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Agency's ethics hit in oil lease foul-up

US losses pegged at $10b due to royalty omission

WASHINGTON -- An official overseeing oil leases says he was directed in the 1990s to remove a provision concerning royalty payments, creating a financial windfall for oil companies, an Interior Department official says.

Inspector General Earl Devaney also unleashed a broad rebuke of his department's record on ethics.

He testified yesterday at a House hearing that the leasing official's contention could not be verified despite a lengthy investigation and a polygraph test, which the official passed. He said the official implicated three people, but all denied making such a directive. One also passed a polygraph.

Devaney, the department's internal watchdog for seven years, said he could not say whether anyone will be disciplined over the oil royalty mistake. It involved thousands of leases issued in 1998-99 without a section that would have required royalty payments if oil prices reached a certain level.

He contended midlevel department officials covered up the mistake for five years. Devaney also lashed out at what he said was the department's failure to deal with ethical missteps and conflicts of interest.

Devaney said that despite a lengthy investigation, he can conclude only that this was ``a very costly mistake" and there is no indication anyone at the Minerals Management Service colluded with the oil industry or benefited financially.

That agency oversees the federal offshore oil and gas leasing program. The flawed leases involved deep-water projects in the Gulf of Mexico; the investigation focused on the service's New Orleans office.

To spur oil exploration in deep Gulf waters, Congress in the 1990s directed that such leases exempt oil from federal royalty payments. But the leases also were supposed to included language that would lift the exemption if oil prices exceeded $36 a barrel. That threshold is well below today's prices of $60-plus a barrel.

For some reason, the price-threshold requirement was omitted from more than 1,000 leases issued in 1998 and 1999. This error surfaced publicly only this year.

Representative Darrell Issa, Republican of California, the subcommittee chairman who has held hearings on the issue, contends the error could result in the loss of more than $10 billion in federal royalties during the life of the 1998-99 leases. Some will continue for years.

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