Drilled, Baby, Drilled: The strange battle to keep Big Oil from cheating
Three years ago this month, outside some drab federal offices in Lakewood, a bespectacled man sporting a white cowboy hat and a bolo tie stood in a teeth-rattling wind before a clump of reporters and bureaucrats and declared his intention to lay down the law.
"We're no longer doing business as usual," he said. "There's a new sheriff in town."
Ken Salazar, Barack Obama's newly minted Secretary of the Interior, delivered his remarks with hardly a shiver or a smile. As far as anyone could tell, he was completely serious.
During his confirmation hearing days earlier, still-Senator Salazar vowed to restore public confidence in the Department of the Interior, a troubled fiefdom that controls one-fifth of the land mass of the United States and a million square miles of ocean known as the Outer Continental Shelf. And he chose to kick off his reform campaign at the Denver Federal Center offices of the Minerals Management Service — the most dysfunctional, ethically challenged and scandal-rocked agency in the entire DOI.
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Until a few months before Salazar arrived in Lakewood, few people had ever heard of MMS. Responsible for collecting royalties on oil, gas and mineral leases on federal lands, Indian reservations and offshore waters, MMS was small in size but huge in its impact on federal revenues, bringing in between $10 billion and $20 billion a year. It was an obscure yet extremely important bit of government business.
But in the waning days of the Bush administration, MMS had become the stuff of lurid headlines. A series of reports by Earl Devaney, the department's inspector general, had denounced "a culture of ethical failure" inside the agency — a polite term for the brazen conflicts of interest, corruption, drug use and sexual liaisons uncovered by Devaney's investigators. MMS employees had accepted gifts, booze, meals, trips and, in some cases, sex from executives of oil and gas companies. One high-ranking official had steered lucrative consulting contracts to a former aide, violating procurement rules. A Lakewood supervisor had allegedly pressured employees for blow jobs and cocaine, referring to the toot as "office supplies."
Flanked by Devaney and DOI's new ethics czar, chief of staff Tom Strickland, Salazar unveiled a new code of conduct for MMS employees designed to discourage the cozy graft that had flourished there. But the bad behavior discussed in Devaney's reports was, in fact, only the most visible symptom of a much more tangled story. It's the story of an agency that lost its way, that had come to see itself as a partner of the industry it was supposed to regulate — and that had, on occasion, actively colluded with energy companies to steer tens of millions of dollars into corporate coffers that some of its own auditors insisted was owed to American taxpayers.
One chapter of that long-running saga came to a close two weeks ago in a Denver courtroom, when documents were filed formalizing a $26 million settlement reached among Anadarko Petroleum, the Department of Justice and former MMS auditor Bobby Maxwell. A decade ago, Maxwell discovered questionable deductions taken by oil giant Kerr-McGee (since taken over by Anadarko) in offshore drilling operations, deductions that he believed were costing the government millions in uncollected royalties. When his superiors blocked his investigation, Maxwell filed a lawsuit against Kerr-McGee under the False Claims Act, a federal law that allows private citizens to file fraud claims on behalf of the federal government and sue for triple damages — and keep a percentage of any money collected themselves.
Under the terms of the settlement, Maxwell will receive 30 percent of the settlement, more than $7.5 million; the government recovers more than $16 million, and another $2.5 million goes to attorneys' fees. It's a remarkable victory for a fraud sleuth who refused to give up — but hardly a typical outcome for MMS whistleblowers. Randy Little and Joel Arnold, two auditors who worked with Maxwell, filed another False Claims case alleging shortchanged royalties in offshore leases by Shell, a case that could involve damages of $60 million or more. Yet the case has languished in court for years, was abruptly dismissed by a Texas judge last spring, and is now in the limbo of the appeals process.
Although the government stands to gain the most if Little and Arnold prevail, the Department of Justice declined to intervene in the case — just as it did in Maxwell's fight. In fact, the DOJ recently filed a friend-of-the court brief in the Shell litigation supporting the company's argument that federal auditors shouldn't be allowed to bring such lawsuits.
