U.S. oil agency scandal unfolds

WASHINGTON —  Federal investigators said Wednesday that an Interior Department group in charge of collecting oil and natural gas royalties was compromised for years by employees who improperly accepted gifts from oil company employees, handed out sweetheart deals, had sex with subordinates and industry contacts and used illegal drugs.

The reports from the department’s inspector general, Earl E. Devaney, the culmination of several years-long investigations, were the latest to question the cozy relationship between the energy industry and the Minerals Management Service, the obscure Interior Department agency that issues lucrative drilling leases to energy companies and then collects royalties from the leases of taxpayer-owned land.

The alleged misconduct occurred over nearly four years. It involved more than a dozen current and former employees of an arm of the Minerals Management Service, which takes in more than $8 billion a year in royalty revenue from the leases and is the U.S. government’s largest nontax source of revenue.

The reports, delivered to Congress on Wednesday, detail a freewheeling “culture of substance abuse and promiscuity” in which employees of the Denver-based Royalty in Kind program considered themselves part of a commercial enterprise that wasn’t bound by government ethics rules, Devaney wrote in a letter to Interior Secretary Dirk Kempthorne that accompanied the reports.

The program collects royalty payments that are made “in kind” -- in oil, for example, instead of cash -- and resells the crude on the market. The 60-employee group collects revenue representing nearly half of what the Minerals Management Service brings in.

Among the allegations:

* Government employees routinely socialized with industry representatives, having drinks and meals and attending golf outings, a ski trip, a Toby Keith concert and other excursions. Two of the 19 employees cited had received gifts on more than 135 occasions from four major oil and gas companies. Devaney noted that “between 2002 and 2006, nearly one-third of the entire RIK staff socialized with, and received a wide array of gifts and gratuities from, oil and gas companies with whom RIK was conducting official business.”

One government employee said that because the agency regularly paid a major producer to transport oil, it was “perfectly appropriate” for him to attend a desert treasure hunt paid for by the producer, Devaney wrote. Government regulations forbid employees from taking a gift valued at more than $20 and from taking gifts worth more than $50 from one source in a year.

* Two employees engaged in “brief sexual relationships” with customers but didn’t recuse themselves from handling work involving those companies and officials. One employee said she didn’t disclose the contact or consider it improper because “she did not consider a ‘one-night stand’ to be a personal relationship” and didn’t think it would affect government business. Devaney noted: “Sexual relationships with prohibited sources cannot, by definition, be arms-length.” One program official allegedly had sex with two subordinates and bought cocaine, sometimes at his office.

* During a 2004 industry gathering, an employee became too intoxicated to drive to her accommodations and instead stayed at a Shell-provided hotel room. A Shell employee later reassured her in an e-mail, “Nobody will say anything about you being here for the night. As far as I’m concerned, you were in a hotel.” The employee responded, “you are sooo wonderful. You know how much I totally adore you.”

* In some cases officials had “inappropriate” outside employment with entities doing business with the Royalty in Kind group, the reports said. A former program director received more than $30,000 from an industry consulting firm in return for marketing the company to various oil and gas companies doing business with the government agency. A former Minerals Management Service associate director helped direct lucrative consulting contracts to a firm run by two members of the agency who had retired less than a year earlier.

* Royalty in Kind employees routinely allowed energy companies to revise their bids for oil or natural gas after the sale had been awarded to the company. Out of 121 amendments reviewed, only three favored the government. The amendments favoring industry were worth about $4.4 million.

Minerals Management Service spokesman Drew Malcomb said that the agency hadn’t yet reviewed the reports but that it would “take action clearly and quickly” if there was evidence of misconduct. Rep. Henry A. Waxman (D-Beverly Hills), chairman of the House Committee on Oversight and Government Reform, said he would hold a hearing on the matter next week.

Devaney said that one former employee pleaded guilty to an unspecified criminal charge but that the Justice Department declined to prosecute cases against two high-ranking former employees implicated in the scandal.

On Wednesday, Justice Department spokeswoman Laura Sweeney said the department had received referrals related to the reports, but she could not comment further.

The reports gave new ammunition to opponents of lifting long-standing drilling bans in some federal waters just as public support seemed to be pushing lawmakers in that direction.

House Democratic leaders were discussing with their rank and file a new energy bill that would allow new drilling within 50 miles of a state’s coast, if the state approves, and 100 miles offshore regardless -- moves that would give the same troubled Minerals Management Service billions of dollars’ worth of additional leases to award and manage.

Lawmakers immediately condemned the “hanky panky” at the agency. “Royalty collectors gone wild” was the subject of an e-mail sent out by the Democratic staff of the Senate Energy and Natural Resources Committee.

“I warned publicly that we could not trust the oil companies that want to drill in the waters off our most protected coastlines, nor the federal watchdogs charged with keeping a watchful eye over them,” Sen. Bill Nelson (D-Fla.) said on the Senate floor. “Now, we have proof.”

Drilling advocates Tom Davis (R-Va.), ranking Republican on the House oversight committee, and California’s Darrell Issa (R-Vista), ranking Republican on the House domestic policy subcommittee, sent a letter to Waxman that criticized the committee’s “failure to hold accountable” the Minerals Management Service for ethical lapses and mismanagement, “all of which reveal an unacceptable closeness to the oil industry. . . . Taxpayers must get every cent that is owed them, especially if drilling is expanded and royalties increase.”

In a separate statement, Issa said that despite the agency’s failings, “the more the public hears that new domestic drilling will both lower gas prices and make substantial royalty payments to the Treasury, the more they will embrace it.”

Devaney singled out Chevron Corp. as the one major oil company that refused to cooperate with the investigation. The report identifies Chevron, Shell, Gary Williams Energy Corp. and Hess Corp. as providing gifts to Royalty in Kind employees with whom they had a business relationship.

Chevron disputed Devaney’s characterization. “We have cooperated with the government investigation and produced all of the documents that the government requested months ago,” said Don Campbell, spokesman for the San Ramon, Calif.-based oil company.

Environmental groups said the reports raise questions about whether Congress should allow more offshore drilling.

“Is this the agency we want in charge of our coasts?” said Richard Charter, a consultant to Defenders of Wildlife Action Fund.

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elizabeth.douglass@latimes.com

richard.simon@latimes.com

Simon reported from Washington and Douglass from San Diego.