Profit, Baby, Profit

April 2nd, 2010 by Phil Mattera

President Obama’s drill-baby-drill (but not quite everywhere) gambit does not only link him to an environmentally backward policy. It also will force his Administration to defend one of the most dysfunctional federal programs in modern history: the Interior Department’s offshore oil and gas leasing system.

Interior’s Minerals Management Service (MMS) is supposed to collect royalties from companies drilling in offshore public waters. After new activity was restricted in the wake of the devastating spill off the coast of Santa Barbara, California in 1969, the oil industry sought to make its leases more profitable by pressing for reductions in these payments.

In the mid-1990s, when energy prices were low, Big Oil got Congress to expand the “royalty relief” provisions that were already in the Outer Continental Shelf Lands Act of 1953. Royalties were supposed to return to higher rates when prices rebounded, but things got complicated. First, it came to light that MMS had failed to write those provisions into some 1,000 deepwater leases it signed in 1998 and 1999, putting into question its ability to collect billions of dollars in back royalties.

While this was being sorted out, one of the drilling companies – Kerr-McGee (now part of Anadarko Petroleum) – filed suit challenging the right of MMS to impose the higher royalties on any leases. The company’s self-serving arguments found a sympathetic ear in federal court. Last fall the Supreme Court declined to review an appellate ruling in favor of the company, thus allowing Anadarko to avoid paying more than $350 million in back royalties. For the industry as a whole, the Court blocked the Interior Department from trying to collect on a bill that the Government Accountability Office once estimated could run as high as $53 billion.

Then there’s the small matter of the wild parties and gifts that industry representatives lavished on MMS employees in charge of the agency’s royalty-in-kind program. In September 2008 Interior Department Inspector General Earl Devaney (now in charge of the Recovery Accountability and Transparency Board) issued three reports describing gross misconduct at MMS, including cases in which agency employees were literally in bed with the industry. Devaney concluded that the royalty program was mired in “a culture of ethical failure.”

Not all MMS employees were bought off. Some agency auditors came forward and charged that they had been pressured by their superiors to terminate investigations of royalty underpayments.

Once the Obama Administration took office, Interior Secretary Ken Salazar took steps to clean up MMS. Last September he announced plans to terminate the royalty-in-kind program, whose staffers had been at the center of the sex and gifts scandal.

For a while it was unclear whether Salazar would tighten up the remaining royalty programs. In fact, he told the editorial board of the Houston Chronicle last fall that in some cases he thought drilling companies should pay even lower royalty rates. He changed his tune this year, and the Administration is seeking modest increases in royalties and fees.

Yet the entire offshore leasing program still amounts to a giant boondoggle. Thanks to the federal courts, artificially low royalty rates are now effectively an entitlement for the drilling industry. Research conducted by the Interior Department itself suggested that the incentives result in little additional oil production. Not to mention the environmental risks.

And now, thanks to a dubious calculation that making concessions on offshore drilling will help prospects for a climate bill, the Obama Administration is bringing about a major expansion of a program that is disastrous even if there are no spills. Profit, baby, profit.

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