Fighting Mad

Tycoon Jack Grynberg says the energy industry has stolen millions from him -- and billions from the government. What if he's right?

Yet there are other costs to taking on the powers-that-be in the energy business. Grynberg says some independents are reluctant to complain out of fear of retaliation: "They're definitely afraid. They do other business with these companies, or they're partners with them, in some cases. I have been victimized. I'm persona non grata at Merrill Lynch, Morgan Stanley, Lehman Brothers -- they won't do any corporate finance business with me.

"Goldman Sachs fired me after fourteen years of doing business because I've sued some of their best clients," he claims.

But that hasn't altered Grynberg's ways. Last year he even sued Israel for refusing to allow him to drill offshore for natural gas. He worked behind the scenes pro bono, advising the state of Alabama in a lawsuit over gas royalties that led to a record $11.9 billion verdict against Exxon Mobil in 2003; reduced to $3.6 billion by the trial judge, the judgment is currently on appeal. And he persuaded the city fathers in Aspen, where he's a part-time resident, to file suit against Kinder Morgan, claiming that the company was overcharging residents for natural gas because it calculated BTUs at sea-level heat content rather than the reduced heat value when the gas reached an elevation of 8,200 feet. A district judge ruled that the dispute should go to the Colorado Public Utilities Commission, not the courts; that decision was upheld on appeal earlier this year.

Aspen city attorney John Worcester says officials there haven't decided yet whether to file a protest with the PUC, but he believes that Grynberg's argument has merit. "It's like saying you're going to sell potato chips, and there are fewer chips in each bag, depending on where they're sold -- but the bag costs the same," he notes. "There are other utilities in the state that don't charge by volume; they charge by BTU content. You'd think the PUC would have the same methodology for everybody."

Yet all of Grynberg's other cases pale compared to his False Claims Act lawsuits. Taking penalties, triple damages and other multipliers into account, Grynberg estimates the total amount owed to the public and the Indian tribes in the cases he's developed at around $400 billion. His own private duels with the energy companies have shown him how you can shave a percentage point here, another there, and pretty soon you're talking real money.

"I said to myself, 'If they do things like this, how else do they cheat?'"

T hese are not the best of times for the Minerals Management Service and its parent, the Department of the Interior. Scathing reports in the New York Times have detailed how MMS signed off on sweetheart offshore drilling contracts that could cost the government $10 billion in lost royalties. Congressional hearings last summer exposed what Interior's inspector general described as "ethics failures" at the highest levels of the department. A Government Accountability Office probe of how the MMS handles its royalty collections is looming.

And the agency's own auditors are going to court, claiming that they've been thwarted in their efforts to catch fraud committed by the companies producing oil and gas on federal lands.

Some of the problems at MMS, including the botched offshore leases, date back to the 1990s. But the agency's critics say the situation has deteriorated under the Bush administration, which has cut back on auditors and placed former energy-industry lobbyists in key positions at Interior ("Grazin' Hell," April 7, 2005). "This looks like an agency that has been captured by the industry it is supposed to oversee," commented Representative Henry Waxman of California, the ranking Democrat (and soon-to-be chairman) of the House's Committee on Government Reform, during last summer's hearings.

Nearly a third of domestic oil production and a fourth of domestic gas comes from leases administered by MMS. Yet with oil and gas prices and production soaring in recent years, the amount the agency collects from its audit activities has sharply declined -- from an average of $176 million annually in the 1990s to $46 million in the years 2002 through 2005.

MMS officials say that's because they've handed over more auditing responsibilities to Indian tribes and state agencies and are collecting more royalty payments in the form of crude oil or gas rather than cash, a system known as "royalty-in-kind." In addition, they're conducting more "compliance reviews" rather than full-fledged audits in the name of efficiency.

But tribal leaders and watchdog groups have questioned the compliance-review procedure, since it depends on self-reporting by the energy companies. "It's not a real audit," says POGO's Beth Daley. "It's basically a pass for the company. If nobody double-checks, they can report whatever they want, and taxpayers are at risk. The oil and gas industry has figured out ways to game the system."

Or as former MMS auditor Bobby Maxwell told Westword last year: "Government is doing less, so the companies can do more -- more cooking of the books."

Maxwell worked for MMS for more than two decades and was regarded as one of the agency's top performers. Four years ago he was told by his superiors not to pursue an inquiry into oil royalty payments by Kerr-McGee, which Maxwell believed to be $12 million short. While working as a program manager in the MMS Lakewood office, Maxwell decided to file a False Claims Act lawsuit against Kerr-McGee on his own. Shortly after Kerr-McGee attorneys received a copy of his complaint, Maxwell was told that his position was being eliminated. He later received a substantial settlement from the government over his termination and is now preparing to go to trial against Kerr-McGee.

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