Congress to investigate oil and gas royalty collections

The House Natural Resources Committee on Thursday will hold a hearing to explore the findings of an Interior Department inspector general probe into the "culture of ethical failure" at the Minerals Management Service office responsible for collecting in-kind payments of oil and gas from companies that lease wells on federal or tribal land.

A two-year IG investigation made public last week in three separate reports revealed widespread, pervasive misconduct at the royalty in kind program office near Denver. Nearly one-third of the 55-person staff accepted gifts and gratuities from oil industry officials with whom they did business. Three senior executives, all good friends, were willfully ignorant of conflict-of-interest regulations and steered lucrative contracts to a company created by one of them, the report found.

The IG also documented illegal drug use, sex between a supervisor and his subordinates, and between MMS staff and oil industry officials. "Sexual relationships with prohibited sources cannot, by definition, be arms-length," Interior Inspector General Earl Devaney wrote.

The Justice Department declined to prosecute cases against two former employees for misconduct, as recommended by the IG. They were Lucy Querques Denett, the former associate director of the minerals revenue management program at the Minerals Management Service in Washington, who the IG found manipulated the contracting process, and Greg Smith, former director of the royalty in kind program office. Denett retired last February after 33 years of federal service; Smith retired during the course of the investigation after 28 years of service.

Two employees have pled guilty to criminal charges and "others have escaped potential administrative action by departing from federal service, with the usual celebratory send-offs that allegedly highlighted the impeccable service these individuals had given to the federal government," Devaney noted. "Our reports belie this notion."

Interior Department Secretary Dirk Kempthorne said the agency would take "swift action to restore the public trust," but that isn't likely to placate congressional Democrats, especially in an election year.

Rep. Edward Markey, D-Mass., chairman of the Select Committee on Energy Independence and Global Warming, on Monday said that his panel would conduct its own investigation into the scandal. He sent letters to executives at Shell Oil, Chevron and Gary Williams Energy Corp., whose companies were named in the IG report. "It takes two to tango, and the oil companies appear to have danced over just as many ethical lines as Bush administration officials," he said.

Rep. Nick Rahall, D-W.V., chairman of the Natural Resources Committee, said, "The activities at the RIK office are so outlandish that this whole IG report reads like a script from a television miniseries -- and one that cannot air during family viewing time."

Among the witnesses scheduled to testify was Danielle Brian, executive director of the Project on Government Oversight, which has chronicled misconduct and problems in oil and gas royalty collections since the 1980s.

"I think it is breathtaking that Justice declined to prosecute Smith," said Brian. "This is an extraordinary conflict."

Energy companies meet their royalty obligations either through cash payments to the government, known as royalty in value, or by giving up a percentage of the oil or gas drilled, known as royalty in kind. With royalty in kind payments the Minerals Management Service takes possession of the oil or gas and then sells it.

The royalty in kind program actually was initiated by industry, Brian said, after scandals in the late 1980s revealed energy companies were underpaying cash royalties. What began as a pilot program spread much more widely in 2003. Now 72 percent of crude oil royalties and 45 percent of natural gas royalties are collected in kind.

"I believe this was a system that was intended to fail," Brian said. "This was an industry created idea, an industry promoted idea, and an industry corrupted idea."