President Obama’s drill-baby-drill (but not quite everywhere) gambit
does not only link him to an environmentally backward policy. It also
will force his Administration to defend one of the most dysfunctional
federal programs in modern history: the Interior Department’s offshore
oil and gas leasing system.
Interior’s Minerals Management Service (MMS) is supposed to collect
royalties from companies drilling in offshore public waters. After new
activity was restricted in the wake of the devastating spill off the
coast of Santa Barbara, California in 1969, the oil industry sought to
make its leases more profitable by pressing for reductions in these
payments.
In the mid-1990s, when energy prices were low, Big Oil got Congress
to expand the “royalty relief” provisions that were already in the Outer
Continental Shelf Lands Act of 1953. Royalties were supposed to return
to higher rates when prices rebounded, but things got complicated.
First, it came to light that MMS had failed to write those
provisions into some 1,000 deepwater leases it signed in 1998 and 1999,
putting into question its ability to collect billions of dollars in back
royalties.
While this was being sorted out, one of the drilling companies —
Kerr-McGee (now part of Anadarko Petroleum) — filed suit challenging the
right of MMS to impose the higher royalties on any leases. The
company’s self-serving arguments found a sympathetic ear in federal
court. Last fall the Supreme Court declined to review an appellate ruling in favor of
the company, thus allowing Anadarko to avoid paying more than $350
million in back royalties. For the industry as a whole, the Court
blocked the Interior Department from trying to collect on a bill that
the Government Accountability Office once estimated
could run as high as $53 billion.
Then there’s the small matter of the wild parties and gifts that
industry representatives lavished on MMS employees in charge of the
agency’s royalty-in-kind program. In September 2008 Interior Department
Inspector General Earl Devaney (now in charge of the Recovery
Accountability and Transparency Board) issued three reports describing gross misconduct at MMS,
including cases in which agency employees were literally
in bed with the industry. Devaney concluded that the royalty program was mired in “a
culture of ethical failure.”
Not all MMS employees were bought off. Some agency auditors came
forward and charged that they had been pressured by their
superiors to terminate investigations of royalty underpayments.
Once the Obama Administration took office, Interior Secretary Ken
Salazar took steps to clean up MMS. Last September he announced plans to terminate the royalty-in-kind
program, whose staffers had been at the center of the sex and gifts
scandal.
For a while it was unclear whether Salazar would tighten up the
remaining royalty programs. In fact, he told the editorial board of the Houston
Chronicle last fall that in some cases he thought drilling
companies should pay even lower royalty rates. He changed his tune this
year, and the Administration is seeking modest increases in royalties and fees.
Yet the entire offshore leasing program still amounts to a giant
boondoggle. Thanks to the federal courts, artificially low royalty rates
are now effectively an entitlement for the drilling industry. Research conducted by the Interior Department
itself suggested that the incentives result in little additional oil
production. Not to mention the environmental risks.
And now, thanks to a dubious calculation that making concessions on
offshore drilling will help prospects for a climate bill, the Obama
Administration is bringing about a major expansion of a program that is
disastrous even if there are no spills. Profit, baby, profit.
(Photo of offshore oil drilling
platform from the National
Energy Technology Laboratory.)