This paper demonstrates beyond any reasonable doubt that the U.S. Department of Interior has been in the past, as an agency, essentially a co-conspirator with major oil and gas industry companies to defraud the Federal government, some states and some Indian tribes. The pattern and practice of deliberate malfeasance is quite clear, and only a major house-cleaning at the Rogue Bureaucracy we call Interior will prevent this from continuing. Even as this is written, Interior is pushing to close out tremendous under-paid (stolen) oil and gas royalties owed the U.S. taxpayer and to limit forever the period fraud can be investigated.
By the summer of 1999, Alaska and other States had collected about $ 5 billion in back, "underpaid" oil and gas royalties over several years. However, the Justice Department (which had taken over a Fraud Claims Act lawsuit some 18 months previously) was dutifully settling back royalties from Federal land for mere pennies on the dollar. One company which had supposedly settled all it's back underpayments five years ago for $150 million is now offering another $94 million in another "final" settlement, according to Platt's Oilgram News. This settlement process is truly government in the shadows. Meanwhile, Congress continues to block much-needed new oil valuation regulations in response to ample campaign contributions. See Washington Monthly Magazine's September 1999 issue for "Shooting the Whistleblower," and the October issue for Bill Robinson's published letter on that article.
In June of 1996, a major lawsuit was initiated by American Indians against the Federal government, based on a long history of mis-management of the $2.4 billion Indian Trust Fund. A quick search of recent General Accounting Office reports on the subject between 1991 and mid-1996 found 22 reports attesting to that. For example: there was no supporting documentation for receipt and disbursement (June 1996); the BIA has spent 5 years and over $21 million in a vain attempt to reconcile the accounts (May 1996); Interior's track record on past attempts at corrective action have not been good (September 1994); BIA trust funds are not properly reconciled (April 1994); BIA has been criticized for erroneous allocations of receipts, erroneous payments to account holders, failure to consistently invest trust fund balance and failure to pay interest (April 1994); "BIA's record has been so poor, in fact, that the Office of Management and Budget has placed trust fund accounting on its high-risk list of government programs most vulnerable to waste, fraud and abuse."
On November 18, 1994, the Wall Street Journal noted that the State of Alaska is collecting $2 billion from British Petroleum, and another $1.7 billion from several other oil and gas firms, and has another billion or more in targeted collectable funds. All for undervaluation of oil and gas, with concomitant underpayment of taxes and royalties to Alaska. The BP payment had been saved aside. One wonders how BP could be so prescient!
In April of 1994, Chevron "settled" it's so-called "underpaid" oil and gas royalties to the U.S. Government by agreeing to pay $150,000,000 in two equal installments. Half on March 31st, and half by year's end. Sources say the company got off cheap. Other such "global settlements " are pending, and each will lock in incredible oil and gas royalty losses. Chevron is one of a number of firms which also "settled" with the State of California, paying as a group of firms several hundred million dollars to the State and to the City of Long Beach in back oil and gas royalties.
A Federal report showing that the government may have lost up to $422 million based on the same findings as a State of California lawsuit (1962 to present) has been squelched by the U.S. Department of Interior (Interior), and an alternate study was ordered sent from Denver to Washington - showing no losses since 1986. (Oil prices dropped sharply that year, and there is no other apparent reason for re-structuring the report's time-span.) Inside analysts agreed that the new report was specious in it's arguments that California losses, side by side with Federal leases, could yield no Federal losses. Interior now claims that another California study, based on a very small audit sample, is underway. However, one member of the interagency task force told me that the report was being squelched again.
And, the Department of Energy has forcefully brought the issue of "abnormally low prices" (the basis for underpaid royalties) of California crude oil to the attention of Ron Brown in Commerce and Bruce Babbitt in Interior in two 1994 letters. The revised Interior study looks like an egregious cover-up, and another suppressed report (late Bush Administration) surfaced in October 1994, showing up to $20 million a year in State/Federal oil royalty losses in one Federal oil field for at least six recent years.
Forbes Magazine showed recently that the majors have paid dividends in significant amounts (up to 100% return in five years) while laying off field workers. None have missed a dividend in that period. Making those companies pay up will not hurt them.
Over 100 Federal reports and studies over past decades point out that billions of dollars in Federal and States' oil and gas royalties have been "underpaid," which means lost. One by Congressman George Miller in late 1994 put the recent losses at between a few hundred million dollars a year and a billion dollars a year.
On another front entirely, a coalition of 32 environmental and resource groups organized by the Mineral Policy Center of Washington, DC, recently identified over $86,000,000,000 in Federal platinum, gold and silver which has been given away under the 1872 Mining Law, for only $5 per surface acre. No royalties are paid to the taxpayer-owners. No reclamation is required. These give-aways occurred in National Forests in four western states, and were initiated or completed within the past 6 years. The Senate hopes to keep this law intact (S.775), while the House (George Miller) wants true reform. Interior responded to efforts to impose a moratorium on such give-aways by accelerating the rate of approvals.
Taken together, these facts seem to point to common action between some companies, and between those companies as a group and certain Interior functions, to cause the loss of hundreds of millions of dollars to the government and to some States and Indian Tribes which are owed mineral royalties.
For example, Congressman Whitten withheld an early 1990 report showing 13.3 percent underpaid on a wide sample of Federal wells, a sample taken by Interior and concealed. The logical conclusion was that such underpayments (up to 20 percent per annum) surely affect the much larger Federal and states' share (which is about 97 percent of collections).
Also, the government has lost billions of dollars by selling timber from National Forests at less than the cost of building roads into the woods for the timber companies' convenience. In Last Stand, Richard Manning shows how down-hill bulldozing of trees and brush is likely to eliminate re-growth altogether, and that the Federal government has "cooked the books" to show a false profit on timber sales - even to the point of amortizing road-building costs in one forest over 1,200 years in the future to show a "profit."
