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Federal and Indian Mineral Lessees May Face Drastically Expanded Civil Penalties for Royalty Reporting Violations

Beveridge & Diamond, P.C., May 21, 2014

On May 20, 2014, the Interior Department’s Office of Natural Resources Revenue (“ONRR”), the federal agency that manages reporting and collection of royalty and other revenues from federal onshore and offshore and Indian mineral leases, proposed to overhaul its civil penalty regulations.  Though ONRR styles its proposal as merely “clarifying” in nature, in fact the changes are numerous and significant.  In sum, ONRR intends to crack down on incorrect reporting by resorting to more severe knowing or willful civil penalties while simultaneously stripping away lessees’ legal and procedural protections.  If adopted, these changes would have profound impacts on all lessees of oil and gas, geothermal, coal, other solid leasable minerals, and offshore wind. 

Some of the key changes proposed by ONRR include:

  • Equating a “knowing or willful” violation with the lowest “gross negligence” standard;
  • Newly defining “maintenance of false, inaccurate, or misleading information,” which is subject to knowing or willful civil (and potential criminal) penalties, to mean providing royalty data to ONRR, later learning it was wrong, and then not correcting it – even if the underlying notice was a non-appealable agency email or communication;
  • Newly defining “submission of false, inaccurate, or misleading information,” which is subject to the same penalties, to mean providing data that you knew or should have known was wrong;
  • Deeming lessee internal recordkeeping issues to be a knowing or willful failure or refusal to permit an audit;
  • Holding a corporation strictly and vicariously liable for its employees’ actions;
  • Insulating from administrative review ONRR’s “discretion” to issue a civil penalty, and otherwise limiting a lessee’s statutory right to a hearing on the record before an administrative law judge;
  • Eliminating a lessee’s option to seek a stay of penalty accrual pending administrative appeal of a civil penalty notice;
  • Curtailing a lessee’s ability to appeal the substantive basis for a subsequent penalty; and
  • Divorcing the penalty amount from the extent of any underlying underpayment.

These regulatory changes, among others, proposed by ONRR arguably are legally suspect in light of ONRR’s statutory and other legal constraints.  Indeed, multiple lessees are presently litigating the agency’s statutory authority to do the very things it now proposes via its new rule.  Public comments on ONRR’s proposed rule are due by July 21, 2014.

Click here for a PDF of this news alert.

Beveridge & Diamond operates at the forefront of emerging ONRR reporting, payment, and civil penalty issues, and counsels clients in attaining compliance and defending enforcement actions.  For more information on ONRR’s proposed rule and how it may impact your company, please contact either Peter Schaumberg at (202) 789-6043 or pschaumberg@bdlaw.com; Jamie Auslander at (202) 789-6009 or jauslander@bdlaw.com; or Don Patterson at (202) 789-6032 or dpatterson@bdlaw.com.  A full copy of ONRR’s proposal is available here.

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