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

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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."

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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."

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Alan Prendergast has been writing for Westword for over thirty years. He teaches journalism at Colorado College; his stories about the justice system, historic crimes, high-security prisons and death by misadventure have won numerous awards and appeared in a wide range of magazines and anthologies.
Contact: Alan Prendergast