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Houston Chronicle: Royal mess

EXTRACT: The New York Times reported that two auditors claim Shell Oil Co. inflated transportation costs to avoid paying $18 million in royalties.


Sept. 24, 2006, 9:59PM

Lawsuits and testimony suggest the U.S. Interior Department has forgotten its duty to the public.

In 1998 and 1999, U.S. Interior Department officials incompetently botched leases aimed at encouraging oil companies to venture into deeper waters in the Gulf of Mexico. For years afterward, department officials kept mum about the mistake, which allowed oil companies to avoid paying fair royalties on assets owned by the taxpayers.

Compounding the error, senior officials of the Interior Department’s Minerals Management Service inexplicably and improperly ordered a halt to audits and investigations that had turned up evidence that oil companies had shortchanged the government by $30 million dollars.

The original error on the leases has cost taxpayers an estimated $1.3 billion in royalties that high energy prices should have triggered. However, as the companies invested hundreds of millions of dollars into deep-water exploration based on the absence of price triggers, there is little expectation that the Interior Department can recover what has been lost. A deal is a deal.

However, that principle should apply in spades when oil companies do not scrupulously follow the terms of their government lease agreements and shortchange the taxpayers.

According to four lawsuits recently unsealed in Oklahoma City, Interior Department auditors allege that their superiors suppressed their efforts to recover millions in unpaid royalties due the government.

The New York Times reported that two auditors claim Shell Oil Co. inflated transportation costs to avoid paying $18 million in royalties. Another auditor states his bosses in Denver ordered him to drop his demand that several oil companies pay $1 million in back interest.

The Interior Department’s most successful auditor, Bobby L. Maxwell, alleges in his whistleblower suit that Kerr-McGee sold oil to a marketing company at $12 million below market value, but received free services in that amount from the go-between. Maxwell, who had been given an award for stellar service by Interior Secretary Gale Norton, was fired.

Interior Department officials say the auditors should have followed proper procedure rather than suing their own agency. But the auditors had followed proper procedure, only to be thwarted by irresponsible superiors.

Department officials say Maxwell’s claim is not warranted, but Louisiana state officials simultaneously reached the same conclusion as Maxwell and successfully pressed their claim on behalf of the state’s taxpayers.

Maxwell, quoted in the Times, said, “The agency has lost its sense of mission, which is to protect American taxpayers.”

He would appear to be right. Offshore oil and gas deposits belong to the public. No government official has the right to give them away to private parties when those parties have agreed to pay for them. It’s one thing to encourage risky deep-water exploration by lowering royalty payments; it is quite another to let oil companies get away with paying less than they owe.

The offshore industry has a history of paying less than it should, only to pay up when government auditors detected the error — if it was, in fact, an error. Interior Department Inspector General Earl Devaney told the U.S. House last week that the department was rife with “managerial irresponsibility and lack of accountability.”

Given those circumstances, the administration is adding fuel to the fire by reducing the number of auditors, including award-winning civil servants such as Maxwell, who had recovered hundreds of millions in unpaid royalties that went to build highways and pay for government services.

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