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Applicability of Six-Year Federal Contract Statute of Limitations to Department of Interior's Federal and Indian Royalty Audit and Collection Procedures

R. Carol Harvey, Oil and Gas Operations in Federal and Coastal Waters (1989)

This paper addresses the United States Department of the Interior's (“DOI”) current audit strategy for federal and Indian leases.

Historically, the DOI adhered to the federal six-year statute of limitations applicable to contract actions in auditing and making claims for royalties allegedly due.

Recently, however, the DOI departed from its past practice of auditing leases within six years such that claims for alleged royalty underpayments could be asserted in accordance with the statute of limitations. In March 1988, thirteen lessees, who account for more than 80% of all royalties paid to the government, received audit notices covering federal offshore, onshore, and Indian leases for the period 1980-1986. The DOI is also routinely issuing self-audit orders and making claims for royalties allegedly due for periods dating back more than six years.

These new practices, which render the six-year statute of limitations meaningless, have far reaching implications for the DOI and lessees.

This paper examines relevant statutes, their legislative history, and the DOI's past and current royalty audit policies and procedures in regard to the six-year federal contract statute of limitations. It also discusses the recent negotiations between certain companies and the DOI regarding its audit strategy and procedures. Finally, it addresses the case law and