"Nobody seems to care that this company is ripping off the taxpayer," says Little, who retired from MMS in 2010. "Early on, we told the Department of Justice we didn't want any of the money, that we'd bow out if they'd take the case. All we wanted was to see these issues worked. But they didn't take it. Instead, they filed a brief against us."
Three years after his white-hat performance in Lakewood, Sheriff Salazar has found that reforming federal oversight of energy companies extracting public resources takes more than a new code of ethics. Shortly after the British Petroleum spill in the Gulf of Mexico two years ago, Salazar decided to dissolve MMS and shift its competing, sometimes conflicting missions — collecting royalties, managing energy leases and overseeing offshore environmental protection and worker safety — into three new Interior agencies. The royalty function, formerly a mess within MMS, is now the purview of the Office of Natural Resources Revenue — or ONRR, pronounced "honor."
Since its creation fifteen months ago, ONRR has beefed up its audit staff and implemented new software and data-mining procedures to target royalty-reporting problems. Its director, Greg Gould, has also vowed to pursue stiffer civil penalties against companies caught misreporting production or the royalties they owe.
"We're letting the companies know that we're serious," Gould says. "If they chronically misreport, it's going to be a very large penalty."
Gould believes the rebranded organization has emerged from its controversies as "a world-class revenue-collection agency," but he's cautious about predicting a dramatic uptick in revenue. "While we've made a lot of progress over the years, there's still a lot to be done," he says.
One thing that the agency hasn't done is put to rest the skepticism of its whistleblowers. They claim that schemes similar to the royalty-avoidance techniques at issue in the False Claim Act lawsuits are still being used by major oil companies in the Gulf of Mexico, resulting in tens of millions in lost revenues.
"I don't think a lot has changed," says Little. "Shell isn't the only company doing this. We turned in several other companies to the inspector general. We gave them our files. We had to force them to take them. And they still have not done one thing. They have not pursued any of those companies."
The way Bobby Maxwell tells it, the early days at MMS were never dull. The organization was created in 1982 by James Watt, the former head of the Denver-based Mountain States Legal Foundation who became Ronald Reagan's Secretary of the Interior, with the aim of ensuring "that all oil and gas originated on the public lands and on the Outer Continental Shelf are properly accounted for." It was a grand and somewhat confusing mission, requiring MMS to promote energy development and regulate it at the same time, making sure the government got its fair share of the massive revenues involved.
Initially, it was a seat-of-the-pants operation, long on enthusiasm and short on planning. Maxwell and other pencil-pushers would meet in a cafeteria in Houston and pick oil companies to audit out of a phone book. "We had no office and no strategy," he says.
A soft-spoken Tennessean, Maxwell had come to the agency after service in the Army and work as an auditor for the Department of Energy. He soon distinguished himself as a stubborn, aggressive campaigner who relished the battle of wits with the sophisticated financial wizards at the oil companies. The federal regulations concerning the valuation of oil, gas, coal and other resources had many gray areas, and Maxwell frequently locked horns with energy companies over issues that couldn't be considered outright fraud — but inhabited, perhaps, the same zip code. An Arco executive once told him, "It's my job to maximize profits, and it's your job to catch me if I go too far."
Some of his bosses, Maxwell knew, weren't as keen to pursue possible fraud as he was. At one point he'd developed a compelling case involving a company's underpayment of $20 million in royalties, only to be ordered to drop the investigation. The same day the order came down, though, Maxwell learned from the company's attorney that its management had agreed to cough up the disputed amount. His director quickly reversed course, Maxwell remembers, telling him, "I guess we'd better take the money if the company wants to pay."
By the late 1990s, Maxwell was in charge of an audit team in the Oklahoma City office of MMS, focused on huge offshore drilling operations. It was one of the most productive teams in the entire agency, detecting numerous instances of royalty misreporting by the companies and recovering millions of dollars every year. Maxwell estimates that over the 23 years he worked for MMS, his teams recovered half a billion dollars owed to the government.