Most of this paper deals with the pattern of deceit and mis-management by Interior concerning oil and gas issues, but all of this needs to be examined in the context of the need for reform of a run-away, rogue bureaucracy which is in charge of our natural resources - Interior and certain companies.
This analysis covers the estimated loss of over $90,000,000,000 in hard-rock mineral wealth (on which no royalties will be paid under the 1872 Mining law). It also addresses the loss of an estimated $15,000,000,000 in the last decade in federal, states' and Indian oil and gas royalties, and additional lost federal taxes.
The $15,000,000,000 is estimated based on a Washington Post article concluding that as much as $ 4,000,000,000 in potential taxes went unpaid on federal oil and gas production by some major companies, plus up to $ 11,000,000,000 in under-paid federal/states/Indian royalties which I have documented in this analysis.
Also documented here is the pervasive pattern of denial and oppression of dissenters which the U.S. Department of Interior and the major energy companies have continued, in tandem, for many years.
The facts presented here will show that the U.S. Department of Interior, as an institution, is unable to deal truthfully with the citizens of the United States. Indeed, Interior has cooperated with the major oil and gas and coal companies to a great extent, to hide the truth from the public (or to so distort it) in a manner that could be construed as institutional malfeasance, or worse.
On October 17, 1989, the State of Alaska announced the goal of the lawsuit it had initiated 12 years earlier, for unpaid royalties and interest on Alaska's oil and gas wells operated by 15 companies: $901,983,282.66 in royalties lost. By 1993, over $455 million was collected - after penalties and fraud issues were waived! That original Alaska information is documented in a memo to Senator Tim Kelly, President of the Alaska State Senate and Sam Cotten, Speaker of the Alaska House of Representatives, from the Commissioner, Alaska Department of Natural Resources. After failing to get a change of venue, the companies had flatly denied any wrongdoing.
In 1993, the Mineral Policy Center in D.C. called S.775 "Sham 775." It was and still is the Senate substitute for real hard-rock mineral reform, which would result in reasonable royalties and cleanup if the House version were passed. This concerns gold, silver, platinum and other minerals being given away under Federal land for $5 per surface acre.
On November 20, 1989, Senate Report 101-216 announced that the U.S. Department of the Interior..."charged with stewardship of federal and Indian land...knowingly allowed...widespread theft...for decades..."
On November 20, 1989, the Washington Post noted that James Cason of Interior had sold federal oil shale lands for 1/880 of their worth, allowing an incredible $37,000,000 return on a $42,000 purchase for one private buyer (who purchased at $2.50 an acre under the 1872 Mining Law).
On August 3, 1989, the Washington Post's Thomas W. Lippman reported that "probably billions of dollars are at stake" in an antitrust investigation opened by the U.S. Justice Department. The Justice case alleges that "several major oil companies conspired (emphasis added) to hold down their reported prices of west coast crude oil, to evade federal taxes and state royalties owed". The Post article was based in part on the July 24, 1989, edition of Tax Notes, authored by Martin Lobel and Henry Banta (of Lobel, Novins, Lamont and Flug in Washington, D.C. - Phone 202-371-6626.) The Post article did not touch on federal nor on other States' royalty losses, because Mr. Lippman was limited to reporting on the facts of that particular California case. Nor did the article mention that the same factors which affect the "under-payment" of windfall profits taxes equally effect the computation of royalties owed.
The Justice investigation parallels an ongoing civil antitrust suit won on appeal by California and the City of Long Beach, CA. The suit was originally filed against Atlantic Richfield (which settled the case separately) and Texaco, Mobil, Chevron, Exxon, Shell and Unocal corporations. Atlantic Richfield (or ARCO) is still not out of the woods, because the IRS issued that company a notice of unpaid debt on oil and gas it produced totaling more than $1,000,000,000 in "windfall profits taxes", penalties and interest.
The 1872 Mining law mandates that any mineral wealth found on Federal land can be taken at any foreign or domestic company's discretion, with no royalties owed and no reclamation required. Over $4 billion is mined now under National Forests, and over $86 billion is up for grabs now. The "sham" reform bill in the Senate as of June 1993 contains provisions for a 2 percent royalty on value, but allows so many reductions that the actual royalty paid would be zero. This analysis is taken directly from a recent Washington Post article which showed that both Interior and the Congressional Budget Office had come to that same conclusion.
The Federal government has leased out about 120,000 oil and gas sites within or just offshore from southwestern, western and northwestern states. The states get half of the royalties collected within their boundaries from federal land (except Alaska, which gets 90 percent), and about a third from certain offshore areas. Royalties are computed at between 12 and 16 percent (on average) of the fair market value of the raw material at the wellhead.
When oil and gas prices peaked in the early 1980's, royalty income spiked as well. Actual collections in federal coffers were between four and six billion dollars per year. States got a share of onshore, and part of offshore, royalties. American Indians own all of their royalties collected, but Interior "manages" that collection process as well (about three percent of all collections), to the great dissatisfaction of Indian tribes.
In addition to royalties, the federal government collected tens of billions of dollars in windfall profits taxes during the peak price periods recently. That collection process was likely flawed as well, as evidenced by the Justice anti-trust suit.
Any "under-valuation" of the fair market price at the wellhead, or "under-reporting" of actual volume, or "over-charging' of allowances against the value, will act to reduce both legally-owed royalties and taxes on federal oil and gas. Furthermore, California prices for crude oil are the basis, or benchmark, for Alaskan North Slope crude oil. This raises the stakes significantly, because of the far greater volume of Alaskan crude oil.
When a blue ribbon panel called the Linowes Commission reported in 1981 that federal losses could be up to 10 percent per year, a new law was passed to force long-needed changes in the way Interior does its business. One would think that the new law would have set things straight. Not so.
