Drilled, Baby, Drilled: The strange battle to keep Big Oil from cheating

Instead, MMS staff started doing more "compliance reviews," a less detailed examination of production figures supplied by the companies. Critics maintained that the compliance reviews amounted to an honor code, that the watchdogs were essentially letting the industry police itself. The General Accounting Office issued several reports noting a range of problems with RIK production data and the agency's ability to keep track of revenues, shortcomings that the GAO calculated could be costing as much as $160 million in uncollected royalties in 2006 and 2007 alone.

The program was based out of the head field office in Lakewood, where Maxwell himself worked for several months. But he rarely saw any of the RIK people, who tended to regard themselves as an oil-and-gas marketing group rather than regulators. "The group that was doing RIK kind of seceded from the rest of us," he says. "They were in another part of the building and kind of secretive.

Mark Manger

White hat: In January 2009 Secretary of the Interior Ken Salazar declared an end to "business as usual" at MMS, flanked by ethics czar Tom Strickland (left) and DOI Inspector General Earl Devaney.

John Johnston

Reduction in force: Days after auditor Bobby Maxwell's lawsuit against Kerr-McGee was unsealed, he lost his job at MMS.

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• Randy Little
• Joel Arnold
• Bobby Maxwell
• Trials
• Civil Trials

"At one point, another employee came to me and said that they'd changed some [lease] bids, that they were notifying companies they preferred to get a bid after the deadline had passed and letting them put in a revised bid. I said, 'You must have misunderstood.' But that's exactly what they were doing."

Two Oklahoma City auditors, Joel Arnold and Randy Little, also began to question suspicious deductions and contract modifications in offshore drilling leases involving Shell and other big companies. They took their concerns to Maxwell, who asked RIK program employees for the relevant contracts. "They refused to give them to us," he says. "I was told I shouldn't be looking at anything they did."

Frustrated, in the summer of 2004 Maxwell arranged a meeting at the Denver Federal Center with DOI Inspector General Devaney and representatives of an outside audit firm that had reviewed RIK documents. Maxwell and Arnold flew out from Oklahoma City — and waited in an empty room.

No one else showed up. The IG's office wouldn't return their calls. No explanation was ever offered for the canceled meeting, but Maxwell soon received a phone call from MMS associate director Lucy Denett, telling him he "should not be auditing RIK" and ordering him not to seek any more documents.

"The whistle was blown early," Maxwell says now. "We had indications that contracts had been changed inappropriately. We were totally closed down. To me, that meant it was coming from somewhere high in Interior."

Four years later, the chummy dealings between the energy industry and the RIK group would erupt in scandal. Denett herself would retire after being embroiled in what Devaney considered a bid-rigging scheme to throw consulting work to a former aide; the Department of Justice declined to prosecute in the matter.

Maxwell figured his own days at MMS were numbered. He had one more investigation to pursue, though, involving some pre-RIK offshore oil leases that had been awarded to Kerr-McGee.

In 2002, Maxwell had begun an audit of the Kerr-McGee leases. He'd found that the company was selling the oil to Texon at below fair market value in exchange for marketing services provided by Texon — and basing its royalty payments to the feds on the reduced sale price. That arrangement was depriving the government of about $1.50 per barrel of oil in royalties, Maxwell figured, or around $7.5 million over a four-year period, during which the leases yielded five million barrels of oil. Maxwell insisted the scheme was a clear violation of Kerr-McGee's obligations under the law and the lease terms. But the company denied any wrongdoing, and Maxwell was soon instructed by his superiors not to pursue the claim.

Maxwell couldn't fathom why upper management was passing up such an obvious case of underreporting. "There was part of me that still believed the government was going to do the right thing," he says. "But it just became so dysfunctional in MMS. They weren't doing their job. The government is almost an embarrassment to the taxpayer, and MMS became an embarrassment to all other government agencies."

In June 2004, the same month that his meeting with the Inspector General failed to materialize, Maxwell filed a False Claims Act lawsuit against Kerr-McGee in federal court in Denver; if MMS wouldn't go after the company for the disputed millions, he would do it on his own. Such cases are sealed for several months while the Department of Justice investigates the allegations and decides whether to intervene. After six months of review, the DOJ declined to join Maxwell's battle, and Kerr-McGee's attorneys received a copy of the complaint.

A few days later, Maxwell was told his position was being eliminated. Officially, his firing was described as an efficiency move rather than an act of retaliation ("Duke of Oil," September 8, 2005). But Maxwell, who later reached a favorable settlement with Interior over his termination, saw it differently.

"They made an example out of me," he says.

*****

Before he joined MMS in 1999, Randy Little had worked for 25 years in the oil and gas industry, serving as comptroller or financial officer for several companies; at one point he even operated his own wells. He understood the drive to maximize profits — and the games the companies played with state and federal auditors.