Audit: State could be losing oil royalty money

The Department of Natural Resources hasn’t done a consistent job of collecting royalties owed to the state from oil and gas activity, possibly leaving millions of dollars on the table, according to an audit released last Monday.

Legislative Auditor Daryl Purpera’s office said lax reviews by the department’s Office of Mineral Resources could have cost the state cash that it was owed and that would have helped cope with budget shortfalls in recent years.

“We determined that OMR did not always ensure the state received complete, accurate and timely mineral royalty payments,” the audit says.

The review covered five budget years from 2007 to 2012.

The Department of Natural Resources agreed with most audit findings, and said it will consider improvements recommended by the auditor.

Companies must pay the state mineral royalties when they extract oil and gas from state-owned land or water-bottoms.

Royalty payments brought in $537 million during the last budget year, and they represent about 7 percent of the state’s general fund income annually, making it one of Louisiana’s largest non-tax revenue sources, according to the audit.

The Office of Mineral Resources works with the State Mineral and Energy Board to collect and audit the royalty payments, and the performance review by Purpera’s office questions whether OMR was aggressive enough in its collection efforts.

The audit says the number of internal reviews over collections has been shrinking, with the percentage of royalties audited in the field dropping from 23 percent to less than 13 percent over five years, which could have allowed underpayments or non-payments to go unnoticed.

As the field audits fell, the amount of underpaid royalties identified by the state also fell.

The Office of Mineral Review blamed the drop on employee turnover and a change that moved the audit responsibility to its office from the state revenue department, the review says.

The audit says the state failed to collect $1.7 million in royalties from companies that incorrectly deducted severance taxes owed to the state from their royalty payments.

Also, according to the audit, state officials didn’t impose penalties on some companies that made late royalty payments and waived another 45 percent of the $12.8 million in penalties assessed.

Robert Harper, executive administrator for the state mineral board, submitted a written response to the audit for the Department of Natural Resources. In it, he said penalties not billed for late royalty payments represented less than 1 percent of the total interest and penalties collected during the time.

Penalty bills “have since been issued and the penalties have been collected. Additional review procedures have been implemented to ensure that no penalty assessments are missed,’’ Harper wrote.

But he disagreed with the audit’s suggestion that the penalty waivers represent lost income for the state. He said the mineral board issues waivers to encourage voluntary compliance, which he said cuts litigation and audit costs for the state.

On the improper calculation of royalties tied to severance tax payments, Harper disagreed with the audit’s assertion that the incorrect deductions were a widespread or systemic problem, saying an online reporting system has eliminated the risk for such errors.