U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

30–328 PDF 2006

PART TWO: INTERIOR DEPARTMENT: A CULTURE

OF MANAGEMENT IRRESPONSIBILITY AND

LACK OF ACCOUNTABILITY?

HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 14, 2006

Serial No. 109–183

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

BRIAN P. BILBRAY, California

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

LAWRENCE HALLORAN, Deputy Staff Director

BENJAMIN CHANCE, Clerk

MICHAEL GALINDO, Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

(III)

C O N T E N T S

Page

Hearing held on September 14, 2006 ..................................................................... 1

Statement of:

Scarlett, P. Lynn, Deputy Secretary, U.S. Department of the Interior,

accompanied by Johnnie Burton, Director, Minerals Materials Management Service, U.S. Department of the Interior .......................................... 43

Letters, statements, etc., submitted for the record by:

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 37

Davis, Chairman Tom, a Representative in Congress from the State of

Virginia:

Prepared statement of ............................................................................... 3

Prepared statement of POGO ................................................................... 10

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, prepared statement of ................................................................ 33

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, prepared statement of ........................................................... 18

Markey, Hon. Edward J., a Representative in Congress from the State

of Massachusetts, prepared statement of ................................................... 41

Scarlett, P. Lynn, Deputy Secretary, U.S. Department of the Interior,

prepared statement of ................................................................................... 47

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared statement of ........................................................... 7

(1)

PART TWO: INTERIOR DEPARTMENT: A CULTURE OF MANAGEMENT IRRESPONSIBILITY

AND LACK OF ACCOUNTABILITY?

THURSDAY, SEPTEMBER 14, 2006,

HOUSE OF REPRESENTATIVES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10:30 a.m. in room

2154, Rayburn House Office Building, Hon. Tom Davis (chairman

of the committee) presiding.

Present: Representatives Tom Davis, Waxman, Cummings, Davis

of Illinois, Duncan, Gutknecht, Bilbray, Mica, Issa, Kucinich,

Maloney, Norton, and Watson.

Also present: Representative Markey.

Staff present: David Marin, staff director; Larry Halloran, deputy

staff director; Keith Ausbrook, chief counsel; Anne Marie Turner

and Thomas Alexander, counsels; Michael Galindo and Benjamin

Chance, clerks; Leneal Scott, computer systems manager; Larry

Brady, subcommittee staff director; Phil Barnett, minority staff director/chief counsel; Karen Lightfoot, minority communications director/senior policy advisor; Alexandra Teitz, minority counsel;

Shaun Garrison, minority professional staff member; Earley Green,

minority chief clerk; and Jean Gosa, minority assistant clerk.

Chairman TOM DAVIS. Good morning.

Yesterday, our Subcommittee on Energy and Resources held its

fourth hearing on natural gas royalties for the Federal offshore

leases. Inspector General Earl Devaney discussed why price thresholds were omitted from deepwater leases in 1998 and 1999. Mr.

Devaney also cited numerous times during his 7-year tenure at the

Department of examples of waste, fraud and abuses uncovered by

the Office of the Inspector General and subsequently ignored by the

Department.

During Mr. Devaney’s testimony, we learned of the massive departmental confusion surrounding the deepwater leases in 1998

and 1999. Not only were price thresholds omitted from deepwater

leases during those 2 years, those within the Department of Interior aren’t even clear on when the omission was discovered. E-mails

from 2000 show that upon the discovery, a decision was made at

the Associate Director level of the Minerals Management Service to

keep silent the omission, a silence that lasted for another 5 years.

Despite the lack of managerial oversight, Devaney testified that

no one within the Department of the Interior has been fired, suspended or reprimanded as a result of the multi-billion dollar coverVerDate 11-MAY-2000 12:31 Oct 30, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\DOCS\30328.TXT HGOVREF1 PsN: HGOVREF1
2

up. Unfortunately, as the Inspector General found, the deepwater

lease issue is not an exception at the Department of the Interior.

The OIG has issued countless reports citing cases of ethics failures

and ineffective management and policies within the Department.

These failings permeate employee morale, as the Inspector General’s office found in 2004 that 46 percent of employees within the

Department believe that discipline was administered fairly only

sometimes, if ever. There are reasons to look on the bright side. In

May, Dirk Kempthorne took the reins. In the 4 shorts months of

his tenure, Secretary Kempthorne has already shown signs that

the status quo at Interior is unacceptable. Mr. Devaney testified

that he met with Secretary Kempthorne on the Secretary’s first day

regarding the OIG’s work.

Additionally, the Secretary sent a memorandum to all Interior

employees instructing them to cooperate with the Office of the Inspector General.

