Editor’s Note: Since we posted the story below from our Media Partners at NewWest.Net Tuesday morning, Secretary Salazar said at a House Natural Resources Committee later in the day that the Royalty-in-Kind program – which allows industry to provide oil and natural gas directly to the Interior Department in lieu of cash royalty payments — will be killed.

“The royalty-in-kind program has been a blemish, in my view, on this department,” Salazar said at a House Natural Resources Committee hearing. “There were allegations of sex and drugs and a whole host of other inappropriate conduct. … My decision is that it’s time for us to end the royalty-in-kind program.”

Because the program was created through an administrative action, Salazar said he has the authority to cancel it. Below is more background on the story.

House Bill 3534, the Consolidated Land, Energy and Aquatic Resources—or CLEAR—Act, could finally rectify the Interior’s royalty-in-kind scandal

By Laton McCartney and Rone Tempest, WyoFile, Guest Writer, 9-16-09

For more than a decade, West Virginia Democratic U.S. Rep. Nick Rahall watched powerlessly as the Bush administration and a Republican Congressional majority made Royalty in Kind the main method of collecting oil and gas royalties on federal lands.

Huge sums were at stake. For the federal government, oil and gas royalties are one of the biggest sources of revenue, second only to income taxes.  Energy producing states like Wyoming, with vast tracts of federal land, get 49 percent of federal royalties, which annually account for hundreds of millions of dollars in public funds.

As ranking minority member of the House Resources Committee, Rahall repeatedly called for audits of the controversial RIK program and ordered Government Accountability Office oversight reports, only to be frustrated by incomplete information from the Interior Department agency, Minerals Management Service, that administered the program.  He was still on the sidelines in 2008 when an investigation by the Department of Interior Inspector General uncovered widespread corruption and unethical behavior in the Minerals Management Royalty- in-Kind office in Lakewood, Colorado.

On September 8, Rahall’s turn finally came. Now chairman of the powerful House Resources committee, Rahall authored HB 3534, the Consolidated Land, Energy and Aquatic Resources—or CLEAR—Act of 2009. The bill is intended “to provide greater efficiencies, transparency, returns and accountability in the administration of federal mineral and energy resources.”

The act would consolidate federal minerals management and leasing programs into one entity, the Office of Federal Energy and Minerals Leasing of the Department of the Interior. At present, the Bureau of Land Management handles on-shore leases, and Minerals Management Service leases off-shore sites.

Explaining the need for his bill, Rahall pointed to a new Government Accountability Report on erroneous data entered in Minerals Management Service databases, which may have cost Americans $160 million in oil and gas royalties.

“The CLEAR Act…would eliminate the scandal-ridden Royalty-in-Kind program to help prevent the loss of even more money owed to the American people for the disposition of our public energy resources,” Rahall said in a press release announcing committee hearings on the bill.

The first day of hearings on September 16 features testimony by Interior Secretary Ken Salazar and representatives from the offices of the Interior inspector general and Government Accountability. On September 17, the Resources Committee will hear the perspectives of “a variety of stakeholders.” Of special interest to all is Section 217, “Limitation on Royalty In-Kind Program.” The section amends the Mineral Leasing Act of 1920 to prohibit the Secretary of Interior from conducting a “regular program” to take oil and gas lease royalties in kind.

If passed as written, the bill would instantly undo years of intense oil and gas industry lobbying efforts, often assisted by key Wyoming public officials and partisan activists, to make Royalty in Kind the main means of royalty collection on federal lands and offshore leases. For Wyoming, it would end a four-year-old RIK program for natural gas that in fiscal year 2007-2008 accounted for more than half of the $533 million in federal royalties collected in the state.

On August 14, a month before he introduced his proposed legislation, Rahall received yet another Government Accountability Office report, “Royalty-in-Kind Program: MMS Does Not Provide Reasonable Assurance It Receives Its Share of Gas, Resulting in Millions in Forgone Revenue.” The title basically says it all, but among the details noted in the report is the observation that in fiscal year 2008, Minerals Management Service collected a more than $12 billion in oil and gas royalties, more than half “in kind”: gas valued at more than $2.4 billion, and oil valued at nearly $4.2 billion.

The report noted that Management Service “estimates” it is owed a net of $21 million, but “cannot calculate the full amount” due because it does not have enough data to see if it has received its full percentage of Royalty-in-Kind gas. The agency’s estimate also does not include interest due on unpaid “gas imbalances” because the agency has not determined when interest begins to accrue on an “imbalance.” An imbalance is the difference between the amount of RIK gas a company owes Minerals Management, and the amount it actually pays.

The Service monitors imbalances on a monthly, rather than daily basis, leaving Minerals Management vulnerable to energy companies’ gaming the system by providing less RIK gas to MMS when prices are high and making up the difference when prices fall. This deprives the government of revenues it could realize by selling gas on days when prices are high.

Ignorance and inadequate training add to the Management Service’s difficulties in running a natural gas marketing outfit. The GAO pointed out that “the agency does not know how companies allocate gas” among those claiming a percentage of production, and RIK gas staff is not trained on industry standards for gas imbalance calculations.

Minerals Management appears to take a soft line on the energy companies with which it does business, failing to enforce deadlines and allowing companies to “negotiate imbalances indefinitely.” The Service does not even compel the companies to document production and deliveries in a consistent format, so that MMS employees spend their time gathering and reformatting data instead of finding and collecting imbalances. Despite years of promises to update information technology, the agency’s system can’t calculate cash settlements or compare different kinds of information. Minerals Management processes more than half of its gas imbalance data by hand.

The report also noted that Minerals Management Service “does not audit gas companies’ production and allocation data, therefore it cannot verify that it is receiving its entitled percentage of gas.” The Service does not audit, according to the report, because it believes its verification procedures are “sufficient.” The report observed that gas companies and “other governments” routinely audit their imbalances and “uncover inaccuracies” that could have lost them money if unchecked.

Wyoming’s state government will join those that audit, as Gov. Dave Freudenthal on September 10 wrote to S. Elizabeth Birnbaum, the Obama administration’s director of Minerals Management Service, requesting “the opportunity” to perform an audit of the 2006-2009 RIK natural gas production in the state, in order to protect “the public’s interest in the management of this nonrenewable public resource.”

Freudenthal asked Michael Geesey, director of the Wyoming Department of Audit, to undertake the audit of the RIK royalty revenues remitted to Wyoming.

The potential demise of an industry’s favorite royalty payment method comes just eight years after oil and gas lobbyists and their allies had firmly established RIK as national policy.

READ THE COMPLETE ARTICLE HERE.