"Bobby took pride that his office was the largest collector of funds in MMS," says Little. "The Houston office was probably three times as big, but it probably didn't collect a third as much. We worked hard. We didn't overstep our boundaries. We just went after stuff where there was a flagrant error."
Yet the team's ability to expose flagrant error changed considerably after the 2000 presidential election. George W. Bush had promised to make government more "business-friendly," and that agenda was pursued with a vengeance within MMS. The compliance staff was slashed by more than 10 percent in the next few years, and the amount of money collected from audits of companies declined even more dramatically — from a $176 million annual average in the 1990s to $46 million in the years 2002 through 2005, even as the price of oil and gas was skyrocketing ("Fighting Mad," November 16, 2006).
"They were consciously quitting doing detailed audits," Maxwell says. "You had a really easy job because you didn't have to do anything. It sounds unbelievable, but I lived it."
The official explanation for the decline in audit recoveries was that MMS had embarked on a new program, called "royalty-in-kind" or RIK, that required the energy companies to pay the government's royalty share in product rather than cash. This was supposed to resolve many of the conflicts with industry over the valuation of oil and gas and allow the government to get compensated more quickly and accurately. "The goal is to reduce friction," states the 2003 MMS annual report. RIK had been launched as a pilot program in the Clinton era, but under Bush, it quickly became the standard arrangement for most oil leases. Since the government was getting barrels of oil, not royalty checks, there was less need for full-blown audits — or so the rationale went.
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.
"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.
But soon after Little started working for Bobby Maxwell on the government side of things, the rules of the game began to change. "When oil went RIK, the auditors stopped looking," he says. "The management group in Denver took over and did the contracts, the whole thing. I told Bobby we should be following the taxpayers' oil from start to finish. But every time we'd start pushing real hard, there would be pressure from upper management to get us to back off."
Even before the RIK program took off, Little was appalled by various arrangements MMS had made with leaseholders that seemed to benefit the companies at the expense of the government. Dozens of companies owed the feds millions just in interest on royalties they hadn't gotten around to paying, he discovered — but there was an established policy at the agency that the companies didn't have to pay the interest until MMS formally billed them. If the company didn't submit statements of interest owed, the government would assume that the company was claiming a "hardship" and do the laborious calculations for them, adding to the delay in collections.
When Little contacted company officials and demanded to know why they weren't paying the interest, they chuckled and told him to send them a bill. The gist of the message was: We know your system is broken. Maybe you'll never get around to collecting. Why should we pay?
Royalty-in-kind was supposed to alleviate that problem and other forms of chiseling and fraud. Instead of chasing cash payments for years, the government would get its share in product — barrels of crude, for example, that it could turn around and sell for cash or add to its strategic reserves. But far from being foolproof, RIK actually presented a whole new set of opportunities to cheat. There were issues over how production volume was measured — and even more issues over the types of deductions companies were claiming in connection with the costs of delivering oil and gas to the government.
The companies were prohibited from deducting the "gathering costs" associated with drilling for oil and bringing it to a central collection point, such as an offshore platform. They were allowed to claim certain "transportation costs" involved in getting the government's share to market — by, say, moving the oil from the platform to a refinery onshore. But when Little began to review offshore RIK leases, he identified a range of deductions by multiple companies that he deemed unauthorized and illegal, from subsea gathering costs to capital costs associated with the platform to inflated transportation costs.
Some of the costliest deductions Little found involved twelve leases in the Gulf operated by Shell's exploration division. Although he had difficulty obtaining all the paperwork from RIK managers, he saw enough to suspect that Shell was taking unallowable deductions for gathering costs. He also came across a contract with Shell that had been amended by an MMS employee, an RIK "oil marketing specialist" named Crystal Edler, allowing Shell to increase its transportation deductions for moving the government's oil to shore. If Shell moved the oil through its own pipeline at cost, Little explains, the deduction would have been around $.84 a barrel. Instead, Shell was subcontracting with a third party, Gary-Williams, to move the same oil through the same pipeline — and charging Gary-Williams almost three times as much, which was then being billed to the government.
