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Energy Panel Chair Seeks GAO Probe of RIK

The chairman of the Senate Energy and Natural Resources Committee on Thursday asked the Government Accountability Office (GAO) to undertake a "thorough review" of the royalty-in-kind (RIK) program overseen by the Interior Department's Minerals Management Service (MMS). The Department of Justice launched a criminal investigation of the RIK program last month (see Daily GPI, Jan. 3).

In a letter to GAO Comptroller General David Walker, Committee Chairman Jeff Bingaman (D-NM) and Sen. Ron Wyden (D-OR) noted that two previous GAO studies of the RIK program in 2003 and 2004 were unsuccessful because MMS was unable to provide complete and accurate records.

The investigation of the MMS program at first centered on Gulf of Mexico (GOM) deepwater leases issued between 1998 and 1999. Offshore leases included a royalty incentive allowing companies to produce a set volume of oil and gas before paying royalties. The incentives were not to be applied if market prices exceeded a certain threshold. However, leases issued in 1998 and 1999 omitted a price threshold, and as a result, companies were not required to pay royalties until all of the incentive volume was produced, even when prices were high.

Several producers that benefited from the 1998-1999 leases agreed in December to modify their royalty agreements (see Daily GPI, Dec. 15, 2006).

Wyden noted a review of the RIK program is necessary because MMS wants to expand it under its fiscal 2008 budget request. MMS anticipates that nearly 80% of its GOM oil and gas royalties will be paid as RIK by 2009, according preliminary budget figures.

The RIK program, said Wyden, "raised flags" in GAO's review in 2004, "and now the Inspector General tells us that a criminal investigation is under way. The fact that the Interior Department would now take steps to expand this program defies logic. It is essential that Congress conduct a thorough review of the program to ensure that taxpayer dollars are not being wasted."

Specifically, Bingaman and Wyden requested GAO review the following:

"Given the growth of this program because of the [proposed] energy bill, its impact on the treasury and the problems that MMS has had with record keeping, we think it's just good government to have GAO take a closer look at this program," Bingaman said.

Interior Department Secretary Dirk Kempthorne testified for about one hour before the committee Thursday about Interior's fiscal 2008 budget request. Kempthorne's testimony centered on President Bush's parks enrichment initiatives, but in pointed questioning that lasted for about 40 minutes, several senators were more interested in the RIK program.

Sen. Pete Domenici (R-NM) offered a spirited defense.

"When you look at the 1998 and 1999 lease situation, it's as if the oil companies had actually taken advantage of the program," Domenici said. "We have settled into a reality that it's nothing of the sort. Actually, those leases were issued without any royalty provision, and that is what the administration in office at the time [Clinton] wanted. That was the law for them, and that's what they wanted."

But Wyden begged to differ.

"The oil royalty issue...is more than just a few innocent mistakes," he said, noting that the RIK program is "now officially under criminal investigation. This program is a big deal. It's the future..., but every time we look at the program, we can't find out from Minerals Management something resembling total revenue, savings..., the nuts and bolts of how this program works."

Wyden asked Kempthorne why it seemed to be "so difficult" for MMS to provide requested financial information.

"You would think that it would not be," Kempthorne answered. "It's a government operation, and it needs to operate under accounting procedures, auditing procedures. To a great extent, it is. Minerals Management has a very dedicated staff," but there have been problems.

"The 1998-1999 situation where the price thresholds were left out, we believe it was a mistake. We all do," Kempthorne said. "We do not believe it was just some oversight. We don't think it was anything other than error. But someone made the error. We have taken some actions based on a preliminary investigation by the Inspector General. And we will continue to work on what changes need to be made, how best to make those changes and if a program of audits need to be made." Kempthorne said his department "will continue to press for answers."

Wyden clearly was not satisfied. He said that because the RIK program was "big" in MMS' future budget plans, "this is very troubling. We're not talking about...thrashing about past leases. And I really do hope the department has 80% of the money coming in 2009. But when GAO comes out with these reports that Minerals Management can't get its arms around the costs involved, I'm telling you, I'm going to get to the bottom of this. This is a big program, royalty payments. I'm going to stay with it till we do [get the answers]."

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