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New York Times: Criminal Inquiries Look at U.S. Oil-Gas Unit

Published: December 15, 2006

WASHINGTON, Dec. 14 — The Justice Department has begun two criminal investigations into the Interior Department’s Minerals Management Service, which is already the focus of several inquiries into its collection of royalties for oil and gas produced on federal property.

The new investigations are still in the early stages, said Congressional officials who were briefed this week by Earl E. Devaney, the Interior Department’s chief independent investigator.

The investigations are an unexpected development in what has already become a broad examination of the Interior Department’s oversight of companies that pump more than $60 billion worth of oil and gas each year from publicly owned land and coastal waters.

One Justice inquiry involves Interior Department officials in Denver who manage the government’s fast-growing program to collect “royalties in kind,” which are royalties in the form of oil and gas rather than in financial payments, people briefed on the investigation said.

That investigation is being run by the Justice Department’s Public Integrity Section, which examines suspected criminal violations by federal employees. The focus of the second investigation is unclear, but it is being conducted by the inspector general with help from the Federal Bureau of Investigation.

Mr. Devaney, the department’s inspector general, is already conducting two other investigations into suspected mismanagement of the minerals agency. And just last week, he issued a scathing criticism of the agency’s system for auditing oil and gas royalty payments.

Mr. Devaney is also finishing up an investigation into how the Interior Department signed 1,100 oil and gas leases in the late 1990s that inadvertently permitted companies to avoid up to $10 billion in royalties over the next five years. The errors were made during the Clinton administration, but people briefed on Mr. Devaney’s investigation said he had concluded that high-ranking agency officials either knew or should have known about the problem at least two years ago.

Representative Ed Markey, a Democrat from Massachusetts, said Thursday in a statement that Mr. Devaney had briefed his staff.

“The two criminal referrals by the Department of Interior’s inspector general to the F.B.I. and Justice Department are proof positive that the conflicts of interest between Bush administration regulators and those they regulate in the oil and gas industry are costing the American taxpayers billions in royalty revenues,” Mr. Markey said.

Word of the criminal investigations surfaced just as the Interior Department announced Thursday that five big oil producers had voluntarily renegotiated leases and agreed to not exploit a loophole that could save them hundreds of millions of dollars each.

The leases gave companies an incentive to drill in deepwater in the Gulf of Mexico by letting them skip royalties on millions of barrels of oil and gas. But the leases omitted a standard escape clause that would have required the companies to pay in full if oil prices rose above about $34 a barrel. Interior officials have said the mistake, if left unchanged, could cost the government as much as $10 billion.

The Interior Department said Thursday that it had concluded new deals with BP, ConocoPhillips, Marathon Oil, Royal Dutch Shell and Walter Oil and Gas. Those companies hold about 17 percent of the flawed leases, according to Interior data.

But about 50 other companies have not yet agreed to change their leases. Among them is Chevron, one of the biggest potential beneficiaries of the error. Chevron and several partners could save more than $1 billion in royalties in years to come if the lease language is not changed.

Don Campbell, a spokesman for Chevron, said company executives had met several times with government officials to resolve the matter. Mr. Campbell said his company “put a reasonable offer forward” and would “look forward to further discussions.”

The new agreements did little to mollify the Interior Department’s Republican and Democratic critics in Congress.

The incoming Democratic chairman and the retiring Republican chairman of the House Government Reform Committee sent a letter to Attorney General Alberto R. Gonzales, suggesting that the leases might never have been valid and that the government might be able to force the companies to pay up.

Officials have provided few details about the new criminal investigations, except to say they are “related” to previous inquiries of the royalty-management program.

Started about six years ago, the royalty-in-kind program has become a multibillion trading program run from Denver. Since President Bush took office, Interior officials and many of the industry’s biggest producers have argued that the government should collect as much of its royalties as possible through “in kind” payments because, they say, the accounting is much simpler.

In 2005, the Interior Department collected about $3 billion worth of royalties in oil and gas — about a third of the total. The government funnels much of the oil it receives to the Strategic Petroleum Reserve, but it sells virtually all its natural gas and sends the cash to the Treasury.

Congressional officials briefed this week by Mr. Devaney said he had cautioned that both of the criminal investigations would last several more months. Mr. Devaney said it was possible the investigations would not lead to criminal charges, though he suggested that they should at least lead to disciplinary actions. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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