The True Story Of Koch Oil’s Multimillion-Dollar Swindle
Oklahoma ranch house, via Flickr.
At some point in 1987, Thurmon Parton’s royalty checks for the three oil wells he inherited from his mother suddenly dropped from $3,000 a month to a little over $1,000. He and his sister, Arnita Gonzalez, members of the Caddo tribe, lived near Gracemont, Oklahoma, a town of a few hundred people on a small grid on the prairie.
Those modest royalties were the only source of income each of them had. The county where they lived, named after their tribe, saw 27 percent of its population below the Federal poverty level in 1990. The median household income was $17,857 a year - a figure that their newly-reduced royalty payments dropped them well beneath. Nearly two-thirds of their income had suddenly vanished.
The siblings tried to decipher the cryptic charts detailing how much oil was extracted and what they were paid, but couldn’t. They appealed to the Bureau of Indian Affairs, the body responsible for distributing the royalties, and got nowhere.
Mary Limpy, a Cheyenne-Arapaho squatting in an abandoned house in Oklahoma City and physically unable to work, relied on her royalty checks as well. But unlike Mr. Parton and Ms. Gonzales, hers no longer came regularly at all. She couldn’t go on public assistance because she was listed as a royalty owner, even though she wasn’t getting royalties. She, too, tried to find out why the checks were drying up, to at least know if they would ever come again so she could get assistance and feed her kids, pay rent on an apartment - but found only dead ends. Eventually, her children went into foster care.
What happened to Mr. Parton, Ms. Gonzales and Ms. Limpy had nothing to do with the wells or how they were producing. Their oil was being stolen. And all of the evidence pointed to the same culprit: Koch Oil, a division of Koch Industries.
How To Steal Oil
In Oklahoma in the late 1980s, it turns out that stealing oil wasn’t really that hard. There were two ways to do it: by mismeasurement, or by what one expert called “brute force.”
Mismeasurement was the more elegant system. In order to assure that the person who owned the well and the person who took the oil to sell agreed on how much was being sold, there were a series of measurements that were taken. The temperature of the oil was important, since warmer oil occupies more volume, and therefore fills more barrels. Oil pumped from standing tanks had to be measured before and after pumping, so seller and buyer knew how much was removed. The viscosity of the oil is measured, to determine its grade, and the amount of impurities (sediment and water) is calculated with a centrifuge.
As one petroleum consultant speaking at the time said, “what you try to achieve is an amount of accuracy so that you won’t have significant difference.” Because a significant difference adds up. A temperature swing of 22 degrees expands the oil 1% in total volume - meaning a 100 barrel tank appears to hold 101 barrels. Accuracy means income. And inaccuracy in reporting the extraction of oil could significantly pad a profit margin.
Of course, an unearned profit of 1% can be nice, but it doesn’t beat a 100% profit. Which is where brute force comes in. The wells in Oklahoma - and throughout the West - were scattered, isolated. Those who owned the mineral rights in those days relied on the honor system from the companies taking the oil to market, which made mismeasurement possible. It also made it possible for rogue operators to back empty tanker trucks up to holding tanks at will and bleed them dry - no measuring, no cost, just profit.
Natural gas was a whole different issue. Being a gas, it relied on a much more sensitive and complex measuring system which made transfer between parties almost entirely a matter of trust. Which made the oil and gas business quite lucrative for an unscrupulous operator.
Koch Oil
The farmer who leased Mary Limpy’s land to grow crops was growing tired of the trucks. Paying no mind to where the crops lay, they drove in to the well, filled up, and drove back out. The farmer’s attempts to lock them out didn’t work; they simply broke the lock.
As Ms. Limpy testified, she wasn’t getting checks for that oil. It was being taken from a well which hadn’t been producing and had been capped for two years. No measurement, no reporting.
Eventually, she learned that the purchasing agreement had transferred to Koch Oil. Her brother spoke with a representative of the company. Their explanation? The gas was being sold below market value - so they sent Mary a check. For $1,000. Once.
What’s most remarkable about this story isn’t that a four billion dollar company would take gas from a homeless woman - it’s that this wasn’t the company’s worst behavior.