Will changes be implemented? It is too soon to tell. I don’t know.

If the culture of waste, fraud and abuse continues in the Department of Interior, it will never be able to wrap its arms around the

problems of deepwater leases. But I also know that for changes to

occur, they have to start from the top down.

I have a personal connection with the Department of the Interior.

After serving as the Attorney General of Nebraska, my grandfather

moved to DC to become Solicitor for the Interior Department. He

subsequently went on to serve as the Department’s Under Secretary and Acting Secretary. It is my grandfather’s career at Interior that caused my family to move from Nebraska to northern Virginia. This move ultimately resulted in my career in the House of

Representatives.

It is with deep disappointment that I hold this hearing today,

given my fond memories of the Department of the Interior and the

hard work of those in decades past. I know they would also be disillusioned by the culture of waste, fraud and abuse at the Department and would echo my call for immediate reforms.

I would now recognize our distinguished ranking member, Mr.

Waxman, for his opening statement.

[The prepared statement of Chairman Tom Davis follows:]

3

4

5

Mr. WAXMAN. Thank you very much, Mr. Chairman.

Today, the committee has the opportunity to investigate several

important problems at the Department of Interior. This shouldn’t

be the last of the series of hearings on what went wrong in 1998

and 1999 for leases. It should be the first in a series of hearings

on how the Department of Interior is broken and how we can fix

it.

The majority has held four previous hearings investigating who

was responsible for the omission of price thresholds for royalty relief in oil and gas drilling leases signed in 1998 and 1999. I think

we all recognize this was a huge and unacceptable mistake. Already the House has taken action to correct this costly mistake.

Earlier this year, the House passed legislation barring the award

of leases to any company that refuses to renegotiate its leases to

include price thresholds for royalty relief. That is a powerful incentive for companies to come to the table.

The Senate has included similar language in committee. While

these provisions were sponsored by Democrats, every Member

should insist that they be retained in the final Interior appropriations bill.

Unfortunately, the 1998 and 1999 leases are only a small part

of what is wrong at the Department. What we really need to focus

on are the broader problems within Minerals Management Service

and the Department of Interior as a whole that allowed this mistake and many, many others to happen. The Inspector General testified yesterday that the underlying problems still haven’t been corrected. That is an invitation for future failures and losses.

Since the late 1990’s, 12 major oil companies have paid over $400

million to settle lawsuits brought by private parties alleging the

companies had systematically cheated the Government on royalties. Why were all these claims left to private parties to initiate?

Where was MMS? A Colorado oil executive currently has 73 lawsuits pending against more than 300 energy companies. He is accusing them of cheating the Government out of roughly $30 billion

in royalties. If they have merit, MMS should be pursuing these

claims.

And the problem isn’t just that MMS is failing to act. MMS may

actually be collaborating with the oil industry to discourage MMS’s

own auditors from recovering money owed to the Government. A

former senior MMS auditor sued Kerr-McGee for $12 million in unpaid royalties after MMS refused to pursue the claim. MMS fired

that auditor a few weeks later.

Another senior auditor fired by MMS alleges that under the

Bush administration, agency managers pressured him not to collect

on unpaid royalties when oil and gas companies complained. State

and tribal auditors are protesting MMS pressure on them to scale

back their auditing efforts in favor of more superficial compliance

reviews which won’t reveal deliberate cheating. This looks like an

agency that has been captured by the industry it is supposed to

oversee, with the American taxpayers footing the bill.

I have been disappointed by the refusal thus far to hear from

witnesses on these allegations. I hope that Chairman Davis and

Chairman Issa will reconsider and investigate these issues. The Interior IG’s explosive testimony yesterday highlights even greater

6

problems at the very highest levels of the Interior Department. Inspector General Devaney stated that ‘‘ethics failures on the part of

senior Department officials, taking the form of appearances of impropriety, favortism and bias, have been routinely dismissed with

the promise not to do it again.’’ And he described how the former

Secretary of Interior refused to hold high-level officials accountable

for their misdeeds.

This committee has the responsibility to investigate Government

misconduct. We should not ignore what Inspector General Devaney

said yesterday. There are serious problems at the top of the Department of Interior, and we have an obligation to investigate

these matters and hold officials accountable for ethical lapses.

In closing, I want to thank the chairman for holding today’s

hearing and request unanimous consent to insert into the record

testimony from the Project on Government Oversight, which details

some of the issues I have raised today.

[The prepared statement of Hon. Henry A. Waxman follows:]

7

8

9

Chairman TOM DAVIS. We will include the POGO’s comments in

the record.

