DNR’s Office of Mineral Resources: Where the Oil & Gas Industry Runs Louisiana

Private oil and gas leases benefiting from the publicly funded Bayou Postillion dredging project. (Source: Dan Collins)
Private oil and gas leases benefiting from the publicly funded Bayou Postillion dredging project. (Source: Dan Collins)

At the heart of Dan Collins’ successful whistleblower lawsuit against the Louisiana Department of Natural Resources is an example of collusion among property owners, at least one oil and gas company, and the Office of Mineral Resources (OMR) in DNR. (Dan Collins will be my guest on Where the Alligators Roam on KPEL FM 96.5 FM on Sunday, June 26 @ 5 pm CDST.)

OMR, various property owners, and Tortuga Interests hijacked what was supposed to be a water quality improvement project in the Atchafalaya Basin and turned it into a three-mile dredging project that opened the area down the bayou to natural gas exploration and production.

OMR is the state office in charge of monetizing the state’s mineral wealth. OMR negotiates mineral leases on state-owned lands and water bottoms, and collects of royalty payments from  those leases (the state is Louisiana’s largest property owner), and (in theory, at least) conducts audits of oil and gas production from state owned lands.

Here’s how OMR describes its significance on its website:

THE OFFICE OF MINERAL RESOURCES IS ONE OF THE LARGEST RECEIVERS OF STATE REVENUES. THE OFFICE RECEIVES REVENUES FROM ROYALTIES, BONUSES, RENTALS, INTEREST, AND FEES FOR LEASES ON STATE-OWNED LANDS AND WATER BOTTOMS. REVENUES FROM THESE SOURCES COMPRISE APPROXIMATELY 15% OF THE STATE GENERAL FUND. IN ADDITION TO THE GENERAL FUND, REVENUES COLLECTED ALSO PROVIDE MAJOR SOURCES OF FUNDING FOR PARISH GOVERNMENTS, SCHOOL BOARDS, THE DEPARTMENT OF WILDLIFE AND FISHERIES, THE COASTAL PROTECTION AND RESTORATION AUTHORITY, AND THE DEPARTMENT OF NATURAL RESOURCES.

Royalty payments from oil and gas produced on state properties account for about 8% of state General Fund dollars (about $600 million in good years).

Dan Collins discovered in the work that led to his lawsuit, that OMR had engaged in deception in describing properties that would be available for lease. In the project at the center of Collins’ suit, maps issued by OMR to describe Bayou Postillion were altered to make it appear that the bayou was on the opposite side of the Atchafalaya Basin from its actual location. Had the maps been accurate, it would have tipped off environmentalists who would have recognized immediately that the proposed mineral lease areas overlapped the Atchafalaya Basin Water Quality project that was targeted for Bayou Postillion. In fact, the maps renamed the bayou, and included other alterations to make it appear as those the mineral leases were occurring on the western side of the Basin.

The collusion among OMR and the oil and gas interests in this project was so extensive, that the state actually gave up property rights in the bayou which, once the wells began producing, meant less mineral revenue for the state.

The State’s claim to water bottoms dates back to the Louisiana Purchase and the French crown’s claim on those water bottoms. The claims are supposed to be perpetual. The fact that OMR gave up some portion of those rights along Bayou Postillion for nothing in return suggests the degree to which OMR serves the interests of the industry rather than protecting the interests of the state.

Since his suit was filed, Collins has discovered yet another Basin water quality project that also involved deceptive property descriptions that were posted by OMR.

This level of collusion between OMR and the oil and gas industry is all the more alarming considering the findings of two Louisiana Legislative Auditor reports on OMR’s handling of its main work — the collection of royalties from state-owned lands and water bottoms.

LLA2010-OMRauditcoverIn its July 28, 2010 report on OMR, the Legislative Auditor found that the office had not completed a desk audit (comparing oil and gas sales recorded by companies with state leases against the production figures they had reported to the state) in 10 years. The report explained the significance of desk audits:

These audits also help ensure that all production wells on state lands are submitting royalty payments. In a July 2009 audit report on the Minerals Management Service (MMS),1 the Governmental Accounting Office (GAO) conducted work similar to a volume audit for a sample of companies in the Gulf of Mexico and found approximately $117 million in royalties that may not have been collected by the federal government. By not conducting these volume audits, DNR could be missing opportunities to identify extra royalty payments that are owed to the state.

