Two Interior Department officials have been faulted in an oil-lease blunder that let oil companies skip royalties they should’ve paid the government.
by Bill Walsh
Newhouse News Service
Minneapolis Star Tribune
WASHINGTON – Two federal officials who oversee drilling off the nation’s coast are being blamed for one of the costliest bureaucratic blunders in U.S. history.
The foul-up at the Interior Department allowed dozens of energy companies to extract oil and gas from federally owned waters in the Gulf of Mexico without having to pay a share of their revenue to the government.
The error occurred in the late 1990s, but the loss to taxpayers has been especially heavy since recent energy prices — and industry profits — reached record highs. Congress’ Government Accountability Office estimates the blunder could cost $10 billion. Earl Devaney, inspector general at the Interior Department, said he has found no evidence of criminal wrongdoing; he categorized the episode as “bureaucratic bungling.”
The energy companies involved are refusing to pay what they should have been charged.
And the Bush administration backs them up, saying they don’t have to. Some in Congress, though, are seeking to recoup lost revenue.
“It’s a shame Congress is having to spend time on this because upper-level managers didn’t do the job they were supposed to do,” said Rep. Darrell Issa, R-Calif., whose House subcommittee has for months been investigating the problems with the leasing program. “Like most things, the mistake isn’t the story. The story is the coverup.
“The mistake was neither reported up the chain of command, nor did anyone try to rectify it,” Issa said.
With oil prices recently at more than $70 a barrel, energy companies need little government incentive to drill in the Gulf of Mexico. But a decade ago, when oil fetched $20 a barrel or less, few were willing to take the risk of coming up empty. To stimulate drilling, former Sen. J. Bennett Johnston, D-La., in 1995 pushed through a package of financial incentives designed to encourage companies to sink new wells.
Normally, companies must pay royalties of 12 to 16 percent on oil and gas extracted on federal property. Johnston’s Deep Water Royalty Relief Act waived the royalties up to a limit: If the market price of oil hit $38 per barrel or natural gas went to $3.50 per million thermal units, the royalties would kick in.
“It was definitely our intention to have those [price] thresholds,” said Johnston, now a Washington lobbyist. “Somebody just screwed up.”
Price thresholds disappeared
For two years, everything worked fine. Gulf drilling leases auctioned off in 1996 and 1997 included the price thresholds that would trigger royalty payments. By 1998, however, they had vanished.
In January 1998, the Interior Department issued a final regulation spelling out for government and industry how Johnston’s royalty relief program would work. But in drawing up the rule, according to the inspector general’s office, there was confusion in the department’s Minerals Management Service about whether the thresholds should be included. Ultimately, they were dropped.
The effect was that oil and gas companies wouldn’t have to pay a dime in royalties to taxpayers no matter how high the market price got.
Milo Mason, a Harvard-educated lawyer at the Interior Department who was instrumental in overseeing development of the rules, acknowledged to Issa’s subcommittee that he should have caught the omission. But he also said that, with the price of oil and gas well below the price thresholds at the time, few were worrying about it.
“It didn’t seem like as big a deal as it is now,” Mason told the subcommittee.
What especially incenses lawmakers, they say, is that Mason did little to fix the problem when he discovered it in 1999.
“He failed to either correct it or adequately document the problem,” Issa said. “Instead, he noted that his practice is not to write memoranda or keep a chronological file because his desk drawer is full.”
‘Poor processes’ blamed
Chris Oynes, who oversaw the lease sales from the New Orleans office of the Minerals Management Service, is the other federal official who has come under scrutiny for the error. He told the House subcommittee at a July 27 hearing that the foul-up was “a big mistake” that he blamed on “poor processes and not because of any intentional or calculated act.”
Oynes said that, when he signed off on hundreds of leases, he assumed that the price thresholds were in them. But subcommittee members expressed skepticism, because officials from Chevron Corp. testified at the same hearing that they tipped him off to the problem in 1998.
“Mr. Oynes signed 668 deepwater leases in 1998 and 1999 and was in the best position to know of the problem and take corrective action,” Issa said at the July hearing. “Alas, the American people are now unnecessarily burdened with this unprecedented $10 billion loss.”
The loss could be much larger if Kerr-McGee Corp. convinces a federal court that the price thresholds in effect between 1996 and 2000 are unconstitutional, as it asserts in a lawsuit. If the company prevails, the precedent could cost taxpayers $60 billion over 25 years, officials have said.
The leases were finally fixed in 2000, when Minerals Management Service officials realized the mistake. But managers there tried to keep a lid on it. An e-mail unearthed by the committee documents their decision not to notify the service’s director.
Some in Congress are pushing to fix the royalty problem retroactively. But the Bush administration and the energy companies have opposed the effort, saying that, while the leases were flawed, they still are binding legal contracts. Several companies are talking with Minerals Management, but only about paying future royalties, not past ones.
Mason and Oynes remain on the job. A spokesman for the Minerals Management Service said that, if any disciplinary action occurs, it won’t be until after the inspector general issues his final report, still weeks away.
©2006 Newhouse News Service. All rights reserved.
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