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Oil Companies Billed $66 Million In Late Interest Payments

The Department of Interior's Minerals Management Service announced it had issued bills for $66 million in backlogged interest payments owed by oil and gas companies, according to an internal email circulated by DOI Assistant Secretary Stephen Allred yesterday. The email caps an effort by the agency to bring its interest billings up to date.

The interest backlog was exposed when two auditors who disagreed with management's decision to ignore the backlog filed False Claims Act lawsuits against 24 oil companies to collect. The auditors revealed that companies were not reporting and paying the interest that they owed on royalty adjustments. Meanwhile, MMS wasn't billing them for the interest either, in part because a $150 million computer system built by Accenture which failed to work.

Yesterday's email and a report released last week by the DOI Inspector General underscore the urgent need for the Congress to pass legislation requiring MMS to restore its auditing function. House Resources Committee Chairman Nick Rahall championed provisions in the pending Energy bill (H.R. 2337) to require the MMS conduct 550 audits of oil companies per year. That was the same level of auditing activity the agency sustained prior to 2000 when MMS started to gut its audit function, leaving behind "billions of dollars in royalty payments owed to the American people," according to Chairman Rahall. The Senate version of the Energy bill did not include a corresponding provision. The Senate and House are currently working toward a conference on the Energy bill.

In 1997, MMS notified oil companies that if they failed to calculate and pay interest owed, MMS would assume that they had a "hardship" and would calculate the interest for them. Under questioning from IG investigators, the author of the memos, MMS Associate Director Lucy Dennett admitted "if Joe Public looks at it, they probably think we're crazy."

The Inspector General found that MMS even encouraged companies not to pay interest in a presentation made for royalty payment trainings. According to the IG, "Slide 26, titled 'Reporting Your Own Interest,' from the presentation used for the training advises companies that they do not have to report their own interest. The slide contains the following language: 'Do I have to? It's too hard. The answer is NO!'"

Former MMS Director "Johnnie" Burton who was asked by IG investigators what was being done to eliminate the interest billing backlog responded "We're doing the best we can. We don't have very many resources to throw at the problem, outside of what needs to be done daily."

Section 111A of the 1996 Royalty Simplification and Fairness Act requires that oil and gas companies "shall calculate and report the interest due" at the time of any adjustments made in their royalty payments unless it "would impose a hardship." Under the hardship provisions, the DOI or a delegated state would calculate the interest and bill the company. MMS policy allowed oil companies to abuse the hardship rules.

Numerous insiders interviewed by POGO have pointed to Accenture's crippled royalty payment computer program as a primary reason that taxpayers, states and tribes should be concerned that oil royalty payments are not being accurately collected. One Accountant interviewed in a report released last week by the DOI Inspector General (IG) called that computer program "the rape of the American taxpayer." The IG has vowed to keep investigating the contract for failed computer program.

Additional Resources: Interior Dept. Watchdog Slams MMS, POGO, September 26, 2007.