Monday, January 23, 2006

As Profits Soar, Companies Pay U.S. Less for Gas Rights

Here is your Republican-controlled government at work. This is from The New York Times:

WASHINGTON, Jan. 22 - At a time when energy prices and industry profits are soaring, the federal government collected little more money last year than it did five years ago from the companies that extracted more than $60 billion in oil and gas from publicly owned lands and coastal waters.

If royalty payments in fiscal 2005 for natural gas had risen in step with market prices, the government would have received about $700 million more than it actually did, a three-month investigation by The New York Times has found.

But an often byzantine set of federal regulations, largely shaped and fiercely defended by the energy industry itself, allowed companies producing natural gas to provide the Interior Department with much lower sale prices - the crucial determinant for calculating government royalties - than they reported to their shareholders.

As a result, the nation's taxpayers, collectively, the biggest owner of American oil and gas reserves, have missed much of the recent energy bonanza.

The disparities in gas prices parallel those uncovered just five years ago in a wave of scandals involving royalty payments for oil. From 1998 to 2001, a dozen major companies, while admitting no wrongdoing, paid a total of $438 million to settle charges that they had fraudulently understated their sale prices for oil.

Since then, the government has tightened its rules for oil payments. But with natural gas, the Bush administration recently loosened the rules and eased its audits intended to uncover cheating.

Industry executives deny any wrongdoing, arguing that the disparities stem primarily from different rules for calculating the sale prices for paying royalties and the sale prices for informing shareholders.

Now I can understand that the energy companies would love to get oil and gas off of the federal lands. But what pisses me off is how the energy industry is writing the rules on how to collect the gas, and set up the byzantine rules regarding royalty payments that favor the industry at the expense of the American taxpayer. And what is the Bush administration's take on this new scandal? Loosen rules, ease the audits, and let the energy companies get away with more robbery. Screw accountability, screw the government, and screw the taxpayer.

But wait--here's the industry's response to this scandal. Continuing on:

"The price of gas downstream is always going to be higher because you have costs that have to be recouped for getting it to the customer," said Robert H. Davis, a spokesman for Exxon Mobil. "You have to process the gas. You have to transport it, and you have to sell it. There will always be a discrepancy there."

Companies that pump oil and gas on federal property are required to pay the government royalties, usually 12 percent to 16 percent of the value of what they sell.

What a crock. Exxon Mobil, whatever price you sell for that gas should be the value to pay for the royalties. Yes, there is always costs for extracting and processing the gas. But that does not give Exxon Mobil the right to shift those costs to the American taxpayer. Those costs are your burden for extracting the gas. This whole crap of creating two gas prices--one price for measuring royalties, and one price for informing shareholders should be stopped. There should be one price for selling gas to the consumer--period. And that is the price of which the royalties should be calculated.

But the industry is not going to do that. Continuing on:

Royalties for natural gas have climbed sharply in the last three years. But while prices nearly doubled from 2001 to 2005, the $5.15 billion in gas royalties for 2005 was less than the $5.35 billion in 2001. When oil and gas are combined, royalties were about $8 billion in 2005, almost the same as in 2001.

Because much of the information about specific transactions is kept secret, it remains unclear to what extent, if at all, the weakness in royalty payments stems from deliberate cheating or from issues with the rules themselves.

But one major producer, Burlington Resources, admitted to shareholders last year that it might have underpaid about $76 million in gas royalties in the 1990's. And in Alabama, a jury ruled in 2003 that Exxon had cheated on $63.6 million worth of royalties from gas wells in state-owned waters. The jury awarded $11.9 billion in punitive damages, which a judge later reduced to $3.5 billion. Exxon disputes the charges and is appealing the verdict.

The possible losses to taxpayers in gas could be even higher than the losses tied to the scandals over oil royalties. For one thing, natural gas production on federal land is worth twice as much as oil.

Moreover, the Interior Department has scaled back on full audits, pushed out a couple of its more aggressive auditors and been criticized by its own inspector general for the audits that it did pursue.

"We are talking about the same issues and in many cases the same players as before," said Danielle Brian, executive director of the Project on Government Oversight, a nonprofit watchdog group that exposed many of the oil royalty scandals.

"These companies had knowingly been cheating on oil for years, if not decades," Ms. Brian continued. "To ignore the likelihood that the same thing is happening on the gas side is absurd."

Johnnie M. Burton, director of the Interior Department's Minerals Management Service, said the disparities were mostly the result of deductions that the regulations let companies take, reducing the sale prices they report to the government.

But Ms. Burton said she had not known and could not explain why companies were reporting higher sale prices to their shareholders and to the Securities and Exchange Commission than to her office.

"I can't answer because I don't know," she said in an interview. "We don't look at S.E.C. filings. We don't have enough staff to do all of that. If we were to do that, then we would have to have more staff and more budget. You know, there is such a thing as budget constraint, and it's been real tough, let me tell you." The contrasts between what companies are telling the government and what they are telling shareholders is stark.

