The US government's program to allow oil companies to pay royalties for drilling on federal lands with crude oil rather than cash is plagued with bad business practices and potential favouritism, the US Interior Department's inspector general said. The Interior Department's Minerals Management Service administers the federal government's decade-old "royalty-in-kind" program, which in 2007 sold about $ 1.7 bn worth of oil to third parties and transferred another $ 306 mm worth of oil into the emergency US stockpile.
The Interior Department's Inspector General, Earl Devaney, said that investigation found that "modifications to oil sale contracts were made without clear criteria, and that the modifications appeared to inappropriately benefit the oil companies."

The errant practices, including a lack of documentation of bidding rounds and allowing companies to revise their bids days after the deadline, have been "largely corrected," the report said. But a lack of clear guidelines "can lead to inconsistent treatment of companies and potential favouritism," it said. Staff administering the program had "inappropriate relationships with industry that could compromise their objectivity," it said.
The program has been plagued by problems leading back to the Clinton administration, which signed faulty drilling leases with energy companies that could allow them to avoid paying billions of dollars. Democrats in the House of Representatives are currently pursuing legislation that would force leaseholders to either renegotiate their deals or pay a hefty fee.

A separate report shows that because of higher oil and natural gas prices, the government could lose billions of dollars more in royalties than previously thought on the faulty leases issued in 1998 and 1999 to energy companies that drilled in the Gulf of Mexico. The Government Accountability Office said the Interior Department could miss out on $ 14.7 bn in royalties over the life of the leases, about 40 % more than the $ 10.5 bn the agency had estimated last year.
The bigger losses assume similar production levels from the leases, but higher prices for the oil at $ 100 a barrel and $ 8 per tcf for the natural gas.

The GAO said the government could lose even more money if the Interior Department does not prevail in lawsuit challenging whether the department could limit a waiver of royalties in leases from other years issued to companies that drilled in the deeper Gulf of Mexico waters. Lost royalty revenue from the industry could hit $ 38.3 bn over the 25 year life of the leases, again due to higher energy prices.
The royalty relief was provided by Congress at a time of low oil prices and to encourage companies to drill in the more expensive deeper Gulf waters. However, the department denied the royalty relief when energy prices rose to certain higher levels.

The dollar amounts at stakes in the bidding are huge. For example, the MMS in May said that the sale of 16 mm barrels of oil from federal leases in the Gulfof Mexico could raise nearly $ 1.9 bn.
Oil and gas produced in federal waters accounted for about a third of all US domestic supply in 2007, according to the GAO.

Source: http://uk.reuters.com