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Federal Authorities Investigating Interior's RIK Program

The Justice Department is investigating whether officials with the Interior Department's Minerals Management Service (MMS) played favorites or took money from energy companies bidding on contracts under the agency's royalty-in-kind (RIK) program.

The probe is the latest in a string of investigations into MMS' alleged mishandling of its collection of $10 billion a year in royalties from oil and natural gas production on federal lands.

The Justice probe into the multi-billion-dollar RIK program was first reported Friday by The New York Times, which based its story on sources who spoke on the condition of anonymity because the investigation has not yet been announced publicly. The sources said investigators were concerned that MMS officials may have steered huge oil trading contracts to preferred companies. The inquiry so far appears to be focused on the oil trading side of the RIK program.

Under its highly touted RIK program, MMS accepts royalty payment from producers in the form of oil and gas product rather than in cash, and then resells the product to companies that typically agree to pay more than the daily spot price. In a report sent to Congress last September, the agency said it received a total of $50 million more in revenues in fiscal years 2004 and 2005 because of oil and gas producers paying royalties in kind instead of cash. The MMS said it also received $3.74 million in administrative cost savings in fiscal year 2005 as a result of the program.

As a result of the inquiry, Gregory W. Smith, director of the RIK program in Denver, and three subordinates have been transferred to different jobs and have been ordered to cease all contacts with the oil industry until the investigation is completed, according to the published account.

In addition, Interior Inspector General Earl Devaney has referred two cases to the FBI and Justice Department for possible criminal ethics violations. These cases "tangentially involve royalties," said Rep. Edward Markey (D-MA) last month.

Devaney and Congress also are investigating missing price thresholds in the deepwater Gulf of Mexico oil and gas leases that were issued by the MMS in 1998 and 1999. The absence of the lease price thresholds, which are designed to trigger the payment of royalties when market prices rise above certain levels, are costing the federal government billions of dollars in lost royalties, according to the Government Accountability Office (see Daily GPI, Dec. 15, 2006).

Devaney is expected to issue a report on the missing price thresholds in mid-January, Markey said.

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