits and related activities on Indian lands within the State. See also, 30 C.F.R. Pt. 228 (1986).]

6. Where federal or Indian oil and gas leases are involved, the MMS has the authority to delegate all or any part of its audit, investigative and enforcement functions to the State wherein the particular lease is located. However, the State and the MMS cannot conduct duplicative audits. [30 U.S.C. § 1735. The written consent of any affected Indian tribe or allottee is required to support such a delegation as to Indian lands within the State. See also, 30 C.F.R. Pt. 229 (1986).]

7. Where a State is conducting an audit of a federal or Indian oil and gas lease account pursuant to a delegation of authority from the MMS, the initial contact letter and the issue letter which starts the formal phase of the audit will be issued by the State. However, the demand letter which concludes the audit will be issued by the MMS. This demand letter is a final...