A House Government Reform subcommittee investigating the absence of price thresholds in deepwater oil and natural gas leases negotiated in 1998 and 1999 said it has uncovered a "trail of irresponsibility and gross mismanagement" by the Department of Interior that led to the omissions, and an apparent "cover-up" that served to only worsen the problem.

Since March, the House Energy and Resources Subcommittee "has reviewed the documentation surrounding nearly every aspect of the lease creation process...The subcommittee has interviewed individuals intimately familiar with all levels of the lease sale process. What has surfaced is a trail of irresponsibility and gross mismanagement," the House panel reported (see Daily GPI, March 6).

"This investigation has revealed that the problem began in 1995 when the Interior Department promulgated inadequate regulations" that excluded the price thresholds in some deepwater leases. The price caps serve as a benchmark to determine when oil and gas production becomes subject to royalties. Without them, producers who negotiated leases in 1998 and 1999 have been able to escape paying royalties on production up to a certain volume level. The price caps were included in leases that were negotiated in 1996, 1997 and 2000, but not in the 1998 and 1999 leases -- which only compounds the mystery.

"Instead of correcting those regulations, the department applied a series of 'Band-Aids' that never stopped the bleeding. This irresponsible behavior may have culminated in a cover-up by the department that only perpetuated the problem," the subcommittee said. "At best, the Interior Department suffers from a poor management culture. At worst, there is a persisting cover-up with regard to the missing price thresholds," subcommittee staff wrote in a briefing memorandum.

"The department testified, under oath, that nobody noticed the lack of price thresholds until early 2000. The subcommittee staff believes that this is inaccurate. The documents suggest that someone noticed the problem and unsuccessfully attempted to fix it," the briefing memo further said.

The Government Accountability Office (GAO) has estimated that these royalty-free leases will cost the federal government upwards of $10 billion in lost revenue, according to the subcommittee. The GAO is carrying out a parallel investigation into the absence of price thresholds in the 1998 and 1999 oil and gas leases, at the request of Sen. Jeff Bingaman of New Mexico, the ranking Democrat on the Senate Energy and Natural Resources Committee.

It's estimated that producers are holding 576 leases that do not contain price caps, and thus are not paying any royalties on certain volumes of oil and production from those deepwater leases.

The subcommittee has scheduled another hearing Wednesday to "ascertain how these egregious errors occurred and who is responsible for them." It has called three existing and former Interior attorneys to testify, as well as executives from Exxon Exploration Co., ConocoPhillips, Kerr-McGee and Chevron. Kerr-McGee is challenging in court Interior's authority to impose price thresholds between 1996 and 2000.

"It is crucial to examine the role of the oil and natural gas producing companies. This includes their interactions with the Interior Department...and whether they ever raised issue with the omission of price thresholds in the final notices of sale and the leases themselves," the House panel said. "Assuredly, the oil and gas companies realized what kind of deal they were getting," the staff subcommittee memo said.

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