#1 Department of Interior Loses $10 Billion in Oil Revenue

Andrew B. Einhorn — Mon, 03 Dec 2007 21:50:00 GMT

Oil prices have rapidly climbed to the $100 a barrel mark over the past two years, granting oil companies historically high profits. Unfortunately, these corporate behemoths are still paying royalties as if oil were below $36 per barrel.

The Department of Interior ‘s (DOI) Minerals Management Service is responsible for handling the leasing of public lands to private commercial interests i.e. oil drilling companies. In highly volatile markets such as oil, lease royalty payments are supposed to increase if the price of oil rises above a certain amount. In the case of the contracts at issue, which were negotiated and signed during the last years of the Clinton Administration, if oil rose above $36 per gallon, the lease royalties were to increase by a predetermined percentage. The contingency clause was somehow excluded from the final agreement, which was signed by companies such as Kerr McGee, Exxon Mobil, Chevron, Shell, and Conoco Phillips.

The situation is akin to offering rent-controlled apartments on New York's Park Avenue to Google corporate officers during the hottest real estate market ever. Had DOI been more diligent in their duties, they would have collected an estimated $10 billion more in revenue from oil conglomerates.

What would America do with this extra $10 billion? For one, the money could go toward research and development into alternative energy sources, increasing refining capacity (something that hasn't been done since the oil shocks of the 1970's), or call me crazy, as tax relief.

Although the initial blame can be placed on the Clinton Administration for negligently leaving out a key clause from the leasing contracts, auditors at the Mineral Management Service didn't discover the errors until 2000. It wasn't until 2005 that auditor Bobby Maxwell filed suit against Kerr McGee in federal court. Although the court acknowledged that the oil conglomerate should remedy the underpayment, it was let off on a technicality. Shortly thereafter, Mr. Maxwell's position was terminated in a convenient "reorganization."

The head of MMS, Ms. Johnnie Burton, who coincidentally was once an oil executive with TCS, refused to acknowledge the leasing error and to this day, denies knowledge of it. Her denial flies in the face of recent evidence unearthed in Congressional investigations, that she should have known of the lease underpayments and acted accordingly. In effect, the carelessness of the Clinton Administration drafters, combined with the seemingly willful ignorance of Bush II appointees, will deprive the nation of billions of dollars.

After the scandal came to light, Ms. Burton resigned her post in a cloud of controversy. One can only imagine what her next step will be, although given the revolving door between high government and high industry, a position with an oil company wouldn't be surprising.

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#1 Department of Interior Loses $10 Billion in Oil Revenue