Audit finds inconsistent royalty rates, incorrect payments and missing documentation
A legislative audit heard in a committee Tuesday found glaring inconsistencies in the application of royalty rates for mineral extraction companies operating on the Great Salt Lake, in addition to incorrect payments and missing documentation.
The audit of the Utah Division of Forestry, Fire and State Lands — requested by Rep. Casey Snyder, R-Paradise — noted that some improvements had been made by the state agency, but there remains a lack of oversight of companies extracting five minerals leading to violation of leasing agreements.
Revenues from the extraction companies go into a state account, of which a little over a third were specifically spent to benefit the Great Salt Lake. It is the largest of the eight bodies of sovereign lands in which the division has oversight.
House Speaker Mike Schultz, R-Hooper, noted in the legislative committee hearing that it was actually the division itself that pushed for the audit to help it correct mistakes of the past and set a clearer path going forward.
He commended the division for that move.
Jamie Barnes, division director, said she was not making excuses, but a lot of the problems happened during a time that preceded her and she hopes to get that fixed. She added provisions in HB453, which passed during the last legislative session, will greatly aid the division. Barnes agreed to the recommendations in the legislative audit and said it has worked to foster better working relationships with operators on the lake.
That work between operators and the regulatory agency is starting to make positive impacts, she said, especially given the legislative support.
Over the years, as a result of the lack of the oversight determined in the audit, there have been financial losses in the revenue that should have gone to the state division, the audit said.
The law allows companies to take deductions in royalty rate calculations for certain expenses. Even though an internal audit by the division conducted in 2011 questioned if storage was an appropriate deduction, the legislative audit found a lack of clear guidance or any adjustments made at the time.
“Consequently, we found that the mineral extraction operator in this example has continued to deduct storage costs from royalties owed to the state even after discontinuing production. Annual storage deductions averaged $560,000 for a cumulative five-year total of $2.8 million,” the audit said, adding that “No other mineral extraction operators apply storage deductions to their royalty rate calculations.”
Rate calculations an ongoing problem
The legislative audit said that for more than a decade, the division has been made aware of specific concerns with mineral royalty calculations and correct royalty payments regarding minerals that have been mined from the brines of the Great Salt Lake.
The Department of Natural Resources’ internal audit function conducted six internal audits of mineral extraction operators over a 10-year period between 2007 and 2017. Collectively, these audit reports set forth 61 recommendations, 32 of which specifically addressed problems with royalty calculations and the ensuring of correct royalty payments.
Still, the problem persists today against a backdrop in which this audit found memorandum of understanding agreements left unsigned and a continued pattern of inequity in royalty rate calculations.
In addition, in one instance, a royalty rate agreement was not reviewed at all during a three-year period and some operators have agreements negotiated over 50 years ago.
“While we recognize the division’s position and obligation to adhere to the antiquated provisions in these royalty and/or lease agreements, there are still regulatory actions that FFSL could have taken to ensure compliance,” the audit said.
It noted a lengthy history of royalty agreement violations yet only one instance in which money was required to be paid.
The division will hire a person who manages royalty oversight and agreements, but Barnes noted finding a person with the required skills is a challenge because it is such a complex field. However, operators are on board with upcoming administrative changes and pending ways to ensure equity.
“We’ve seen a complete shift with the mineral companies on the lake. We’ve went from it being completely one-sided to them working hand in hand with us. The legislation that came out last year I think made that shift with them and we’re making progress — we’re doing good things,” she said. “And the tone has changed. They want to save the lake. They want to still operate out there. And they realize that without a lake, there is no success for anyone.”
