Interior Staff Had Inappropriate Relationships with Oil Industry

The Department of Interior Inspector General (IG) Earl Devaney has just released a report on the Royalty-In-Kind Program (RIK), an obscure multi-billion-dollar oil and natural gas trading program at the Department that has been the focus of controversy.

According to the report, "RIK staff had inappropriate relationships with industry that could compromise their objectivity," and the Department's Office of the Solicitor found that some Program's contracts "provided significant risk to the United States and are inconsistent with accepted contract law generally." The report provides further confirmation that the Minerals Management Service, which runs the program, has been too cozy with the oil industry and has failed to protect the public interest. In addition, it reports that the RIK Program made modifications to bid contracts "that appeared to inappropriately benefit oil companies."

Today's report also describes how the oil and gas contracts being done through the RIK Program are no longer subject to the Federal Acquisition Regulations, and how contracts are no longer being run through the MMS Procurement Office, as a result of a decision issued by the Department's Office of the Solicitor in November 2007. According to the report, this removed "the independent oversight that the Procurement Office previously provided."

In 2006, the IG, Department of Justice, and FBI reportedly mounted criminal investigations into the RIK Program over concerns that "senior government officials had been steering huge oil-trading contracts to favored companies." Four of those employees were re-assigned or have since left the MMS, notably the program's head Greg Smith. Smith appears to have been given a highly desirable early retirement package, prompting House Committee on Natural Resources Chairman Nick Rahall to cry foul, saying: "this Administration uses retirement like some perverse witness protection program."

According to an unconfirmed source, the Department of Justice failed to indict any of the RIK officials in the first Grand Jury which met last year. So, it remains to be seen if the criminal inquiries will lead anywhere.

The expanded RIK Program today is very much the creature promoted by the largest oil and gas companies drilling on federal land. Their lobbying campaign to expand the program coincided with the industry's major loss in 2000 when new royalty collection regulations would have forced them to pay full market value on federal oil. The GAO documented industry's stance at the time:

Although states that receive distributions of these royalties generally support the proposed regulations, oil industry representatives generally oppose them, believing that oil companies should not pay royalties on higher prices and that they would suffer increased administrative requirements. As an alternative, the oil industry has suggested that MMS instead be required to accept, as the federal government's royalties, a percentage of the actual oil and gas produced from federal leases (known as royalties in kind).

But the RIK Program was troubled from the very beginning, facing stinging criticism from the GAO and a series of failed pilot programs with millions of dollars in losses to the government.

Since 2001, an increasing share of domestic U.S. oil and natural gas production is being traded under the RIK Program. The RIK Program accepts compensation from oil and gas companies drilling on federal properties in the form of oil or natural gas products which it then sells. According to the GAO, 42% of the $9.74 billion in royalty payments made in FY 2006 were done in kind rather than in value (accepting payment in cash).

Central to these talking points is the flawed theory that the government no longer needs to conduct independent audits which reference third party documentation and follow Government Auditing Standards to oversee the program. While it could be credibly argued that less auditing of oil and gas companies is needed, MMS has taken the position that almost none is needed at all, and that the taxpayers' interests will be best protected through the use of superficial "compliance reviews" which simply check information provided by oil and gas companies--in other words, a Boy Scout's honor system.

According to Bobby Maxwell, a senior former auditor who testified before Congress last year, MMS has also sought to shield its own internal RIK functions from audits, ensuring that no news is good news. Under the rubric that fewer audits are needed, MMS has shifted resources to reflect its priorities. According to its 2009 Budget Justifications, since 2001, MMS has overall downsized its full time employees conducting onshore and offshore auditing and compliance activities by 60, while at the same time moving 35 positions over to operate the RIK program.