[The information referred to follows:]

10

11

12

13

14

15

16

Chairman TOM DAVIS. Mrs. Maloney.

Mrs. MALONEY. I want to thank the chairman for holding this very, very important hearing at a time when we have an $8 trillion

debt, soaring deficits, the largest trade deficit in history, to find out

that we are missing billions and billions of dollars that are owed

to the American taxpayers for oil extracted from land that is owned

by the American people is inexcusable. It is wrong and we have to

correct it.

Yesterday’s hearing was tremendously disturbing. The Department of Interior’s Inspector General, Mr. Devaney, testified that at

the top levels of the agency, widespread ethics failures and abuses,

cronyism, have become commonplace. This is absolutely unacceptable. He testified that at the Interior Department’s Office of Ethics,

they dismissed 23 out of 25 potential ethical breaches, and then he

noted that he found that investigators had missed millions of dollars in underpayments. His office uncovered evidence that agency

auditors had lost key files, then tried to fool investigators by forging and back-dating the missing documents. He noted that the

agency gave a bonus to the official who came up with the false papers.

I find this outrageous. I request unanimous consent to place in

the record two articles on MMS and the Interior Department from

my hometown newspaper, the New York Times, and also on the

huge royalties that Chevron is avoiding.

Mr. DAVIS. Without objection, the articles will be placed in the

record.

Mrs. MALONEY. I just want to say that MMS, as Mr. Waxman

just said, they seem to be captured by the industry they are supposed to oversee. I had someone call me last night, Mr. Chairman,

and say it is a revolving door, that half the people who work at

MMS are from the oil industries. I don’t know if that is true or not,

but I would like to join you in a GAO report request to find out

is it a revolving door. I would like to look at how many people presently and in the past have been put there by the oil industry, because they certainly are not serving Government. They are not

serving ethics. They are not serving what they are supposed to be

doing.

The allegations that have been made are absolutely almost criminal. What I would like to know, and I find it difficult because I am

supposed to be chairing or be ranking member at another meeting

for the Democrats right now, but I want to know, and this is a

question I want to know and I want to place it in writing. I will

come back and hopefully have a chance to ask more question.

But I want to know why since 2001, there has been a plunge in

the royalty money collected from these companies. This has been

found from the auditing and compliance review. How do you explain the differences in the average from 1989 through 2001 at

$176 million per year? And from 2002 through 2005, when it has

been less than $50 million? How do you drop so much?

Something is wrong. MMS is not doing its job. I specifically

would like that question answered. I will get it to you in writing.

It is based on auditing that I have read.

I just want to add that the Government Accountability Office estimates that because price thresholds were not included in the

17

deepwater leases from 1998 and 1999, the Government, that is the

American taxpayers, will lose approximately $10 billion in revenue.

The GAO further estimates that the Government could lose as

much as $60 billion over the next 25 years if the Kerr-McGee Corp.

wins its lawsuit challenging the price thresholds set on its leases

from 1996, 1997 and 2000.

At a hearing that Mr. Issa had earlier in July, we learned from

witnesses, from Chevron, that they had raised the issue of the

missing price thresholds with officials from MMS on several occasions in 1998 and 1999, that for some reasons these officials took

no action. We have to look into what happened there.

These ‘‘mistakes’’ have cost the American taxpayers literally billions and billions of dollars. We as a Government cannot afford

these types of errors. We must ensure that this never happens

again. Personally, I believe the whole Department should be abolished and the whole oversight should be moved out of Interior to

a different, independent department or some other place in Government because clearly they cannot get it right. This is just one of

a long series of serious mistakes, possibly criminal actions, that

have taken place where the American taxpayer has not been protected, and been abused on oil extracted from land owned by the

American people.

I look forward to the testimonies. Thank you, Mr. Chairman.

[The prepared statement of Hon. Carolyn B. Maloney follows:]

18

19

20

21

22

23

24

25

26

27

28

29

Chairman TOM DAVIS. Thank you.

Mr. Kucinich.

Mr. KUCINICH. All across this country, the American people have

been aware of the power of the oil companies. Over this past summer, however, they were able to squeeze consumers by raising the

price of gasoline far over $3 per gallon. What is reflected here is

that the Government has stood back while the oil companies have

continued to aggregate, monopolize the restraint of trade necessarily has produced market conditions which have put a squeeze

on the consumers, jacked up the price of oil, and people are basically at the mercy of the oil companies which are now anticipating

the elections, trying to protect some of their friends, putting the

price of oil down a little bit.