In fact, within a couple of years the Congress would be finding the situation to be worse than ever, and two years later would find from one set of audits that royalty losses might be as high as 21 percent per year (the actual losses on a 464-lease sample).
Interior insisted that 21 percent losses were not likely, that it "believed" the losses to be "only" 3 percent, although no full-fledged auditing was ever done.
About two leases in one hundred were being audited, based on Interior's own Inspector General's (IG) findings, making the Interior estimate suspect.
Additionally, in the mid-80's the IG found that losses from "drainage," the possible taking of federal oil through nearby private wells, were significant in the cases pursued. Press reports from Arizona in late 1987 noted that the 8,400 alleged drainage cases on the books would take 50 years to investigate, at the rate Interior was proceeding.
When the issue heated up in the early 1980's, the man who was to replace James Watt as Secretary of Interior, Donald Hodel, noted in a hearing that oil companies had ways of "cooling the price" of oil and gas, meaning lower stated fair market value, ("Cooled prices" reduce legally owed royalties and taxes. Some prices were "cooled" by up to $ 7.00 a barrel.)
There are over 100 government reports on failures to reform the system. One of the first U.S. General Accounting Office (GAO) reports on this subject (see excerpt below) faulted Interior, as did the next 10 to 15 reports:
"To improve the administration of royalty accounting, the report includes recommendations to the Director, Geological Survey, to transfer the responsibility for royalty accounting to the organizational unit within the Survey which has the responsibility for all other accounting functions; to expand the scope of internal auditing; to prepare and maintain currently a royalty accounting manual; and to revise procedures to provide for the prompt billing and collection of unpaid royalties due the Government." (B-118678; December 31, 1958)
Leaping forward to the past 12 years, the reports continued in that same vein:
In May of 1983, GAO documented that Interior had sold Powder River Basin coal leases in Wyoming and Montana for $ 100,000,000 less than GAO's revised estimates of their value. In June of 1984, a followup report found that the Deputy Assistant Secretary of Interior had given a coal company official the secret "minimum acceptable bid" information before the sale, and that official's company got the bid. The IG, Richard Mulberry, was found to have ducked the investigation, and when he finally did start it, he terminated it after 16 days. When faced with this, Mulberry simply resigned. No followup investigation occurred to my knowledge.
In August of 1984, Howard Kohn published an article titled "The Lawman Who Corralled the Oil Rustlers." It documented fraud against American Indians who own 3 percent of the federally-managed oil and gas leases. The "lawman" of the title was Charles Thomas, an Interior employee of the U.S. Geological Survey (before the Survey was taken out of the royalty business and Minerals Management Service was created). In part, the article noted:
"Charles Thomas had finished his patrol of Wyoming oil fields, and in the steely dusk of June 11, 1980, was driving home to his wife and four children. Suddenly an oil tanker roared past, moving away from the Wind River Reservation. Impulsively, Thomas flashed his lights and forced the truck off the road."
Thomas knew that pipelines, not trucks, carried most of the oil out of that area. When he asked for proof of a transaction, the driver stated it was sludge oil, but it was really high grade crude oil which was being stolen.
Thomas reported the attempted theft to his Interior bosses, but they ignored him. He then went out and found other evidence, such as pump seals missing and pipes that bypassed measurement meters. Phone threats against Thomas started, and the FBI was called in. Interior responded by moving Thomas to Alaska, but the Shoshone Tribe hired him back as an independent employee. Next, a dead snake was left at their door, then a bullet was fired into one of their windows, narrowly missing his wife. She was later forced off the road by a truck, on the same day that Thomas was forced to evade a tanker on a steep hill.
That article in Reader's Digest concluded with the fact that Interior had collected $ 98,000,000 in unpaid royalties, a fact I had independently learned a month or so earlier, plus some significant added information which was not in the article:
One of my contacts in D.C. had met with me one Saturday in mid-1984 to relay the fact that a high level official in Interior, Robert Boldt, had told a number of people that his audits and others showed a combined audit finding on some leases (a very small share of the producing leases "universe") of $ 598,000,000 in under-paid royalties over about six recent years. I called Boldt from my home while he was still in his office late one day, and he confirmed to me the $ 598,000,000 in audit findings from the small fraction of all federal leases audited.
Boldt stated that industry was "challenging" $ 500,000,000 of that set of audit findings, leaving the $ 98,000,000 unchallenged. I relayed this fact to the network of analysts on the Hill and in various investigative functions in the Federal sector, noting that it might point to far greater losses, on a percentage basis.
The Interior Department later denied to the press and the Congress that the audit findings on those leases were over $298,000,000 (later revised to about $320,000,000). These serious contradictions of fact were never resolved.
I advised Gerald E. McDowell, Chief of the Public Integrity Section, Criminal Division, U.S. Department of Justice, of the audits and other discrepancies, and sent him a copy of the Denver Post's November 1983 series, "The New Indian Wars." He relayed the information to the Inspector General at Interior around June 22, 1984, informing me by letter that day. Interior did not respond to my comments.
Next, I went to one of Mo Udall's top aides. Udall had just released a report saying that things were getting worse, not better. But somehow Interior had kept those audit findings secret during that intensive study. I'm told that Udall referred the matter to House Interior Appropriations' Subcommittee Chairman Sid Yates. Yates launched a long, detailed study which eventually surfaced in September of 1986, finding an actual 21 percent federal loss level on 464 lease audits which his staff pulled out of Interior. Yates' final report in 1986 estimated a loss of about $5,800,000,000 in lost royalties from under-valuation, by extension of the 21 percent level against actual collections for six years.
This extrapolation of the findings of a 464-lease audit came under sharp criticism from Interior, although there were no counter- vailing studies to refute it.
