THE VINE SEPTEMBER 18, 2009
On Wednesday, the Interior Department finally terminated a program few people had ever heard of: the royalty-in-kind (RIK) system, which allowed oil and gas companies to drill in public lands and pay the government in oil, rather than cash. Over the past decade, the program, run out of an office in suburban Denver, had allowed companies to underpay the government by $10 million. But that's not why it was shut down--the tale goes well beyond ordinary waste and abuse and into the delightfully tawdry realm of sex, drugs, and graft.
Onlookers knew that the RIK system was a bad idea from the start. In the mid-1990s, oil companies saw that the royalties they owed the government were rising alongside the price of oil, and proposed that they should just be allowed to pay the government in oil to "simplify" the process--even though the proposed system would require a new, multimillion-dollar office within the Minerals of Management Services (MMS). But Alaskan Senators Frank Murskowski and Don Young, themselves the recipients of oil industry largesse, liked the idea and pushed it through.
Just like that, the government had entered the oil and gas business, collecting commodities and selling them on the open market. Even though early trial runs showed that the Treasury was making less money this way than through the old way of simply taxing mining companies--in part because the government now had assumed the responsibility of managing and marketing a natural resource--the program kept growing, while whistleblower warnings and government reports were brushed aside. Eventually, 40 percent of all royalties for drilling rights were collected in-kind, with such weak auditing that investigators called it an "honor system." (For more context, read the Project On Government Oversight's full report from last year, or even this rollicking Washington Monthly story from 1999.)
And that’s when things started to get weird. Last year, the Interior Department's inspector general, Earl Devaney, revealed a "culture of ethical failure" inside the program. About a third of the RIK staff had been regularly accepting gifts from the oil companies they dealt with, and happily let oil buyers revise their bids downward after contracts were handed out--a free subsidy to oil companies. Several employees went even further, drinking heavily and doing drugs at oil-industry events and engaging in "brief sexual relationships with industry contacts." (The details were endlessly lurid: One RIK employee even enlisted oil-industry clients for the sex-toy business she ran on the side, while the program’s director had staffers procure his coke, calling it “office supplies.”)
After this all became public last September, Bush's interior secretary, Dirk Kempthorne, expressed "outrage," but didn't actually overhaul or terminate the program. That move only came this week, after a GAO report on the breathtaking oversight problems with RIK became public. Meanwhile, House Natural Resources Chairman Nick Rahall has introduced legislation that would scrap RIK and return to directly charging companies for the oil and gas they extract.
That’s good news for the taxpayers. Although it’s not clear whether the Interior department--an historically aggrieved agency--will be so much fun ever again.