Inspector: Too much gas escapes royalties

WASHINGTON — Federal law allows oil and gas producers not to pay royalties on small amounts for "beneficial use," such as for running their own drills and operations.

But when inspectors recently reviewed beneficial-use claims, they "found 43 instances in which companies claimed more than 100 percent of their production as beneficial-use deductions," which Interior Department officials had never noticed. In the most extreme case, one company claimed 555 percent of its production as beneficial use.

The inspector general of the Interior Department said in a report released Tuesday that this incident is an example of how Interior agencies are allowing oil and gas companies to avoid as much as tens of millions of dollars a year in royalties for the federal government and states.

The report said the Mineral Management Service and the Bureau of Land Management "have failed to carry out effective oversight and management to ensure that all royalty income due to the Treasury is collected" when it comes to reviewing what is actually declared as excluded for "beneficial use."

The report also complained that the agencies do not require companies to receive their approval before they claim beneficial-use deductions. Instead, the Interior essentially trusts companies to meet guidelines. The inspector general said that "leads to inadequate monitoring and weak or nonexistent oversight, and a potential loss to the government of significant royalty payments."

The inspector general estimated the value of "beneficial use" natural gas from public lands and offshore areas excluded from royalties in 2008 had a market value of $1.16 billion, with a potential royalty value of $145 million.

It looked in detail at records for January through March of 2009, and said producers claimed beneficial-use deductions on 9,485 properties amounting to 46.26 million Mcf (thousand cubic feet) of natural gas — enough to heat 650,000 homes for a year. It estimated that normal royalties on that amount would have been $25 million.

It found some problems that it said are serious.

"We found 43 instances in which companies claimed more than 100 percent of their production as beneficial-use deductions" with market value of $3.5 million, on which $440,000 in royalties would otherwise have been paid.

"The instances in which the companies reported more than 100 percent of their production as a beneficial-use deduction raise serious concerns," the report said.