Senate Special Committee
In the spring of 1989, a Special Committee on Investigations of the United States Senate’s Select Committee on Indian Affairs was formed to look into concerns that the path to tribal self-rule was impeded by fraud, corruption and mismanagement from all sides. The numbers certainly reflected something amiss: according to the 1990 Census, for every dollar an American made, a Native American earned 62 cents. 31% lived in poverty (45% on reservations), compared to 13% nationally. Twenty percent of homes lacked indoor plumbing.
The Special Committee, empowered with the authority to issue subpoenas and depose witnesses under oath, was made up of Arizona Senators Dennis DeConcini and John McCain, and South Dakota’s Tom Daschle. Ultimately, the Bureau of Indian Affairs (BIA) and the Bureau of Land Management (BLM) were isolated for particularly strong critique.
In few areas was BLM more roundly castigated than in their handling of allotted oil leases. Within a span of months, the Special Committee determined that “Koch [Oil] was engaged in systematic theft, stealing millions in Oklahoma alone.” BLM, even with a tip that Koch was behaving improperly, hadn’t done a thing.
For their investigation, the committee started at the pumps. Understanding the facility with which mismeasurement could reap huge rewards, they reviewed the work of a consultant who’d been hired to do “back gauging” - surreptitiously observing and echoing the measurements of Koch Oil “gaugers,” whose job it was to perform the measurements. (In the coming days, we’ll explore the rationale of the man who first hired that surveillance consultant - Charles and David Koch’s brother, William.)
The consultant, Christopher Tucker, performed a series of back gauges at three lease sites, staking them out to observe (and, in some cases, videotape) the measuring process used by Koch Oil gaugers. He found that in each case, Koch gaugers took measurements that would underreport how much oil Koch acquired: in one case, they stole .8% extra; in another, 1%; in a third, 2%. The processes they used to do so varied, skipping measurements or performing them incorrectly. In his testimony before the Special Committee, Tucker lamented how easy the crime was:
There are no checks and balances. There’s no one supervising the measurements. A good example is taking a bag full of money to the bank, and you walk in and hand it to the teller and say there’s approximately $20,000 in here, give me a count and call me at home. Well, the teller gives you a count an hour later, and says well, the count was $19,500. And you go, well, that’s approximately $20,000, no problem. Well, the count could have been $20,100. You just don’t know. There’s no way. You’re not doing anything to check yourself. It’s a silly system.
The Committee also engaged a Special Agent with the FBI, Richard Elroy, who also performed back gauges. He and his team selected eight Native American-owned leases at random, and surveilled them, using brush, ditches and even Hereford cattle as cover. On six of the eight leases, they observed mismeasurement (in Elroy’s words, “they were stealing oil”). The two honest gaugers worked for Sun Oil and Vintage Oil. The other six all worked for Koch.
In fact, one of the Koch gaugers never bothered to measure at all. He simply provided the pumping company with the seals used to indicate measurements had been taken and filed reports with completely fabricated data. Koch Oil came out 2.5% in the black.
For Agent Elroy, alarm bells were going off. With a random sample, 75% of the measurements were fraudulent.
“It tells me,” he told the Committee, “that the theft is widespread and pervasive, and these people are being horribly victimized.”
His next step was to interview Koch Oil employees, starting with the gaugers on the six back gauged wells.
He interviewed the gauger who never bothered to show up, a man responsible for gauging 260 to 300 wells. The man at first claimed to have done the gauging accurately, but when presented with proof that he hadn’t, he explained how he reported the numbers to ensure that he never came up short - that is, that Koch was always getting more oil than it was paying, not less. Elroy recounted the conversation to the Senate Committee’s lead Counsel:
Mr. Elroy: …he would use a little black book that Koch furnished him that would give him the general information on each well as to what the gauging should read-what the temperature, the specific gravity, the grind-out should read. And he would take those figures and then inflate them to make absolutely sure that he was not under or coming up short.
Mr. Ballen: And he would do that? And did he state whether or not his superiors in the company had given him any direction on this matter?
Mr. Elroy: He said there was continuous pressure not to be short - never be short. He said he was never short, and therefore he was never, ever questioned. His figures were never questioned.
Another employee interviewed explained the difference between Koch and his previous employer, Big Heart Oil Company. Again, Elroy’s testimony:
Mr. Elroy: …they falsified all or a portion of the run ticket completely, meaning that they would record temperatures and they never took a temperature. One man said that he had not used the thermometer since Koch took over the company.
