Oil, Sex and Corporate/ Government Corruption

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18 September, 2009. It’s been a fun first week here at EconomyWatch, which “just happened” to coincide with the first anniversary of Black September 2008 – a fun-filled weekend that saw the collapse of Lehman Bros, the beginning of the never-ending bailout of AIG, and the disappearance of the icon of Wall Street bullishness Merrill Lynch into the maw of giant Bank of America.

18 September, 2009. It’s been a fun first week here at EconomyWatch, which “just happened” to coincide with the first anniversary of Black September 2008 – a fun-filled weekend that saw the collapse of Lehman Bros, the beginning of the never-ending bailout of AIG, and the disappearance of the icon of Wall Street bullishness Merrill Lynch into the maw of giant Bank of America.

Did we “plan” it that way? That’s for us to know and you to torture yourself guessing.

But it’s almost the weekend, and in line with a corporate trend we definitely want to encourage towards “casual Fridays”, we thought we’d end what some around the office have been snarkily calling “America Week” on a lighter note – or what passes for such, in a world still deeply stuck in recession no matter what people want to tell themselves or Ben Bernanke wants to tell them.

While we all recall the dramatic Lehman Bros / AIG / Merrill Lynch events, most of us have forgotten a more “humorous” situation that came to light just before the lights went out on Wall Street, involving what might be called a “scandal squared“:

a sex / drugs / corporate “favors” scandal that was found to be SOP – standard operating procedure – for a revolting US government give-away program to oil and gas companies that was, in itself, a scandal. [br]

You decide which one was bigger.

We were reminded of these shenanigans when US Interior Secretary Ken Salazar announced this week his department was suspending the so-called “royalty-in-kind” program instituted by the Cheney / Bush regime – gee, no connections to the oil business there – that allowed the carbon-besotted industry to avoid taxes by giving the government, well, oil and gas instead of money when it came to settling up their public “obligations.”

The New York Times nicely summarizes the structural dynamics of this little charade carried out, once again, in full view of the taxpayers who were getting ripped-off by a coy little arrangement between the government and politically powerful corporations.


[A]dministered by the department’s Minerals Management Service, it allows oil companies to pay the government in oil and gas rather than cash for the right to drill on federal lands.

We’ll leave aside for now whether the government should even be permitting private companies to drill on Federal lands. But shouldn’t they at least get what they’re owed for letting corporations benefit from the public inheritance.


Recent audits have shown the government has failed to collect tens of millions of dollars worth of royalties owed it under the program.

Mr. Salazar called the program “a blemish on the department” in testimony before the House Natural Resources Committee. “Clearly, the department’s energy leasing and royalty programs have not been working as they should, and the American people have not been receiving the full benefits from these valuable assets,” he added.

The Minerals Management Service, based in Denver, was found to do a poor job of tracking drilling revenue and assuring that compensation was paid to the government, according to the Government Accountability Office.

A report issued by the office this week found that the royalty-in-kind program had failed to collect at least $21 million in fees last year.

A separate report found that oil companies might have misreported drilling revenue and underpaid $160 million in royalties to the government in 2006 and 2007.

The royalty program has been a large source of government revenue in recent years, collecting about $6.6 billion in deliveries of natural gas and oil in 2008.

At first glance, this may seem like a good deal, given the absolute level of money involved – but remember, people, this is the oil and gas business, and the financial stakes are always high.

Which means the crucial issue is the relative division of spoils – and it’s much easier for oil companies to divert a little of their “black gold” to the government – at a high valuation – than to go through the trouble of transporting / refining / wholesale distribution / and retailing, and still having to fork over cash to the Feds.

So it’s hardly surprising the O & G folks emphasized precisely this aspect of the situation in their efforts to fight against the ending of the program:


[They] criticized the decision to kill the program, saying it would be burdensome and costly for both the government and the companies.

The companies and government will have to hire armies of accountants,” said Obie O’Brien, vice president for government affairs at the Apache Corporation, a big producer in the Gulf of Mexico. “You will have to perform a lot more audits and there will be a lot more disputes over whether a company got the best price that it could.”

Jack Gerard, president of the American Petroleum Institute, said in a statement that “terminating this straightforward method of handling royalty payments runs the risk of raising administrative costs and adding additional layers of paperwork required to determine the value of oil and gas production.”