"By law and by lease terms, they have to move that oil to shore at cost," Little says, "and this was costing the government an extra $10 million a year."
In a phone conference with Edler and other RIK personnel, Little demanded to know why the contract had been altered. Edler said she'd made the change because Shell requested it. Little was dumbfounded.
"They acted like these companies were their clients," he says. "They were totally in awe of these people, with all their money and power."
Maxwell and Little's immediate supervisor, Joel Arnold, supported his efforts to investigate the Shell leases. But the RIK division wasn't cooperative, and then Maxwell was gone. Undeterred, in the fall of 2005 Little fired off an e-mail to Shell questioning subsea "gathering" deductions totaling $3.2 million. Shell agreed to pay back slightly over $1 million and disputed the rest. "I wrote them back and said, 'Since you've admitted those [deductions] are wrong, here's a whole bunch more,'" Little recalls.
Shell executives responded to the letter by requesting a meeting with Lonnie Kimball, who was Arnold's boss and the manager in charge of offshore royalty-compliance efforts. Arnold and Little weren't invited. Shortly after that meeting, Little says, he and Arnold were taken off the Shell inquiry, which Kimball would later characterize as "a desk review and not an audit."
Kimball also formally rescinded Little's e-mail seeking additional payments from Shell. The manager would later tell investigators that the Oklahoma City auditors had "been aggressive in making claims against industry without all of the facts." He also said that "Bobby Maxwell was responsible for this culture."
Little and Arnold responded by filing a False Claims Act lawsuit against Shell, claiming that the company improperly took more than $19 million in deductions on the RIK leases over a four-year period. "Our job was to find the discrepancies and bring the money back into the coffers of the United States," Little says. "If you're being stopped internally, you need to go externally."
Shortly after they filed the case, Arnold and Little were reassigned to other duties. MMS officials said the move was made to avoid any potential "conflict of interest" in their work; the auditors considered it retaliation. Little was sent to a Bureau of Land Management office in Moore, Oklahoma, where he was put to work on a project involving abandoned wells, supervised by an employee who was considerably his junior in age and pay grade. (Arnold, who is still employed at MMS, declined through his attorney to be interviewed for this story.)
That Maxwell, Arnold and Little were publicly pursuing their claims in defiance of MMS management made for embarrassing news stories — and prompted Salazar's predecessor as Secretary of the Interior, Dirk Kempthorne, to request an investigation by the inspector general's office. But Devaney's probe into the matter seemed to be focused on whether the auditors "followed proper procedure" or used work time and privileged documents to prepare their lawsuits. Their claims that Big Oil was ripping off taxpayers for tens, possibly hundreds of millions of dollars — with help inside MMS — appeared to be a secondary consideration. Devaney's final report was masterfully inconclusive on numerous points, including the retaliation issue, citing "poor communication" and "a complex, and sometimes confusing, array of facts."
One reason for the confusion was that the interviews with the auditors had opened up fresh avenues of embarrassment well beyond the original scope of the report. Little remembers being grilled by an investigator who found it hard to believe that the RIK group was blithely signing off on costly contract amendments requested by the oil companies. At one point the investigator asked if he thought RIK employees were "in bed" with the people they were regulating.
Little replied that, from what he'd heard, "being in bed together" might literally be the truth. It was said that RIK people took trips with oil executives and partied with them, he explained. That tidbit, coupled with information from other sources, eventually led to an investigation of the RIK program itself, an office of sixty people responsible for collecting close to $4 billion a year in federal revenues.
