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Oil industry leases need a closer look

Discovery of huge new oil reserves beneath the Gulf of Mexico will help relieve U.S. dependence on imports, but U.S. taxpayers may be shortchanged if the Department of Interior continues to manage the resource carelessly.

Earlier this year, the New York Times reported that many oil companies will be able to skip billions in payments to the U.S. Treasury because leases for drilling rights in the gulf omitted language requiring royalties when crude oil prices exceeded $36 per barrel. The Interior Department administers the leases. The defective agreements date back to the Clinton administration.

The department says — correctly — it can do nothing to amend the leasing contracts, but a few companies have stepped up to make at least partial reparations. To encourage more to come forward, some members of Congress want Interior to deny additional leases to companies that scored the windfall from the government’s previous mismanagement unless they pony up full royalties, an estimated $13 billion, from leases they already have. The U.S. House of Representatives passed a bill to that effect, but the provision was attached to legislation that would open waters off U.S. coastlines to oil exploration. West Coast states want nothing to do with such drilling.

Johnnie Burton, the head of the agency responsible for managing the leases, says denying companies access to more federal leases could raise constitutional issues. Or they might choose to invest exploration dollars elsewhere around the globe, she says.

Meanwhile, in litigation and testimony before Congress, current and former Interior Department employees allege they have been ordered to ignore royalty underpayments of more than $30 million. One of the scofflaws is Kerr-McGee, which is also pushing an interpretation of oil lease language that would free the industry of almost any royalty obligations.

The employees, all auditors, claim several companies, notably Kerr-McGee and Shell, avoided $31 million in royalty payments. Both those firms allegedly dodged payments by selling oil produced from federal leases at below market prices, or by deceptively reporting transportation costs. The auditors say their superiors told them to lay off pursuit of the government claims.

Louisiana, which noticed the same kind of fraudulent pricing practices on state leases, negotiated $600,000 in additional royalties from Kerr-McGee.

The auditors, if their claims are true, should be commended for taking on their bosses. But their motives are not entirely altruistic. They would be entitled to a share of the underpayments and treble damages, a potential sum of more than $100 million. At the same time, those employees who remain with the department are certainly taking a major professional risk by going to court. One, the most successful in terms of turning up payment shortfalls, was forced out of the agency in 2004.

The Interior Department’s immediate response to the litigation has been one of criticizing the auditors for not working through channels.

Unfortunately, the Interior Department’s recent track record on recoveries from companies drilling on federal leases is not reassuring. Auditors are now forbidden to subpoena oil company documents, and they and other officials are recovering just one-quarter of the amount of alleged lease underpayments they did prior to the Bush administration.

The department’s inspector general earlier this month told a congressional subcommittee that Interior has tolerated all manner of questionable conduct short of a crime over the last seven years, but added that new Secretary Dirk Kempthorne has pledged to reassert ethical standards.

Kempthorne, Idaho’s former governor, should start by checking out the claims of his auditors, and taking them off the leash. Allowing the oil industry to exploit public resources without proper compensation is a slap in the face to consumers.