Oklahoma House of Representatives
Media Division
October 24, 2003

OKLAHOMA - Oilfield thefts on private leases reportedly cost the state treasury up to $60 million annually in unreported tax revenue.

As a result, Rep. Fred Perry asked members of the House Committee on Criminal Justice to gather recently at the state Capitol with officials from the Oklahoma State Bureau of Investigation and the Oklahoma Tax Commission. The committee, chaired by Rep. Paul Roan, D-Tishomingo, was searching for ways to reduce oilfield thefts and fraud in Oklahoma. Roan is a retired Oklahoma Highway Patrol trooper.

"This study is important because not only are we looking for justice in terms of people who are breaking the law, but revenue in this state is negatively impacted by the fact that too many people are getting away with stealing oil through 'blue collar' and 'white collar' techniques," Perry said. "And that's what we are attempting to stop."

House Bill 2795 by Perry and signed into law last year authorized the OSBI to assign two additional agents to conduct oilfield fraud investigations. Up to that point, the agency had only one agent to investigate oil patch crimes for the entire state.

Adding two agents to oilfield theft and fraud investigations subtracted from the problem, but it was only half of the equation, said Perry, a member of the House Committee on Energy and Utility Regulation.

"The other half involves identifying where the law can be changed to further cut down on those kinds of thefts." He said in some cases, a change of procedures in state agencies "might be necessary rather than making recommendations to state law."

Officials told the panel that one theft scenario involves small amounts of oil stolen at each of several private leases by an operator, or by an oil reclaimer who provides a service to the operator by removing contaminated oil from the bottom of tanks on the lease property. Records indicate Oklahoma has about 125,000 active oil and gas production sites.

OSBI Director DeWade Langley said he attends law enforcement meetings almost every week throughout the state. "At the end of meetings, we asked about problems relating to oil and oilfield theft," Langley said. "Invariably, they will say engines are being stolen left and right as well as other merchandise taken from oil production sites."

For example, an Apache Production Service of Oklahoma City employee reported $9,300 in equipment was stolen in July from a trailer on a rig site northeast of Cyril.

Langley announced plans to add a fourth OSBI agent to the oilfield unit. "To do 24-hour surveillance on one sight is unbelievably labor-intensive," Langley said. "Four people aren't going to be able to do that for very long at one site. And the state has thousands of oilfield sites."

Langley suggested lawmakers seek a funding stream to pay for training of law enforcement officers. "I have no problems whatsoever about letting the bad guys pay for the system, which could include more auditors, more agents and more equipment."

Richard Barnett, who has a quarter-century of experience in the oil industry, said oil stolen from his own lease caused him to wonder how thieves were getting away with the crime.

"Texas has 23 oil reclaimers and two or three times as many oil wells as Oklahoma," he said. "But the Sooner State has approximately 212 oil reclaimers because it's a lucrative business, and a lot of money is going under the radar."

Barnett agreed that adding agents to investigate oilfield theft and fraud was a positive step. He said oil is stolen from private leases because no one is out there with the proper kind of knowledge watching for thefts and investigating where the oil is going. "Oil has no serial number and it can't be traced," he said. "Who do you go to when your oil is stolen?"

Barnett said the OSBI and the state Tax Commission can help find ways to "close loopholes that could be costing the state $30 million to $60 million in lost tax revenue in this area alone."

"Who is stealing oil?" asked Rep. Lucky Lamons, D-Tulsa, a retired metropolitan police officer. Barnett said an unscrupulous operator who owns royalties at several sites and has oil to sell, or a reclaimer who is licensed by the state
might fudge on paperwork. "We know there are people under the name of reclaimers who are laundering oil because they have the ability to milk an oil site and leave with a product on which no taxes are paid," Barnett asserted.

Of the more than 200 oil recalimers, records indicate fewer than half of them, about 96, are actually reporting state tax revenues to the Oklahoma Tax Commission. "That should send up a red flag." Robert Olson, a geologist with more than 20 years in the oil industry and an Oklahoma businessman, told the legislative panel that up to 25 percent of the state's oil revenue could be lost. "I thought myself that percentage is too high, so I made a graph and anything over 25 percent didn't fit the curve," Olson said. "Although that figure might be high, it still gives you an idea of the problem."

Olson said a reclaimer would have to sell a minimum of 20,350 barrels of oil annually just to stay in business. If no severance tax were paid, the state could lose up to $28,836 from each reclaimer.

"Multiply that by 200 oil reclaimers and approximately $5,767,200 in minimum severance taxes isn't reported," he said.
Olson said there are numerous ways of selling oil without paying state taxes. "For example, stolen oil can be transported out of the state and swapped for high-quality distillate in Texas or Kansas," he said. "It can be shipped back to Oklahoma and blended with other oil, which turns it into a pipeline quality product, and no severance tax is paid on any of it."
Bob Terhune is one of the OSBI special agents assigned to oilfield theft and fraud. "Ninety-nine percent of the people in the oil industry are honest," he said. "I deal with the 1 percent who are either operating in a gray area of the law, or who are out-and-out crooks."

Terhune is a 15-year veteran of the OSBI and has 20 years' experience with the Oklahoma City Police Department.
Terhune said oilfield theft is not a garden variety type of crime. "You can't steal something in the oil patch and take it to a pawn shop," he said. "It must be sold back inside the industry." He gave an example of a person who is in prison for "fencing" $750,000 worth of crude oil from a dry well. "That well was incapable of producing oil because it didn't even have piping. It was all done on paper." Terhune said they were able to introduce that case into the federal court system, and the man was convicted of mail fraud."These guys in the oil industry protect one another," Terhune said.

"They even have their own language. If they suspect you are not one of them, they will lie to you all day long."
Oil industry representatives recommended educating district attorneys and local law enforcement agencies in how oilfield thefts and fraud is conducted in the state. "I think a team approach among the Oklahoma Corporation Commission, state Tax Commission and the OSBI would offer the biggest bang for the buck," Langley said. "But I urge the Criminal Justice Committee to consider a designated funding stream of some kind to combat oilfield theft and fraud."

A representative of the Oklahoma Tax Commission told the study panel that a single audit of an Oklahoma reclaimer is in progress. He said the Commission does not have the resources or manpower to audit those suspected of oilfield theft or fraud.
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Scott Hancock
Media Specialist
Oklahoma House of Representatives
1-800-522-8502 ext 422  ¶ 8:41 PM