Oil lease blunder hidden 6 years

Investigator says mistake cost taxpayers billions of dollars
By DAVID IVANOVICH
Chron
Sep. 14, 2006

WASHINGTON - Interior Department officials realized in 2000 that their offshore lease agreements with oil companies shortchanged American taxpayers, but they covered up their multibillion-dollar mistake for six years, an investigator said Wednesday.

After combing through 11,000 e-mail messages and interviewing 29 current and former Interior Department employees, federal investigators still aren't ready to say who they think told a staffer to omit contract language that would have forced oil companies operating in the deep waters of the Gulf of Mexico to pay billions of dollars in royalty payments as energy prices rose.

"Although we have found massive finger-pointing and blame enough to go around, we do not have the proverbial 'smoking gun,' " Interior Department Inspector General Earl Devaney told a House panel Wednesday.

"However, we do have a costly mistake."

Devaney's office discovered a "flurry of e-mails" back in 2000 as officials at Interior's U.S. Minerals Management Service learned they had failed to include price triggers in leases signed with oil companies in 1998 and 1999.

That was no small misstep. The Government Accountability Office estimates the federal government has already lost some $2 billion in royalty payments and could be out another $8 billion from deep-water leases signed in those two years.

After being notified about the omission, an associate director ultimately chose not to notify the head of the agency, Devaney said.

"Unfortunately, the official who made this particular decision is deceased," Devaney said.

Inspectors interviewed three former MMS directors who ran the agency during the years in question.

All three said they were unaware of the price trigger blunder until it was reported in the New York Times earlier this year.

No criminal evidence
Though he has not completed his investigation, Devaney said he has not found evidence of criminal activity.

"I'm satisfied there isn't anything that would allow us to take this case to a U.S. attorney," Devaney said.

Still, Devaney describes an overall culture at the Interior Department rife with "managerial irresponsibility and a lack of accountability"

"Simply stated, short of a crime, anything goes at the highest levels of the Department of Interior," Devaney said.

Rep. Darrell Issa, R-Calif., chairman of the House subcommittee investigating the issue, said the Interior Department "has breached its fiduciary duty to the American people."

Reacting to Devaney's testimony, Interior Secretary Dirk Kempthorne said, "I take these allegations concerning issues dating back to 1998 very seriously," adding: "I will continue meeting with the inspector general and will review his final report and determine a further course of action."

Deputy Interior Secretary Lynn Scarlett and MMS Director Johnnie Burton are both slated to testify today for the House Government Reform Committee.

113 leases at issue
During the two years at issue, MMS signed 113 deep-water leases lacking price threshold language with 56 oil companies, agency officials say.

MMS officials are currently in talks with about 18 different oil companies, trying to renegotiate leases to add price triggers, MMS officials said.

Among the companies involved in negotiations is BP. Robert Malone, president of Houston-based BP America, told a Senate panel Tuesday: "We are very close to a settlement."

To encourage oil companies to wade out to the deeper waters of the Gulf, lawmakers passed the Deep Water Royalty Relief Act of 1995. The idea was to give producers a pass on royalty payments until they had produced a certain amount of oil and gas or prices reached specific targets. The Interior Department issued an interim rule the following year and then a final rule in 1998.

The interim rule did not include price triggers, but that provision was spelled out in addenda to the lease documents in 1996, 1997 and 2000. But in 1998 and 1999, the department stopped detailing these royalty provisions in leases.

If the triggers had been written into leases for 1998 and 1999, oil companies would have had to begin paying royalties when crude hit $28 a barrel and natural gas passed $3.50 per thousand cubic feet — prices far below current levels.

A staffer responsible for preparing the leases told investigators that MMS's Economics and Leasing Division had instructed him to remove the price threshold language from the agreements, Devaney said.

The inspector general's office then questioned three individuals in that office, all of whom denied issuing those instructions.

One person refused to provide a sworn statement and did not take a polygraph test. Another person provided a statement but refused to submit to a polygraph, while a third individual provided a statement and then passed a lie-detector test, Devaney said.

Omission not caught
Nearly 30 different Interior Department officials were required to sign off on those lease agreement, but no one apparently caught the omission.

The oil companies, however, did notice the change. Chevron officials met with Chris Oynes, MMS' regional director, three times in 1998 and 1999 to discuss the lack of price triggers, according to a subcommittee memo.

Oynes told lawmakers at a previous hearing he did not recall those conversations. Oynes took a polygraph test after the hearing and passed, Devaney noted.

Of the thousands of e-mail messages Devaney's office examined, only 20 pertained to the price trigger problem. And none of those dated prior to 2000, Devaney said.

Sam Fraser, an economist at MMS' Herndon, Va., office, first discovered the problem in 2000 and relayed the information to his superiors, but his report never reached the directors office, Devaney's office said.