Fewer Audits Being Done of Oil Leases on U.S. Land
- March 1, 2006
Fewer Audits Being Done of Oil Leases on U.S. Land
By EDMUND L. ANDREWS
WASHINGTON, Feb. 28 — The Bush administration is scaling back on audits
of energy companies that pay billions of dollars for leases to produce
oil and gas on federal property, state officials said.
The changes have drawn protests from several oil-producing states and
American Indian tribes, which receive a share of the royalties energy
companies pay the federal government for oil and gas produced on public
lands. Those royalties have risen much more slowly than prices for oil
and gas, which reached record highs last year and are expected to remain
high for several years.
Officials at the Interior Department, which oversees federal leases for
oil and gas, say the apparent shortfall stems largely from changes in
production and lag times in reporting that distort the government's
But in a letter last week to House members, a group of state and tribal
auditors said that the Interior Department had cut back on audits in
favor of a much looser approach known as "compliance review" that could
miss many instances of cheating.
"Compliance reviews do not involve getting underneath the reported
information to look at company books," wrote Lisa Dockter, chairwoman of
the association of state and tribal auditors. As a result, she said, the
government would not be able to confirm whether a company's report was
Yusef Robb, a spokesman for California's state controller, said the Bush
administration's approach was based largely on spotting inconsistencies
between different forms that energy companies file to the Interior
"Under the compliance review system, if you fill out your fraudulent
form correctly, you can get away with the fraud," Mr. Robb said. "We
know we can't trust companies to do what's right without regular auditing."
Last year, the government collected about $8.5 billion in royalties from
oil and gas sales on federal land and in the Gulf of Mexico.
The Bush administration has cut spending over the last five years for
what it calls "compliance and asset management" — the job of verifying
royalty obligations — even as it has sharply expanded oil and gas
leasing in the Gulf of Mexico.
The administration is proposing to spend $43.1 million on compliance
efforts in 2007, up slightly from $42.7 million in 2006 but well below
the $51.3 million that was spent in 2001.
The Bush administration is also proposing to sharply cut the amount it
pays several oil- and gas-producing states, notably California and
Colorado, for auditing work on behalf of the federal government. The
federal government essentially hires state governments and Indian tribes
to keep track of oil and gas leases within their boundaries.
California officials asked for $1.2 million in 2006, the amount they
said was necessary to keep the number of auditors at 10. The Interior
Department provided $800,000, enough for eight auditors, and California
officials say it wants to cut spending next year to about $700,000.
Similar cuts are being imposed on Colorado, which monitors thousands of
oil and gas leases in the Rocky Mountains. Colorado's budget for
auditing and compliance was reduced to $750,000 in 2006, from $975,000
in 2005, and the Bush administration is seeking additional cuts for next
Administration officials say they have developed better strategies.
"We implemented a new management strategy that increases efficient use
of our internal resources, and in fact allows us to do as many or more
audits with fewer auditors," Johnnie M. Burton, director of the Minerals
Management Service wrote to House members last month.
Administration officials said they had been able to reduce auditing
costs by letting more companies pay royalties in the form of oil and gas
rather than in cash.
Supporters of this approach, known as "royalties in kind," say it
permits the government to do away with much of the arcane accounting
that goes into determining the sales value of oil and gas in dollar terms.
Administration officials also say they have concentrated more of their
money on the biggest oil and gas producers, a tactic that leads to a
more efficient use of auditors.
Some state auditors say the government is short-changing itself, and by
extension the nation's taxpayers.
California officials say their auditors typically recover three times as
much money from underpayments as they spend on auditing.
Dennis R. Roller, a state auditor in North Dakota, said the Interior
Department occasionally misses even the most obvious lapses in payments.
Mr. Roller said the Interior Department had not noticed that a bankrupt
company in North Dakota had stopped paying royalties, even though it was
still producing oil and gas, until North Dakota officials alerted
Washington in December.
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