What's new in production

	Vol. 229 No. 10
DAVID MICHAEL COHEN, PRODUCTION ENGINEERING EDITOR, DAVID.COHEN@WORLDOIL.COM

Beyond the sex and drugs: The real crude behavior at MMS

Before the financial meltdown monopolized the US government, there was a brief surge last month in congressional interest in the inner workings of the US Interior Department’s Royalty in Kind (RIK) program.

The buzz centered around three reports issued by the department’s inspector general, detailing misconduct between 2002 and 2006 in the department’s Minerals Management Service (MMS), which administers the RIK program.

These reports paint a lurid picture of an agency rife with promiscuous sex, both within the agency and between employees and industry representatives, rampant drug and alcohol abuse, and wild parties and extravagant gifts courtesy of oil and gas companies.

Without dwelling on the most lurid stuff-the program’s manager snorting cocaine off the toaster of one of the two subordinates with whom he had intimate relations, an employee selling sex toys out of the office-the reports describe a broad web of conflicts of interest in RIK, which sells oil and gas collected from companies operating on federal leases in place of cash royalties.

The investigation found that some 19 officials, a third of the staff, accepted gifts from industry employees, some with “prodigious frequency,” and eight RIK staffers had accepted gifts whose value exceeded the limit mandated by ethics rules, including meals, rounds of golf, ski trips, a Houston Texans football game and a Toby Keith concert.

Two RIK marketers known to “party” regularly with industry executives were known as the “MMS chicks.” In one instance, the two employees spent the night in lodging provided by an oil company after becoming too intoxicated at the company’s daytime golf outing to safely drive to a hotel. Both had brief sexual relationships with industry contacts, and didn’t see any reason to recuse themselves from work involving the companies those officials represented.

RIK officials also used federal contacts to consult on the side for private companies, and to secure lucrative-and illegal-post-agency employment.

How did one department rack up so many blatant ethical violations even though staffers regularly attended ethics training? According to some of the RIK employees interviewed, they felt that the federal rules didn’t really apply to them because of their “unique” role as a government agency that was also “part of industry.” Because RIK acted in some ways like a private company, marketing its oil and gas to companies and accepting contracts for transportation of that oil and gas (more on that below), the normal rules didn’t apply. Some employees said socializing with industry representatives was necessary to conduct “market intelligence,” and that attending free company-sponsored outings was necessary because business was often conducted in such recreational settings.

What the “MMS chicks” didn’t seem to realize is that drinking excessively at business functions and sleeping with potential customers aren’t just violations of ivory-tower ethical decrees. They’re also really bad business practices. And in the RIK employees’ cases, the shareholders whose business interests they failed to represent were the American people.

Nonetheless, the RIK employees’ arguments, however faulty, do have some merit; their office does perform a unique function that requires closer contact with industry than would generally be proper. It all begs the question: How did a federal agency get into the oil and gas marketing business in the first place?

RIK began as a pilot project in 1996 and expanded to full scale after 2004. In 2007, nearly half of all oil and gas royalties were collected in kind. The program arose as a solution to disputes with industry over the price at which oil and gas royalties should be collected; royalties collected in kind do not require the government to determine a price. Since MMS doesn’t own any pipelines or storage, the agency must contract out these services to private companies. This, plus the need to sell the collected oil and gas back to the private sector, lays the groundwork for RIK’s uniquely cozy relationship with industry.

The program also shifts the marketing and brokerage costs of the collected oil and gas from the private sector to the public-a small fraction of the price of oil, but it adds up when you collect billions of dollars’ worth a year. (MMS is the largest source of US government revenue after the IRS.) Despite this extra cost, RIK is supposed to yield an overall increase in revenue, both by eliminating litigation over the price of royalties and because the government can sometimes fetch a higher price by selling large amounts of oil or gas at once.

How has that worked out in the real world? According to some less-interesting MMS investigations of the previous few years, it’s hard to tell. One review of the program, conducted by the Government Accountability Office in 2004, found that MMS was unable to accurately compare its revenue from RIK sales with royalties it would have received in cash, because the agency had not developed information systems to collect the necessary information. This finding is corroborated by a 2007 report by Interior’s inspector general, which found “profound failure” in MMS’s ability to accurately track and collect royalties, both in kind and in cash. This failure was attributed both to technological failures and to senior officials quashing auditors’ efforts to recover revenues from companies that underpaid.

There is no way to know just how much money may have been lost due to these problems, but one of those auditors, Bobby Maxwell, sued as a private citizen and convinced a jury that just one company cheated the public out of $7.5 million in royalties. MMS had told him to back off the case, and fired him one week after he filed suit. The verdict was later thrown out based on a technicality in the federal whistle-blower law.

Furthermore, the most recent reports on RIK say officials allowed contracting companies to revise their bids, even after an award had been made, resulting in over $4 million in lost revenue.

It’s utterly puzzling; granted that the RIK office sees itself more as a private company, “part of industry,” than a governmental agency, have you ever known a private oil company to be so loose with its money? Perhaps MMS should get out of the oil and gas business altogether, ill-equipped as it is for such work, and return to collecting cash royalties.