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

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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.

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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