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State Audit Says Terra Energy Siphoning MIllions of Dollars From Taxpayers

Attorney General Vows to Recover the Money

June 1, 1997 | By Keith Schneider
Great Lakes Bulletin News Service

Mineral Lease Sale

A Department of Natural Resources audit of 10 Antrim Shale gas fields operated by Terra Energy on public lands has revealed that the company used a questionable accounting maneuver to shortchange Michigan taxpayers $1.3 million dollars in royalties. (See chart).

In addition, the audit found that Terra inappropriately withheld $748,596 more in operating expenses--known as "post production costs" (PPCs)--from state royalty payments.

Attorney General Frank Kelley initiated his own investigation this spring, and is evaluating whether to file criminal or civil charges against Terra Energy. Mr. Kelley also vowed to recover the missing money, which is designated for the Natural Resources Trust Fund to acquire land for public recreation and conservation.

In July, the state House of Representatives approved a resolution that called on the DNR to postpone a state mineral lease sale scheduled for September. The House said it was concerned about"serious financial irregularities" which "may have led to the loss to state taxpayers of substantial revenues." A day after the resolution was passed, the DNR and the Natural Resources Commission complied.

These actions stem from an expanding state investigation of financial practices within the Antrim gas industry. DNR Director K.L. Cool ordered audits in 1996 after widespread controversy erupted over exorbitant post production cost deductions, which were draining the Natural Resources Trust Fund of $4 million to $8 million annually.

Preliminary audits have been conducted on six energy companies. Each had overcharged the state for PPCs, in some cases by hundreds of thousands of dollars.

The additional finding, that Terra may have deliberately under-reported the value of Antrim gas extracted from public lands, sparked further investigation from the Attorney General's office and the public disclosure of the questionable accounting maneuver.

The cancellation of the September lease sale was first proposed in May by the Michigan Land Use Institute and the Michigan United Conservation Clubs. In a letter sent to Gov. John Engler and Mr. Cool, the groups said that leasing of public lands for oil and gas development should cease until all audits and investigations are completed, and the missing money is recovered.

"Unfortunately, through lax oversight on the part of a number of state agencies, our Natural Resources Trust Fund is getting skimmed to the tune of millions of dollars by unscrupulous oil companies," said Rick Jameson, Executive Director of MUCC.

The DNR at first ignored the call for a moratorium. Mr. Cool said the energy industry was the DNR's "partner" in developing natural resources for economic gain, and he was reluctant to interrupt production.

Gordon Wright, a senior oil and gas executive with CMS Energy, the parent company of Terra Energy, said the "state received correct gas royalty payments" and called the conclusions of the press and industry critics "unfair."

"Oil and gas accounting is complex," Mr. Wright said, "and interpretations of legal and accounting requirements are often based on differences of opinion."

It is not yet clear how much Antrim producers diverted to their own accounts. According to the DNR, the state has recovered $700,000 in wrongful PPC charges from three companies. There are at least 15 energy companies developing Antrim gas, with more than 3,000 wells on state land.

In addition,if the manipulation of the gas sale price discovered at Terra Energy turns out to be a widespread industry practice, the cost to taxpayers could register in the tens of millions of dollars.G

Here is how the newly-revealed accounting maneuver was used for some of Terra Energy's wells.

Howard Energy then sold the gas to Energy Acquisition, a subsidiary of Terra, for $2.00 per m.c.f. Energy Acquisition sold the gas to
MichCon, Terra's parent company, for $3.15 per m.c.f. According to the audit report, these paper transactions occurred simultaneously, in February 1992. No transport or processing of the gas occurred to justify the price increases at each sale. Similar transactions took place on other Terra wells from 1992-94.
Terra Energy drilled the gas and sold it to Howard Energy for $1.24 per thousand cubic feet (m.c.f.).
The public received a 1/6 royalty based on this price.

Support the call by the Institute and MUCC for a continued moratorium on the leasing of public lands for oil and gas drilling until all audits are complete, all the money owed to the state treasury is recovered, and state regulators make sure that the industry pays us our fair share for selling public resources.

For more information, contact: Hans Voss or Keith Schneider at the Institute, 231- 882-4723; or Rick Jameson at MUCC, 517-371-1041.

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