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Interior IG Mulls Taking Over Royalty Auditing Function

The Interior Department inspector general said Friday his office is exploring the idea of taking over from the embattled Minerals Management Service (MMS) the auditing of offshore oil and natural gas royalties that are paid to the federal government. The MMS has been under constant attack for a year for its failure to collect billions of dollars of royalties that are owed by producers.

"Recent events probably suggest that we should take a look at this issue of where that auditing takes place in the department," Inspector General Earl Devaney told the House Natural Resources Committee during a hearing on the widespread problems at Interior.

"I've asked my staff to prepare a white paper on that subject," he said under questioning from Committee Chairman Nick Rahall (D-WV). "I think we need to think about this a little bit." He noted that the royalty auditing function originally was performed by the inspector general's office. But it was taken away in the late 1980s and given to the MMS.

Devaney weighed the pros and cons of returning the auditing function to his office. On the plus side, the Interior Department "would be less prone to criticism" if the auditing was done by the inspector general and his staff, he said. But, "I'm not particularly anxious to inherit some of the issues [that are] going on there right now," he told Rahall.

Any royalty anomalies detected by Interior "should trigger a real audit, where someone goes out and knocks on the door and asks for the books," Devaney said. But "we didn't find any evidence of that when we looked at [the MMS] program."

The MMS, which is charged with collecting royalties on oil and gas production in the Outer Continental Shelf, is conducting fewer audits than in past years. Most of the audits are performed on large producers, while the majority of smaller producers are "never looked at" by MMS, Devaney said.

Interior, specifically the MMS, has been on the hot seat for more than a year, ever since it was disclosed that the agency failed to include critical price thresholds in deepwater oil and gas leases that were issued in 1998 and 1999. The Government Accountability Office (GAO) estimates that $1 billion has been lost to the federal government so far due to the oversight.

"It's certainly a lot of money" that won't be recovered as a result of the missing lease price thresholds, Devaney said. When pressed further, he said it could be tens of billions of dollars if the leases between Interior and producers are not renegotiated.

The MMS has estimated that foregone royalties from leases issued between 1996 and 2000 could be as high as $80 billion, said Robin M. Nazzaro, director of natural gas resources and environment for the GAO, at the House hearing. "Currently, we [are] assessing MMS' estimate...in light of changing oil and gas prices," she noted.

The critical price ceilings serve as a benchmark to determine when oil and gas production becomes subject to federal royalties. Without them, producers who negotiated leases in 1998 and 1999 have been able to escape paying royalties on production up to a specific volume limit. The price caps were included in leases that were negotiated in 1996, 1997 and 2000, but were not in the 1998 and 1999 leases.

Some committee members put pressure on Devaney, saying that his report on the investigation into the absent price thresholds, which concluded the omission was the result of a mistake rather than a deliberate act, did not go far enough.

"I find deep flaws...in the report. You state that the price thresholds were left out as a mistake," said Rep. Stevan Pearce (R-NM). While he didn't believe there was "criminal activity" involved on the part of the Clinton administration, which issued the faulty leases, Pearce concluded that there was an "inherent conscious decision" made by MMS officials at the time not to include the price thresholds in the 1998-1999 leases.

The mistake was the result of a "terrible breakdown in communications," Devaney said. MMS officials did not put the price thresholds in the 1998-1999 leases because they mistakenly believed the Deep Water Royalty Relief Act of 1995 had included the price caps. When the agency finally realized the mistake, Devaney said he agreed the agency "did not look at it in the robust way" that it should have done.

The MMS was not the only Interior agency to come under attack at the hearing, GAO's Nazzaro said the Bureau of Land Management (BLM) and Fish and Wildlife Service (FWS) had not been "effectively carrying out [their] responsibility" to ensure that hard rock mining and oil and natural gas activities do not cause "unnecessary environmental harm."

The increased oil and gas activity on private and federal lands "has lessened BLM's ability to meet environmental mitigation responsibilities for oil and gas operations," she told the committee.

In addition, the FWS has not been "consistently inspecting" oil and gas operations in national wildlife refuges to ensure environmental standards are being meet, Nazzaro noted.

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