Royalties on natural gas are based upon a percentage of the market price. So taxpayers should be getting a windfall as the return on leases of public lands keeps pace with the boom in private energy company profits, right?
Well, not exactly.
Nationally, energy companies paid $8.7 billion in royalties in 2005, up 64 percent from 2002. That’s a sizeable jump, but the returns to federal and state governments as well as Indian tribes are lagging below expectations. Now, 22 U.S. senators have asked the Government Accountability Office to investigate whether the U.S. Minerals Management Service is fully collecting federal oil and gas royalties from leases on public and Indian lands. Led by New Mexico Sen. Jeff Bingaman, the senators asked David M. Walker, the GAO’s comptroller general, to answer nine sets of questions by Feb. 24 – including why total royalties from federal lands have not risen at the same rate as oil and gas prices and whether MMS has reduced its number of audits conducted each year.
The Minerals Management Service has already cited several reasons for the lag in revenues, including decreased production in the Gulf of Mexico caused by Hurricane Katrina. While some of the production in the Gulf has been replaced by increased output in the Rocky Mountain region, such an exchange can reduce revenues because the royalty for off-shore production is one-sixth of the market price while on-shore royalties are only one-eighth. Thus, it takes 4,000 cubic feet of onshore production to produce the same revenue as 3,000 cubic feet of off-shore gas.
Colorado oilman Jack Grynberg offers a simpler explanation for the royalty shortfall, as Kim McGuire reported in Monday’s Denver Post. Grynberg claims some producers are cheating federal and state governments as well as Indian tribes by under-reporting production. Grynberg speaks with the authority of a man who has collected several million dollars over the last 30 years under a federal whistleblower law, his share of settlements in cases where such underpayments have been proven. Now, Grynberg is going big-time, filing 73 lawsuits in Casper, Wyo., claiming more than 300 energy companies have defrauded the federal government of an estimated $30 billion in royalties.
Federal royalties are shared with the states, so Colorado taxpayers have a strong interest in this issue. Past abuses don’t prove that current producers are cheating taxpayers. But New Mexico’s Bingaman and his colleagues are entirely justified in demanding that existing contracts be rigorously audited and strictly enforced.
