Legal Updates

IBLA Upholds ONRR $3 Million+ Penalty For A Company’s Delay In Correcting Royalty Report Forms

A recent decision of the Interior Board of Land Appeals (IBLA) vividly makes the point that the Department of the Interior considers accurate royalty reporting to be equally if not more important than payment of the proper amounts. In Quinex Energy Corp., 192 IBLA 88 (2017), the operator underpaid royalties on several tribal and allotted leases covering lands on the Uintah and Ouray Indian Reservation in Utah in the amount of $120,242 because it used “erroneous gas prices.” The decision does not explain the reason for the erroneous prices but apparently the underpaid amount was promptly paid upon receipt of the Office of Natural Resources Revenue (ONRR) order to report and pay sent to Quinex. However, it took Quinex between 8 and 22 months to correct the royalty reports on the ONRR-2014 forms that it had filed relating to the royalty underpayments. The ONRR sent civil penalty notices to Quinex assessing penalties in the aggregate amount of $3,217,250 – more than 26 times the amount of the underpaid royalty! The penalty was assessed based on $25 per day for 229 reporting violations (one for each inaccurate line on the 2014 form) that continued for between 8 and 22 months.

The ONRR has statutory authority to assess civil penalties of up to $25,000 per day per violation for knowingly or willfully preparing, maintaining or submitting false, inaccurate, or misleading royalty reports. 30 U.S.C. § 1719(d). Under the Federal Civil Penalties Inflation Adjustment Act of 1990, that $25,000 statutory maximum is now $59,834 (30 C.F.R. § 1241.60(b)(2)). At the time of the events involved in the Quinex case, $25,000 was the maximum penalty, which ONRR reduced, in its discretion, based on the size of the payor (Quinex stated that it had five full-time and four part-time employees). Although there was no allegation that Quinex had behaved willfully, the IBLA stated that it did behave knowingly, because of the significant time between receipt of notice of the order to report and pay and final correction of the reports. The regulations define “knowingly or willfully” to include an act or failure to act committed with actual knowledge, deliberate ignorance, or reckless disregard of the facts surrounding the event or violation. 30 C.F.R. § 1241.3(b). No proof of specific intent to defraud is required as a condition to assessement of a civil penalty for knowing and willful violations of the regulations.

The IBLA specifically held that ONRR is not required to consider the amount of the royalty underpayment in determining the appropriate amount of civil penalties to assess for knowing or willful failure to correct inaccurate royalty reports. Consequently, even a de minimis royalty underpayment could trigger a substantial civil penalty if the associated incorrect royalty report is not timely corrected. Operators who make payments to ONRR for royalties on Federal or Indian leases should ensure that their revenue accounting staffs are trained to respond immediately to any ONRR orders, to bring any such orders to the attention of management or the legal department, and to negotiate with the ONRR for any extensions of time that may be necessary to correct previously filed royalty reports. Because of federal and state statutory deadlines for making royalty payments, revenue accounting staffs often lack the time to focus on correcting prior reports but, in the case of orders from the ONRR to do so, the consequences of failing to timely correct inaccurate reports can be severe.