A Billion Here, A Billion There...
How one big goof in a little-known federal agency gave taxpayers a big black eye
For years the Department of Interior's Minerals Management Service operated pretty much in the backwaters of the nation's capital, drawing little scrutiny from the press or Capitol Hill. Such obscurity, however, is a thing of the past. Last summer, congressional investigators discovered that the agency had bungled its job so badly that energy companies legally avoided paying an estimated $2 billion in royalties on oil and natural gas extracted from federal waters. The final tab to taxpayers could reach $10 billion. Lawmakers, to put it mildly, are incensed.
Now, when the new Congress convenes in January under Democratic control, there will be scrutiny aplenty of the beleaguered Interior Department unit. In the Senate, Democrat Ron Wyden of Oregon will chair a subcommittee and vows a "very vigorous" investigation of the oil and gas leasing program run by the minerals agency. Taxpayers, Wyden said in an interview, are victims of a giant "rip-off" by oil and gas companies. In the House, says a senior aide to Rep. Nick Rahall, the West Virginia Democrat expected to chair the House Resources Committee, "there will be an intensive and exhaustive review of royalty underpayments."
"Steal a loaf." The minerals agency may be little known, but it has been an important source of revenue for the U.S. Treasury and for American Indians. Last year, it collected $9.9 billion in royalties on oil and gas pumped from federal and Indian lands and from U.S.-owned coastal waters. Some 2,600 companies hold 27,800 producing leases.
The current scandal focuses on the agency's failure to ensure that oil and gas producers paid their full share of royalties on oil and gas pumped from the deep waters of the Gulf of Mexico. This is what happened: MMS officials inexplicably failed to include provisions in some deep-water leases that would have required energy companies to pay royalties once the price per barrel reached a certain level. That mistake cost the Treasury some $2 billion in lost revenue. Today, the minerals agency is attempting to cut new deals with 12 of the 56 oil companies that hold these lucrative leases. A few companies seem keen on working something out. "We would like to see a mutually beneficial solution," says Donald Campbell, a spokesman for Chevron Corp.
As congressional investigators dig deeper, they have an important ally in the Interior Department's chief watchdog, Inspector General Earl Devaney. He has been snapping at the heels of MMS officials for years. Last week, he issued a tough, 50-page report warning that the minerals agency's audit and compliance program on royalty payments for federal and Indian properties is so flawed that there is a high risk that the agency "may not detect underpaid royalties." Agency officials defended the program but promised to fix any problems.
Devaney's conclusion came as no surprise to investigators at the Project on Government Oversight, a watchdog group that has long criticized the minerals agency for lax oversight of energy producers. "If you don't have a policeman in the neighborhood," Beth Daley, POGO's chief investigator says, "the thief is going to steal a loaf of bread from the bakery." The watchdog group has helped the government recover hundreds of millions of dollars in royalty underpayments.
The scandal has hurt MMS's top official, Johnnie Burton, who testified in September before a House panel chaired by Rep. Darrell Issa, a California Republican. In an interview, the lawmaker says bluntly that Burton misled Congress. "She said she hadn't learned about the missing price thresholds [in some deep-water] leases until 2006," Issa says. But he has information, he says, indicating that Burton learned of the problem two years earlier. Issa wants Burton out. "I would like to see a reformer in that position," he said. "I do not believe she is a reformer." Burton, says an Interior Department spokesperson, declined to comment on Issa's statements.
Even some of the agency's own auditors are appalled at the mess. A former top auditor has filed a lawsuit in federal court, claiming that the minerals agency blocked his efforts to recover money owed to the government. Look for this to be one of the first big housecleaning moves when Congress comes back after the holidays.
This story appears in the December 18, 2006 print edition of U.S. News & World Report.