MMS Chief Knew of Lease Errors in 2004 -- Report

A top Interior Department official was informed of errors in Gulf of Mexico oil and gas leases in 2004 -- contrary to her testimony to a congressional committee, the department's inspector general says in a new report cited in a New York Times story.

The errors, if not corrected, could cost the Treasury billions of dollars in lost revenues.

According to the Times' account, the inspector general's report says Minerals Management Service Director Johnnie Burton appears to have been informed in early 2004 that deep water Gulf of Mexico leases issued in 1998 and 1999 lacked "price thresholds" or clauses that would have suspended royalty waivers when oil prices exceed $34 per barrel.

Burton told a House panel last year she learned of the problem in early 2006 or late 2005. Interior's handling of the issue has attracted criticism and legislative efforts to ensure companies pay full royalties on those leases. About 45 companies hold 1998-1999 leases that allow "royalty relief" even when prices exceed around $34 per barrel.

The Clinton administration's mistakes in drafting the 1998 and 1999 contracts could cost the Treasury an estimated $10 billion in coming years. Interior has already reached agreements with five companies -- including Shell, BP and ConocoPhillips -- to ensure payment of royalties on production from these leases occurring after Oct. 1, 2006.

But lawmakers on both sides of the aisle have accused Interior of acting too slowly, a charge that may intensify when the the inspector general's report is released at a Senate Energy and Natural Resources Committee meeting tomorrow. MMS said when announcing the agreements with the five companies that the decision not to seek royalties from past production on these leases would mean around $900 million will not be recovered.

Some lawmakers have criticized Interior's insistence that only voluntary negotiations should occur with companies holding 1998 and 1999 leases and the decision not to seek back payments, calling it a needlessly weak stance.

Democratic legislation the House will vote on tomorrow would take a more aggressive stance -- it would deny new offshore leases to companies that do not agree to inclusion of price thresholds or charge new "conservation of resources" fees.

The various royalty provisions in the bill -- including fees on nonproducing gulf leases -- would raise an excess of $6 billion over 10 years, according to a Congressional Budget Office estimate. Leases issued in 1996 and 1997 included the price thresholds, as do leases issued beginning in 2000 when lower level officials spotted the problem.

Royalty relief stems from mid-1990s legislation aimed at spurring costly deepwater gulf production at a time when oil prices were much lower. Despite problems with the 1998 and 1999 leases, Interior and industry officials say the program has been a success, pointing to the major growth in deep water production in recent years.

But the program will face new criticism later today when Sen. Charles Schumer (D-N.Y.) releases a new Joint Economic Committee study of royalty relief. Schumer chairs the committee.

The Joint Economic Committee report will say that despite costing taxpayers "tens of billions of dollars," royalty relief has not helped reduce oil import reliance, created jobs or lower consumers' energy costs, according to an announcement of the forthcoming study from committee Democrats.

When top officials knew

In September, Burton told a House Government Reform subcommittee investigating the issue that she learned of the problem in late 2005 or early 2006.

But the inspector general report cites several e-mails from March 2004 -- after energy prices had surpassed levels that should have ended the waivers -- by MMS officials working under Burton that discussed the issue, according to the New York Times.

The messages suggest that questions about how to handle the issue were brought to the top officials. It goes on to say that Thomas Readinger, then the associate director, said "he was sure" he discussed the issue with Burton.

In a statement this morning, MSS said: "Director Burton was informed by the IG that an MMS employee had told her earlier about the lack of price thresholds on 98-99 leases. Director Burton responded that if an employee said that to her, it was likely true but she could not remember the event nor the circumstances."

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Company: Minerals Management Service (MMS) more info
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