Report Says Oil Agency Ran Amok

Investigators referred their findings to federal prosecutors, who did not charge Smith with any criminal wrongdoing and declined to comment on their decision.

Justice officials also declined to comment on their decision not to pursue a criminal case against the highest-ranking official named in the report, Lucy Querques Denett, former associate director of the Minerals Management Service, who worked in Washington. She is accused of improperly arranging a million-dollar deal for two retired employees.

Denett, 55, the wife of Paul A. Denett, the procurement policy administrator for the White House Office of Management and Budget, retired from government service Jan. 31. She declined to comment on the report. She told investigators she had a "personal issue." People familiar with the investigation said health problems were a factor in the decision not to prosecute her.

The Justice Department's decision not to charge Denett or Smith created a rift with Interior officials, according to sources with knowledge of the dispute.

One of the two retired employees, Jimmy W. Mayberry, pleaded guilty in July to a federal conflict-of-interest charge related to the investigation. Another employee, Milton K. Dial, has been under investigation for similar conflict-of-interest allegations, according to two sources with knowledge of the matter.

According to the report, Mayberry discussed with Denett how he could be "brought back to work" for the agency after his retirement in January 2003.

Before he left, Mayberry created a job for himself by writing the job description and the criteria for selecting the winning bidder, court documents show. He started a company out of his Texas home and was awarded a $150,000 contract in June 2003. He later hired Dial, the report said. Mayberry's firm collected $788,000 worth of contracts. Mayberry and Dial did not return phone calls seeking comment. Mayberry's attorney, Danny C. Onorato, also declined to comment.

The royalty-in-kind program, which started as a small pilot project a decade ago, has been touted as a way to simplify the way oil and gas companies pay for the right to drill on federal land and offshore. Instead of calculating the profit from a well, they can simply give the government one-eighth to one-sixth of whatever they take from the ground.

Revenue rose quickly, from $1.5 billion in 2004 to $4.3 billion last fiscal year. But the growth occurred "in an environment with relatively unstructured in-house oversight," the congressionally convened Royalty Policy Committee said in a December report. Previous reports have said that companies were allowed to revise their million-dollar bids for projects indiscriminately, that government workers routinely failed to seek out legal advice on complicated deals and that the agency used outdated computers and a $150 million software program that resulted in royalty money going uncollected.

Lee Ellen Helfrich, a lawyer who represented states and tribes entitled to a cut of the royalties, said it was nearly impossible to get accurate numbers from the agency. "They kept hemming and hawing," she said.

In late 2006 questions arose over its handling of leases written in 1998 and 1999 that allowed major oil companies drilling in the Gulf of Mexico to avoid billions of dollars in royalty payments.

Former Interior Department auditors accused the agency of failing to bill companies. "We weren't allowed to audit them. It was kind of disturbing," said Bobby L. Maxwell, an auditor who sued the federal government for not collecting royalties. "You couldn't really see what was going on."

Yesterday, Luthi, the minerals agency director, said in a news conference that the harm done by the royalty employees was to "public trust," adding, "I do not believe Americans have lost financially" as a result of the alleged activities. However, in a later interview he acknowledged that "it is too early to tell" whether financial considerations were given to firms that gave favors to federal employees, and he said the contracts will be audited.