US: Federal Oil Officials Accused In Sex and Drugs Scandal

WASHINGTON -- Employees of the federal agency that
last year collected more than $11 billion in royalties from oil and gas
companies broke government rules and created a "culture of ethical
failure" by allegedly accepting gifts from and having sex with industry
representatives, the Interior Department's top watchdog said Wednesday.

A report by the Interior Department's inspector
general, Earl Devaney, described a party atmosphere at the Denver
office of the Minerals Management Service, a bureau of the department.
Some employees of the office, which houses the department's
royalty-in-kind program, "frequently consumed alcohol at industry
functions, had used cocaine and marijuana, and had sexual relations
with oil and gas company representatives," the report said, adding that
"sexual relationships with prohibited sources cannot, by definition, be
arms-length."

The report also says that between 2002 and 2006, 19
employees in the agency's royalty-in-kind program, roughly a third of
the program's total staff, had "socialized with and had received a wide
array of gifts from oil and gas companies with whom the employees were
conducting official business."

Mr. Devaney's blistering assessment spotlights the
agency as Congress and the presidential candidates weigh proposals to
expand offshore drilling. "We discovered a culture of substance abuse
and promiscuity," his report said.

The Minerals Management Service oversees the nation's
natural-gas, oil and other mineral resources on the outer continental
shelf, and its duties include drawing up leases for drilling in
offshore waters. In some years, it is the second-largest source of
revenue for the U.S. Treasury, behind only the Internal Revenue
Service. Through the royalty-in-kind, or RIK, program, the government
receives oil instead of cash payments from energy companies in exchange
for drilling rights.

"The activities at the [royalty-in-kind] office are so
outlandish that this whole IG report reads like a script from a
television miniseries -- and one that cannot air during family viewing
time," House Natural Resources Committee Chairman Nick Rahall (D.,
W.Va.) said in a statement. "It is no wonder that the office was doing
such a lousy job of overseeing the RIK program; clearly the employees
had 'other' priorities in that office."

The report said that most industry representatives who
were interviewed by the inspector general's office admitted buying
meals, drinks and entertainment for government employees, but denied
they were made in exchange for preferential treatment, according to the
report.

Gift Givers

The report named four companies -- Chevron Corp., a U.S. unit of Royal Dutch Shell PLC, Gary-Williams Energy Corp. and Hess
Corp. -- as gift givers. In a written statement Wednesday, the Shell
unit said it cooperated fully with the investigation, but that it would
be premature to comment on the report "until we have an opportunity to
review the content." A spokesman for Hess said the company had
cooperated with the inspector general's inquiry, and that the company's
own investigation "indicated no wrongdoing" by employees. Officials at
Gary-Williams Energy couldn't be reached Wednesday for comment.

Democrats seized on the inspector general's report as
evidence of what they say is the Bush administration's cozy
relationship with the oil industry. Congressional Republicans accused
Democrats of not following up on earlier Republican-led investigations
of possible wrongdoing within the bureau.

In a teleconference with reporters Wednesday, MMS
director Randall Luthi said he didn't see any evidence that American
taxpayers had been hurt financially by the alleged misconduct. But he
said he took the report's findings "very seriously" and would review
the allegations and consider taking appropriate action in the coming
months.

Mr. Luthi, who took office in July 2007, said the
royalty-in-kind program generated tens of millions of dollars in
additional government revenue during the most recent fiscal year,
compared with what would have been received if the agency had taken its
royalties in cash.

Wednesday's report is the latest black eye for the
Minerals Management Service. In July, a former aide to the agency's
associate director of minerals revenue management pleaded guilty in
U.S. District Court to violating conflict-of-interest laws. The
employee, Jimmy W. Mayberry, 65 years old, acknowledged helping create
a consulting position that he later took after retiring from government.

In a memo to Interior Secretary Dirk Kempthorne made
public Wednesday, Mr. Devaney said his office had referred cases
against two other former high-ranking MMS officials to the Justice
Department, but the department had declined to prosecute.

Mr. Devaney said some MMS employees who acted
inappropriately should be removed, but others had escaped punishment
"by departing from federal service, with the usual celebratory
send-offs that allegedly highlighted the impeccable service these
individuals had given to the Federal Government. Our reports belie this
notion."

The report also criticizes what it says was "the
ultimate refusal of one major oil company, Chevron, to cooperate with
our investigation." A spokesman for Chevron said Wednesday that the
company couldn't comment on the report because it hadn't yet seen it.
"We have cooperated with the government investigation and produced all
of the documents that the government requested months ago," the
spokesman said.

Avoiding Payments

In recent years, the Interior Department has come
under criticism from Mr. Devaney's office for mistakes at MMS that
allowed oil companies to avoid paying royalties for offshore-drilling
rights -- errors that government auditors have estimated will cost
taxpayers as much as $10.5 billion over about 25 years.

In May, a report by Mr. Devaney's office said an
investigation of the program by his agents found that "the integrity of
the RIK oil sales process is undermined by poor business practices,"
with companies often allowed to modify their bids after the deadline
for submitting them. Of 718 bid packages awarded to companies between
2001 and 2006, Mr. Devaney's report said, 121 were modified, with only
three modifications favoring the government. The value of the modified
bid packages not in favor of the government totaled $4.4 million,
according to Mr. Devaney's May report.

Under the royalty-in-kind program, the government
receives oil or natural gas instead of cash for payments of royalties
from companies that lease federal property for oil and gas development.
The government then sells the product into the marketplace and returns
the proceeds to the Treasury. Interior Department officials say the
program results in higher revenue collections and lower administrative
costs.

Write to Stephen Power at stephen.power@wsj.com

• 190 Natural Resources
• 208 Regulation