The two House Surveys and Investigations men who conducted the study were given an initial summary (attached to a thick sheaf of listings) which showed one-third the actual audit levels when they added the numbers themselves! When the two investigators wrote to question this, Interior sent over a revised summary showing the actual 21 percent loss on that set of audits. I have that May 23, 1986, letter which was signed by Thomas Thompson for Jimmy W. Mayberry, Deputy Associate Director for Royalty Management. Those two investigators paid a price for their diligence, as noted later.
Let's bring this into focus for other U.S. citizens. Here are the yearly receipts of a few of the 28 STATES which received a share of federal royalties collected in 1984 (not the peak year), from Federal lands' within or just offshore from their boundaries. You can easily compute what the losses might be, if these figures turn out to be 80 to 90 percent of what was owed (the logical extrapolation of the range of audit findings):
WYOMING, with about half earmarked for education, got $204,000,000;
NEW MEXICO, all for public school funds, got $ 131,935,000;
CALIFORNIA, crediting the State School Fund at $ 49,000,000;
COLORADO, paying it mostly to counties for education, got $47,049,000;
UTAH, more than half going to higher education, got $32,084,000;
MONTANA, putting 62.5% of royalties into education, got $22,295,000;
ALASKA, paying royalties into the general fund, received $20,906,000;
NORTH DAKOTA, paying royalties into education and highways, received $10,464,000 that year.
One effort by a group of teachers in southern Wyoming led to collection of over $1,000,000 (for one county alone) of previously "under-paid" oil and gas royalties. Gennie Bonham, WY NEA Director, generated that income for county teachers and staff. Furthermore, that group could collect as much as $5,000,000 more from disputed coal mining royalties!
Although revenues for any individual Indian from oil are quite small, they constitute a desperately needed source of income to Indian citizens with an unemployment level which averages 25 percent and reaches 85 percent in some areas. Cass Peterson broke the story "Indians Are Being Denied Millions in Oil, Gas Royalties" on May 25, 1985. She detailed a situation that affects "more than 250,000 Indians or tribal governments", (out of about 1.5 million Indian U.S. citizens). Mike Synar (D-OK), said "If it's not a scandal, it's one of the worst cases of mismanagement I've ever come across."
Officials in four Interior Bureau of Indian Affairs (BIA) offices were holding more than $1,000,000 in interest owed, some of it owed for four years. Congressman Glenn English said "It may have gone to the point that it may need a grand jury." The Oklahoma Corporation Commission documented that producing wells were reported by BIA as non-producing, costing only six Indians about $ 24,000 in 1984.
The same article noted BIA was withholding checks because of claimed overpayments, when they really owed some people more than $ 20,000. One Indian lady was force to sell fry-bread at garage sales for her livelihood, while about $ 17,000 was owed her family. Synar documented non-compliance with the law, citing 26,000 Indian "allottees" who had received no documentation in writing of their royalty payments, in his July 1985 report to the House Committee on Government Operations.
In July of 1985, Synar cited similar findings from government audits, study commissions and reports over about 25 years, including the 1958 report (published in 1959). Interior official John Fritz testified that "...frankly we did not have an operating computer system until late last fall." (Frankly, as it turned out, he didn't have one that really worked then, either.) Minerals Management Service (MMS), furthermore, had no comprehensive system for auditing Indian leases.
It seemed difficult for BIA and MMS to "coordinate" on this. Mr. Jimmy Mayberry said that a Memorandum of Understanding was being developed, had been in draft for over a year, and would be out soon. Similarly, MMS audits on seven of thirteen BIA requests were not even started by April 8, 1985. The six that were completed showed $ 59,000 in additional royalties owed. Nick Kelly, the MMS regional manager, said he had received no instructions to do the other seven audits for over one year after the date his Chief reported that MMS was "commencing the audits."
Why do I keep bringing up Indian losses, "only" tens of millions in lost royalties? One reason was brought out in an article I read by Felix S. Cohen on the "Erosion of Indian Rights" in the Yale Law Journal, which said in part:
"Like the miner's canary, the Indian marks the shift from fresh air to poison air in our political atmosphere...our treatment of Indians, even more than our treatment of other minorities, reflects the rise and fall of our democratic faith."
In addition to Charles Thomas, several other Interior officials have been hit with reprisals for speaking out, and two Congressional investigators were moved out of their specialty area, Federal loss of oil and gas royalties:
In the early 80's, Les Schwartz questioned the use of a series of small computers being set up to do a job only a larger, more powerful computer could do - track royalties paid and owed. For his questioning, he was stripped of supervision of some 26 Interior accountants and staff, put in an office literally the size of a broom closet, and left there with no work until he opted for early retirement.
In 1985, Vince Laubach's reinstatement rights were restored after an unusual coalition of public interest groups (including Government Accountability Project) and conservative Senators rallied in his support. Laubach had asked Interior to consider collecting some $ 200,000,000 in coal strip mining fines and fees. He was hit with un-sustainable charges and forced out. Interior had routinely stated that less than $20,000,000 was owed by the coal companies, an assertion that the Congressional studies refuted totally. Laubach's findings were substantiated, but there is no evidence that the fees and fines were ever collected.
It was never reported that those two investigators for Yates, who hit Interior on the actual audit findings of 21 percent losses on 464 leases, were later removed from oil and gas studies, their prime area of expertise, by political pressure.
In December of 1984, GAO reported that windfall profits taxes on Alaskan crude oil were likely to be challenged. The report noted that "substantial adjustments to and, for the most part, increases in producers' tax liability will be proposed and applied retroactively." It also noted that a very small per-barrel adjustment generates millions of dollars in additional windfall profits taxes owed. "For example, if the taxable...basis is adjusted upward by only one cent per barrel, the increased tax liability...(is) about $ 2.8 million a year."
In plain English, this means that the companies were under- stating fair market value (again, "cooling the price"), so they owe more taxes. The same computation would apply to royalties, using legally set percentages of 12 to 16 percent of adjusted value.
