The Department of the Interior’s Office of Natural Resources Revenue (“ONRR”) accounts for and collects royalties owed on production from federal and Indian mineral leases onshore and on the Outer Continental Shelf (“OCS”). ONRR issued a final rule on August 1, 2016 (81 Fed. Reg. 50306) amending its civil penalty regulations for enforcing those obligations under the Federal Oil and Gas Royalty Management Act (“FOGRMA”),

30 U.S.C. § 1719. The new regulations substantially enlarge ONRR’s civil penalty authority under its regulations in 30 C.F.R. Part 1241, subjecting more lessees to knowing or willful violations and immediate, substantial civil penalties without notice from the agency or opportunity to correct. ONRR’s civil penalty regulations apply to oil and gas, coal, and geothermal lessees, and renewable energy lessees on the OCS.

FOGRMA’s Civil Penalty Hierarchy

Congress enacted FOGRMA in 1983, and established a tiered system of civil penalties with the amount of penalties escalating with the severity of the violations. Historically, ONRR pursued most violations under 30 U.S.C. § 1719(a) and (b), which authorize ONRR to impose up to $11,744 per day in civil penalties for any violation of FOGRMA, the mineral leasing laws, lease terms, or regulations, including the obligation to correctly report and pay federal and Indian royalties. Under these provisions, however, ONRR first must provide the lessee formal notice of the violation and an opportunity to take corrective action. If the violation is corrected, no penalties may accrue.

ONRR now proposes to broaden the types of violations triggering FOGRMA’s more severe civil penalties. Congress reserved these penalties for specific, “knowing or willful” violations, including a failure to pay royalties at all or to permit an inspection or audit (30 U.S.C. § 1719(c)), or for the physical or paper theft of oil and gas (30 U.S.C. § 1719(d)). Section 1719(d) violations can trigger civil penalties of up to $58,871 per day per violation. FOGRMA does not require that ONRR provide any notice or an opportunity to correct these “knowing or willful” violations before civil penalties accrue.

FOGRMA also prescribes that no civil penalty may be assessed before the lessee has an opportunity for a hearing on the record (30 U.S.C. § 1719(e)). A lessee that receives a penalty notice is entitled to a formal hearing before an Administrative Law Judge (“ALJ”) within the Department.

ONRR’s New Civil Penalty Rules

While purporting that it is merely “clarifying and simplifying existing regulations,” ONRR is adopting entirely new regulatory provisions that will substantially expand the scope of violations subject to immediate knowing or willful civil penalties. The Agency will now have greater ability to circumvent using the non-knowing or willful civil penalty provisions that require ONRR to first provide notice of a violation, and an opportunity to correct that violation, before any civil penalties may be assessed. ONRR is expanding its knowing or willful penalty authority by adopting the following changes to its rules:

  • Failure or refusal to permit an audit under § 1719(c) now includes a lessee’s refusal to keep, maintain or produce documents.
  • ONRR is redefining § 1719(d)(1) which applies to a lessee that “knowingly or willfully prepares, maintains, or submits false, inaccurate, or misleading reports, notices, affidavits, records, or data to the agency.” Specifically, a lessee now “maintains” erroneous royalty reports whenever it provides information to an ONRR data system, later learns the information was inaccurate (by either a formal notification from ONRR or an informal communication such as an email), and fails to correct that information or other reports on ONRR’s data system. Violations also now extend to other submitted information that the lessee knows, or should know, contains the “same” inaccurate information.
  • ONRR also broadened knowing or willful submission under
    § 1719(d)(1) to include circumstances where a lessee learns of and corrects a reporting error, but makes the same error in a later royalty report, whether on the same lease or any other lease.
  • “Knowing or willful” is defined for the first time as a low threshold including actual knowledge, deliberate ignorance, or reckless disregard, requiring no proof of specific intent to defraud the government of royalty due.
  • Lessees may be held responsible for the knowing or willful acts of their employees or “agents,” defined as any person with actual or apparent authority to act for the lessee.

ONRR adopted other changes to the civil penalty regulations as well. While ONRR is continuing to allow motions to stay accrual of civil penalties pending appeal to the ALJ, that stay is forfeited and penalties are reinstated retroactively if the ALJ later determines on the merits that the lessee’s defense is “frivolous.” Another change is that in determining the size of a penalty, ONRR will consider the size of the lessee’s business, but will not consider the royalty consequence of the underlying violation, thereby allowing sizeable civil penalties even for a reporting error that resulted in an overpayment of royalty to the government.

Armed with these new regulations, federal and Indian mineral lessees should anticipate that ONRR will no longer resort to the non-knowing or willful penalty provisions that require ONRR to provide formal notice and opportunity for correction before any sanctions may be imposed. Rather, ONRR will seek to fit even relatively minor violations or paperwork errors within the scope of knowing or willful actions, and impose immediate and correspondingly higher sanctions.