The IG's office discovered that roughly a third of the entire RIK staff had socialized with and accepted gifts from oil- and gas-company executives. Many of the favors didn't amount to much — a free dinner, Colorado Rockies tickets, that kind of thing. But at least eight of the employees had exceeded the allowable limits for gifts, and several had been showered with more golf and ski trips, luggage and silver trays than your typical game-show contestant. Two employees, Stacy Leyshon and Crystal Edler, were known among industry execs as "the MMS chicks" because of their frequent presence at social events ("Crossing Over," September 18, 2008).
Leyshon, who supervised the government's oil-marketing efforts, also operated a sex-toy business on the side. When first questioned by investigators, she denied having inappropriate personal relationships with industry executives. Later she acknowledged having intimate relations with two oil-company people, including a Shell employee, but clarified that she "did not consider a 'one-night stand' to be a personal relationship."
Like Leyshon, Edler denied that the gifts or socializing influenced how she did her job. She also admitted to two romantic relationships with oil-company people, including a Shell employee. It was the RIK group's goal to be "part of industry," she explained. "Being in the business and going out and meeting with these people and becoming friends with them has gotten me very far with them."
Sources complained that Edler had leaked information about a pipeline deal that RIK had made with one company to a competitor, which happened to be Shell; Edler denied divulging any confidential data. The penchant for fraternizing and party gifts demonstrated by the MMS chicks seemed tame compared to the boorishness ascribed to Greg Smith, the director of the RIK program; in addition to running an energy consulting business on the side, Smith was accused of awarding a performance bonus to an underling who sold him cocaine and pressuring female employees for sex. (Smith admitted using cocaine away from the office but denied the other allegations.) In the long run, though, the friendly relationships with industry execs may have cost the government much, much more.
To this day, there's been no thorough accounting of the lost royalty revenues that occurred during the RIK fiasco. MMS defenders say the matter was blown out of proportion by Bush-bashing media types and point out that the alleged misconduct involved only a few thousand dollars in gifts and a handful of employees — some of whom, like Smith and Denett, retired during the investigation, while others, including Edler, still work there. But the IG's office found that of 121 contract amendments approved by Leyshon that it reviewed, only three favored the government; the others cost the government an estimated $4.4 million. Little maintains that the change in transport costs on a single Shell contract ended up costing the taxpayers $10 million a year. And there's no way of knowing how much revenue vanished down the rabbit hole of dubious deductions while the RIK watchdogs were substituting token "compliance reviews" for real audits and turning into party animals.
Secretary Salazar abolished the RIK program at the end of 2009, drily observing in the termination memo that his department "should be regulating, not participating in, industry activities." After an appeal to the U.S. Office of Special Counsel, Little and Arnold were eventually reinstated in their MMS auditor jobs in Oklahoma City. But it wasn't the same.
"They took us off the offshore leases — that's where the big money is — and put us in charge of doing audits for the Indian reservations," Little says. "The whole office. We went from collecting thirty to forty million dollars a year to a few hundred thousand dollars, maybe a million."
Like the former "oil marketing specialists" over at RIK, the auditors were no longer playing in the Big Game.
Last year, the federal government recovered a record-busting $2.8 billion in False Claims Act lawsuits initiated by whistleblowers. More than 80 percent of that total involved cases of health-care fraud, but the rest included some tidy sums drilled out of Big Oil's wallets, such as a $20.5 million settlement from BP Amoco and affiliates and a $16.35 million settlement from Kerr-McGee and Anadarko. Both cases involved claims that the companies deliberately underpaid royalties on natural gas produced on federal and Indian lands.
Yet at the same time that Justice Department attorneys were trumpeting their successes under the False Claims Act, they were actively opposing the lawsuit launched by Little and Arnold against Shell. And they avoided direct involvement in Maxwell's case against Kerr-McGee until it was time to put in an appearance in order to collect the government's share of the settlement.
