U.S. House Staff Memo Hints at Interior 'Cover-up' on Royalties

A House staff investigation is looking at whether Interior Department officials pursued a "cover-up" to hide discrepancies related to Gulf of Mexico oil and gas royalty waivers, according to a staff memo obtained by E&E Daily.

A House Government Reform Committee background memo says Interior in the 1990s failed to fix flawed regulations drafted to govern the new royalty incentive program. "Instead of correcting those regulations, the department applied a series of 'bandaids' that never stopped the bleeding," the memo states. "This irresponsible behavior may have culminated in a cover-up that only perpetuated the problem."

The memo finds approval of leasing and rulemaking decisions at multiple levels that allowed royalty-free production without price caps. "The fact that nobody raised an issue with the lack of price thresholds forces one of two conclusions: Nobody reviewed the leases and regulations, or everyone reviewed and knowingly approved the faulty leases and regulations," the memo states. "Either scenario is unacceptable."

Leases in 1996, 1997 and 2000 contain the price caps.

The memo was obtained on the eve of a House Government Reform subcommittee hearing this Wednesday on problems with the royalty relief program that may cost the government billions of dollars. The Energy and Resources Subcommittee is investigating why deep water Gulf of Mexico leases issued in 1998 and 1999 lack so-called price thresholds that end royalty incentives when energy prices climb past certain levels.

The head of Interior's Minerals Management Service, Johnnie Burton, last week said she hopes companies will voluntarily agree to the inclusion of price thresholds in the 1998 and 1999 leases. But she said the Bush administration opposes forcing industry to revisit the contracts. A preliminary Government Accountability Office study found that the omission of price thresholds may cost the government $10 billion in lost royalties over 25 years.

The subcommittee memo says Interior suffers from a poor management culture at best. At worst, there is a "persisting" cover-up on the price thresholds, the memo charges.

Tracing the mistake

The House memo focuses specifically on Interior's position as to why the 1998 and 1999 leases lack price thresholds. Royalty relief stems from 1995 legislation designed to encourage high-cost deepwater Gulf Coast production.

It starts with an interim Interior rule, issued in March of 1996, to implement the incentive program that failed to address price thresholds. As a result, the department began adding the price thresholds as addenda to leases because the interim rule was incomplete. This allowed price thresholds to apply to leases issued in 1996 and 1997.

But then Interior issued a final rule in early 1998 that led to the absence of thresholds in leases for the next two years, the memo states. It also says that according to one department official, "everyone incorrectly assumed" that the 1998 rule set forth the price thresholds. There was no longer a need to put them in addenda to leases. Instead, leases in 1998 and 1999 referenced the new rule, the memo states.

"This allowed for the 'disappearance' of price thresholds from leases entered into during these two years," the memo states.

When did Interior know?

The subcommittee staff believes an Interior claim that the absence of thresholds went unnoticed until early 2000 is inaccurate, the memo states. Instead, the memo states that documents the panel has reviewed suggest someone "noticed the problem and unsuccessfully attempted to fix it."

Specifically, the memo says, lease sale notices in 1998 referenced the flawed final rule, while in 1999 they referenced a separate regulation that does address price thresholds. This separate regulation applied only to leases issued before 1995, and thus "the change had no effect," the memo states.

The memo says this effort to change the regulations in sale notices shows that someone realized the problem and attempted -- unsuccessfully -- to address the situation. However, the subcommittee says several questions remain outstanding, such as why someone tried to fix the situation without going through the proper channels.

The subcommittee is also taking aim at industry. Over 50 companies have leases issued in the two years in question, including major oil companies and large independents. The memo says the subcommittee wants to learn more about industry's interactions with Interior during the leasing process, whether companies raised the missing price threshold issue with the department, and what kind of legal reviews the companies undertook.

Officials with companies including Exxon Mobil Corp., Chevron Corp. and Shell Oil Co. appear on the witness list for the hearing that is included with the memo. The hearing and witness list were not yet detailed on the committee's Web site at press time.

The memo's witness list says Shell President John Hofmeister has been served a subpoena to appear. A Shell spokeswoman yesterday confirmed the company will appear and that a subpoena had been received but could not confirm that Hofmeister specifically would appear. The panel will also hear from two current and one former Interior Department attorneys.

Resources offshore drilling plan unclear

On a related issue, the House Resources Committee is grappling with efforts to produce a plan to expand coastal oil and gas leasing. The committee plans to hold a markup as soon as this week on an outer continental shelf production measure, but it had not been scheduled at press time.

A committee spokesman could not be reached Friday. The committee faces several challenges trying to craft a viable plan that can clear the floor. Chairman Richard Pombo (R-Calif.) in the past has backed a plan to essentially let coastal states withdraw from offshore leasing bans.

The plan shares offshore production royalties with states that may decide to allow leasing in areas where federal bans now apply, and with states where offshore production already occurs, including Louisiana. The committee last week held a hearing on Rep. Bobby Jindal's (R-La.) "opt-out" and revenue plan.

But MMS's Burton indicated to the committee last week that the administration does not support sharing significant revenues from leasing in areas where production is already allowed. She cited concerns about the effect on the deficit. "We would be more interested in discussing brand new areas," Burton said last week. However, she said she wants to have a "dialogue" with the committee on the issue.

Also, a costly revenue sharing plan -- especially one that applies to areas where production is already allowed -- would draw the ire of some GOP fiscal conservatives, observers say. But Louisiana and some other Gulf Coast lawmakers in the House and Senate are insistent that revenue-sharing for their states accompany offshore drilling legislation. Current bans cover both coasts, most of the eastern Gulf of Mexico and part of Alaska.

Other issues swirling around the committee include Pombo's efforts to craft a plan that Florida lawmakers -- who want to keep offshore production away from their shores -- can agree to. Also, Rep. John Peterson (R-Pa.) is aggressively pressing for his more sweeping plan that lifts bans on natural gas drilling, stopping 20 miles from state shores. "The question is how they get out of this box," says one House Democratic aide of the various issues confronting Pombo's offshore effort.

Royalty relief hearing schedule: The subcommittee will meet Wednesday, June 21, at 9 a.m. in 2154 Rayburn.

The subcommittee memo lists the following witnesses: Milo Mason, attorney, Interior Department; Geoffrey Heath, attorney, Interior; Peter Schaumberg, attorney, Beveridge & Diamond, P.C., formerly with Interior; Randy Limbacher, executive vice president, exploration and production of Americas, ConocoPhillips Co.; Tim Cejka, president, Exxon Mobil Exploration Co.; Gregory Pilcher, senior vice president, Kerr-McGee Corp.; Paul Siegele, vice president for deepwater business unit, Chevron Corp. The memo also says Shell Oil Co. President John Hofmeister has been called to appear.

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