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Bloomberg: U.S. Oil Lease Official May Have Misled Congress, Lawmaker Says

By Jim Efstathiou Jr.

Dec. 1 (Bloomberg) — The top official at the U.S. agency that oversees Gulf of Mexico oil and gas drilling helped cover up missteps on leases that may cost taxpayers $10 billion in lost royalties, said U.S. Representative Darrell Issa.

Minerals Management Service Director Johnnie Burton was “less than forthcoming” when she testified before the House Government Reform Committee on Sept. 14 that she first learned of errors in some leases early this year, said Issa, a California Republican. “Johnnie Burton became part of the coverup.”

The third-ranking official at the agency assured oil producers in early 2004 that the leases would be honored, said two people with knowledge of the matter. Those contacts show that Burton, who has run the agency since 2002, either knew or should have known of the matter before this year, Issa said in a Nov. 16 interview. Burton said nothing in her testimony about the communications between the agency and the companies.

Lawmakers are trying to force Royal Dutch Shell Plc, BP Plc and about 50 other companies to renegotiate the leases and agree to pay full royalties on the oil and gas they produce. Record energy prices in the past year have spurred interest in Congress in cracking down on any giveaways to the industry.

A probe by the Interior Department, parent of the minerals service, found that “bureaucratic bungling” caused the original error in which leases were written in 1998 and 1999 without provisions to charge royalties during times of high oil prices. Oil has more than tripled since 1999 and would have triggered payments starting in 2004 if price thresholds had been included.

`Utmost Confidence’

Burton spokeswoman Blossom Robinson and spokesman Gary Strasburg didn’t respond to requests for comment on her handling of the leases.

Secretary of Interior Dirk Kempthorne appointed Stephen Allred in October to oversee the Interior Department’s land and minerals management division and Burton’s effort to address the flawed leases.

“I have not found anything that would lead me to believe she would cover anything up or purposely distort what’s going on,” Allred said in a Nov. 17 interview. “I have the utmost confidence in what she’s doing.”

The leases in question were based on a 1995 law, the Deep Water Royalty Relief Act, that was intended to encourage drilling by dropping fees when oil and gas prices were low and restoring them when prices rebounded. The price triggers that should have been in the lease agreements in 1998 and 1999 were included before and after.

“I had no idea something was wrong” with the leases, Burton said at the Sept. 14 hearing. “I did not review all the contracts that were issued before I arrived at the department.”

Web Site Footnote

The terms for royalty payments are set when leases are signed and affect fees paid out over decades. Years can pass from the signing of a lease to actual drilling and production.

The oil and gas producers were querying the agency in 2004 as oil and gas prices rose and they were preparing to make investment decisions on the tracts covered by the flawed leases, according to the people, who asked not to be named because they are not authorized to discuss the matter.

The official who fielded those queries was Tom Readinger, associate director at the agency, who retired in June. He determined at the time that there was no legal basis for collecting royalties on the 1998 and 1999 leases. A footnote was added to the agency’s Web site in early 2004, clarifying that price thresholds to trigger royalty payments would not apply.

Readinger, reached at his home in Harrisburg, Pennsylvania, declined to discuss the matter. The people familiar with the matter wouldn’t comment on whether Readinger told Burton of his actions.

Companies have made investment decisions based on the communications with the Minerals Management Service in 2004 and booked revenue from the Gulf of Mexico leases, Issa said. That’s making it harder to renegotiate the leases, he said.

`Out the Window’

Shell said on Oct. 2 that it had a preliminary agreement on the disputed leases. The company would pay royalties for future oil and gas production, and the government would forego fees that should already have accrued, said John Hofmeister, president of the Shell’s U.S. unit.

Burton said the cost to the Treasury under such a plan would be as much as $1.3 billion in lost revenue for the oil and gas that companies have produced so far.

Some lawmakers have objected to abandoning that much money. The House passed a bill in May to force companies to renegotiate the leases, and the Senate is weighing a similar measure.

“Billions of dollars are now out the window,” said Representative Tom Davis, a Virginia Republican who chairs the Government Reform Committee. Issa is a member of the committee.

Inspector General

The estimate that the omissions in the 1998 and 1999 leases will cost the government $10 billion comes from a March 27 report by the Government Accountability Office, the investigative arm of Congress, and covers potential revenue through 2029. The GAO is preparing another estimate to be released soon.

The original failure to include price triggers in the leases was a bureaucratic error, according to Earl Devaney, Inspector General for the Interior Department. The employees who put the price threshold provisions back into leases in 2000 knew of the problems in prior years and failed to notify their superiors, he said at a Sept. 13 hearing.

Devaney testified that officials at the Interior Department are not forthcoming about mistakes or incompetence: “Simply stated, short of a crime, anything goes at the highest levels or the Department of the Interior.”

Another report on the disputed leases will be published by Devaney’s office around the end of the year and will include an examination of how Burton has dealt with the matter.

To contact the reporter on this story: Jim Efstathiou Jr. in Washington at [email protected] .

Last Updated: December 1, 2006 00:16 EST

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