Senators take new look at Interior royalties blunder

In a fresh look at the Interior Department's costly blunder that could cost the Treasury up to $10 billion in lost oil and gas royalty payments, the Senate Energy and Natural Resources Committee on Thursday questioned department officials about ways to cut losses by persuading reluctant energy companies to pay for the mistake.

Six of the companies -- which control about 20 percent of the production from deepwater wells in the Gulf of Mexico -- have agreed to renegotiate their contracts with Interior. The remaining leaseholders, including ExxonMobil, are apparently waiting to see if Congress acts to extend their leases before coming to the bargaining table.

On that point, Assistant Interior Secretary C. Stephen Allred told the committee that such guarantees on contract extensions could induce the balky companies to revamp their leases.

The whole matter, which has been under investigation for months by Interior's inspector general and the Government Accountability Office, stems from the failure of the Interior Department's Minerals Management Service to include price thresholds for royalty payments in leases granted in 1998 and 1999.

Companies that drill in deep water are eligible for lower royalty payments to the government until they exceed certain thresholds on the volumes they produce or market prices for the oil or gas. According to the GAO, about $1 billion in such payments have been lost, and over the next decade the loss could reach $10 billion.

Interior IG Earl Devaney, echoing his earlier testimony to Congress, told the committee today that there is "no smoking gun" to prove that a lone bureaucrat or higher official was culpable for the lapse in royalty collections -- which were collected for the three years before 1998 and every year since 2000.

But Devaney blasted the department for "a shockingly cavalier management approach to an issue with such profound financial ramifications." He called it "a jaw-dropping example of bureaucratic bungling." And while his office has concluded this particular inquiry, Devaney said his deputies are looking into at least a dozen other instances in MMS, "some of which are criminal in nature."

Energy and Natural Resources Chairman Jeff Bingaman, D-N.M., acknowledged the department's progress in getting half a dozen companies to renegotiate their contracts. But "this is a far cry from making the American people whole," he said, alluding to the failure of other leaseholders to come to the bargaining table.

Sen. Byron Dorgan, D-N.D., angrily proposed to Allred that Interior simply refuse to deal in the future with companies that balk at such negotiations. "We need to let bidders know very clearly that we won't do business with them again when mistakes are made in contracts that cost taxpayers billions of dollars," he said.

Allred said department lawyers had advised him that the contracts "can't legally be abrogated," particularly in this case when "a conscious decision to drop the price thresholds had been made" by MMS officials. "That would make it very difficult" for the department to win a lawsuit should the companies contest the abrogation, he said.