Drilling Regulator Yields $13 Billion in U.S. Revenue With `Cozy' Oil Ties

The U.S. agency overseeing offshore drilling safety is also the government’s second-largest money maker, a dual role being probed in hearings on last month’s deadly oil-rig explosion in the Gulf of Mexico.

The Minerals Management Service generates about $13 billion a year for the U.S. Treasury by partnering with companies such as BP Plc and Exxon Mobil Corp. to develop oil and natural gas, trailing only the Internal Revenue Service in revenue.

At the same time, the agency and its 1,700 employees enforce safety rules, suggesting “inherent internal conflicts of interest,” Senator Robert Menendez, a New Jersey Democrat, said in an e-mail. Menendez and his colleagues on the Senate Energy and Natural Resources Committee held the first congressional hearing on the incident today.

Scrutiny of the Interior Department agency intensified following the explosion that killed 11 workers, sank a $365 million drilling rig operated by BP, and triggered an oil spill that threatens Gulf Coast states from Louisiana to Florida.

President Barack Obama’s administration today announced plans to split MMS into one unit to inspect rigs and enforce safety rules and a second to oversee drilling leases and royalty collections.

The division of duties will let “the American people know they have a strong and independent organization holding energy companies accountable,” Interior Secretary Ken Salazar said in a statement.

Trend Internationally

“That tends to be the trend internationally, to separate the resource-management agency from the safety and pollution- prevention agency,” Elmer Danenberger, who retired in January after 38 years in offshore regulation at the Interior Department, told the Senate committee today. Splitting the MMS “is something that is probably going to be looked at.”

House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters today that he supports splitting MMS’s revenue and enforcement duties.

The MMS failed to mandate certain safety devices required on offshore rigs in other countries and allowed BP to drill in 5,000 feet of water without requiring a detailed environmental analysis, said Kevin Book, a Washington-based managing director for ClearView Energy Partners LLC, a policy research firm.

“The oil spill is the cost of having a relationship with industry like the one MMS has,” Book said. “MMS by charter is in the business of doing business with industry.”

Lamar McKay, chairman of BP America Inc., testified today along with Steven L. Newman, chief executive officer of rig owner Transocean Ltd., and Tim Probert, president of global business lines at Halliburton Co., which was in charge of cementing the well.

Pointing Fingers

The companies pointed fingers at each other in their testimony.

“Transocean’s blowout preventer failed to operate,” McKay said. The Transocean and Halliburton executives said BP had the lead decision-making role in the project. The executives pledged to cooperate to find the cause.

At least five congressional panels plan hearings on the incident that began April 20. The Energy and Natural Resources hearing was to be followed by a Senate Environment and Public Works Committee session today.

Danenberger recommended an independent commission to review “all aspects” of offshore energy regulation. He defended MMS regulators as “100 percent committed to their safety and pollution prevention mission.”

Sex, Gifts

It’s not the first time the agency’s relationship with the industry it regulates has come under fire. In 2008, Interior Department Inspector General Earl Devaney found that MMS employees in the division that gathers fees had sex with and accepted gifts from industry contacts while failing to collect almost $200 million due from energy companies.

The allegations led Salazar in September to scrap a program that accepted payment of drilling fees in oil and gas instead of cash, calling it “a blemish” on the department.

The 2008 allegations followed revelations by Devaney in 2006 that MMS failed to include terms in offshore drilling leases that could have generated $10 billion in additional revenue for the government.

The MMS, created in 1982, is “too cozy” with the companies it regulates, said U.S. Representative Darrell Issa, a California Republican. The relationship discouraged the agency in 2003 from demanding better systems to prevent well blowouts like the one spewing an estimated 5,000 barrels of oil a day into the Gulf of Mexico, Issa said.

Issa has introduced legislation to separate the MMS from the Interior Department and make it an independent agency like the IRS.

Blowout Preventer

The explosion and sinking of the Deepwater Horizon rig about 130 miles (209 kilometers) southeast of New Orleans opened leaks 5,000 feet underwater.

BP’s McKay in his testimony pointed to the blowout preventer, a device intended to stanch the well, which failed in the initial phases of the accident. Backup systems such as a dead man’s switch that is supposed to respond when its signal is lost, and remote-controlled underwater robots, have failed to activate the device.

“We were working on the belief that the failsafe, if everything else didn’t hold the pressures, that blowout preventer would close,” David Nagel, executive vice president of BP America, said yesterday in a briefing with reporters.

Exclusion Given

The MMS gave BP a “categorical exclusion” from the National Environmental Policy Act in 2009, which released the company from preparing a detailed environmental assessment for the well. BP’s exploration plan called the prospect of an oil spill “unlikely.”

In a 2000 safety alert, the MMS warned that backup systems to activate blowout preventers were “an essential component” of deepwater drilling. Three years later, a consultant for the MMS said an acoustic system mandated by Norway and Brazil that can be triggered by encoded signals sent through the water, was too costly and untested in the presence of a mud of gas plume.

“It’s not a clear case that they should have mandated the acoustic sensor,” said Kenneth Arnold, an offshore energy consultant based in Houston who helped write a 1990 report on the MMS offshore inspection program.

Federal Lands

If research showed that systems to activate a blowout preventer weren’t foolproof, the MMS should have demanded that the industry spend “hundreds of millions, perhaps billions of dollars” to develop something better in return for access “to these very profitable federal lands,” Issa said.

Even industry allies such as Representative Joe Barton of Texas, the top Republican on the House Energy and Commerce Committee, say stricter regulation may be necessary.

“I’m not satisfied with the answers,” he said after meeting BP executives May 4. “Those of us that support offshore drilling have to be open to the possibility that we have to toughen up a bit.”

To contact the reporter on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net.

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