In January of 1986, the Interior IG's Eastern Region reported "virtually unaudited" leases held by Exxon and Texaco. These particular leases paid almost a tenth of all royalties collected in 1985. The report said that only one royalty audit was done at these Exxon leases, and none at Texaco leases, in Fiscal Years 1984 and 1985!
In September of 1986, word spread around Washington, D.C., that Interior officials were pressuring Congressman Yates not to release his study. On the 19th, six interest groups wrote to Yates to tell him how much his efforts were appreciated, and saying "Interior frequently promises a new accounting system, but never seems quite able to deliver." The letter also noted that losses of up to 10 percent were unacceptable when applied to about $ 5,000,000,000 a year (average) in actual royalty income. That letter was signed by the following persons:
Louis Clark, Executive Director Government Accountability Project
Suzan Shown Harjo, Executive Director National Congress of American Indians
Eric Eberhard, Executive Director Navajo Nation, D.C.Office
Joan Claybrook, President Public Citizen
Robert T. Coulter, Executive Director Indian Law Resource Center
Loeb Julie, President Coalition to Stop Government Waste
These groups, and later both the Friends Committee on National Legislation and Americans for Indian Opportunity, made up the informal coalition which we called Alliance for Royalty Compliance (ARC).
On October 1, 1986, I prepared a detailed, eleven-page analysis of Yates' released findings and Interior's responses, point by point. One of the most remarkable MMS comments was that it had "not mounted a major effort to derive an estimate of unreported royalties, nor do we believe that it can be done with a satisfactory degree of reliability. Fluid prices and market conditions combined with continuous changes in the regulatory and enforcement climate make it difficult to arrive at a reasonable assessment of underpayments during any prior period." (MMS had created that "climate," yet state auditors had no difficulty auditing!)
The MMS review of Yates' Preliminary Report, which was released to the press, misleadingly stated that it "...does not provide an accurate, balanced, or correct assessment of the history of the Royalty Management Program...In many cases the report is factual; in others it is in error...In many cases, facts are misrepresented and lead to erroneous conclusions ...In yet others, the authors simply mistake the facts in apparent confusion. The report generally lacks supporting facts, illustrations, and adequate explanation to provide context...For the above reasons, it is difficult to provide a clear and cogent response to the report."
The MMS response would lead one to believe that the House investigation was seriously flawed. Yet MMS went on to agree substantially with practically all of Yates' charges! This, in my view and in the view of most members of the State/Tribal Royalty Audit Committee (STRAC), was one of the most deliberately misleading Interior documents that they had ever seen. In fact, I'm told that my 11-page paper was introduced for the record at the next meeting of the Royalty Management Advisory Committee, of which the State/Tribal Royalty Audit Committee members are a part.
Although they challenged state auditors' figures, MMS noted that it had "been unable to analyze the audit data provided to the Investigative staff by State Auditors." This was self-serving speculation, at best.
MMS noted that "We are aware that state auditors' staffs are in solid agreement that oil and gas royalties losses are severe. Also, we are aware that an advisory group, the Royalty Management Advisory Committee, has prepared draft valuation regulations which it estimates will result in losses of over $600 million per year."
MMS agreed that the minicomputer system it adopted was a "catastrophic" decision (the one Les Schwartz fought unsuccessfully before he was demoted, harassed and removed).
MMS' so-called error rate of five percent was found to be a simple calculation of how many forms were complete, not whether the proper value of the crude oil was used to assess what was owed.
The Investigative report found that payments actually made could be "adjusted" after the fact without audit. In 1985 alone, such "adjustments' totaled $ 1,217,189,276 (paid back to companies!).
The Investigators submitted four bogus sales reports to the system in order to test it. MMS had the gall to demand an investigation of the investigators, in a letter to the Justice Department!
Because MMS had no means of verifying prices, the royalty system was found to be an "honor system," depending on the veracity of the oil companies to submit the correct data. (In 1982, a similar report said this was like calling the grocery store to tell them what you'd bought.)
One legal case which dragged on for eight years found royalties 90 percent undercut. That settlement was made on fields right next to Federal fields, yet no known federal audit resulted. (The Interior response to the Yates report was totally silent on this point.)
Even after Chevron denied access to one series of audits, losses of $12,000,000 were uncovered without those records. MMS concurred.
In October of 1986, just as Sidney Yates was raising hell at MMS through his very accurate report, and estimating serious losses based on actual losses on those 464 leases, MMS reported certain problems to Congress. One was the failure of the Royalty Management Advisory Committee to agree on product valuation regulations, which are the basis of royalty computations.
MMS failed to state that Conoco Oil Co. had written those regulations for MMS (the "Conoco Draft," which states' representa- tives on the committee had fought), that State and Indian auditors had represented all the negative votes, and that estimates showed the new rules would save oil and gas companies $600 million per year!
In the April 1987 Washington Monthly Magazine, John Eisendrath noted those omitted facts, and said that MMS audits had found $320 million owed, which "sounds like a lot, but Congress now estimates that under-collections for those years total about $ 5 billion" - a careful understatement of Yates' $ 5.8 billion estimate - 15 times the shortfall MMS found.
Eisendrath said that officials at MMS are so proud of collecting less than seven percent of what is owed that they are reluctant to take on more auditors.
Eisendrath showed that the government had actually collected more than $28,000,000,000 since 1979, but that Interior may be failing to collect "as much as $ 1 billion a year" in royalties. He noted that as of 1979, the government's leases were so poorly managed that there was no way to know whether money was owed or not on the greater share of them. By May of 1981, the portion of accounts with errors "had grown from 60 to 73 percent."
