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Report Says Oil Agency Ran Amok

Interior Dept. Inquiry Finds Sex, Corruption

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By Derek Kravitz and Mary Pat Flaherty
Washington Post Staff Writers
Thursday, September 11, 2008; Page A01

Government officials in charge of collecting billions of dollars worth of royalties from oil and gas companies accepted gifts, steered contracts to favored clients and engaged in drug use and illicit sex with employees of the energy firms, federal investigators reported yesterday.

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Investigators from the Interior Department's inspector general's office said more than a dozen employees, including the former director of the oil royalty program, took meals, ski trips, sports tickets and golf outings from industry representatives. The report alleges that the former director, Gregory W. Smith, also netted more than $30,000 from improper outside work.

The report from Inspector General Earl E. Devaney contains fresh allegations about the practices at the beleaguered royalty-in-kind program of Interior's Minerals Management Service, which last year collected more than $4 billion worth of oil and natural gas from companies given contracts to tap energy on federal and Indian lands and offshore. The revelations come as Congress is set to consider opening the Arctic National Wildlife Refuge and areas off the coast of Florida for drilling.

The royalty-in-kind program, based near Denver, allows energy companies to pay the government in oil and gas, rather than cash, for the privilege of drilling on government land. It has been the subject of multiple investigations since 2006 by the Interior Department's secretary, its inspector general, the Justice Department and Congress for alleged mismanagement and conflicts of interest.

In the report released yesterday, investigators said they "discovered a culture of substance abuse and promiscuity" in which employees accepted gratuities "with prodigious frequency." The report cited one e-mail from a Shell Pipeline representative asking a woman in the royalty office to attend "tailgating festivities" at a Houston Texans football game: "You're invited . . . have you and the girls meet at my place at 6am for bubble baths and final prep. Just kidding."

Besides Shell, the energy company employees mentioned in the report worked for Chevron, Hess and Gary-Williams Energy. The social outings detailed in the report included alcohol-, cocaine- and marijuana-filled parties where certain employees of the Minerals Management Service were nicknamed the "MMS Chicks" by the energy employees. The companies paid for federal workers to attend football and baseball games, PGA Tour events, Colorado ski trips, paintball outings and "treasure hunts," investigators found.

Democrats who have opposed expanded drilling seized on the report as fodder for the debate. "This all shows the oil industry holds shocking sway over the administration and even key federal employees," said Sen. Bill Nelson (D-Fla.), who supports more exploration offshore but not in Alaska. "This is why we must not allow Big Oil's agenda to be jammed through Congress."

The current director of the Minerals Management Service, Randall B. Luthi, said that he takes the report "very seriously" and added that the small number of people implicated "does not represent a culture" in an agency of about 1,700 employees. The royalty-in-kind program, where the lapses cited in the report occurred, has about 50 employees.

Many employees identified in the report told investigators that they didn't think ethics rules applied to them because of their "unique" role in the agency and that they needed to socialize with industry representatives for "market intelligence," according to the report. Those employees, some of whom have been transferred to different offices, have been recommended for internal administrative action.

The inspector general's release comprised three separate reports, including one devoted to the program's former director, Smith, 56, who resigned last year. It alleges that Smith improperly worked part time for Geomatrix Consultants, an Oakland, Calif.-based environmental and engineering firm, and marketed the company to government clients.

Additionally, the report said, Smith had an inappropriate sexual relationship with a subordinate whom he paid to buy cocaine, allegedly promising her a $250 bonus in return. The report stated that Smith admitted to the sexual encounter.

Smith, who now works for a private oil company in Denver, did not respond to requests for comment. His lawyer, Stephen Peters, said that he has not read the report but that the allegations about drug use and sexual liaisons "sound very much embellished and fabricated. . . . Greg Smith was a very loyal and dedicated employee" who increased revenue under his watch.


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