Bingaman Statement/Royalty Hearing

STATEMENT OF SENATOR BINGAMAN

Oversight Hearing on Oil and Gas

Royalty Management

January 18, 2007

Today the Committee will hear from witnesses on the topic of oil and gas royalty management at the Department of the Interior. Problems in this program have been the subject of work by the Department’s Inspector General and the Government Accountability Office. I have had a chance to briefly review the IG’s report that is being released today and I think there is plenty of blame to go around.

Almost one year ago, we became aware that Outer Continental Shelf oil and gas leases issued in 1998 and 1999 in the Gulf of Mexico did not contain so-called “price thresholds,” thus allowing for a certain volume of royalty-free production under the Deep Water Royalty Relief Act of 1995. At that time, I was joined on a bi-partisan basis by 21 members of the Senate and additional members of the House in requesting that the GAO look into this matter. This problem may result in losses to the Treasury of $10 billion over 25 years.

While this error initially occurred on the Clinton Administration’s watch, it is clear that the mistake was made by career civil servants. Lease terms were changed without the Solicitor’s Office asked to review the modifications. Communications were confused. And when the error was discovered, mid-level managers did not bring it to the attention of any Departmental official.

Subsequently, when the problem did become known to Bush Administration officials, initially little action was taken. Efforts over the last year have resulted in settlement agreements with a handful of companies, but this is a far cry from making the American people whole.

From my vantage point, the entire matter raises serious questions about management and organization at the Department and the adequacy of resources, particularly in the Solicitor’s Office. I hope that the testimony today can lead to concrete, constructive steps such as increased resources where they are needed, any warranted management reforms, and legislative solutions as required.

I am also deeply concerned about pending litigation brought by Kerr-McGee Oil and Gas Corporation (which was recently acquired by Anadarko Petroleum Corporation) relating to this same deepwater royalty relief program. This lawsuit challenges the authority of the Secretary to impose price thresholds for leases issued in 1996, 1997, and 2000. I believe Congress intended that price thresholds apply, but if the industry prevails in this litigation, the exposure to the Treasury and windfall to industry could be enormous – an estimated $60 billion over 25 years.

Unfortunately, the royalty management problems do not end here. Last month, the IG released a report relating to the audit and compliance review process for both onshore and offshore royalties. That report indicates that MMS has reduced the number of auditor positions by over 20 percent since 2000. The number of audits has been reduced by 22 percent over the period from 2000 to 2004/2005. Ensuring the MMS collects the proper amount of royalties has implications not only for the Federal Treasury, but also for States, which share in the royalty proceeds, and for Indian tribes, when Indian oil and gas resources are involved.

I am also concerned that four government auditors who have monitored leases for oil and gas on Federal lands allege that the Interior Department suppressed their efforts to recover millions of dollars from the lessees. These individuals have filed qui tam cases under the Federal Government Civil False Claims Act, seeking to recover these amounts on behalf of the Federal Government. I understand that the IG is looking into this matter.

Finally, last June, Chairman Rahall and I requested that GAO review whether the royalty rates for oil and gas leases are commensurate with royalties received by states and private interests on their lands. I noted with interest that last week the Administration announced an increase in royalty rates for OCS leases in deep waters of the Gulf of Mexico. I hope that GAO will be able to provide us with their initial findings.

Finally, I am seriously concerned about what I hear regarding the tone and the ethics climate at the Department of the Interior. I was alarmed, Mr. Devaney, when you stated last fall that “short of a crime, anything goes at the highest levels of the Department of the Interior.” We intend to take our oversight responsibilities seriously. At the same time, it is my goal to engage in a constructive manner and to seek solutions.

Thank you to the witnesses for being here today. I look forward to your testimony.

# # #

Democratic News