Interior Dept's Inspector Genl Cites Criminal Probes

The U.S. Interior Department was dealt a double blow on Tuesday, as an inspector general who has been probing the government's oil and gas royalty collections program said four criminal investigations are underway, while federal auditors said that the department's system for monitoring royalty payments continues to have problems.

Earl Devaney, the inspector general, told a House subcommittee that his team had discovered a number of issues worthy of separate investigations, including ethics lapses, such as accepting gifts from and fraternizing with the industry. He told Congress that his group has been working with the Justice Department for 13 months.

"MMS has more than its share of royalty management issues," Devaney testified.

In the meantime, government auditors said that the Interior Department's system for ensuring that U.S. taxpayers are paid for oil and gas produced on federal lands is "more of an honor system than we are comfortable with." The Government Accountability Office said that it continued to find "persistent" weaknesses in royalty collections, including a failure by two different divisions to meet targets for inspecting equipment used to measure oil and gas production.

Randall Luthi, the director of the Minerals Management Service, criticized the GAO draft report, telling reporters that it "wasn't quite ready for prime time." It is rare for the GAO to publicly release draft reports. Typically, the public only sees final reports, which incorporate input from the government agency that is under scrutiny. The Interior Department says that the draft report thus doesn't fully reflect its own assessment of its royalty-payments oversight.

Congress is up in arms over signs of mismanagement in the royalties program because it is one of the largest sources of revenue for the U.S government outside of taxes. In fiscal 2007, the Minerals Management Service collected more than $9 billion in revenues from companies drilling on federal land, the GAO said.

The GAO found problems with overseeing royalties due for both offshore and onshore production. The problems varied, as in a failure to inspect all offshore royalty meters as required by internal policy in 2007. Meter inspections are an important part of verification because one of the most common violations involves missing or broken seals, which are meant to prevent tampering with measurement equipment, according to the GAO.

As for onshore production, the GAO cited problems with a system under which companies self-report their royalty obligations. Since 2001, the Minerals Management Service has relied more heavily on compliance reviews to evaluate the self-reporting system rather than than full-blown audits, the GAO said. The strategy leads to problems when it comes to onshore production, in part because the Minerals Management Service doesn't systematically compare outside data with a company's own self-reported information, the GAO said.

With some 27,000 leases covering about 70,000 wells, Interior Department officials said that they have typically focused on only bigger producers, which account for a greater share of production. But the officials said they may consider looking at producers that generate as few as 5,000 or 6,000 barrels of oil a day, down from its current threshold of 12,000 barrels.

At the same time, the Minerals Management Service continues to lack the ability to automatically detect missing royalty reports, the GAO said. And while in 2004 the service modified its system to automatically detect missing production reports, it now has a backlog of about 300,000 missing production reports that must be investigated and resolved, the GAO said. The government needs a full set of production reports so that it can prioritize investigations, the GAO said.

Copyright (c) 2008 Dow Jones & Company, Inc.

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