Louisiana Voice

By MIKE STAGG (Independent filmmaker, citizen activist, political strategist – Special to LouisianaVoice)

For the past seven years, as Louisiana has lurched from one fiscal crisis to another, the State of Louisiana has paid the oil and gas industry $2.4 Billion in severance tax exemptions. Despite that massive transfer of public wealth into private hands, the oil and gas industry used its influence inside the Department of Natural Resources and the Jindal administration, to limit—and for three years shut down—audits that would have revealed whether the industry’s severance taxes and royalty payments to the state were accurate.

These facts have been hiding in plain sight, contained in five performance audits of the Department of Natural Resources and the Louisiana Department of Revenue conducted by the Legislative Auditor since 2010. Two of those audits focused on royalty collections from oil and gas produced on state-owned lands and water bottoms. Another focused on severance tax collections; yet another dealt with mineral leases handled by the State Mineral and Energy board, while the fifth audit examined how the Office of Conservation has handled the orphaned and abandoned well cleanup program.

The cozy relationship between DNR and the oil and gas industry is explicit in the department’s regulation of the industry. That coziness, when extended to state finances, has proven disastrous for the Louisiana treasury and its residents. DNR is responsible for collecting oil and gas royalties, which account for roughly seven percent of state General Fund dollars, or approximately $800 million per year.

For a three-year period, between July 2010 and July 2013, DNR had jurisdiction to determine the accuracy of severance taxes and royalty payments.

And DNR let industry have its way.

Audits on royalty revenue dropped. Audits on severance tax revenue all but stopped, even as the state’s financial condition continued to worsen. In short, when it came to providing rigorous oversight to ensure that the royalty and severance tax payments were accurate, DNR’s Office of Mineral Resources deferred to the oil and gas industry while programs that serve the citizens of Louisiana were cut, primarily in healthcare and higher education, the unprotected portions of the state General Fund.

DNR’s relationship with the oil and gas industry is a blatant example of regulatory capture. Regulatory Capture is a form of political corruption that occurs when an agency, created to act in the public interest, advances instead the special concerns of the industry it is charged to regulate.

Severance taxes are the constitutional expression of our, as Louisiana citizens, shared claim on our state’s vast mineral wealth. Exempting severance taxes negates the public claim on that mineral wealth and undermines our ability to invest in ourselves as a state.

Severance tax exemptions are direct payments from the state to the oil and gas producers after the companies have submitted their exemption certificates. Royalties are the property owners’ share of the proceeds from the sale of oil and gas produced from wells on their land. For purposes of this story, royalties are the state’s share of the revenue from oil and gas produced on state-owned lands and water bottoms after severance taxes have been paid.

Since the mid-1980s, Louisiana Department of Revenue has published an annual report on tax exemptions called “The Tax Exemption Budget.” In that document, the department identifies each tax exemption and quantifies the cost of each exemption to the state.

It makes clear that tax exemptions are in fact a spending of state funds — here’s how the LDR explains it in every report: “Tax exemptions are tax dollars that are not collected and result in a loss of state tax revenues available for appropriation. In this sense, the fiscal effect of tax exemptions is the same as a direct fund expenditure.”

Between 2008 and 2014, according to the Tax Exemption Budget, the State of Louisiana paid oil and gas companies more than $2.4 Billion in severance tax exemptions. Those checks went out at the exact same time that our legislature cut funding for programs like aid to families of children with disabilities, behavioral health programs, home health care, and programs that assisted victims of domestic violence. During that same period, state funding for higher education was also cut by more than $700 million as the tuition and fees paid by those attending technical colleges, community colleges, and state universities were jacked up to cover the difference.

The first performance audit on royalty collections was released in July 2010. Royaltieshttps://app.lla.state.la.us/PublicReports.nsf/B6B5DE331E9D48818625776E005CFDA5/$FILE/00018070.pdf The Legislative Auditor found that DNR’s Office of Mineral Resources took a lackadaisical approach to verifying the accuracy of royalty payments from the 1,888 active mineral leases on state-owned lands and water bottoms.

The Legislative Auditor noted that severance taxes and royalties are connected, that both are dependent on the amount of oil and gas produced, as well as the price of the resource.

Desk audits compared the volume of oil and gas sold to the volume of oil and gas produced, which ensures that royalty payments are properly calculated. These audits also help ensure that production wells on state lands are submitting properly calculated royalty payments.

The Legislative Auditor found that the Office of Mineral Resources (OMR) had not conducted a single such audit in a decade. Despite the Auditor’s recommendation that it resume these audits, OMR waited another three years before getting around to doing so.

The Legislative Auditor also found that OMR did not compare royalty reports against severance tax reports filed with the state Department of Revenue, nor did it compare royalty reports to production reports submitted elsewhere in DNR.

In its response to the Legislative Auditor’s Royalty performance audit findings, on June 24, 2010, DNR announced that “As part of the Streamlining Commission’s recommendations, OMR will take over LDRs severance tax field audit program and the two audits will be integrated beginning July 1, 2010.”

In September of 2013, the Legislative Auditor released a follow-up performance audit on royalty collections. https://app.lla.state.la.us/PublicReports.nsf/DB918AD8E33411F286257B490074B82A/$FILE/00031C97.pdf

The auditors were dismayed to find that the revenue produced by OMR’s audits had fallen below the levels reported in 2010.

The Auditor also found that that the State Mineral and Energy Board had waived 45% of the $12.8 million in penalties that were assessed against companies by OMR for late payment of royalties.

Neither the Office of Mineral Resources nor the State Mineral and Energy Board seemed at all concerned about the fiscal impact their indifference to generating revenue had on the programs that Louisiana residents depend on. Their primary concern was with not inconveniencing their friends in the oil and gas industry.

