Johnnie Burton, director of the Interior Department’s Minerals Management Service (MMS), was involved in a cover-up of the mistakes made in the 1998 and 1999 deepwater Gulf of Mexico oil and natural gas leases that could cost the federal government billions of dollars over the life of the leases if the contracts are not renegotiated, said a spokesman for a congressman who has been investigating the matter.

Burton “knew relevant information [about the defective leases] that she chose not to disclose to the congressional investigation” when she testified before the House Government Reform Committee on Sept. 14, said Frederick Hill, an aide to Rep. Darrell Issa (R-CA) who, as chairman of the committee’s Energy and Resources Subcommittee, has been conducting a probe of the flawed leases since March.

The story was first published in Bloomberg Friday. Citing knowledgeable sources, Bloomberg reported that Burton assured oil producers in early 2004 that the flawed leases would be honored by the federal government. This showed that Burton, who has been in charge of the agency since 2002, either knew or should have known of the problem before this year, Issa told the news service. However, at that hearing, Burton testified that she first learned of errors in some of the leases earlier this year.

“This problem is something she should have known about. Whether or not you knew something or whether or not you willfully blinded yourself, that still puts you in a position of not taking the responsibility that she should have,” Hill said. NGI was unable to interview Issa, who is traveling in the Mideast.

MMS spokeswoman Blossom Robinson on Friday said the agency had no comment.

The problem with the 1998-1999 offshore leases issued by MMS was that they failed to include price ceilings. The lease price ceilings cut off royalty relief to producers when oil and gas prices are too high. Without this cut-off point in the 1998-1999 leases, producers who negotiated leases in those two years have escaped paying royalties on production up to a specific volume limit. The price caps that trigger royalties were included in leases that were issued in 1996, 1997 and 2000, but were inadvertently omitted in the 1998-1999 leases due to a mistake on the part of the MMS. Congress has put pressure on producers to renegotiate these leases with the MMS.

In a preliminary report last March, the Government Accountability Office (GAO) estimated that the omission of the price ceilings in the 1998-1999 leases could cost the federal government up to $10 billion over the life of the leases if they are not renegotiated.

A nine-month investigation by Issa’s subcommittee found that the flawed leases were the result of gross mismanagement and a failure of accountability on the part of Interior and the MMS. A review of the matter by Interior Inspector General Earl Devaney confirmed that the omission of the lease price thresholds was first detected in 2000 but then was covered up (see NGI, Sept. 18). The discovery of the mistake and subsequent cover-up occurred before production on the 1998-1999 leases had begun and royalties were owed, according to the subcommittee. If the missing price thresholds had been properly reported to superiors in 2000, the whole incident could have been avoided, Issa said.

Issa said the “central issue” from Devaney’s testimony was the cover-up of the missing price thresholds at Interior, which caused a “$10 billion-plus wound.” The public will not accept “the wink and the nod that that was just a mistake,” he noted.

In October, Interior Secretary Dirk Kempthorne appointed Steve Allred, Interior’s new assistant secretary of land and minerals, to take a “fresh look” at the flawed leases, and reach a “fair and equitable resolution” on the issue of royalties owed to the federal government. Allred refused to point a finger at Burton. “I have not found anything that would lead me to believe she would cover anything up or purposely distort what’s going on,” he said in an interview with Bloomberg.

Interior in November formed an independent panel to review and offer advice on ways to improve the department’s mineral revenue collection from federal offshore/onshore and Indian lands. Rep. Edward Markey (D-MA) quickly denounced Interior’s action, saying he had “no faith” in the ability of the department to police itself.

The panel will conduct its review over a six-month period and then turn over its findings and recommendations to the Royalty Policy Committee, an independent advisory board appointed by the Interior secretary to advise the MMS on royalty management issues and other mineral-related policies.

In September, Burton said the agency would forego efforts to try to collect royalties that have been lost so far due to the failure of the agency to include price thresholds in 1998-1999 leases, but rather would concentrate on recovering revenues on future production from the flawed leases (see NGI, Sept. 25). Burton estimated the lost revenues at $1.3 billion, while the GAO pegged the lost revenues from the 1998-1999 leases at $2 billion so far.

This evoked anger from Capitol Hill. House Government Reform Committee officials, including Issa, who said the agency’s decision not to recoup billions of dollars in back royalties on past production from the defective leases was unacceptable (see NGI, Oct. 2).

In early October, Shell said it had reached a preliminary agreement with the MMS to add price thresholds and pay royalties on production stemming from the 1998-1999 leases when the price ceilings are exceeded (see NGI, Oct. 9).

Shell signaled that its agreement focused solely on recovering royalties on future production from the 1998-1999 leases, rather than on retrieving royalties from past production under the leases. “We believe royalty payments should be made prospectively in order to honor the sanctity of the contracts and are negotiating that with MMS now,” the Houston-based producer said.

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