A Window Into Oil Lease Profiteering

The Associated Press

Wednesday 13 September 2006

Washington - An official overseeing oil leasing says he was directed in the 1990s to remove a provision concerning royalty payments, leading to a financial windfall to oil companies, the Interior Department's inspector general said Wednesday. He also unleashed a broad rebuke of his department's record on ethics.

Inspector General Earl Devaney testified at a House hearing that the leasing official's claim could not be verified despite a lengthy investigation and a polygraph test, which the official passed. He said three people were implicated by the official but all denied making such a directive, and one also passed a polygraph.

Devaney, who has been the department's internal watchdog for seven years, said he could not say if anyone will be disciplined over the oil royalty mistake. It involved thousands of leases issued in 1998-99 without a section that would have required royalty payments if oil prices reached a certain level.

He contended that midlevel department officials covered up the mistake for five years. Devaney also lashed out at what he said was the department's failure to deal with ethical missteps and conflicts of interest.

"Short of a crime, anything goes at the highest level of the Department of Interior," he said. "Ethics failures on the part of senior department officials - taking the form of appearances of impropriety, favoritism and bias - have been routinely dismissed with a promise of not to do it again."

He said his office's recommendations usually were ignored. In testimony before the House Government Reform's energy subcommittee, Devaney described a meeting with former Interior Secretary Gale Norton about questionable ethical conduct by a senior official.

Norton, who resigned last March and cited personal reasons, "indicated that she accepted this official's admission that he exercised bad judgment, but given his promise not to do so again, she was unwilling to take any action against him," Devaney said.

Devaney later told reporters the incident involved an investigation - one he said cost $1 million - of then-Deputy Secretary Steven Griles.

Two years ago, Devaney's office referred 25 potential ethics violations by Griles to the federal ethics office, which cleared Griles on 23 of them but sent two to Norton for final decision.

Griles, who resigned in January 2005, has said he did nothing illegal and cleared his action with his department's ethics office.

Devaney said he has raised his concerns with Norton's successor, Dirk Kempthorne, shortly after he took office in July and that Kempthorne promised to "create a culture of ethics and accountability."

Concerning the oil royalty investigation, Devaney told the committee, "Although we found massive finger pointing and blame enough to go around, we do not have a smoking gun" that pinpoints blame.

Devaney said that despite a lengthy investigation, he only can conclude this was "a very costly mistake" and there is no indication anyone at the Minerals Management Service colluded with the oil industry or benefited financially.

This agency oversees the federal offshore oil and gas leasing program. The flawed leases involved deep-water projects in the Gulf of Mexico; the investigation focused on the service's New Orleans office.

To spur oil exploration in deep Gulf waters, Congress in the 1990s directed that such leases exempt oil from federal royalty payments. But the leases also were supposed to included language that would lift the exemption if oil prices exceeded $36 a barrel. That threshold is well below today's prices of $60-plus a barrel.

For some reason, the price threshold requirements was omitted from more than 1,000 leases issued in 1998 and 1999. This error surfaced publicly only this year.

Rep. Darrell Issa, R-Calif., the subcommittee chairman who has held hearings on the issue, contends the error could result in the loss of more than $10 billion in federal royalties during the life of the 1998-99 leases. Some of them will continue for years.

Devaney described what he viewed as a five-year cover-up by the service.

In 2000, he said, an economist in the New Orleans office noticed the absence of the price threshold language in the flawed leases and passed the information to superiors. But an assistant administrator, now deceased, told the economist to drop the matter, Devaney said.