Even after Maxwell won a $7.5 million jury verdict against Kerr-McGee in a federal courtroom in Denver in 2007, MMS continued to declare on its website that the company didn't owe the government the money. The verdict was thrown out a few weeks later by U.S. District Judge Philip Figa on jurisdictional issues but was reinstated in 2008 by the 10th Circuit Court of Appeals. Maxwell attorney Sean Connelly says the DOJ attorneys "supported the jury verdict" and were helpful "silent partners" behind the scenes. It took another three years to finalize the $26 million settlement and attain government approval of the 30 percent share that Maxwell will receive.
"I never worked so hard in my life to give the government $16 million," says Richard LaFond, another one of Maxwell's attorneys. "This case is A Civil Action with a happy ending. But the road has been incredible."
"I still can't believe it's over," says Maxwell. "After nine years and so many ups and downs, I'm still kind of numb."
For Little and Arnold, it's far from over. Their lawsuit against Shell was moved from Oklahoma to Texas at the company's request — where, for almost five years, it sat as inert as an expiring lizard in the Houston courtroom of Lynn Hughes, an industry-friendly federal judge whose financial-disclosure reports list stock in Chevron and mineral royalties on properties he owns. (Hughes was reportedly BP's choice to oversee the slew of lawsuits filed against the company after the 2010 Gulf oil spill.) Last April, Hughes dismissed the case, claiming that the auditors had "attempted to manufacture a claim by violating rules and issuing arbitrary orders."
The auditors' attorneys — a team that includes some of the same Denver lawyers who represented Maxwell, including LaFond, Connelly, and Michael Porter — have appealed Hughes's ruling. They are also seeking to get the case reassigned to a different judge, arguing that the decision was so one-sided and dismissive that "an objective observer reasonably would question the district court's impartiality." Their appeal is being contested not only by Shell, but also by the Department of Justice, which contends that it's a conflict of interest for federal auditors to bring False Claim Act cases on their own.
Attorney Porter says that there's substantial case law that federal employees can bring such suits — including, of course, the Maxwell case. Amendments made to the law 25 years ago were designed to encourage whistleblowers like Little and Arnold, he points out: "If the government isn't doing its job, who else is going to bring these kinds of suits?"
Little says he was told by Justice attorneys that his case was a good one to pursue, but that the government couldn't support it because it didn't want to "open the floodgates" to similar cases from rogue federal workers. He and Maxwell both believe that officials at Interior have also attempted to discourage government participation in the actions.
"Arnold and Little are good people, two of the best I ever worked with," Maxwell says. "The issues they developed are valid. But Interior will go to the extreme not to get involved — because if they do, they look like idiots. We blew the whistle, and they ignored it."
Last fall, Tom Strickland, Salazar's ethics czar, left Interior for a job with the law firm that was defending BP in the oil-spill debacle. Over at the restructured Office of Natural Resource Revenue, director Greg Gould is focused on the future, not his predecessors' blunders. He's implemented new data-mining programs that pore over royalty reports and have already caught millions of dollars in reporting errors. "That's eight million dollars we would have caught in our audit process, but we would have caught it two or three years later than we're doing now," he says.
Gould has also increased the auditing staff substantially. The number of audits performed by ONRR declined initially compared to the Bush years at MMS, from 339 in 2008 to 162 in 2010. But last year the team nearly doubled the number of audits, bringing the number back up to 311. The total amount of dollars recovered from compliance efforts, while rising, still lags behind the $176 million averaged annually during the Clinton administration.
The ONRR director believes that could be due to several factors, including the agency's willingness to impose substantial civil penalties on transgressors. Last summer, for example, Chevron was hit with a $1.1 million fine for claiming improper transportation deductions on offshore leases. "The companies are getting in line," Gould says. "If companies are complying up front, you're not going to see as much recovered in audits. Our goal is to collect every dollar due — no more, no less."
Randy Little is a bit too cynical to accept on face value the claim that energy companies that do business with the government are starting to follow the rules. He'd like to look at the books first. Nothing beats a detailed audit for catching fraud.
"They can make those numbers come out any way they want to," Little says of the government's statistics. "The companies know what the regulations are. They know they're wrong, and they still do what they do."
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