It is hard to imagine a time in recent history when the federal government has more abjectly failed in its duty to protect our common wealth. The Hurricane Katrina catastrophe may be the most massive and visible failure, but today, as reported by The New York Times in its lead story, the Interior Department was acting as a virtual co-conspirator with the natural gas industry in helping it defraud the public. The Bush administration failed to collect at least $700 million in royalties for natural gas extracted from publicly owned lands and coastal waters; the actual level of under-collected royalties could be much higher.
Royalties paid to the government are usually between 12 and 16 percent of the sales price. But dozens of companies grossly under-stated those prices over the past five years even as actual sales prices soared. Prices for natural gas nearly doubled between 2001 and 2005, but the royalties paid to the government were actually a little bit lower in 2005 than 2001.
What makes this scandal so contemptible is that the Bush administration took deliberate steps that made it far more likely that any accounting fraud would go undetected. In GOP circles, this is apparently known as being “pro-business.” Despite a similar scandal between 1998 and 2001 involving under-reporting of sales prices for oil, the Interior Department’s Mineral Management Service not only did not tighten the reporting rules for natural gas sales on public lands, it expanded the accounting loopholes so that values could be more easily under-stated. It also scaled back on full audits and fired two of its most aggressive auditors even though the Department’s own inspector general had criticized it for the audits that it did pursue.
Two other factors helped disguise the fraudulent reporting of natural gas sales prices: byzantine rules for calculating the royalties (which expanded the opportunities for fraud) and a cloak of secrecy over the entire system.
The American people owe a big thanks to the Project on Government Oversight, a tenacious watchdog group that has long monitored oil and natural gas royalties, and the Times, for its own three-month investigation. The key to discovering the fraud, it seems, was the disparity in sales prices reported to the Securities and Exchange Commission and the prices reported to the Interior Department. Years ago, a Nader report dubbed such duplicity “crosstown hypocrisy,” when it found that corporate filings with the SEC didn’t jibe with numbers reported to the EPA.
Don’t expect any apologies from any of the miscreants. They’ve become too brazen and smug in their ability to pull off such scams and then know they can escape accountability. For a president who sermonizes about responsibility, we too often get smirks and evasion, if not another round of fraud. In this case, after bringing the cooked statistics to the attention of the Mineral Management Service, the Service supplied a new set of natural gas numbers to the Times, claiming it needed to make legitimate statistical adjustments. It turns out that the new statistics were contradicted by data compiled by the Energy Information Administration. The explanation, supplied two days later: the statisticians had incorrectly shifted 800 cubic billion feet of gas sales from 2004 and 2001, when they should have shifted about 8 million cubic feet.
Incompetence? Deceit? Too much complexity? None of the credible explanations are reassuring. But if any business were run this way, its managers would have been thrown out a long time ago.