The article also noted that in 1984, when MMS had 90 auditors, MMS Director William Bettenburg told Rep. John Murtha, 'We're in good shape on auditors.'...and that later Bettenburg told Rep. Sidney Yates that the 130 auditors [Congress gave more anyway] now on staff were all he needed. Only after an internal report concluded that, by spending $2.5 million more on 50 additional auditors, the department could increase collections by $20 million (a recovery of eight dollars for every one spent) did Bettenburg admit that more auditors would be helpful. But the prior September, when had Yates asked Bettenburg whether he'd like 100 more, Bettenburg replied: 'We think not.' (Some studies showed even greater payback.)
The Washington Monthly article also noted that Interior tried to clean up its books in a unique way in 1985, by "wiping the slate clean"...for only those accounts where the books were off by more than $100,000. The government might be owed $100,000 or it might have been overpaid by that amount..." When asked to produce the cost-benefit analysis for this write-off, Interior officials said that "all the copies of the report had somehow been misplaced." That plan was then shelved.
Eisendrath closed with a conversation at a meeting between Linowes, Chairman of the panel in the early '80s, with James Watt and Watt's key deputies. Linowes had urged them to compare production reports with sales reports, which they ** never ** did. He stressed that without this effort, it was impossible to be sure the proper amount of royalties was being assessed. Watt said "As of today, we'll start doing that." Months later, Linowes found no action, and the deputies told him "We didn't hear the Secretary say he was going to do anything."
By April 15, 1987, Suzan Shown Harjo, Executive Director of the National Congress of American Indians, was saying to Interior officials that "We believe that the proposed [valuation] regulations are so seriously flawed that we will need to seek court and/or Congressional action if they are not revised to address our basic concerns."
Joan McKinney of the Baton Rouge Morning Advocate compared the Federal losses to a current lawsuit by Louisiana against Texaco. Someone in Interior gave her an estimate of six percent losses. She also noted that a half-billion dollar, royalty-fed State of LOUISIANA education fund might have been underpaid by industry if the Federal studies proved true.
Practically simultaneously, Robert D. Hershey, Jr. reported in the New York Times that Linowes had found up to 10 percent of royalties lost, and the House study more than 20 percent underpaid. He added that "In North Dakota, state auditors say the under-collection is 40 percent." Interior held to its estimate of 3 percent losses.
In early February of 1987, Interior advised Government Accountability Project's Tom Devine that his series of Freedom of Information Act requests beginning back in October of 1986 had been finally assessed at $ 96,135 in total costs which GAP would incur if the FOIA was continued. Naturally, this chilled the FOIA effort by GAP.
On April 22, 1987, I wrote to the new Inspector General of Interior, James R. Richards, who was fresh from the Energy Department. Since I had discussed the royalty losses with one of his aides while he was in Energy (and she had said it wasn't over until the fat lady sings), I asked him to oversee the new royalty "valuation" regulations that Interior was pushing, despite heavy opposition from the Conference of Western Attorneys General and the State/Tribal Royalty Audit Committee.
I noted that clear indications of probable conflicts with existing law were cited in one analysis by the Controller of California (March 4, 1987).
I also noted that Senator J. Bennett Johnston had requested that GAO review possible outer continental shelf losses as high as 21 percent per annum, in a march 27, 1987 letter to the Comptroller General. And, I told him that Congressman John D. Dingell may have made some inquiries on possible losses in Alaska.
Citing the "Conoco Draft" valuation regulations, I noted the prevalent belief that the proposed regulations would block effective audit.
In a weak reply, Thomas T. Sheehan responded for Richards on May 14th, brushing aside the arguments summarized from many highly qualified state and tribal officials' written comments to Interior.
On June 10, 1987, Jay B. Stephens, Deputy Counsel to the President, The White House, wrote to me and thanked me for calling his attention to the Washington Monthly article. Of course, I had provided more detail than that. But I appreciated the fact that he referred the letter to the Administrator for Information and
Regulatory Affairs, Office of Management and Budget (who turned out to be Wendy Gramm, wife of Senator Gramm of Texas). No written response resulted, but certain inquiries were made which discomfited Interior officials.
MMS was even forced to ask, in a final version of the new regulations on oil and gas pricing, whether auditors could "determine compliance" with these regulations, and to "address the extent to which these draft rules are responsive to concerns regarding royalty underpayments identified in the Linowes Commission Report and reports of the Congress, the General Accounting Office and the Department's Office of Inspector General." (Federal Register, Monday, 8/17/87)
The response was astounding, with overwhelming opposition from the State and Tribal Royalty Audit Committee members, the State of Louisiana and the Conference of Western Attorneys General.
In spite of well-documented response to those specific questions, as noted below, the final regulations were published with the blatant bureaucratic lie that no specific comments had been received, openly stated in the Federal Register.
In a letter to the Honorable Donald Hodel, Secretary of Interior, the Conference of Western Attorneys General wrote in part: "We must express our serious concern that our comments to date are not even being given cursory attention, let alone the serious consideration that they deserve. The most recently published notice in the Federal Register states MMS did not receive any specific comments on 'approaches which will reduce underpayments and minimize any abuse in payment and collection of royalties' or any comments on 'the ability of auditors to determine compliance with these regulations'. The notice also says that MMS has not received any specific comments on 'the extent to which these draft rules are responsive to concerns regarding royalty under-payments identified in the Linowes Commission Report.'
To the contrary, the comments submitted to you in September by the Conference specifically addressed these issues. The comments contained four pages, single-spaced, on the Linowes report. These comments apparently were not read, or have been completely ignored." (Litigation Action Group)
Peter Jennings of ABC National News aired two stories on oil and gas issues in late 1994. Roger O'Neil of NBC National News aired two stories on the royalties issue in two years, plus one in late 1992 on the sale of over $32,000,000,000 in platinum for $10,000 in one Montana mine.
Public Citizen Magazine covered the issue with "Big Oil's Billion Dollar Bonanza" covered the federal and Indian losses projected by Yates' findings.
