Lawsuits filed by oil and gas lessors against producers, alleging underpayment of royalties, are becoming more common. The recent wave of lawsuits against Chesapeake Energy is just one example Both the federal government and lessors in Texas and other states have alleged that resource producers often use questionable accounting techniques, such as deducting post-production costs, to avoid paying the full amount of royalties due.
For their part, oil and gas producers usually claim they are following the terms of their leases. However, many producers have agreed to higher payments in response to demands or lawsuits by lessors.
The current wave of lawsuits and other disputes may owe its origin in some part to one Texan who made a mission of uncovering alleged fraud in oil and gas royalty payments. In 1996, Harrold Eugene Wright filed lawsuits against some of the largest oil companies in the United States, claiming contract fraud. He battled the producers until his death in 2008.
Elizabeth Ann Wright, Harrold Wright’s stepdaughter, told Thomson Reuters that the man began his career as a “wildcatter,” prospecting for oil by digging wells in untested areas.
Wright testified numerous times in Washington before the Senate Finance Committee; at one session, he claimed to have overheard an oil executive say that lessors were often unaware of what royalties they were owed, and that companies could pay whatever amount would satisfy them.
According to his stepdaughter, Wright took what he heard to heart. ExxonMobil had wells on land that Wright owned, and with his industry experience he was able to roughly calculate the royalties he was owed. He asked ExxonMobil for more money and was sent a check for $25,000. According to his stepdaughter, he then asked for more money and received another check. Wright was not placated but outraged at the scale of what he considered to be fraud.
In 1996, Wright sued over a dozen large oil and gas companies on behalf of the U.S. government under the Federal False Claims Act, which allows citizens to file such fraud actions and share in the recovery. Wright’s lawsuits alleged that producers were underpaying royalties to the government from wells on federal and tribal land. Several of the suits were settled for tens of millions of dollars.
Today, lessors who are considering filing underpayment disputes may wish to thank Wright for some of his pioneering efforts in this area.