Now, these people were trained to gauge by a company called Big Heart Oil Company, and this company was purchased by Koch - I believe in the early part of 1987. These people then went to work for Koch from Big Heart.
The significance of that is that they tell us that when Big Heart operated the same area they stressed accuracy, and they were told that if they were over or short that they would be subject to termination.
Big Heart then hired investigators and sent them into the field and spot checked them just exactly the way we were and took aggressive action if they found they were not accurate.
Mr. Ballen: What happened - go ahead.
Mr. Elroy: I asked them if, when they worked for Big Heart, they did the same sloppy procedure and falsified the information. They said no, they checked every single one because they never knew when they might be watched, and also the company put no pressure on them to be long.
Mr. Ballen: And what did they state was the pressure they got now that Koch took Big Heart over?
Mr. Elroy. They said they’d have these continuous improvement meetings, whatever they did was not good enough, they were always screaming that they were short, so they couldn’t -
Mr. Ballen: When, in fact, they were not?
Mr. Elroy: They couldn’t figure out how they could be. They had been falsifying these figures in favor of the company significantly, and they keep raising them and raising them because they keep being told all the time they’re short.
Mr. Ballen: Was there ever any discussion from company officials, according to these gaugers, about directing them to steal, precisely in those words?
Mr. Elroy: No. They said that Koch never came out and had a meeting and said “Steal all you can.” But they indirectly put the pressure on them to do - at least with these employees that were trained by Big Heart, they were not trained to steal. So there had to be a reconditioning process, or apparently a reconditioning process by putting pressure on them to not be short.
Mr. Ballen: Was there a term for the kind of activity they were engaging in?
Mr. Elroy: “Volume enhancement” was what they preferred to call it.
Volume enhancement. If the volume of oil collected was 100 barrels, Koch employees were trained to “enhance” that up to 101, maybe 102 barrels. Other employees confirmed that description. One, a supervisor, told Elroy that he’d been taught the “Koch method” of measuring: bump this number up, that one down, raise the temperature 10 degrees.
One gauger, Gene Poteet, wasn’t willing to use the “Koch method” of gauging. So he was replaced by someone who was. That man, R. A. Rivas, was soon observed during a back gauging operation using a wide variety of tricks to mismeasure the oil. His final estimation of the oil pumped was twenty times more helpful to Koch than the independent analysis. The analysis was done on behalf of the owner of the well, Apache Oil. When Rivas’ deceit was discovered, Apache contacted Koch Oil who remitted a $100,000 claim for overages on five wells. Rivas, even after costing Koch Oil six figures, kept his job and was reassigned to Texas.
Elroy also interviewed a former head of security for Koch. On occasion, they’d encounter an employee who was stealing oil from Koch for his own use. But, unfortunately for Koch Oil, there wasn’t anything that they could do - their oil volume was so far above what it should have been that they weren’t able to show a loss.
How much over? After subpoenaing 30 oil companies, the Select Committee compiled the following chart.
The chart compares annual figures for five companies: Koch, Sun, Conoco, Kerr-McGee and Phillips. The first two columns give barrel discrepancies and aggregate value for Oklahoma; the second two, for the full company.
What it shows is staggering. In 1986, Koch was over by 240,680 barrels in Oklahoma alone - oil worth over $3.6 million. That same year, the next most overage was by Phillips, who were 2,181 barrels over - 1% of Koch’s haul.
According to testimony before the Senate Select Committee, Koch’s 1988 annual profit was $30 million. That year, company-wide, they made $7.1 million on 474,000 barrels of oil that they weren’t supposed to have. The overage gave them a 30% increase in profits.
Not all of that $7.1 million would go directly to the owners of the leases like Mr. Parton and Ms. Limpy. A representative stake for a Native American owner was an eighth. So in 1988, for example, those lease owners were deprived of nearly a million dollars by Koch’s “volume enhancement.”
The Senate Special Committee subpoenaed Koch Oil boardmembers, as well, past and sitting. One former boardmember indicated that he’d brought the matter of the significant overages to top management. He was told that oil “multiplied in the pipeline.” If so, our energy problems? Solved.
