WASHINGTON, DC, Sept. 14 -- Confusion over where to place a price threshold in the final rule may have led to its omission in federal deepwater leases in 1998 and 1999, US Minerals Management Service Director Johnnie Burton told a US House committee Sept. 14.
Burton emphasized that the Department of the Interior agency still is not certain what actually happened. She awaits the results of an investigation she requested from Earl E. Devaney, the department's inspector general, soon after learning of the omission in early 2006.
But Burton told the House Government Operations Committee that MMS's own inquiries show that after Congress passed the Deepwater Royalty Relief Act in 1995, a price threshold was included on each deepwater lease's addendum starting in 1996 and 1997 while a final rule was developed.
"When the rule became final early in 1998, the staff, which had been used to putting the threshold in the addendum, assumed it would be in the lease. But the director of the offshore program decided that it should continue to be in the addendum. That was not communicated to the staff," she said.
Deputy Interior Sec. P. Lynn Scarlett said that after the omission was discovered, price thresholds were included on federal deepwater leases starting in 2000.
"With respect to any renegotiation of past leases, we do not have authority in a mandatory way to do that. Instead, we appealed to companies to come in and discuss renegotiation. That process is under way," Scarlett said.
She said the omission and other errors occurred during President Bill Clinton's administration. "In 2001, we inherited 170 weaknesses in program and financial controls. Four more have been identified since, but the 170 that were there have been corrected," she said.
Several committee members seemed more concerned with what they felt may have been a cover-up by DOI and MMS employees until the omission was reported in the New York Times early this year.
"Had they notified officials and amended the contracts when the omissions were discovered, they could have corrected the problem at no cost to the companies or the public. Instead, they chose to cover it up," said Darrell E. Issa (R-Calif.), chairman of the committee's Energy and Natural Resources Subcommittee, which conducted its own 7-month investigation.
"I didn't know about it because I arrived at MMS in 2002, 4 years after it happened," Burton said. "The people who knew about it were no longer there. I don't think others realized they needed to tell me about it. I did not review all the contracts that were issued before I arrived at the department. There was no reason for me to ask about those specific years. I had no reason to believe there was anything wrong with them."
Burton said the only correspondence from the period that she has found since was a letter that Carolita U. Kallaur wrote to a leaseholder in 2001 when she was associate MMS director for offshore minerals management. It explained that price thresholds were reinstated a year earlier because the Deepwater Royalty Relief Act required them.
Kallaur retired from MMS and DOI on Feb. 11, 2002, and she since has died, Burton said.
Burton said that after the omissions became public earlier this year, 20 leaseholders contacted MMS and 10 began renegotiations to put price thresholds on their 1998-99 leases as addendums. "Shell Oil [Co.], is very close to signing an agreement. BP [PLC], is not far behind. These are major deepwater leaseholders. One of the reasons this takes time is that these companies have several partners who also have to agree," she said.
Rep. Edward J. Markey (D-Mass.) contends that more pressure should be put on leaseholders to renegotiate terms. Rep. Maurice Hinchey (D-NY) and Markey cosponsored an amendment to DOI's annual appropriation that bars oil and gas producers from receiving future federal leases if they hold 1998-99 deepwater leases and are unwilling to renegotiate (OGJ, June 12, 2006, p. 30). The House passed the amendment, he said, and the Senate has passed similar legislation.
"The administration and Interior Department have opposed this amendment, seeking instead to cajole oil companies to come back to the table," Markey said. "This is simply trying to continue to work with bad actors."
Scarlett said, "The administration has significant concerns about mandatory renegotiation. These contracts, like all contracts, reside at the bedrock of a reliable federal government. It's very important that we uphold their sanctity so the federal government can be seen as a reliable business partner."
"Simply shining a light on this is putting pressure on these companies, which report record profits, to come back to the negotiating table," suggested Rep. Tom Davis (R-Va.), the committee's chairman. But he also warned that Congress might have to step in if more producers don't come forward.
Rep. Dennis J. Kucinich (D-Ohio) recommended more aggressive actions: "These leases should be canceled. There also should be a criminal investigation of those who were responsible for these omissions and the cover-up. How can we sit still and accept that something which cost the American people billions of dollars was simply a mistake?"
Contact Nick Snow at [email protected].