The Interior Department, using the numbers given by companies paying royalties, said the average sale price of natural gas on federal leases was $5.62 per thousand cubic feet in fiscal 2005, which ended Sept. 30.

By contrast, Exxon told shareholders that it received about $6.88 per thousand cubic feet in the nine months that ended Sept. 30. Chevron said its average price in that period was $6.49. Kerr-McGee, which suffered huge losses from hedging against a drop in prices, nonetheless said it still received an average price of $6.59.

"There's no reason why what the companies report to their shareholders should be higher than what they report" to the Minerals Management Service, said Lee Helfrich, a lawyer who has represented California in many battles with the industry over royalties. "The ultimate goals or mission of the S.E.C. and the M.M.S. are different, but the information reported to each should be the same."

This is how you cheat the government. You have the energy industry write the regulations, creating different pricing schemes for two different government agencies. You create other loopholes that the energy industry can drive a gas truck through, then use the budget deficit to cut funds from the Interior Department so they can not effectively audit these transgressions. You have a Bush White House that will ignore this issue, considering that the Bush White House favors any regulations or lack of accountability that will favor their big energy constituents. Continuing on:

In the scandals over oil royalties in the 1990's, government investigators, aided by industry whistle-blowers and investigation by the Project on Government Oversight, found that companies were using a host of tricks to understate their sale prices.

These included buy-sell agreements in which producers swapped oil with each other at artificially low prices and then resold it at higher prices. Companies also sold oil at below-market prices to their own affiliates, classified high-priced "sweet" oil as much cheaper "sour" oil and padded their deductions for transportation costs.

In the wake of the scandals, the outgoing Clinton administration pushed through tough new rules for valuing crude oil, which relied on comparing company reports with an index of spot market prices.

A Pro-Industry Approach

But the Bush administration did not close any loopholes for valuing natural gas. Indeed, in March 2005 it expanded the list of deductions and decided against valuing sales at spot-market prices when companies were selling to their own affiliates.

The industry-friendly stance was intentional. Mr. Bush and top White House officials also placed a top priority on promoting domestic energy production. Vice President Dick Cheney's energy task force called for giving lucrative new incentives to companies that drill in the Gulf of Mexico and other high-risk areas.

The Bush administration also took a much more relaxed approach to auditing and fraud prevention. In 2003, the Interior Department's inspector general declared that the auditing process was "ineffective" and "lacked accountability" and that many of the auditors were unqualified.

In one instance, inspectors discovered that auditors had lost the working papers for an important audit and tried to cover up their blunder by creating and back-dating false documents. Rather than punish anybody, the inspector general recounted, the minerals service gave the employee who produced the new documents a financial bonus for "creativity."

And it goes on:

The Interior Department also fired two of its most aggressive and successful auditors. One of them was Bobby L. Maxwell, a veteran auditor who had recovered hundreds of millions of dollars in underpayments over a 22-year career and received an award for meritorious service in 2003 from Interior Secretary Gale A. Norton.

Mr. Maxwell was fired in early 2005 after clashing with superiors over his belief that Kerr-McGee had shortchanged the government $12 million. Mr. Maxwell charged that he had been wrongfully fired, and the government paid him an undisclosed amount of money to settle out of court.

This is another example of the "culture of corruption" that exists within the Republican-controlled government. Continuing on:

Perhaps the most striking example of sluggish auditing is the government's effort to collect back royalties from companies that blatantly ignored one of the government's basic rules.

Under current rules aimed at promoting energy production in deep waters, companies can produce large volumes of oil and gas without paying royalties at all. But the rules also require companies to start paying royalties if market prices climb above certain "threshold" levels.

As it happens, market prices have been above those levels since the 2003 fiscal year. But even though dozens of companies never bothered to start paying, Ms. Burton said earlier this month that the government had yet to demand repayment three months into the 2006 fiscal year.

"It's more complicated than you might think," said Lucy Querques Dennett , associate director of the Minerals Management Service in charge of the issue.

But enforcing the rules about price thresholds is easy compared with verifying the actual sale value of natural gas.

Over the last four years, the Bush administration has ordered its auditors to move away from detailed inspections in favor of a more cursory approach of looking for anomalies in company reports. If a company in Louisiana, say, reported prices that differed from those of other companies in the same region, it would attract closer scrutiny.

I could go on with this story. The simple fact is that we have a government that is by the corporations, of the corporations, and for the corporations. We have a Bush White House that will ignore any sense of accountability, nor will this administration go after companies that knowingly and willfully cheat the federal government. What this Republican Party-controlled government is now saying is that whatever is good for corporate interests, is good for America. Cheating the government is good for America. And the Bush White House will selectively look away as corporations steal billions in unpaid royalties from the taxpayer. The Republican Party-controlled Congress will look away as the energy industry will write legislation that favors their own interests at the expense of the country as a whole. This is what our government has become. And it will get worst over time.

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