DOI: More 'tools' needed for revised deepwater lease agreements

Jan. 24, 2007
Six companies holding deepwater Gulf of Mexico leases issued in 1998-99 without price thresholds have voluntarily renegotiated terms, but the government needs more tools for encouraging others to do so, a top US Department of the Interior official said on Jan. 18.

Nick Snow
Washington Correspondent

WASHINGTON, DC, Jan. 24 -- Six companies holding deepwater Gulf of Mexico leases issued in 1998-99 without price thresholds have voluntarily renegotiated terms, but the government needs more tools for encouraging others to do so, a top US Department of the Interior official said on Jan. 18.

"One would be to offer for those who would sign, and who have diligence on their leases, an extension on those leases," C. Stephen Allred, assistant secretary for land and minerals management at DOI told the Senate Energy and Natural Resources Committee.

"These are very expensive and very difficult developments to undertake. The 5-year period we now have may not be long enough for [leaseholds] to accomplish what needs to be done," he said.

Some committee members immediately questioned the notion of offering incentives to encourage more leaseholders to renegotiate.

"Why would the government not take the position that leases have to be renegotiated or the companies can't do additional business with it?" Sen. Byron L. Dorgan (D-ND) asked. "You indicated you'd like some additional incentives and tools. I'm just saying that the best incentive is to say, 'Either you come clean on what we both know was a mistake, or don't show up the next time there are leases offered.' I don't think the department is being aggressive enough about this," he told Allred.

Allred responded that he was being as aggressive as possible in trying to reach a solution. "There has to be a reason for companies to sign that would give them a benefit without decreasing royalties to the United States. I would like to work with the committee and its staff in developing a suite of tools to do this," he said.

Other witnesses
DOI Insp. Gen. Earl E. Devaney and Mark Gaffigan, acting director of the natural resources and environment section at the US Government Accountability Office, also testified at the hearing, which also examined federal royalty revenue management and auditing practices.

Most of the emphasis, however, was on the reason price thresholds were omitted from federal deepwater oil and gas leases issued by the US Minerals Management Service in 1998 and 1999 under the Deepwater Royalty Relief Act of 1995, and responses once the omission was discovered.

Devaney said the DOI's inspector general's office conducted 44 interviews and reviewed 19,000 e-mail messages and 20,000 pages of documents in an investigation of the omission.

"The person responsible for directing the preparation of the leases said he was told by persons in MMS's economics and leasing divisions to take the price thresholds out. The people in the economics and leasing divisions denied doing so," he said.

The one person involved in both the regulation development and the lease review process, an attorney in the DOI solicitor's office, conceded that he should have spotted the omission and did not, Devaney continued. "The official who signed the leases told us he relied on the [solicitor's office] attorney and his staff," he said.

Devaney said when an MMS staff member, who has since died, discovered the omission in 2000, the information was not conveyed up the chain of command to the DOI division's director. He said the IG's office interviewed MMS directors from the period of the omission and the time since, who said they became aware of it only after it was reported in the New York Times early in 2006.

2004 e-mails
Near the investigation's conclusion, however, the IG's office found a series of e-mails that suggested current MMS Director Johnnie Burton was advised of the omission as early as 2004, Devaney said.

"When she read the e-mails, she appeared genuinely surprised, but conceded that the e-mails indicated that she probably had been told of the omission in 2004. She still had no independent recollection, but speculated that she was probably told of the mistake in conjunction with being told the solicitor's office had opined that nothing could be legally done about the issue," Devaney said.

He said the omission and failures to respond were "at a minimum a shockingly cavalier approach to an issue with such profound financial ramifications, a jaw-dropping example of bureaucratic bungling, and a reliance on a surname process which dilutes responsibility and accountability."

But he added this description does not apply to Burton, Allred, or Interior Sec. Dirk A. Kempthorne, all of whom Devaney said have tried to determine what happened and why, and how it can be corrected.

Sen. Ron Wyden (D-Ore.) asked Allred why action had not been taken since Burton told the committee last year that she learned of the omissions initially in 2006.

'Integrity, competence'
Allred said, "We have just received this information, as you have. While I have reviewed the summary of Mr. Devaney's report, I have not had the opportunity to go through it in detail. The mistakes that occurred did not occur under her management. I have found Director Burton to have the highest integrity and competence. I have not found a reason to change her status."

"The real issue was how the thresholds were omitted and why they were omitted. We seem to be blaming people for it, and that distresses me," said Sen. Craig Thomas (R-Wyo.).

At the same time, he said, Congress should be careful not to put the government in an awkward position. "I don't think we should put the government in the place of doing Venezuelan kinds of things and changing contracts," Thomas said.

Chairman Jeff Bingaman (D-NM) said he had briefly reviewed the DOI IG's report "and there obviously is a lot of blame to spread around." He said, "This was an error accomplished by civil servants working within the department. Lease terms were changed without consultations."

Pete V. Domenici (R-NM), the committee's chief minority member, said it was also important to remember that, while the omission of price thresholds over 2 years shows problems in its implementation, the Deepwater Royalty Relief Act of 1995 worked.

"It was a good thing. We should not confuse the failure of the Clinton administration's implementation of it for 2 years with the substance of this act. Since President Clinton signed this act into law, our production of deepwater oil has grown dramatically. I hope this Congress will resist the temptation of headlines and deal with this in a considered, thoughtful way," he said.

Contact Nick Snow at [email protected].