U.S. Official Overseeing Oil Program Faces Inquiry

WASHINGTON, Dec. 29 — The Justice Department is investigating whether the director of a multibillion-dollar oil-trading program at the Interior Department has been paid as a consultant for oil companies hoping for contracts.

The director of the program and three subordinates, all based in Denver, have been transferred to different jobs and have been ordered to cease all contacts with the oil industry until the investigation is completed some time next spring, according to officials involved.

The officials, who spoke on condition of anonymity because the investigation had not been announced publicly, said investigators were worried that senior government officials had been steering huge oil-trading contracts to favored companies.

Any such favoritism would probably reduce the money that the federal government receives on nearly $4 billion worth of oil and gas, because it would reduce competition among companies that compete to sell the fuel on behalf of the government.

If the allegations prove correct, they would constitute a major new blot on the Interior Department’s much-criticized effort to properly collect royalties on vast amounts of oil and gas produced on land or in coastal waters.

The Interior Department’s Minerals Management Service, which oversees royalty collections, is now the target of multiple investigations by Congress and the Interior Department’s inspector general.

Those investigations are focused on allegations that the agency ordered its own auditors to abandon claims of cheating by large oil companies; that the agency’s arcane rules for calculating sales value and royalties make it easier for companies to understate their obligations; and that the agency’s basic sources of data are riddled with inaccuracies and are unreliable.

Interior officials have promoted “royalties in kind” as a much simpler and more efficient way for the government to get its proper share, because it eliminates much of the arcane accounting and reduces the opportunities for sleight-of-hand bookkeeping.

About a quarter of all oil and gas produced in the United States comes from federal property, and the Interior Department collected about $10 billion in royalties last year on about $60 billion in oil and gas.

At issue is the “royalty in kind” program, a fast-growing program under which companies pay their royalties in the form oil or gas rather than in the traditional form of cash.

For the 12 months ending last April, the government collected about $3.7 billion in oil and gas. Until recently, most of the oil simply went to the government’s Strategic Petroleum Reserve. But the strategic reserve was essentially filled this year, so the Interior Department hires private companies to resell the fuel on the open market.

To ensure that it gets the best price, the Interior Department takes bids for contracts in which companies typically offer to pay a specific premium over the daily spot-market prices quoted on the Nymex commodity exchange. The companies offering the biggest premium over the spot market get the contracts.
People familiar with the investigation said it had begun several months ago, but had picked up speed in the last few weeks.

The most prominent figure in the inquiry is Gregory W. Smith, who was director of the royalty-in-kind program at the Minerals Management Service in Denver. Mr. Smith oversaw the entire program, which now covers 75 percent of royalties for all oil and 30 percent of royalties for all natural gas produced in the Gulf of Mexico.

One person familiar with the investigation said it originally had focused on potentially improper social ties between some of Mr. Smith’s subordinates and executives at companies vying for contracts. The subordinates include two women, including one who is said to be in charge of oil marketing, and a second man.

All four people were transferred out of the royalty-in-kind office several weeks ago. Mr. Smith was reassigned as a “special assistant” to Lucy Querques Dennett, associate director of the Mineral Management Service in Washington. He was given strict orders to avoid any contact with industry executives, according to one official.

One official said investigators were now looking at possible consulting arrangements between the Denver officials and oil companies. The official said the most recent information had, if anything, hardened the suspicions of investigators, and said the potential ramifications could turn out to be far-reaching.

Mr. Smith did not return calls to his office in Denver. Spokesmen for the Interior Department in Washington as well as in the inspector general’s office, which began the investigation before referring the matter to the Justice Department, refused to comment on the matter.

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