Saturday, September 29, 2007

Inspector Finds Broad Failures in Oil Program

By Edmund L. Andrews
The New York Times

Wednesday 26 September 2007

Washington - The Interior Department's program to collect billions of dollars annually from oil and gas companies that drill on federal lands is troubled by mismanagement, ethical lapses and fears of retaliation against whistle-blowers, the department's chief independent investigator has concluded.

The report, a result of a yearlong investigation, grew out of complaints by four auditors at the agency, who said that senior administration officials had blocked them from recovering money from oil companies that underpaid the government.

The report stopped short of accusing top agency officials of wrongdoing, concluding that the whistle-blowers were sometimes unaware of other efforts under way to recover the missing money and that they sometimes simply disagreed with top management.

But it offered a sharp description of failures at the Minerals Management Service, the agency within the Interior Department responsible for collecting about $10 billion a year in royalties on oil and gas. Many of the issues, including the complaints by whistle-blowers, were initially reported last year by The New York Times.

Prepared by the Interior Department's inspector general, Earl E. Devaney, the report said that investigators found a "profound failure" in the agency's technology for monitoring oil and gas payments.

It suggested that the agency was too cozy with oil companies and that internal critics had good reason to fear punishment.

"It demonstrates a Band-Aid approach to holding together one of the federal government's largest revenue-producing operations," Mr. Devaney concluded.

In one case, senior officials decided that it would impose a "hardship" on oil companies to demand that they calculate the back interest they owed after having been caught underpaying. The agency itself was years behind in billing the companies, because its computers could not perform the calculations.

When asked about this matter by investigators, the agency's associate director, Lucy Querques Denett, responded, "How do you define hardship, just because they have a lot of money?"

The report was the latest result of a long series of investigations into the troubled federal program for collecting oil and gas royalties. Last year, Mr. Devaney told a Congressional hearing that "short of a crime, anything goes at the highest levels of the Department of the Interior."

The new report did not try to estimate the amount of money that might have been lost. Early in 2006, officials conceded that the government might lose about $10 billion in revenue over the next decade because of a legal mistake in oil and gas leases that had been ignored for six years.

At issue in the new report were the assertions by the four auditors at the agency, who said that senior officials had blocked them from recovering money from more than two dozen companies that underpaid royalties.

The rebel auditors took the unusual step of filing their own lawsuits against the oil companies under the False Claims Act, a law that allows private citizens to sue companies that have cheated the government and to receive part of any money recovered.

The first of those cases, brought against Kerr-McGee Corporation by a former auditor named Bobby L. Maxwell, went to trial in Denver early this year. Mr. Maxwell lost his job within a week after his lawsuit became public, in what Interior officials said was a reorganization.

In January, a jury in Denver ruled that Mr. Maxwell was correct and that Kerr-McGee had cheated the government of $7.5 million. But the judge in the case reversed the jury on technical grounds, ruling that Mr. Maxwell was not entitled to invoke the False Claims Act.

In their report, the investigators confirmed Mr. Maxwell's assertions that senior officials in Washington had ordered him to drop the case. The report said the senior officials had disagreed about the case's merits. Mr. Maxwell's supervisor in Denver supported his view; lawyers in Washington opposed him.

The decision from Washington appeared to perplex the official in charge of reviewing the quality of audit work, who said in a draft report that investigators had found that the guidance decision, made by "a senior-level M.R.M. official" did not contain "documentation to support the management decision." That comment was excised from the official's final report, the investigators noted.

Interior officials said the report had not accused the department of any specific ethical or legal violations. They said that the inspector general had agreed that the whistle-blowers were unaware of separate efforts to act on some of their concerns.

Randall Luthi, director of the Minerals Management Service, said the inspector general's report indicated that the lawsuits the auditors had filed were the result either of "the auditors' lack of knowledge, or the fact that they simply disagreed with management guidance and decisions."

He said the inspector general also found that the whistle-blowers had not properly reported their suspicions to the "appropriate authorities" before filing suit.

Democrats in Congress argued that the new report showed that the Interior Department remained mired in problems.

"What the inspector general is saying is that this is a dysfunctional place, on issue after issue," said Senator Ron Wyden of Oregon. Representative Nick J. Rahall II of West Virginia, chairman of the House Natural Resources Committee, said the royalty program was "severely flawed from top to bottom."

Particularly striking were complaints by two auditors in Oklahoma City, Randall Little and Lanis Morris, who said that senior officials had refused to demand $1.5 million in back interest from oil companies caught underpaying, saying that requiring the companies to calculate their own bills would be a hardship. But the officials said the Interior Department could not get its own systems to do the calculations.

Mr. Little told investigators that the oil companies were getting a "free ride" and that "the taxpayers ought to be outraged." After the auditors filed their lawsuits, Interior officials removed Mr. Little and Mr. Morris from their jobs at the Minerals Management Service and sent them to work below an entry-level technician at the Bureau of Land Management.

The inspector general did not accuse Interior Department officials of retaliation, and senior officials said Tuesday that the men had to be transferred temporarily because their lawsuits posed a conflict of interest with their regular work.

But the inspector general sharply criticized senior officials for letting the men languish for months without information about their jobs, calling their treatment "inexcusable." He said he had also begun an investigation into the Interior Department's payments of more than $100 million to Accenture, a consulting firm, for a flawed information management system.

Go to Original

The Royalty Mess
The New York Times | Editorial

Friday 28 September 2007

A yearlong investigation has now provided unassailable evidence that the Interior Department abdicated its responsibility to collect royalties from oil and gas companies that drill on public lands, chiefly the Gulf of Mexico. The report increases the pressure on Congress to find a way to recover the money. It also increases the pressure on Dirk Kempthorne, the interior secretary, to accelerate his reforms of the Minerals Management Service, the agency that failed to collect the royalties.

The investigation grew out of the discovery that a loophole in leases signed by the Clinton administration in 1998 and 1999 had allowed oil companies to duck royalties due on oil drilled on federal lands. Midlevel federal officials found the loophole in 2000, but nothing was done to close it or collect the lost revenues until 2006. It has already cost taxpayers more than $1.5 billion, a figure that could rise to $10 billion over the course of the leases.

The Interior Department has been hammered by Congress, but the strongest criticism has come from the department's inspector general, Earl E. Devaney, whose final report was disclosed by Edmund L. Andrews in The Times on Monday. The report attributed the agency's failure not so much to ineptitude as to lazy management, ethical lapses and a culture of secrecy that hid mistakes.

Top officials at the agency also seemed more concerned about the fortunes of the industry they were supposed to regulate than those of the federal government. In one case turned up by Mr. Devaney, officials decided it would impose a "hardship" on oil companies to demand that they calculate the back interest they owed. Officials were also said to have blocked efforts by four departmental auditors to recover the unpaid royalties.

Congress is now in a mood to recover the money on its own. A provision in the House energy bill would charge companies that refuse to amend the flawed leases a separate fee for each barrel of oil that they produce in the future. A Senate proposal would impose a surtax on new oil pumped by the companies involved that would be offset by any overdue royalties they were willing to pay.

Mr. Kempthorne has made personnel changes at the top of the Minerals Management Service. But Mr. Devaney's report makes it clear that he still has a long way to go to change the agency's dysfunctional culture.


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