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DNR Audit Finds $600,000 Unlawfully Withheld by Oil Industry

Post production cost investigation expands

December 1, 1997 | By Hans Voss
Great Lakes Bulletin News Service

Five oil and gas companies improperly withheld $560,715 from public royalty payments, according to a Department of Natural Resources report released last October. T h e report summarized the first phase of a DNR audit of all 22 oil and gas companies that operate Antrim wells on state land.

According to Tom Benson, Chief of the DNR's Office of Internal Audit, the state will make sure that a l l unauthorized deductions are paid back to Michigan's citizens. Royalties from oil and gas development on public lands are earmarked for t h e Natural Resources Trust Fund, which finances the purchase of wildlands, parks, and recreation areas.

The audit, conducted by two private accounting firms in cooperation with the DNR, reviewed some of the "post production cost" (PPC) deductions of five companies. (see chart). A total of 321 active wells were audited.

There are more than 5,000 Antrim wells in Michigan, about one-third of which are on state land. If future audits produce comparable results, the public will be entitled to millions of dollars in back payments.

The objective of this investigation is to determine whether energy companies took advantage of an agreement with the DNR that allowed the deduction of a long list of PPCs before paying royalties from Antrim gas development on public land. The results confirmed the suspicions of community and environmental groups, that industry has in fact been deducting even more than the agreement allowed.

Of the five Antrim operators audited, it was Shell Oil, one of the country's largest energy companies, that had the worst results, owing $332,103 to the Trust Fund. The audit revealed that most of Shell's violations were unauthorized deductions, while about one-quarter were due to a lack of necessary documentation. The DNR has given Shell extra time to produce the paperwork.

Marvin Schneider, Shell's Manager of Business Development and Regulatory Affairs, attributes the audit results to "some serious errors in bookkeeping."

"It's an embarrassing situation for us. But let me assure you, there has been no intent on anybody's part in Shell to cheat anybody," Mr. Schneider said.

In a prepared statement, Frank Mortl, President of the Michigan Oil and Gas Association, said the discrepancies turned up by the audit are "considered normal given the complexity of the guidelines and the large number of costs to be analyzed and classified."

Peter Vellenga, a Boyne City attorney who was a persistent advocate for the audit, does not consider the missing half-million dollars "normal." He joins other critics who contend the results show the special treatment given to the oil and gas industry.

"If this had been done in any other situation, it would be called a breach of contract," Mr. Vellenga said.u

The DNR audit of post production cost deductions covers state leases for wells on public land. Nothing is being done to reclaim the unauthorized deductions owed to private mineral owners, whose leases cover an estimated 3,000 Antrim gas wells in Michigan.

The post production cost agreement negotiated between the industry and the state never was meant to apply to private leases. Most private contracts do not authorize such deductions. Yet, many companies went ahead and used the state agreement as justification for applying the deductions before paying royalties to private mineral owners.

It was when private royalty checks started plummeting, by as much as 80 percent, that the state's generous deduction policy was brought into the open. The ensuing controversy resulted in DNR Director K.L. Cool cutting back the allowable deductions by two-thirds, and ordering the audit of state leases.

Despite continued requests from mineral owners, the DNR is not investigating the oil and gas industry's practices on private leases. And now that the post production cost audit has uncovered that energy companies did in fact take more than they were authorized to from state royalties, private mineral owners are left to wonder how much more might have been taken out of their checks.

To request that the DNR conduct an audit of unauthorized deductions from private mineral owners, contact: K. L. Cool, DNR Director, PO Box 30028, Lansing, MI 48909;Tel. 517-373-2329.

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