Hilcorp San Juan: The Missing Payment After the Estimate

In the Hilcorp San Juan False Claims Act settlement, the oil and gas company agreed to pay $34.6 million to resolve allegations that it knowingly underpaid federal oil and gas royalties from August 2017 through December 2018. The government alleged that Hilcorp used estimates without identifying them as estimates or following them with payments based on actual volumes and values. For someone working in royalty accounting, that puts the case in familiar territory: the report, the transaction code and the payment that should have followed.

The U.S. Attorney’s Office for the Southern District of Texas announced the civil settlement on January 19, 2024. Hilcorp San Juan has offices in Houston and Aztec, New Mexico.

Federal Royalties Follow the Value of Production

Federal oil and gas royalties are the government’s share of the value of production from leased public lands. As the Justice Department explains, companies must pay monthly royalties on oil and gas removed or sold from the lease.

The Justice Department said royalties from federal oil and gas production help support public programs. That is who loses when the payment falls short: the public whose resources the company is allowed to extract, and the programs those royalties support.

The reporting system allows an estimated royalty payment in the month after production. It also requires a later payment based on actual figures, due at the end of the month after the estimated payment. The estimate gets a specific transaction code so the government can recognize that the figures are temporary.

The Missing Estimate Code and the Missing Payment

The government alleged that Hilcorp San Juan left out both parts of that sequence when reporting and paying royalties. According to the settlement announcement, the company knowingly used estimated volumes and prices without identifying the payments as estimates, then failed to make the following month’s payments based on actual volumes and values.

Those are distinct alleged failures. Without the estimate code, the government loses the signal that the payment is provisional. Without the payment based on actual figures, the estimate never gets reconciled through the amount paid. The government’s account connects those reporting practices directly to underpaid royalties.

We see the absurdity in the government’s account: a company produces from public land, but the public’s share stays stuck at an estimate. Temporary, indefinitely. Calling the calculation an estimate cannot make the payment obligation temporary too.

For a production accountant or royalty analyst, the revealing comparison is between the estimated figures used for payment and the actual figures that should have replaced them. The transaction code matters because it tells the government which kind of figures it is receiving.

The Investigation Reached the Loss Calculation

Hilcorp San Juan helped the government investigation by assisting in the calculation of losses and received cooperation credit, according to the Justice Department. That is a specific contribution: assistance calculating the shortfall behind the alleged reporting failures.

The resolution brought together the Department of the Interior’s Office of Inspector General, its Office of Natural Resources Revenue and the Justice Department. The agencies responsible for the public’s royalties worked with those pursuing the alleged shortfall.

Why Money Owed to the Government Matters

The False Claims Act also covers a company that knowingly and improperly keeps money it owes the government. In royalty reporting, the relevant money runs from the producer to the public treasury.

The Congressional Research Service explains that direction of payment in its 2009 report, Qui Tam: The False Claims Act and Related Federal Statutes. Its discussion of reverse false claims distinguishes seeking government money from improperly keeping money owed to the government.

The company’s obligation comes from producing oil and gas on federal leases. The government’s allegation against Hilcorp concerned reports and payments that left part of that obligation unmet. The value of an insider’s knowledge is in connecting those pieces: what was produced, what was reported and what was paid.

The Records a Royalty Insider Would Recognize

The useful evidence in a royalty-reporting case connects the underlying volumes and prices to the royalty report and the payment. We examine the estimated figures alongside the actual figures for the same production, the code used to report them and the subsequent payment history. That comparison gives the reporting practice a financial consequence.

Different records answer different questions. A production record can help explain the volume. The pricing information can explain the value assigned to it. The royalty report shows what the government was told, while the payment history shows whether the actual figures ever reached the amount paid. A corrected report and a corrected payment each have a part in that account.

We also focus on what the company knew when it reported and paid. If you saw actual figures become available, reviewed a reconciliation or raised a concern about an estimate left in place, your account may explain the decisions behind the numbers. Internal correspondence and review records can connect knowledge of a shortfall with what happened afterward.

You may know the production side, the reporting side or the payment side. Our work with you is to understand how that knowledge connects to the royalty obligation and the decisions that left it unpaid.

What Share Is Possible?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Where the Estimate Stopped

If you know why royalty estimates stayed in place after actual figures were available, talk with our whistleblower experts about the unpaid royalties. We work beside you to build the case around the production, reporting and payment decisions, and bring in energy royalty whistleblower lawyers who know the federal leasing system. You know the decisions behind the numbers, and we stay with you through the work of bringing them to light.