Gaming the government’s system for collecting oil royalty payments is illegal.

Persons with evidence that an oil company has been shorting the government may be in a position to file a whistleblower lawsuit.

Oil royalty payments are what oil companies pay the federal government in exchange for the right to drill for oil on federally-owned land.

Over two billion acres of land in the U.S. – more than a quarter of the country’s total land, and most of it in the western states – is owned by the federal government.

Typically, with ownership of that land comes the right to drill for oil on that land. The government can and does lease those rights out to oil companies in exchange for oil royalty payments.

Arrangements like these have resulted in millions of acres of federal land being leased out for oil extraction.

Keeping Track of Oil Royalty Payments

Royalty payments are typically based on the net revenue companies generate from the oil they extract. Companies that pay oil royalty payments are allowed to deduct certain operational costs. Those deductions give companies an opportunity to defraud the government out of royalty revenues.

Royalty payments to the federal government are handled by the Mineral Management Service. Auditors within the MMS are responsible for spotting and reporting evidence of fraud in the way oil companies make their royalty payments.

Over ten years ago, two MMS auditors found evidence of fraud that eventually laid the grounds for a hotly contested whistleblower lawsuit.

The auditors reported to their supervisor that Shell had been taking unauthorized deductions out of its oil royalty payments, effectively short-changing the government. But neither the supervisor nor anyone else in the MMS responded to that report of fraud.

So in 2006, both auditors filed a whistleblower lawsuit against Shell. They alleged that between 2001 and 2006, Shell bilked the government out of $19 million in improper deductions.

At first, Shell managed to get the case dismissed. The company argued that the False Claims only allows “private persons” to bring a whistleblower lawsuit. The two auditors could not be “private persons” because they were both federal employees, the company argued.

But the Fifth Circuit Court of Appeals disagreed and reversed the trial court’s dismissal. The appeals court found that based on the language of the False Claims Act and the legislative history behind it, there is no sensible reason why federal employees should not be allowed to bring a whistleblower lawsuit.

Whistleblower Lawsuits Under the False Claims Act

This whistleblower lawsuit was filed under the federal False Claims Act, an old statute that allows persons with evidence of fraud against the government to file an enforcement action on the government’s behalf.

Once the action is filed, the Department of Justice gets a chance to review the case and decide if it wants to intervene. Intervention allows the DOJ to take over the case as a plaintiff.

The whistleblower stays involved in the case, though. When a False Claims Act lawsuit is successful, the whistleblower may be entitled to collect an incentive award – usually between 15 and 30 percent of the amount of money recovered.