Natural Gas Royalty Settlements: The Deductions Behind the Payments

Chevron, Mobil and Devon reached natural gas royalty settlements over allegations that they understated gas value, took improper deductions or left gas out of royalty reports. If you know the compressor costs, affiliate sales or purchaser statements behind those reports, you may recognize the decisions that made the royalty smaller.

This page follows the gas case that produced separate company settlements and the later gas and carbon dioxide matters. The older oil-pricing settlements involving some of the same companies arose from a separate proceeding. The company name alone does not tell you which payment or practice is at issue.

One Gas Case, Separate Company Settlements

A whistleblower case filed in 1996 brought allegations of natural gas royalty underpayments by multiple companies into federal court in Texas. The Justice Department’s later announcements connect Chevron, Mobil, Devon and the other gas-series settlements to that case.

In its Chevron announcement, the Justice Department alleged improper deductions for boosting gas to pipeline pressure, affiliate transactions that reduced reported value, and processed gas reported as unprocessed. The Justice Department alleged that Mobil used affiliate pricing and excessive transportation deductions. Devon’s earlier settlement concerned its predecessor PennzEnergy, whose alleged deductions and compressor-fuel reporting supplied a different part of the same case.

The Justice Department said the alleged underreporting covered March 1988 to November 2008 for Chevron. For Mobil, it covered March 1, 1988, to November 30, 1999.

Which Natural Gas Royalty Settlements Involved Chevron, Mobil and Devon?

Chevron and Mobil resolved their gas claims in separate settlements, and Devon’s predecessor settlement was followed by a distinct federal-land gas agreement. The table keeps each company’s payment and alleged practice together, including the earlier settlements described in later Justice Department announcements.

Shell’s entries concern different production: offshore gas and liquids in the earlier payment, onshore federal gas in the later settlement. The Dominion entries also name different companies.

Why a Whistleblower Share Can Apply to Part of a Settlement

Total’s settlement combined False Claims Act allegations with the Department of the Interior’s separately pursued administrative claims. Only $92,000 was allocated to the claims pursued through the whistleblower case, and the announced share was 25% of that allocation. The allocation explains the award far better than the headline does.

Devon’s predecessor settlement specified a 26% share for the whistleblower’s heirs. That percentage belongs to the PennzEnergy gas claims resolved in the earlier agreement.

Dominion and Marathon illustrate a different distinction. The Justice Department announced about $1.8 million for the whistleblower’s heirs across those settlements together. It was a combined share tied to separate company payments.

Other announcements put substantial awards beside the gas claims: about $12.3 million for the heirs in Chevron’s settlement and $5.3 million in the BP settlement. Anadarko’s announced share was $1.95 million, while its settlement also resolved additional administrative claims.

Gas Deductions Can Change the Value Without Changing the Gas

The Justice Department alleged that Chevron reported processed gas as unprocessed and used affiliate transactions to reduce reported value. Unprocessed gas, residue gas and gas plant products follow different valuation paths, so plant output and the downstream sale matter to the royalty report. If you know those records, you may recognize the reporting switch. We see the absurdity in the department’s allegation: processed at the plant, unprocessed on the royalty report.

Compression creates another comparison. In the PennzEnergy allegations resolved by Devon, the Justice Department identified both the deduction for boosting gas to pipeline pressure and the failure to report gas used to fuel the boosting compressors. The compressor’s operating costs and its fuel use affected different parts of the royalty account. An employee who knows the equipment and fuel records may understand both.

Gathering, transportation and processing also describe different functions in the physical system. The system map, service contract and cost allocation explain what a charge paid for, while the applicable lease and valuation rule determine its royalty treatment.

Later Cases Follow the Purchaser and the Marketer

Later gas settlements reached costs embedded in third-party charges, reduced purchaser prices and false marketer statements. These cases show why the person who understands the royalty shortfall may work outside the producer’s royalty department.

Devon and Citation’s Marketable-Condition Costs

Devon’s later agreement concerned payments to third parties for transportation and processing that allegedly included the cost of putting gas in marketable condition. The Justice Department said lessees had to bear that cost without charging it to the United States. The gas came from federal lands in Wyoming and New Mexico, a different scope from the earlier predecessor settlement involving federal and Indian royalties.

