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.

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."