The departure of embattled Minerals Management Service (MMS) Director Johnnie Burton (see Daily GPI, May 9) is a good first step, but much more needs to be done to improve the integrity of the agency, said a Washington, DC-based independent watchdog group.

The MMS, which oversees offshore oil and natural gas activity and is charged with collecting royalties, is in "dire need of systemic reform. Burton's departure is a step in the right direction, but will not be enough to restore integrity to oil and gas royalty collections," said the Project on Government Oversight (POGO).

"The agency needs to go back to the old formula for conducting audits. It needs to do [royalty] audits instead of relying on oil and gas company calculations," said POGO spokeswoman Jennifer Porter Gore. Because of its lax auditing, MMS collected an average of $48 million annually in royalties between 2002 and 2005, a sharp drop from the $115 million it collected annually in its first 20 years of existence, POGO contends.

The watchdog group believes the resignation of Burton is the right move for MMS. "It gives them the opportunity to put someone in the position that will be stronger in controlling the companies that they regulate," Porter noted. Burton has been under constant attack from Capitol Hill lawmakers for not aggressively pursuing oil and gas royalties that are owed the federal government.

Interior Secretary Dirk Kempthorne announced Monday that Burton turned in her resignation letter, and that it would be effective at the end of the month. An MMS spokesman said she was not pressured to leave. The usual plaudits that come from Capitol Hill when an administration official announces he or she is leaving did not occur in Burton's case.

POGO's Porter acknowledged that the royalty-collection problems at MMS -- namely, the failure to include price thresholds in the 1998-1999 deepwater oil and gas leases -- occurred prior to Burton assuming office in March 2002. But Porter said Burton failed to take steps to correct the mistake once it became apparent. "Any chance to catch the mistake and correct it were ignored."

MMS has calculated that the missing price thresholds in the 1998-1999 leases already have cost the federal government $1 billion in lost royalty revenues. It further has estimated that between $6.4 billion and $9.8 billion in royalties could be lost to the federal government over the life of the 1998-1999 leases due to the absent price caps -- a figure that the Government Accountability Office said is "reasonable" (see Daily GPI, April 16).

Acting on a directive from Congress, the MMS gave producers a break on royalties in the late 1990s, when oil and gas prices were low, to spur exploration and production in the Gulf of Mexico. The lease agreements were supposed to contain price-threshold language stating that the price relief would come to an end when oil and gas market prices soared above a certain level. But the Interior agency left this language out of the 1998 and 1999 leases -- a mistake that has allowed producers to escape royalties on certain volumes despite the high prices for oil and natural gas..

The MMS earlier this year reported it was negotiating with 22 companies to include price triggers in the faulty oil and gas leases that were issued in 1998 and 1999 (see Daily GPI, March 1). This was in addition to six companies with which the agency reached deals in mid-December (see Daily GPI, Dec. 18, 2006). A large number of producers that hold the 1998-1999 leases still have not entered into talks with MMS.

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