In October of 1987, the Arizona Republic blew the lid off, out West. It's series entitled "Fraud in Indian Country" actually led off with an article which grouped the projection (or estimates) of up to $ 5,800,000,000 in direct federal royalty losses plus a projection (based on an actual IG report) of federal "drainage" losses from private wells nearby at about $5,700,000,000 since about 1979. This was instrumental in galvanizing Senate action, and the articles won four awards. However, the misleading title belied the fact that about 97 percent of losses were federal, even though this was clear in the lead story!
In November of 1987, a completely independent series ran in The Tulsa Tribune under the heading "A Vanishing Trust," detailing incredible abuses against Indians in Oklahoma under Interior's "trusteeship."
The Wall Street Journal of November 16, 1987, said "IRS Estimated Alaskan Oil Producers Owe Over $200 Million for '84, '85." (This was the first widespread publicity on the windfall profits tax investigation that led to current estimates of tax "underpayments" approaching $4,000,000,000 by unidentified major producers on the west coast.)
Eight Congressmen wrote to the Honorable James A. Baker, then Secretary of the Treasury, to note that the Energy Information Agency had published a report out of the Energy Department, in Petroleum Marketing Monthly of April 1987, (covered in the WSJ article) suggesting that not one of the possible causes cited by industry was enough to explain the under-valued crude oil on the west coast. Differentials of significant magnitude were cited (which later turned out to be as much as $7.00 per barrel of crude).
The letter was signed by George Miller, Sam Gejdenson, Morris Udall, Tony Coelho, Fortney Stark, Norman Mineta, James McClure Clarke and Philip Sharp on December 3, 1987, asking Baker to respond by the 28th of January, 1988.
On November 25, 1987, I sent an extensive file to Bill Imfeld, Chief of the Government Fraud Unit, FBI, saying that these reports - taken together - point to systemic underpayment. The response was tepid. Prosecutorial discretion was the code given, meaning "we ain't going to touch it."
Congressman Mo Udall wrote to the Honorable Donald P. Hodel, on December 9, 1987, that the proposed new regulations carry "...a substantial risk for the taxpayers of the United States..." Copies of his letter went to the Governors of ALASKA, ARIZONA, CALIFORNIA, COLORADO, LOUISIANA, MONTANA, NEW MEXICO, NORTH DAKOTA, OKLAHOMA, TEXAS, UTAH and WYOMING.
The Congressional Record of December 21, 1987, noted that criminal and civil actions, and the payment of fines up to a half-million dollars plus five years in prison, had just been enacted into law for those who knowingly act to defraud the federal or states' governments of revenues from their mineral resources.
In June of 1988, Government Executive magazine published "Interior's Struggle to Track Billions in Oil and Gas Royalties." It noted that of the $3,700,000,000 actually collected in royalties on federal lands in fiscal year 1986 (about 60 percent of peak yearly income), approximately 90 percent went to the U.S. Treasury, $ 376,000,000 to states and more than $ 100,000,000 to Indian tribes and individuals.
MMS alleged in statements to the magazine that virtually every mis- management charge made by the press during the last few years had been refuted!
The Department was found to be managing some 120,000 leases, many of which are off-shore. The Department's own IG had recently said that the enormous audit challenge was not being met (as noted below).
MMS said that the estimates of losses had been taken out of context and quoted by critics as a debt owed the Treasury, states and Indian tribes. (This charge is unfounded. All responsible evaluators were citing the findings as estimates, all along, including myself.)
Most of the ARC group signed a letter refuting the MMS assertions, and Government Executive printed that letter.
Senator Proxmire issued a message supporting MMS, saying in essence that the projection of the audit findings had been unjustified based on the evidence. Proxmire's aide who wrote that document was an ex-Interior employee who returned there shortly after it was published.
On September 15, 1988, Senator Inouye released the preliminary report of his Senate investigation, striking at the heart of many of the issues and recent allegations on oil and gas royalty losses. The report said that a number of other areas of government activity "may likewise have been saddled with fraud, corruption, waste, neglect, and an inability to afford effective oversight and assistance."
Inouye cited the Interior Inspector General's own April 1988 findings that:
* The Department was able to audit ONLY TWO PERCENT of federal and Indian leases, a percentage called "inadequate" to ensure full compliance (E-LM-MMS-07-87E);
* Thirty-eight percent of auditing time was spent looking at companies' claims that they had overpaid (rarely challenged);
* The data systems maintained by MMS and BLM are not compatible;
* Many of the problems which have been found in oil and gas matters pertain also to "hard" minerals (platinum, gold and silver); and
* Litigation has raised serious questions about whether the BIA has failed to uphold its trust responsibility...when dealing with private timber companies (more uncharted territory).
That work by Inouye was wrecked, in terms of Senate investigation and follow-up, by the study leader Ken Ballen (and Senator Dennis DeConcini) who took over the study and attacked one Indian leader on one major purchase of real estate. (The purchase legally added to Navajo land base, but that leader allegedly profited from the sale.)
Four oil and gas investigators on the Senate team had left it in disgust, according to my sources, when Ballen would not pursue the royalties issues.
I myself had met with Ballen in private earlier, with a witness, and emphasized to him the "split" in royalty findings represented in the Arizona Republic articles (i.e., that they are mostly federal in nature). In spite of that, he and DeConcini persisted in denying any validity to the overall allegations. They wrongly presented those allegations of multi-billion dollar losses as being strictly against Indians, knowing full well that the Arizona Republic had repeatedly labeled them as Federal and Indian losses!
In an article by the New York Times on October 15, 1988, Bettenburg was quoted as saying "We have demonstrated that you can audit the system, but it's so arduous that no one would ever try." He was removed and put over Gulf Coast operations shortly thereafter, a fact not reported.
However, Bettenburg later got a fourth Presidential award and a large cash prize, in 1989, as noted at the end of this article.
