How To Run A Skim

It's always easier from the inside. NYTimes (01.23.06):

"At a time when energy prices and industry profits are soaring, the federal government collected little more money last year than it did five years ago from the companies that extracted more than $60 billion in oil and gas from publicly owned lands and coastal waters. If royalty payments in fiscal 2005 for natural gas had risen in step with market prices, the government would have received about $700 million more than it actually did, a three-month investigation by The New York Times has found." As Profits Soar, Companies Pay U.S. Less for Gas Rights

"But an often byzantine set of federal regulations, largely shaped and fiercely defended by the energy industry itself, allowed companies producing natural gas to provide the Interior Department with much lower sale prices - the crucial determinant for calculating government royalties - than they reported to their shareholders." For example, for fiscal 2005 (through September 30), Interior came up with an average sale price of $5.62 per thousand cubic feet. For the nine months prior to September 30, Exxon told its shareholders its sale price was $6.88 per thousand cubic feet, Chevron's average sale price was $6.49, and Kerr-McGee said it received $6.59. Ahhh yes, the Interior Department. We've encountered them recently, albeit in somewhat of a different context. In addition to lowballing the average sales price, "the Interior Department has scaled back on full audits, pushed out a couple of its more aggressive auditors and been criticized by its own inspector general for the audits that it did pursue." All told, one could say that Interior's actions (or lack thereof) have created a rather favorable environment for cooking the books, if a producer was inclined to do so. Not that one ever would. Intentionally, at least. Interior's response? That the disparities "were mostly the result of deductions that the regulations let companies take, reducing the sale prices they report to the government", and that it "had not known and could not explain why companies were reporting higher sale prices to their shareholders and to the Securities and Exchange Commission". No. Clue. Whatsoever. Back in the '90s, the producers were running a great little scam with oil royalties, "using a host of tricks to understate their sale prices." After this nonsense came to light, the Feds "pushed through tough new rules for valuing crude oil, which relied on comparing company reports with an index of spot market prices." At that time, however, nothing was done about the rules governing the valuation of natural gas. The current Administration, noticing this oversight, leapt into action. It "expanded the list of deductions and decided against valuing sales at spot-market prices when companies were selling to their own affiliates." It "also took a much more relaxed approach to auditing and fraud prevention." So much so that in 2003, "the Interior Department's inspector general declared that the auditing process was 'ineffective' and 'lacked accountability' and that many of the auditors were unqualified." The following little vignette provides us with a telling snapshot of the current state of ethics at the Interior Department: "In one instance, inspectors discovered that auditors had lost the working papers for an important audit and tried to cover up their blunder by creating and back-dating false documents. Rather than punish anybody, the inspector general recounted, the minerals service gave the employee who produced the new documents a financial bonus for 'creativity.'" Not surprisingly, much of this was cooked up by Dick Cheney's energy task force, which "called for giving lucrative new incentives to companies that drill in the Gulf of Mexico and other high-risk areas." At least that what they said. What actually happened was this: "Over the last four years, the Bush administration has ordered its auditors to move away from detailed inspections in favor of a more cursory approach of looking for anomalies in company reports. If a company in Louisiana, say, reported prices that differed from those of other companies in the same region, it would attract closer scrutiny." Gale Norton is the Secretary of the Interior Department. She might also be considered a friend of BigEnergy. Doesn't hurt to have influential friends, does it.