WASHINGTON – A “jaw-dropping example of bureaucratic bungling” triggered what could ultimately be a $10 billion loss to taxpayers from squandered offshore oil and gas royalties, the Interior Department’s inspector general said Thursday at the conclusion of a yearlong investigation.

Earl Devaney said he found no evidence of criminal wrongdoing but criticized the “cavalier management” of the director of the Minerals Management Service, Johnnie Burton, who he said ignored the blunder for more than a year.

In testimony before the Senate Energy and Natural Resources Committee, Devaney questioned whether, even now, taxpayers are getting what they are owed from private energy companies operating in the Gulf of Mexico. He called the royalty-collection process “basically an honor system,” a characterization that sparked a strong response from Democrats.

“The IRS has no problem sending out a tax bill with interest down to the very penny, but we have a problem doing that with big oil companies,” said Sen. Robert Menendez, D-N.J. “Ask the taxpayers how they feel about that.”

C. Stephen Allred, the assistant secretary in charge of the royalty program, defended the agency’s track record.

“I believe we are collecting the revenue due to the U.S. taxpayers,” Allred told the committee.

But members expressed skepticism, particularly in light of Devaney’s report and ongoing lawsuits by agency auditors who said their warnings about companies shortchanging the government were thwarted.

The lease foul-up occurred when Interior Department employees began implementing provisions of the 1995 Deep Water Royalty Relief Act, which offered companies an enticement to drill in the face of low energy prices. Under the act, companies wouldn’t have to pay royalties – 12.5 percent of their production – unless oil reached $34 a barrel. At the time, it was below $20.

Leases auctioned in 1996 and 1997 contained the price threshold. But 1,032 leases from 1998 and 1999 didn’t, an unexpected windfall for companies allowed to keep their profits no matter how high the price of oil got.

Devaney said mid-level bureaucrats mistakenly assumed the price thresholds were included in regulations so they didn’t need to be written into each new lease. They ordered John Rodi, who supervised Gulf of Mexico lease sales, to remove the language from the leases, which he did. When the omission was discovered in 2000, the provision was put back into the leases.

But it was too late. The Government Accountability Office said nearly $1 billion has been lost because of the blunder and unless companies agree to renegotiate the leases, taxpayers stand to lose $10 billion or more.

“At a minimum, this was a shockingly cavalier management approach to an issue with profound financial ramifications, a jaw-dropping example of bureaucratic bungling and a total reliance on a system which diluted responsibility and accountability,” Devaney told the committee.

Burton, who oversees the leasing program, told a House committee last year that she didn’t learn about the problem until 2006. Soon after, she opened negotiations with energy companies to rework the disputed leases. Devaney, who interviewed 44 people and reviewed 19,000 e-mails, found that Burton actually learned about the problem in 2004. He said she dismissed the matter after being told that “there were no legal options.”

Timing is important because as energy prices rose, companies had less of an incentive to renegotiate their leases. Six companies have come forward representing about 20 percent of the leases, but most, enjoying record profits with high oil and natural gas prices, have refused.

Allred defended Burton. “I have not seen a reason yet to make a change in her status,” he said.

Some senators questioned Devaney’s central finding.

“You keep saying this was a mistake,” Sen. Jeff Session, R-Ala., told Devaney. “But someone made a decision to take this out.”

Several Democrats said Devaney’s conclusions bolster the government’s contention that the disputed leases should be renegotiated. As the House voted Thursday to penalize companies that refuse to pay, Senate Democrats urged the Bush administration to take a harder line.

“Why can’t the government not take the position that either you renegotiate or we say, “Sorry Charlie, you aren’t doing business with us anymore,”‘ asked Sen. Byron Dorgan, D-N.D.

But Republicans urged caution, saying that rewriting contracts would make companies wary of doing business with the United States.

“I hope this Congress will resist the temptation of the headline and act in a thoughtful, practical way,” said Sen. Pete Domenici, R-N.M., the panel’s top-ranking Republican.

Sen. Mary Landrieu, D-La., said she hadn’t decided how best to recoup lost royalties, but wanted at all costs to avoid a protracted legal battle that could keep a share of oil and gas royalties from flowing to Gulf Coast states, including Louisiana.

“My goal is to keep this out of court,” she said. “My people will suffer immeasurably if this is tied up in a lawsuit.”

PH END WALSH

(Bill Walsh can be contacted at bill.walsh(at)newhouse.com)

2007-01-18-OIL-MESS

AP-NY-01-18-07 1800EST

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