Citation Oil & Gas agreed to pay $2.25 million in December 2017 over the same kind of cost issue on federal Wyoming gas. The Justice Department alleged that fees paid to other companies included marketable-condition costs that Citation deducted from royalty value. For someone reviewing those fees, the service behind the invoice matters as much as the invoice’s label.

Great Western’s Lower Sales Price

The U.S. Attorney’s Office for the District of Colorado reported a $600,000 recovery from Great Western Drilling in June 2018. Its allegations concerned federal gas in New Mexico and a cost that reached the royalty calculation through the purchaser’s price.

The U.S. Attorney’s Office alleged that purchasers paid Enterprise Processing for transportation, compression and processing, reducing the sales price Great Western received. It alleged that Great Western paid royalties on that reduced price without crediting the government for the portion attributable to making the gas marketable. In that account, the purchaser paid the processor. The alleged royalty reduction still reached the public’s account.

B. Charles Rogers Gas and False Liquids Statements

B. Charles Rogers Gas Ltd. marketed gas in the San Juan Basin of New Mexico and southern Colorado. In its May 2019 announcement, the Justice Department alleged that transaction statements sent to producers understated the volume and value of natural gas liquids the marketer purchased. Producers with federal leases then underpaid royalties, according to the department.

The company and the settling individuals admitted responsibility for making, using or causing false records material to producers’ royalty obligations. The company and its owners agreed to pay $3.575 million, while a gas supply manager employed by a distributor separately agreed to pay $800,000. The false-record admission reaches an upstream source of the royalty figures: the statement the producer received from its buyer.

XTO’s Gas and Carbon Dioxide Claims

XTO Energy’s 2023 settlement agreement required a $16 million settlement payment and separated the government’s allegations by product and lease group. It covered alleged marketable-condition deductions on federal onshore and Indian leases, a separate offshore deduction claim, carbon dioxide transportation deductions, and unpaid royalties on product processed at the Castle Valley plant in Utah.

The agreement treated the carbon dioxide transportation costs separately from the marketable-condition allegations. For an insider reviewing allowances or plant accounts, that distinction points to the particular product, cost and production period behind the reported value. A general description of processing costs would lose that detail.

Louis Dreyfus and Discounts on Gas That Could Move

Louis Dreyfus Energy Services paid $4,084,000 in the settlement announced in July 2012. The company had bought gas from Interior under contracts tied to federal Gulf of Mexico production. The Justice Department alleged that it claimed pipeline-constraint discounts on days when it could ship the gas.

The alleged discount required a complete or near-complete pipeline constraint that prevented transportation. If you worked with pipeline movements or gas purchases, the shipping record could explain whether the claimed constraint matched the day’s business. In the department’s account, the gas could move. The discount stayed put.

Is the Royalty Owed to the United States, a Tribe or a Private Owner?

The royalty is owed according to the mineral ownership and lease: the United States for federal minerals, a tribe or individual Indian beneficial owner for Indian minerals, or the private lessor for private minerals. Federal administration of Indian royalties preserves the Indian owner’s interest. A release covering federal and Indian leases therefore reaches different owners’ money.

The operator, marketer, reporting designee and royalty payor may each have a different role. The Office of Natural Resources Revenue’s reporting handbook distinguishes the lease, production, sales and reporting information that connects those roles. For someone in the business, identifying the owner and the report behind the payment gives a suspected shortfall its meaning.

What the Gas Settlement Cases Mean for an Insider

The useful evidence connects the physical gas to the value and deductions reported for the same lease and production period. Production and disposition records show what came out and where it went. Purchaser statements and plant accounts explain volumes, products and sales value. Allowance workpapers show which costs reduced that value.

Report versions and adjustment entries then show what the company changed, while the payment account shows what it remitted. The original report, reversal and replacement can explain a discrepancy that disappears in the latest version alone. Someone who prepared or questioned those entries may know how the decision traveled from the operating records into the royalty account.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We connect your knowledge of the gas business to the reports, decisions and royalty obligation that could support a case. Our page on reporting energy and environmental fraud explains how we approach that conversation with you.

You Know What Went Into the Royalty Report

If you recognize the deduction, purchaser statement or missing gas behind these cases, talk with our natural gas royalty whistleblower experts. We develop the case with you, bring in energy royalty whistleblower lawyers who understand gas valuation and reporting, and stay beside you through the decisions ahead.