The New York Times: Bureaucratic Bungling Gave Big Oil Royalty Break

By REUTERS
Published: September 13, 2006
Filed at 3:44 p.m. ET

WASHINGTON (Reuters) – Big oil companies were able to avoid paying the government billions of dollars in royalties normally due on drilling leases in the Gulf of Mexico because of ”bureaucratic bungling” at the U.S. Interior Department, the department’s inspector general told Congress on Wednesday.

The department accidentally left out language in drilling contracts signed with energy companies in 1998 and 1999 that would have ended a waiver on royalties when oil and natural gas prices were at certain high levels, according to Earl Devaney, who looked into how the companies got the special break.

“Although we have found massive finger-pointing and blame enough to go around, we do not have the proverbial smoking gun,” Devaney testified at a House Government Reform subcommittee hearing.

“Unless we come across something entirely unexpected, this appears to be an example of bureaucratic bungling,” he said. ”There isn’t anything right now that would allow us to take this case to a U.S. attorney (for prosecution).”

Companies generally pay royalties based on 12.5 percent to 16.67 percent of the value of the oil and gas they drill. Those royalties were waived on initial production levels starting in the 1990s to make drilling more profitable in the deeper Gulf waters when energy prices were low at the time.

However, language ending the royalty relief was still included in the contracts — except when it was left out by mistake for the 1998 and 1999 leases — just in case prices increased again as they have now.

At current prices for oil and gas, the mistake has already cost the government about $2 billion in lost royalties and it could increase by another $8 billion over the life of the leases, according to the Government Accountability Office.

Devaney said staff at the department’s Minerals Management Service, which oversees energy exploration in offshore federal waters, discovered in 2000 that the price threshold provisions had been left out of the drilling contracts signed during the prior two-year period, but they did not tell the head of the agency about the omission.

He said the mistake was allowed to occur because there was no single person responsible at Interior for reviewing and making sure the lease contracts were correct.

Devaney said while many department officials signed off on the lease contracts there was “no one person ultimately responsible for the quality assurance of the final product.”

He said no department employee has been reprimanded, suspended or fired because of the mistake with the lease contracts.

Rep. Darrell Issa, who chairs the subcommittee, faulted department officials for not fulfilling their basic duties.

“The only thing they claimed is a paycheck,” he said.

Several oil companies, including Chevron Corp. (CVX.N), BP Plc (BP.L) and Shell Oil Co. (RDSa.L), have met with the department to discuss amending their disputed drilling contracts.

The mistake with the contracts reflects the bigger problem with the culture at the Interior Department that “sustains managerial irresponsibility and a lack of accountability,” Issa said.

Devaney said in his seven years as inspector general much of his work has been disregarded by the department.

“Simply stated, short of a crime, anything goes at the highest levels of the Department of the Interior,” he said.

“Ethics failures on the part of the senior department officials — taking the form of appearances of impropriety, favoritism, and bias — have been routinely dismissed with a promise ‘not to do it again.”’

Devaney said his office has documented efforts by department officials to hide the true nature of agreements with outside parties, actions taken that don’t follow regulatory and policy requirements in order to reach a predetermined end goal and bonuses awarded to people whose projects have failed.

“If those at the top are not held accountable, why should those at lower levels not feel empowered to challenge the call for accountability,” he said.

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