The sitting boardmembers, including Charles Koch, all gave uniform responses to the effect of, “Koch’s company policy was to be as accurate as possible and avoid loss.” Charles Koch himself said, “[Oil measurement] is a very uncertain art…. And you have people [measuring] who aren’t rocket scientists …. [N]o one can ever make an exact measurement …. There is a lot of uncertainty… and you [have] got tremendous variations.” Elroy’s assessment of such claims, as given to the Committee:
I could speculate and say that if this company was $12 million short that the CEO would take some drastic action to determine why they lost $12 million between the well head and the refinery. But when they are $12 million long - and this seems to be a continuous pattern - I don’t know how you could draw any other conclusion but that this is top management-directed theft.
Ultimately, the Senate Special Committee agreed. In their final report back to the full Senate committee, they wrote:
Koch Oil (“Koch”), a subsidiary of Koch Industries and the largest purchaser of Indian oil in the country, is the most dramatic example of an oil company stealing by deliberate mismeasurement and fraudulent reporting. Although Koch is also the largest independent purchaser of crude oil in the United States and Canada and the largest in Oklahoma, the company pilfered additional oil from American Indians and others.
In an aside in the final report, the Committee mentioned, “The Committee has forwarded the case against Koch to the Department of Justice for criminal investigation.”
Oh, and that Koch Oil gauger who never bothered to do any gauging? Elroy estimated that Koch “stole about $400,000 worth from that one field,” a field known as Binger Oil Field.
The field where Mr. Parton and Ms. Gonzales owned their lease.
Aftermath
Ultimately, a federal jury found that Koch Oil had, in fact, underreported the amount and quality of oil it purchased. The company was fined over half a million dollars.
But the Kochs went down swinging. The final Senate Special Committee report notes: “After the hearings, Koch also attempted to look into the personal backgrounds of Committee staff. One Koch employee in Oklahoma even went so far as to interview the ex-wife of a Committee investigator about the circumstances of their divorce.”
The company was also forced to pay $200,000 as the result of a separate lawsuit (brought by Bill Koch) that charged the company with systematically destroying records related to the investigation of theft of oil. The Court found that Koch Oil destroyed computer backup tapes that it was legally required to maintain.
Why This Is Relevant
David and Charles Koch have made a concerted effort to inject themselves into the American political sphere. With contributions to right-wing advocacy organizations like the Heritage Foundation, close ties to Americans For Prosperity - a major driver of the Tea Party movement - and heavy contributions to candidates for office like Wisconsin Governor Scott Walker, the brothers at the helm of Koch Industries clearly seek to shape American politics.
It shouldn’t come as a surprise that what the brothers hope to eliminate is the ability of government to provide exactly the sort of oversight that emerged from the 101st Congress’ Special Committee. It’s clear that the Koch’s relationship with the anti-government grassroots (despite David Koch’s declaration that the Tea Party consists of “just normal people like us”) is predicated on their political utility to his cause; their populist credibility is certainly belied by his company’s treatment of vulnerable native populations. (Even a columnist for the often-sympathetic Forbes questioned “how long it will take for Tea Party devotees to realize just how badly they are being used.”) They deliberately exploited a system based on trust for their own benefit.
But this incident also demonstrates that, when the light was low, Koch Oil had no qualms about unethically and illegally maximizing profits.
And now the Koch brothers want to turn the lights off.
Coda
Albert Mooney had worked for Anacora-Verde Corporation in Bakersfield for 14 years by the time his frustration with Koch Oil boiled over. Koch bought crude oil from Anacora-Verde, and Mooney consistently noted that they gamed their measurements in their favor. Even after he called them on it, they appeared to continue to overestimate the amount of sediment and water, mismeasure the temperature, and generally indicate that they bought less oil than they did.
In 1989, Mooney hired an independent contractor to do analysis of Koch’s measurements. His fears were proven warranted; Koch was underreporting the oil they took by 2.43%. Anacora-Verde severed their relationship with Koch.
Once the new purchaser was installed, Mooney immediately noticed that the temperature, sediment readings and volume measurements aligned with his expectations. The new company, it seemed, wasn’t mismeasuring his oil to boost their profit margins. It was behaving ethically, treating the relationship with respect.
That company? The one who replaced Koch Oil?
Enron.
Unless otherwise noted or linked, all information above comes from the official record of the 101st Congress’ Special Committee on Investigations of the Select Committee on Indian Affairs, United States Senate, Parts 4, 5, 6, 7, 10, 11, and the final report.
