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Oil Royalty Agency Threatens Fines in Scandal’s Wake

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Oct. 28 (Bloomberg) -- For energy companies, the scariest thing to emerge from BP Plc’s oil spill in the Gulf of Mexico may be the Office of Natural Resources Revenue, a federal agency that can levy penalties of hundreds of millions of dollars rather than the token fines of the past.

The Interior Department has shut the Minerals Management Service, or MMS, which was faulted for coziness with industry that bordered on corruption. MMS is being replaced by three new agencies, the first of which opened for business on Oct. 1 and collects royalties generated by oil and gas companies drilling on federal leases. The Denver-based office will track cheats with a computer algorithm and add auditors to ensure the government gets every dime it’s owed, said Gregory J. Gould, the agency’s new director.

“We’re sending a message to the industry that if you do cut corners, it’s going to cost you,” Gould said, as reported by Bloomberg Businessweek in its Nov. 1 issue. “You could quickly take care of the federal deficit if you use the maximum,” referring to highest penalties his office can levy.

That’s not a joke to the industry and its lobbyists. Under President George W. Bush, whose priority was boosting domestic energy production, the number of auditors at MMS fell by 30 percent.

“We are worried about an adversarial process,” said Allison Nyholm, a royalty expert at the American Petroleum Institute. “There is huge discretion in the fines. That is where the rub is going to occur.”

Dysfunctional System

The new office is the Obama administration’s solution to a dysfunctional royalty collection system that has been plagued with problems for more than a decade. One MMS manager was cited in a 2008 Interior Department inspector general’s report for buying cocaine from subordinates. Whistleblowers claimed companies were being allowed to skim millions of dollars off royalty bills.

Gould, 49, a geologist who’s been with Interior since 1981, was tapped to mop up in 2008, starting with a restructuring of MMS’s Denver office, the scandal’s epicenter. As oil gushed from the BP spill this spring, Interior Secretary Ken Salazar finally pulled the plug on MMS, which also regulated offshore drilling and where Gould had once served as chief of the environmental division.

“That whole environment” that came to light in 2008 is “100 percent gone,” Gould said.

Some Cheat

Now Gould’s job is to collect some $10 billion a year in royalties from thousands of on- and offshore oil and gas leases, the nation’s second-biggest source of revenue after federal taxes. Energy royalties work much the way income taxes do: Companies self-report what they owe, and like taxpayers, many cheat, audits show.

Gould’s agency will get 19 more auditors this year, bringing the total to 164. The new audit review system uses a risk-based algorithm, modeled in part on one used by the Internal Revenue Service, to identify companies most likely to cheat. Previously, only the biggest companies faced the prospect of an audit, Gould says.

“By going after only the big companies, small ones knew they could cut corners,” he said. “This takes that away.”

To contact the reporter on this story: Michael Riley in Washington at michaelriley@bloomberg.net;

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net

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