The Legislative Auditor conducted an audit on severance tax collection procedures in the

Louisiana Department of Revenue in 2013 but, because severance tax audit functions had been transferred to the DNR in 2010, auditors had to return to the Office of Mineral Resources close on the heels of the second royalty collections audit. https://app.lla.state.la.us/PublicReports.nsf/AC044A6D3709B90C86257BE30065348B/$FILE/000351F7.pdf

In this audit, the Legislative Auditor found that oil and gas industry complaints about the LDR’s use of GenTax software (which identified possible nonpayers of severance taxes) led first, to LDR shutting off the software, and second, audit power being transferred to DNR.

The scale of the oil and gas production not audited as a result of that shift was staggering. DNR’s field audits ignored oil and gas production on private lands — which comprises 98.1% of all oil and gas leases in Louisiana — for a three-year period.

Revenue from severance tax audits fell 99.8% from the levels produced by the Department of Revenue once responsibility was transferred to the Office of Mineral Resources. The actual dollar amount fell from $26 Million in 2010 to $40,729 in Fiscal Year 2012.

For the three-year period that DNR’s Office of Mineral Resources had responsibility for severance tax audits, the industry essentially operated under an honor system.

Prior history shows why this was a problem. In the late 1990s, the Mike Foster administration filed lawsuits against more than 20 oil and gas companies claiming they had shortchanged the state by as much as $100 million on severance tax payments. Now, for three years as recurring revenue shortfalls continued, the Office of Mineral Resources ignored that history.

During this time, the Haynesville Trend emerged as the most productive shale gas field in the country.

Even though the severance tax exemption on horizontal drilling meant that the state was denied severance tax revenue for much of that play, companies still managed to game the exemption system at taxpayer expense.

Under the rules for severance tax exemptions, the state pays back the taxes already paid once it receives the exemption certificate from the company — plus “Judicial Interest” which in the period covered by the audit averaged about 4.5%.

That is, the state had to dip into non-exempt severance tax payments in order to cover the interest costs on those certificates that the companies chose to sit on for several months.

The Audit found that over the course of four fiscal years running from 2009 through 2012, the Department of Revenue issued 13,818 severance tax refund checks totaling $360,190,583. An extra $23,859,012 in interest was tacked on to that. https://app.lla.state.la.us/PublicReports.nsf/CF6244B77E3A958686257C30005E80B1/$FILE/000368DA.pdf

In addition, the Auditor found that the Department of Revenue overpaid severance tax exemption refunds by $12.9 million between July 2010 and May 2012.

The decline in audit revenue, the interest paid to companies on the gaming of the severance tax exemption process, the overpayment of severance tax exemption refunds, the decision by the State Mineral and Energy Board to waive 45% of fines for late payment of royalties combined to benefit the industry at taxpayer expense to the tune of $68 million.

These gifts to the oil and gas industry were made at a time when the industry was already receiving $2.4 Billion in tax exemptions and at a time when every dollar the state did not collect translated into a cut to programs that Louisiana residents depended on.

The Auditor also pointed out that hiring additional auditors within DNR and LDR would produce a great return on the state’s investment. Each auditor costs a department between $50,000 and $60,000 per year, but they bring in an average of $1.3 million per year. LDR said it had requested additional auditors in its budgets but they were never approved by the Jindal administration.

Oil and gas companies control all of the information used in the severance tax and royalty payment process. The industry has used this power to its advantage and to the state’s detriment.

Vigilant auditing can close that information gap.

The Office of Mineral Resources has shown little interest in that kind of work. DNR’s abdication of its oversight role on royalty revenue has had an outsized impact on Louisiana because of the role that revenue plays in state finances. When added to the three-year period when DNR failed to perform severance tax audits, the agency has likely cost the state hundreds of millions of dollars over the past seven years.

That is corruption.

Not all of this went unnoticed. In the 2014 legislative session, Sen. Rick Gallot (D-Ruston) and Rep. Joe Harrison (R-Gray) introduced concurrent resolutions to order LDR, DNR and the Legislative Auditor to agree upon a means to conduct a thorough audit of oil and gas production, severance taxes and royalty payments. Gallot’s resolution passed the Senate by a vote of 35-0. https://app.lla.state.la.us/PublicReports.nsf/D6A0EBE279B83B9F86257CE700506EAD/$FILE/000010BC.pdf

But by the time the resolution reached the House floor in early June, the oil and gas industry and the Jindal administration recognized the threat the audit posed, so they joined forces to kill it. SCR 142

The resolution had to be killed to keep the secret.

In the midst of a prolonged and deepening fiscal crisis, the Jindal administration and the industry did not want legislators and the public to question whether the severance taxes and royalties paid to the state were accurately calculated.

The Department of Natural Resources betrayed the trust of the people of this state. It failed its fiduciary responsibility twice; first, as collector of royalty payments, and again during the time it served as chief auditor of severance tax collections. It has repeatedly put the needs of the industry above the needs of the people of this state.

For the oil and gas industry, $2.4 Billion in severance tax exemption payments were not enough. Its greed is so great that, in a time of fiscal constraints on state government, it went out of its way to cheat the state out of still more money. It used its power and influence in the Department of Natural Resources and its ties to the Jindal administration to do so.

By these acts, the oil and gas industry has shown itself to be unworthy of the trust we have placed in it.

For Looting Louisiana in our time of fiscal need, the oil and gas industry must be stripped of its severance tax exemptions. Under the Louisiana Constitution, we are entitled to the full benefits of this state’s mineral wealth.