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

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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.

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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.

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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