Thursday, September 11, 2008

Federal Workers Caught In Oil Ethics Scandal

Report Says Oil Agency Ran Amok

Interior Dept. Inquiry Finds Sex, Corruption

By Derek Kravitz and Mary Pat Flaherty

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Government officials in charge of collecting billions of dollars worth of royalties from oil and gas companies accepted gifts, steered contracts to favored clients and engaged in drug use and illicit sex with employees of the energy firms, federal investigators reported yesterday.

Investigators from the Interior Department's inspector general's office said more than a dozen employees, including the former director of the oil royalty program, took meals, ski trips, sports tickets and golf outings from industry representatives. The report alleges that the former director, Gregory W. Smith, also netted more than $30,000 from improper outside work.

The report from Inspector General Earl E. Devaney contains fresh allegations about the practices at the beleaguered royalty-in-kind program of Interior's Minerals Management Service, which last year collected more than $4 billion worth of oil and natural gas from companies given contracts to tap energy on federal and Indian lands and offshore. The revelations come as Congress is set to consider opening the Arctic National Wildlife Refuge and areas off the coast of Florida for drilling.

The royalty-in-kind program, based near Denver, allows energy companies to pay the government in oil and gas, rather than cash, for the privilege of drilling on government land. It has been the subject of multiple investigations since 2006 by the Interior Department's secretary, its inspector general, the Justice Department and Congress for alleged mismanagement and conflicts of interest.

In the report released yesterday, investigators said they "discovered a culture of substance abuse and promiscuity" in which employees accepted gratuities "with prodigious frequency." The report cited one e-mail from a Shell Pipeline representative asking a woman in the royalty office to attend "tailgating festivities" at a Houston Texans football game: "You're invited . . . have you and the girls meet at my place at 6am for bubble baths and final prep. Just kidding."

Besides Shell, the energy company employees mentioned in the report worked for Chevron, Hess and Gary-Williams Energy. The social outings detailed in the report included alcohol-, cocaine- and marijuana-filled parties where certain employees of the Minerals Management Service were nicknamed the "MMS Chicks" by the energy employees. The companies paid for federal workers to attend football and baseball games, PGA Tour events, Colorado ski trips, paintball outings and "treasure hunts," investigators found.

Democrats who have opposed expanded drilling seized on the report as fodder for the debate. "This all shows the oil industry holds shocking sway over the administration and even key federal employees," said Sen. Bill Nelson (D-Fla.), who supports more exploration offshore but not in Alaska. "This is why we must not allow Big Oil's agenda to be jammed through Congress."

The current director of the Minerals Management Service, Randall B. Luthi, said that he takes the report "very seriously" and added that the small number of people implicated "does not represent a culture" in an agency of about 1,700 employees. The royalty-in-kind program, where the lapses cited in the report occurred, has about 50 employees.

Many employees identified in the report told investigators that they didn't think ethics rules applied to them because of their "unique" role in the agency and that they needed to socialize with industry representatives for "market intelligence," according to the report. Those employees, some of whom have been transferred to different offices, have been recommended for internal administrative action.

The inspector general's release comprised three separate reports, including one devoted to the program's former director, Smith, 56, who resigned last year. It alleges that Smith improperly worked part time for Geomatrix Consultants, an Oakland, Calif.-based environmental and engineering firm, and marketed the company to government clients.

Additionally, the report said, Smith had an inappropriate sexual relationship with a subordinate whom he paid to buy cocaine, allegedly promising her a $250 bonus in return. The report stated that Smith admitted to the sexual encounter.

Smith, who now works for a private oil company in Denver, did not respond to requests for comment. His lawyer, Stephen Peters, said that he has not read the report but that the allegations about drug use and sexual liaisons "sound very much embellished and fabricated. . . . Greg Smith was a very loyal and dedicated employee" who increased revenue under his watch.

Investigators referred their findings to federal prosecutors, who did not charge Smith with any criminal wrongdoing and declined to comment on their decision.

Justice officials also declined to comment on their decision not to pursue a criminal case against the highest-ranking official named in the report, Lucy Querques Denett, former associate director of the Minerals Management Service, who worked in Washington. She is accused of improperly arranging a million-dollar deal for two retired employees.

Denett, 55, the wife of Paul A. Denett, the procurement policy administrator for the White House Office of Management and Budget, retired from government service Jan. 31. She declined to comment on the report. She told investigators she had a "personal issue." People familiar with the investigation said health problems were a factor in the decision not to prosecute her.

The Justice Department's decision not to charge Denett or Smith created a rift with Interior officials, according to sources with knowledge of the dispute.

One of the two retired employees, Jimmy W. Mayberry, pleaded guilty in July to a federal conflict-of-interest charge related to the investigation. Another employee, Milton K. Dial, has been under investigation for similar conflict-of-interest allegations, according to two sources with knowledge of the matter.

According to the report, Mayberry discussed with Denett how he could be "brought back to work" for the agency after his retirement in January 2003.

Before he left, Mayberry created a job for himself by writing the job description and the criteria for selecting the winning bidder, court documents show. He started a company out of his Texas home and was awarded a $150,000 contract in June 2003. He later hired Dial, the report said. Mayberry's firm collected $788,000 worth of contracts. Mayberry and Dial did not return phone calls seeking comment. Mayberry's attorney, Danny C. Onorato, also declined to comment.

The royalty-in-kind program, which started as a small pilot project a decade ago, has been touted as a way to simplify the way oil and gas companies pay for the right to drill on federal land and offshore. Instead of calculating the profit from a well, they can simply give the government one-eighth to one-sixth of whatever they take from the ground.

Revenue rose quickly, from $1.5 billion in 2004 to $4.3 billion last fiscal year. But the growth occurred "in an environment with relatively unstructured in-house oversight," the congressionally convened Royalty Policy Committee said in a December report. Previous reports have said that companies were allowed to revise their million-dollar bids for projects indiscriminately, that government workers routinely failed to seek out legal advice on complicated deals and that the agency used outdated computers and a $150 million software program that resulted in royalty money going uncollected.

Lee Ellen Helfrich, a lawyer who represented states and tribes entitled to a cut of the royalties, said it was nearly impossible to get accurate numbers from the agency. "They kept hemming and hawing," she said.

In late 2006 questions arose over its handling of leases written in 1998 and 1999 that allowed major oil companies drilling in the Gulf of Mexico to avoid billions of dollars in royalty payments.

Former Interior Department auditors accused the agency of failing to bill companies. "We weren't allowed to audit them. It was kind of disturbing," said Bobby L. Maxwell, an auditor who sued the federal government for not collecting royalties. "You couldn't really see what was going on."

Yesterday, Luthi, the minerals agency director, said in a news conference that the harm done by the royalty employees was to "public trust," adding, "I do not believe Americans have lost financially" as a result of the alleged activities. However, in a later interview he acknowledged that "it is too early to tell" whether financial considerations were given to firms that gave favors to federal employees, and he said the contracts will be audited.

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