In late December 1988, no more than three days after receiving a contract in the form of a letter from 13 oil companies' Louisiana lawyers (Liskow and Lewis of New Orleans), James E. Cason signed and returned it, agreeing to certain limitations on audits. Primarily, the three field units were forced to go searching all Interior records for information readily available in company offices. Andrew Melnykovych of the Casper Star-Tribune's Washington Bureau tore this decision apart in a May 17, 1989 article.
The May 22nd issue of Time Magazine underplayed the issue, singing Mr. Ballen's tune that it was about a one percent loss issue. The article did mention in passing that DeConcini was relaying some issues to Justice for possible prosecution. (No mention was made of the on-site observation of the theft of $ 400,000 worth of oil in one night, while FBI agents literally hid in a nearby herd of cattle!)
On June 8, 1989, Secretary of the Interior Manuel Lujan, Jr. testified before the Senate Select Committee on Indian Affairs that "I believe by-and-large that the Department of the Interior, the Bureau of Indian Affairs and all other bureaus are doing a good job in carrying out the complex programs under their authorities." Amazing, truly amazing.
Senator Thomas A. Daschle (D-S.D.) was quoted in the Washington Post the next day as follows: "I think somebody's got to shake them up. Somebody's got to go in there and kick butt." Lujan had rejected a committee idea for a White House office to handle Indian issues, but said he'd do some "kicking around". He promised to give the Bureau of Land Management more control over fraud by oil companies that purchase crude. Lujan said at that point that his top priority was Indian education (commendable, but somehow not on point).
In June of 1989, the Royalty Owners Action Report, issued by Jim Stafford of the National Association of Royalty Owners, pointed out the findings of the Senate committee, and asked "If that's what happened to the feds, what's happening to us?" He speaks for thousands of private owners.
On July 11, 1989, James Cason's nomination to Assistant Secretary of Agriculture was challenged by the heads of nine major environmental watchdog groups. His record on the oil royalty loss issue, his sale of oil shale land owned by the government to private owners at $2.50 an acre (land which might hold more reserves than Saudi Arabia with proper pricing and later development), his support of oil drilling in national forests, and his support of strip mining in national parks were all challenged. David Albersworth of the National Wildlife Federation in Washington said "It's just a shocking appointment." The groups wrote to President Bush in April, saying that Cason has shown "extreme bias in favor of those who financially benefit from the exploitation of the nation's public lands and resources." His nomination was defeated, but he remained a high-level Interior official.
Bill Bettenburg, who promoted the "Conoco regulations" and who published the notice that no serious objections arose, got a $ 20,000 cash award and a Distinguished Presidential Rank certificate in September 1989, his fourth similar award in about nine years. A Texas oil man was picked to head the Minerals Management Service. And as Bush was leaving office, aides to Interior Secretary Lujan used his auto-pen to sign another batch of $20,000 awards for Interior officials!
It is the system which keeps those types of people in power and those huge losses unaudited (at least 98 percent of them) and uncollected.
On October 7, 1989, the Washington Post reported the Interior Inspector General's finding that his agency "lost" $17,000,000 to $ 19,000,000 from the $ 1.7 billion Indian trust fund. (Much of the income to this fund comes from minerals revenues.) The Bureau of Indian Affairs was blamed. BIA needs up to six years, it replied, to resolve differences in what it owes various tribes.
BIA had a policy of revealing such losses only if the Indians became aware of them and then demanded reimbursement, according to the Inspector General's audit report. Not reported was the fact that BIA has known about this problem for many years, and has left it uncorrected.
The Alaska lawsuits for exactly $901,983,282.66 ("settled " for about $3.7 billion actually paid, including taxes) gave greater credibility to the earlier projections of $ 11,000,000,000 in nationwide Federal and States' royalty losses - plus the closely related windfall profits tax losses of up to $ 4,000,000,000.
The Congressional report dated in February 1990, showing a 13.3 underpayment rate on over 600 federal oil and gas lease royalties, was never officially released. Congressman Whitten kept that report from public view despite two news articles in April, in the Washington Post and the Denver Post, showing the intent of the Justice Department to investigate the companies for illegal acts.
And now we see full evidence of massive give-aways, about $86 billion worth of platinum, gold and silver for less than 1/10 of a cent on the dollar, and more losses looming on that front in terms of oil shale "sales." And the fact that one State, Alaska, is actually collecting over $3.7 billion from several companies is proof positive that we don't just have a little smoke, we have a full-blown forest fire!!
We have to insist on major reforms, and Clinton should mandate major shifts of personnel and functions out of Interior entirely.
Also, major audits on a systemic, random sampling basis across product lines and product quality, for the period 1979 through the present, are needed in oil and gas fields owned by the Federal government. And we have to push Justice to expand it's antitrust investigation nationwide. The six-year statute of limitations runs out on company records, unless fraud is proved.
DELAY is the name of the game. The companies and Interior work together to ignore or ward off major audits and oversight, time and time again, and to shrug off public objections. The U.S. Senate has shown complicity in this scheme, by introducing S.775 without debate and planning to take it to a conference committee this year.
Only by turning the system completely around, and by remaining vigilant from then on, can we hope to stop these huge transfers of public wealth into private hands.
...William E. Robinson, Jr. - Revised August 1996
William E. Robinson, Jr., has no financial relationship with any groups or individuals that are investigating or pursuing this initiative. His involvement in this started in 1981, when he became aware of the continuing losses of Federal and Indian oil and gas and coal royalties while working on a short-term detail from his regular federal position. Review of Federal reports, discussions with key officials and other related activities by the author were conducted on his own time. Significant amounts of his annual leave were used at times in the past to seek a satisfactory resolution of this issue.
He has received two nationwide awards for excellence from two Directors of his Federal agency since 1992, and a Sustained Superior Performance award in May of 1993.
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