September 27, 2008

Fun With Oil and Gas

Unless something changes, any new offshore drilling being contemplated by Congress would be overseen by the ill-run Minerals Management Service. The subject of three withering reports released earlier this month, the MMS seems to have condoned improper and unprofessional behavior by its employees, acting as if the public interest carried little weight.

Instead, employees have improperly cozied up to representatives of oil and gas companies, accepting numerous gifts and even indulging in sexual relationships. According to Inspector General Earl E. Devaney, from 2002 to 2006, the Denver office of MMS felt more like a frat house than a government agency. One official, the since-retired Gregory W. Smith, allegedly had sex with two subordinates in his office and bought cocaine through his secretary.

The problems were worst among a group of employees handling the decade-old royalty-in-kind program. Royalty-in-kind lets companies pay the government with oil and gas, rather than cash, for the privilege of drilling on public land. (Such property includes coastal waters.) Some of these products are sold on the open market; some have gone into the nation's emergency reserve. Last year, the program brought in more than $4 billion worth of oil and gas.

With so much money at stake, it is essential that this program be scrupulously run. Yet the inspector general found employees steering contracts to themselves or their associates. Many were oblivious to ethical restrictions on gifts. Some told investigators they went on company-paid outings in the name of market research.

Earlier reports by the inspector general had found MMS, which is part of the Interior Department, mistakenly letting oil companies avoid paying royalties altogether. The agency routinely allows businesses to revise bid packages, in ways that almost always permit them to pay the government less. How much taxpayers have lost through such shoddy practices is anybody's guess.

In all, MMS collects some $10 billion in annual royalties; some years, royalties on oil, gas and other resources are the second- largest source of federal revenue behind taxes. Mismanagement at MMS means that taxpayers will have to do more to make up the difference. Meanwhile, under the Bush administration, new tax breaks for drillers have been enacted, along with expanded royalty relief.

If Americans are to give up pristine coastal areas to help the oil and gas companies, they should get a great deal for it. It makes little sense to expand drilling without drastically overhauling MMS first. And even then, Americans should have serious second thoughts.

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