Sex, Drugs And Minerals

Before last month, few people had ever heard of the federal government's Minerals Management Service. A scandal involving sex, drugs and lax oversight changed that. The publicity has led to questions about the agency's ability to collect money.

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MADELEINE BRAND, host:

This is Day to Day. I'm Madeleine Brand.

ALEX CHADWICK, host:

I'm Alex Chadwick. Coming up, Ukrainian hostages, tons of weapons and explosives, millions of dollars in cash, a modern pirate story still afloat in the Indian Ocean.

BRAND: First, though, sex, drugs, and oil royalties were at the heart of an investigation at the U.S. Minerals Management Service a month ago. MMS employees were supposed to be regulating oil company workers. Instead, they were partying and having sex with them.

CHADWICK: Now, here's why this is such a big concern. The MMS is the second largest source of revenue for the U.S. Federal Treasury after us tax payers. Last year, it brought in nearly $9 billion. Some say it should have been more. NPR's Jeff Brady reports.

JEFF BRADY: In most cases, oil and gas companies do not own the fossil fuels they pump from the ground. They pay a royalty for the right to extract the fuels. And making sure they pay the full royalty is a tough job. Roy Savage (ph) knows that. He's standing in front of a 10-story-tall drilling rig on three acres that used to be an alfalfa field on his family's ranch. It's about three hours west of Denver in the Rocky Mountains.

Mr. ROY SAVAGE: Just like Michael Jackson gets a percentage on every song, we get a percentage on every million BTUs of gas that comes off of our property.

BRADY: That might sound like an easy job, sit back and wait for the checks to roll in. But Savage says being a successful mineral rights owner requires vigilance.

Mr. SAVAGE: It's a contract in which I have to monitor and manage conscientiously, or I'm not going to get paid correctly. I'll get paid some. I might not get paid all.

BRADY: Here in the Rocky Mountains, where nearly every well produces valuable gas, people like Savage receive royalties up to 25 percent. But the government hasn't kept pace. It's still charging only half that. Frank Resgoe (ph) with the government accountability office says the interior department needs to reexamine its royalty rates.

Mr. FRANK RESGOE (Government Accountability Office): What's the right amount that we should charge them that makes sure we are an attractive place to invest, but also makes sure that the public gets a fair return on these public resources?

BRADY: Resgoe says the MMS also needs better systems that check and re-check royalty collections to make sure oil and gas companies pay all they owe. A program called royalty in-kind is a special concern. That was the same program at the center of that salacious scandal last month. Royalty in-kind means energy companies pay the government in oil or gas rather than money.

Eric Moleto(ph) with the American Petroleum Institute says the industry and the government both save money on legal costs because determining the royalty is so simple. Moleto cites an offshore example of how this works.

Mr. ERIC MOLETO (American Petroleum Institute): We've produced 100 barrels today out in the Gulf of Mexico. Government, you get 18.75 barrels, and then we're set. Both sides can easily come up with what the percentage is because you're just looking at the volume.

BRADY: The government then sells the oil on the open market. The companies like this setup because there are fewer audits, and with their support, the RIK program now accounts for 40 percent of the royalties the government collects. Even in the wake of the scandal last month, Interior Secretary Dirk Kempthorn praised the RIK program at a congressional hearing.

Secretary DIRK KEMPTHORN (Secretary, U.S. Department of the Interior): Several studies of the RIK program indicate it is a valuable tool that can result in increased revenue, reduced administrative costs for MMS, reduced incidents of valuation disagreements, and earlier receipt of royalty revenues.

BRADY: But Frank Resgoe with the GAO says the conclusion that the RIK program brings in more money is based on assumptions that could be wrong.

Mr. RESGOE: Small changes to the assumptions used to estimate that difference between what you collect and what you could've collected could make those numbers be negative.

BRADY: Resgoe says no one really knows if the RIK program brings in more money because the data to determine that aren't available. The inspector general at the Interior Department said his investigators couldn't audit the programs books because they were such a mess. That has changed. The MMS has received a lot of attention from the GAO and the inspector general in the last month. With a clearer set of figures to work with, investigators hope to determine whether the RIK program is a good deal for the federal government. Jeff Brady, NPR News, Denver.

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