The inspector general (IG) of the Department of Interior (DOI) last week issued a strongly worded report on the Minerals Management Service (MMS), noting that the agency displays a conflict of interest in its relationship with the energy industry and is running a flawed oil and natural gas royalty-in-kind (RIK) program.

The report came at the request of Sen. Jeff Bingaman (D-NM), chair of the Senate Energy and Natural Resources Committee, and Rep. Nick Rahall (D-WV), who chairs the House Natural Resources Committee. An investigation of the MMS operations and the RIK program began in earnest following allegations by ex-employees and an audit of the RIK program (see NGI, Sept. 18, 2006; Sept. 25, 2006).

In a letter to DOI Secretary Dirk Kempthorne, IG Earl Devaney said the MMS Minerals Revenue Management program is "fraught with difficulties stemming from myriad causes." The program "presents examples of a systemic dilemma in MMS -- that of the bureau's conflicting roles and relationships with the energy industry."

Devaney's office also investigated 18 allegations of retaliation against then-MMS employees who disagreed with MMS management on how royalties were calculated.

"Although we found no conclusive evidence that MMS deliberately retaliated against the [auditors], we found some disconcerting behavior," Devaney said. MMS management "created an environment where reprisal could certainly be perceived," and the incidents reveal an "element of distrust" in the agency. Devaney also said there is a "Band-Aid approach to holding together one of the federal government's largest revenue-producing operations."

After the report was released, Rahall and Bingaman asked Kempthorne for a detailed response. The lawmakers said the report "raises a number of troubling questions beyond the initial scope of the investigation, exposing matters that heighten our concerns about the agency's administration of its royalty management program."

The report "points to MMS' 'conflicting roles and relationships with the energy industry,' 'systemic communication failures' that hinder federal auditors' efforts to collect royalties owed by oil and gas companies and a 'profound failure' to develop computer systems critical to the efficient collection of these revenues -- a computer system for which the public has paid nearly $150 million," said the congressmen.

Rahall added that the report "further confirms what we have already known for some time now -- the MMS royalties program is severely flawed from top to bottom. The lack of meaningful oversight of this program in recent years has cost American taxpayers millions, perhaps billions, of dollars in lost royalties that are owed to the federal treasury." In the coming months, Rahall said, his committee "will continue to take a hard look at how the MMS royalty collection program is being run, and whether or not fundamental changes are needed to ensure the American people are getting a fair share for the disposition of their oil and gas resources."

MMS Director Randall Luthi said the IG had determined that MMS auditors "did not properly report their suspicions of wrongdoing to the appropriate authority," and "they removed and used proprietary, sensitive or confidential business information without authorization." After the report is reviewed, the MMS will determine what, if any, changes are needed, Luthi said.

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