Wednesday, December 12, 2007

Protecting the Public's Resources

The Department of Interior’s (DOI) Minerals Management Service (MMS) is responsible for collecting almost $10 billion of royalties owed each year on oil and gas produced from federal and Indian lands—the second largest source of income for the Treasury behind the IRS. However, for the past six years, government whistleblowers have alleged that a lack of oversight, deficient procedures, and cozy industry ties between MMS officials and oil and gas companies have created a system that allows the companies to underpay the federal government for scarce resources extracted from public lands.

On September 19th, DOI Inspector General Earl Devaney echoed these concerns in his report “Minerals Management Service (MMS): False Claims Allegations.” The report describes a process systemically plagued by ethical lapses, process failures, mismanagement and conflicts of interest. The IG report highlights the need for vigorous oversight of the oil and gas industry with an eye towards real accountability.

Taxpayers for Common Sense and Project on Government Oversight assert the MMS's closeness with its clients taints its mission to pursue uncollected royalties for the Treasury. This has been especially true, they say, in the six years since the Bush administration instituted a new process called "compliance review." Beth Daley, an investigator for Project on Government Oversight, said there has been a fundamental change with auditors being told not to audit oil companies that hold federal leases: "It was never a great culture, but it has taken a turn for the worse." Before, the agency relied more on auditing to determine whether proper royalties were being levied and paid.

As a result of these alleged abuses, whistleblowers have brought forth legal actions claiming oil and gas companies systematically undervalue the amount and value of resources removed from public and Native American lands, with one case (Burlington Resources) recently settling for more than $97 million. Evidence in these cases suggests oil companies prefer to risk federal penalties rather than pay the actual amounts owed since the prospect of real penalties (particularly under this Administration) stands so remote.

The following areas demonstrate the problems at MMS and the need for genuine leadership from the next Administration:

DEFICIENT OVERSIGHT: During the last several years, more than $500 million in royalty underpayments that the MMS failed to detect and recover has been recouped through False Claims Act lawsuits brought by private individuals on behalf of the federal government. For example, this August, Burlington Resources agreed to pay the United States $97.5 million to resolve claims that it underpaid royalties owed on natural gas produced from federal and Indian leases. The suit against Burlington was originally filed by a whistleblower under the False Claims Act. Interestingly, MMS chose not to require Burlington to pay interest on the under-reporting, deeming such a payment “a hardship” to the company.

ROYALTY UNDERREPORTING: Inspector Devaney points to a substantial body of evidence indicating that oil and gas companies are systematically undervaluing the amount of natural resources they extract from public lands. He characterizes MMS management as “a Band-Aid approach to holding together one of the Federal Government’s largest revenue producing operations.”

HABITUAL UNDERPERFORMANCE: In its 2006 assessments, the Office of Management and Budget (OMB) scored MMS overall as "not performing." Specifically: Strategic Planning at 60%, its Program Management at 66% and its Program Results and Accountability at 32%. In 2007, after firing and replacing MMS Director Johnnie Burton in July, the OMB glossed over the structural problems at MMS with a superficial score of "performing" despite the fact that even in the 2007 edition, OMB rates MMS "Accountability" at 62%--a substandard grade by any system.

ETHICAL LAPSES: In describing ethical lapses and bungling of revenue collection, the Department of Interior’s own Inspector General, Earl Devaney, said “Short of crime, anything goes at the highest levels of the Department of Interior.” In December, 2006 Devaney issued a highly critical audit of MMS’s compliance program.

CORRUPTION AND COLLUSION: According to a December 15, 2006 New York Times article and a December 30, 2006 CBS News report, the Department of Justice’s Public Integrity Section, the DOI Inspector General, and the FBI have two ongoing criminal investigations involving conflicts of interest involving MMS officials. Historically, MMS has created the specter of overly cozy relationships between auditors and oil and gas companies by locating “resident auditors” in the offices of the companies they are supposed to be overseeing.

These reports coupled with the settled and pending whistleblower suits demonstrate the need for vigorous oversight and genuine reform at MMS in order to avoid future recurrence. Such reform would provide substantial resources to invest in the strategic development of new sources of energy.

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