The Legislative Auditor also found that OMR was not auditing all producers on state lands, and that it had also neglected to coordinate with other state offices and departments in an effort to verify the accuracy of oil and gas production reports submitted to it.

This is 2010, two years into the first Jindal term, where a pattern of revenue shortfalls had already been established. OMR, which touted its importance to the state’s fiscal health, was not breaking a sweat to ensure that the state’s mineral wealth was generating the revenue that the state badly needed.

In its response to the Legislative Auditor’s report, OMR promised to do better.

LLA2013OMRauditCoverOn September 11, 2013, the Legislative Auditor issued another report on OMR’s operations. Things had not improved, the report said:

We determined that the Office of Mineral Resources (OMR) did not always ensure the state received complete, accurate, and timely mineral royalty payments during fiscal years 2008 through 2012. As a result, Louisiana may not have received all the royalty revenue owed by companies that extracted minerals from state-owned land and water bottoms.

The report said OMR was auditing a smaller percentage of oil and gas produced and potentially leaving revenue in the hands of oil and gas companies instead of state government. Coincidentally, royalty payments to the state fell in those years of declining audit activity. OMR’s response, written by Robert D. Harper, who had served as interim DNR Secretary during Scott Angelle’s stint as interim Lieutenant Governor in 2010, was to blame the decrease in audit activity on the Legislative Auditor’s 2010 recommendation that OMR also audit smaller companies.

The Legislative Auditor also found that fines and penalties against companies for late or under reporting of royalty payments were not universally enforced. In fact, the Auditor reported that OMR and the Mineral & Energy Board waived 45% of penalties for late royalty payments — $5.8 million of $12.8 million in penalties were waived between 2008 and 2012.

This lackadasical attitude towards collecting money owed the state (coupled with an acute concern for the comfort and well-being of the companies they were supposedly regulating) prevailed during a period of deepening fiscal crisis in Louisiana. Tight budgets and revenue shortfalls were decimating programs for the disabled and the poor, as well as gutting higher education budgets. Yet, OMR seemed to be operating in an environment sealed off from the concerns of the rest of state government.

Against this backdrop of OMR’s misplaced loyalty to the oil and gas industry instead of protecting the state’s mineral wealth, the decision of the Commission on Streamlining Government to recommend that severance tax audit authority be taken away from the Department of Revenue and given to OMR seems perverse.

OMR’s scope of work extended only to leases and production on state-owned lands. According to the Legislative Auditor, there are 1,188 state mineral leases in effect in 2010, approximately 1.9% of total oil and gas leases in the state. The Department of Revenue used a software program to identify potential non-filers of severance taxes on the other 98.1% of the wells and leases in the state. Giving OMR severance tax audit authority would require a significant expansion of its capabilities. It got two additional auditors and reduced spending on audits in comparison to what DOR was spending. OMR did not have a non-filer software program to help it identify those companies not paying.

LLA2013SevTaxauditCoverRecommendation 152 of the Commission states that severance tax audit authority would move from DNR to the Department of Revenue. In reality, the Commission at its November 23, 2009 meeting, voted 7-2 to “let the departments work it out” but Robert Harper told the Commission that the administration had already decided that severance tax audit authority would be shifted to OMR inside DNR.

It was a move that will live in infamy. The Legislative Auditor reported on November 27, 2013 (the day before Thanksgiving) that OMR had walked away from the power it had been given. For three years, there were two audits conducted on severance taxes owed on oil and gas producing from wells located on privately owned lands in Louisiana.  Hundreds of millions of dollars in severance tax revenue might have been missed.

Considering OMR’s misplaced loyalties, it is difficult to imagine that this was an accident — and not just another favor for their friends in the industry.

by Mike Stagg

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