Whoops there it is – again.

Just like the banks – who, you may remember, are resisting all attempts at transparency when it comes to “valuation” of their toxic real estate assets – the oil and gas folks want to make sure they determine how much their assets are worth.

Naturally, those without a direct interest thought the change made sense.


“It’s a great idea to stop taking the oil and gas in kind because the federal Treasury needs dollars and the Strategic Petroleum Reserve is very filled,” said Amy Myers Jaffe, an energy analyst at Rice University. “We’ve added a lot in recent years.”

But that’s precisely what bothers the companies, even though Salazar’s demand for cash can hardly be considered a major setback.

Indeed, in recent months, the “return to prosperity” – at least for financial stocks – has stabilized oil prices after they fell through the floor at the height of corporate and public anxiety during Black September and its aftermath.

Of course, this being America, the fact that corporations are ripping off taxpayers with the help of the government just seems to be “business as usual.”

What really put the microscope on this particular sleaze fest was the discovery – revealed just before the “crash” of last September – that the government program known as RIK [ Royalty in Kind ] was a cesspool of drugs, sex and all manner of favors going back and forth between – beginning to sound familiar? – the regulators and those they were allegedly regulating.

An AFP story from last September 10 reveals the lurid details:


The explosive accusations focus on the MMS’s Royalty in Kind (RIK) program, which manages commercial oil and gas sales activity and barters that oil and gas to the government in lieu of payments for drilling on federally-owned offshore lands.

US Department of the Interior employees who handled billions of dollars in oil contracts improperly engaged in sex with energy company employees …

The report drafted by the department’s inspector general Earl Devaney deplored “a culture of ethical failure” …

The inquiry “revealed … a pervasive culture of exclusivity, exempt from rules that govern all other employees of the federal government”

Now, this is simultaneously a reflection of how the oil business and all those associated with it – even its alleged regulators – tend to consider themselves far far far above the law that applies to mere mortals AND how, in America today, the relationship between regulators and the corporate “regulated” is a total – if not very funny – joke.


The investigation uncovered a “culture of substance abuse and promiscuity” …

The alleged misconduct involved at least 13 current and former employees of the department’s Minerals Management Service (MMS) accused of rigging contracts and accepting gifts and engaging in “illicit sexual encounters” with subordinates and industry representatives …

Between 2002 and 2006, nearly one-third of the MMS staff — in Washington and the western city of Denver — received gifts and gratuities from energy companies.

One MMS supervisor used cocaine and engaged in sex with subordinates, the reports said.

“Internally, several staff admitted to illegal drug use as well as illicit sexual encounters,” Devaney said.

But what’s the scandal here – the sex and drugs, or the whole program in the first place?


A memorandum accompanying the report also revealed that several representatives engaged in corruption, including one MMS official who “manipulated the contracting process from the start” on a lucrative MMS deal.

Danielle Brian, executive director of the non-partisan watchdog Project on Government Oversight, said that “given the billions of dollars at stake, and number of people involved, this is easily the worst instance of government misconduct POGO has seen.”

The group said the charges “illustrate the improper relationship between the regulatory agency and the oil and gas industry that it is tasked with overseeing.”

Senator Bill Nelson of Florida said earlier reports in 2007 and 2008 uncovered the MMS officials’ “inappropriate relationships with industry” including allowing companies to change their bids.

“This all shows the oil industry holds shocking sway over the administration and even key federal employees,” said Nelson …

Congressman Nick Rahall of West Virginia, the Democratic chairman of the House Natural Resources Committee, said the inspector general report “reads like a script from a tv miniseries — and one that cannot air during family viewing time.”

Separate investigative reports showed that the RIK unit’s former Denver office director, Gergory Smith is accused of having sex with two subordinates and accepting $30,000 from a private company for marketing its engineering services to oil companies.

So you tell us – what’s the REAL scandal here ???

The sex and drugs are amusing, and indicate the hypocrisy of the religious right.

But the real scandal is how powerful corporations in America today – whether in oil & gas, or banking & finance – have neither scruple nor problem completely dominating the government agencies that are supposed to regulate them.

David Caploe PhD
Chief Political Economist, EconomyWatch.com
Minerva School / ACALAHA

About David Caploe PRO INVESTOR

Honors AB in Social Theory from Harvard and a PhD in International Political Economy from Princeton.