An echo of the oil and gas slump is complicating efforts to put the state’s fiscal house in order. Office of Mineral Resources auditors are scrambling to audit 14 bankrupt companies that held state mineral leases in order to ensure the state got what it was owed.
Patrick Courreges, DNR’s communications director, says 14 state royalty payers are in various stages of bankruptcy proceedings that are now being audited by OMR.
One of firms, Century Exploration New Orleans, Inc., holds a mineral lease at the center of DNR whistleblower Dan Collins successful suit against the department (see Page 14 for more on this story).
“There’s a total of $399.1 million in royalty payments that are being audited,” Courreges says in a telephone interview. “These are payments that have already been made, but because the companies have declared bankruptcy, they go to the head of the audit line.”
The amount dwarfs the annual amount of royalties normally audited by OMR.
The nearly $400 million in royalty payments tied to bankrupt leaseholders represents 80 percent of the total royalty payments audited by OMR over a five-year period between 2008 and 2012. According to a September 2013 report on mineral royalty payments issued by the legislative auditor, total field audits on royalties examined by OMR auditors during those years totaled $503.3 million.
Courreges says OMR’s 11-member field audit staff has the job of doing the audits of the bankrupt leaseholders’ payments. He adds that there is no special division focused exclusively on auditing bankrupt leaseholders. Because OMR remains understaffed, work on the audits of the bankrupt firms diverts the auditors from their regular round of audits on royalty payments.
“It causes a kind of ripple effect that you don’t think about when you think of impacts of the downturn,” Courreges notes.
That ripple effect could exacerbate persistent performance problems that have plagued OMR for at least a decade.
In its 2013 royalty payments audit, the Louisiana Legislative Auditor found that the office “did not always ensure that the state received complete, accurate and timely mineral royalty payments during fiscal years 2008 through 2012. As a result, Louisiana may not have received all the royalty revenue owed by companies that extracted minerals from state-owned land and water bottoms.”
That 2013 audit also found that OMR’s audits covered a steadily diminishing percentage of royalty payments over the five-year period it reviewed.
Royalty payments account for about 5 percent of state general fund revenue — money raised directly through sales and income taxes and other direct state revenue sources. Together with severance tax revenue, the state received $816.4 million in mineral revenue during the fiscal year that ended June 30, 2016. In the years before the current oil and gas price slump, mineral revenue topped $1 billion annually. Total General Fund spending in fiscal year 2016 totaled $8.51 billion. (Total state spending was more than $24.5 billion including self-generated funds, statutory dedications and federal funds in addition to the General Fund.)
“Orphaned and abandoned” is a term in the oil patch for wells from which the owner has walked away. That captures the fate of OMR during the Jindal years.
After Marjorie McKeithen left OMR in 2009, three interim appointees headed OMR through 2011, after which point the office was left leaderless. Courreges says by email that the Jindal administration put no one in charge of OMR during his second term; David Boulet was named head of OMR earlier this year by Gov. John Bel Edwards’ new DNR secretary, Thomas Harris.
It was part of a curious pattern of indifference to oil and gas revenue apparent during the Jindal years.
Even as a series of revenue shortfalls triggered repeated mid-year cuts in higher education and health care, the percentage of royalties audited declined, fines and penalties against late payers of royalties were waived by the Mineral and Energy Board, and audit positions went unfilled.
OMR remained short of auditors even as it was given authority to audit severance taxes statewide in 2010. During the time it had that responsibility, severance tax audit revenue fell 99.8 percent, according to a November 2013 report from the legislative auditor.
While programs were being cut because of revenue shortfalls, the Jindal administration was leaving oil and gas revenue on the table.
New DNR Secretary Harris says he came into office viewing OMR as a “place with some low-hanging fruit, where the performance of the department could be improved.”
OMR’s Boulet says he is dedicated to improving the performance of his office but the need to audit bankrupt royalty payers while working short-handed complicates that task.
The time it takes to audit the bankrupt firms varies, depending on the size of the operation, according to Courreges.
“We’ve had audits take from six months to more than a year,” Courreges says.
With companies in bankruptcy court, the auditors are racing to keep up with the court’s schedule. The clock is ticking, the possibility of more bankruptcy fillings remains and the state’s revenue needs remain stark.
Century Exploration New Orleans Inc.
Delta Petroleum Corporation
Dune Operating Company
Energy Partners LTD
Energy XXI GOM LLC
Energy XXI Gulf Coats Inc.
Energy XXI Onshore LLC
Goodrich Petroleum Company
Halcon Resources Operating Inc.
Midstates Petroleum Corp
Milagro Exploration LLC
Northstar Offshore Group LLC
Samson Exploration LLC
Swift Energy Operating LLC