You can look at this picture and you could find 100 things wrong

with it. Let me just talk about a few of them. It is absolutely impossible to imagine that this condition could have been created

without the oil companies being intimately involved in the construction of the system which resulted in them being able to basically steal $10 billion from the American people in terms of royalties which were not paid. I think it would be interesting for this

committee to know who actually wrote the leases, and each

iteration of a lease. Government attorneys or industry attorneys

handing it over to the Government? It would be very interesting to

find out.

Also, I think that this committee in its work ought to come to

a conclusion that says that these leases should be canceled and renegotiated. I mean, obviously, there is an element of either fraud

or misfeasance here. That is something that needs to be done in

order to protect the public interest.

Furthermore, action ought to be taken by this Government, if it

is capable of doing it, to sue to recover at least $10 billion that was

due the American people and not paid for. Furthermore, there

should be a criminal investigation of those individuals who are responsible for overseeing the contracts. We can’t just leave this to

some idea of a ‘‘mistake.’’ How is it that mistakes are made and

the oil industry ends up with $10 billion more? That is a mistake?

A mistake?

If there was ever a call for a new energy policy, this is it. If we

had invested a fraction of the amount of money that the American

people have been deprived of here, and alternative energies, we

would be less reliant on oil and wouldn’t be in a situation where

the oil companies are actively trying to cheat the Government out

of royalties that are due to the American people.

So Mr. Chairman, I am glad to see us reviewing this leasing

process. There is a line in the Bible that says that which is crooked

cannot be made straight. Nothing is going to be made straight

about this energy policy until we start to move away from non-renewable sources of energy to more sustainable sources.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you.

Mr. Duncan.

Mr. DUNCAN. Well, Mr. Chairman, very briefly, thank you for

calling this hearing. This is a very important matter.

30

You know, ever since I started following Government and political issues closely as a teenager, over all these years I have read

so many examples of waste, fraud and abuse and mismanagement

at the Federal level that you almost just get immune to it, so that

almost nothing surprises us anymore.

After so many years of reading and hearing about these types of

things, you begin to wonder if the Federal Government can do anything in an economic, efficient way. People aren’t held accountable

for big mistakes. They don’t even get worried about since it is not

coming out of their own pockets, so we hear about mistakes all the

time that, if they happened in the private sector, people would be

fired and major changes would be made.

But when I read, as I read in the Congressional Quarterly Today

publication that came to us this morning, that the Inspector General of the Energy Department testified yesterday, saying that he

‘‘conceded he has no evidence that the mistake over the royalties

was anything more than classic bureaucratic bungling, with a process that required plenty of signatures, but no individual to assume

final responsibility.’’

And then in another companion article, it says that Chairman

Davis said it was unacceptable that the bungled leases failed to

surface for 5 years. And it also says that nearly 30 people signed

off on all this. I mean, this is one of the worst cases I think I have

ever heard of. I am just stunned.

If we end up just letting this go by excusing it as classic bureaucratic bungling, then we have accepted something that we

shouldn’t accept.

So I appreciate your holding this hearing and I hope that we determine or arrive at some really strong action to take in regard to

this.

Thank you very much.

Chairman TOM DAVIS. Thank you.

I would ask unanimous consent that Mr. Markey be allowed to

sit in on today’s hearing. Without objection, so ordered.

Ms. Watson.

Ms. WATSON. I want to thank the chairman for convening this

hearing. The Subcommittee on Energy and Natural Resources,

which I am the ranking member, has held four hearings on this

subject. So I am really pleased to see the Deputy Secretary of Interior and the Director of Minerals Management here in attendance.

This should be a very informative session to finally start talking

about how to fix the errors and the larger issues the Inspector General identified at yesterday’s subcommittee hearing.

I was unfortunately unable to attend yesterday’s hearing, and we

know of the major problems. Several of the oil companies were at

the previous hearings and are ready to work with us to address the

errors.

I am particularly incensed when we know that in the year 2005 oil companies registered over $110 billion in profits and oil prices

are now close to $70 a barrel. This is the only industry here whose

made those types of profits. And so our Government has given the

oil companies tremendous benefits, and not to pay back in terms

of the contractual agreement the kinds of sums that should have

come to the U.S. Government is just unthinkable.

31

So this problem still persists today. The American consumer is

suffering and continues to suffer. We can’t have these kinds of profits without some responsibility on the part of our Government to

follow through. The errors that occurred during 1998 and 1999

could cost our Government an estimated $20 billion within the next

25 years. This should not be happening, but it is not the only problems at the Minerals Management Service and the Department of

Interior.

We have a duty as Congress to the American taxpayer. One of

our duties is not to allow these companies to misuse public assets,

and we must protect American people’s money. So the House had

passed the Hinchey amendment to fix this problem in the Interior

appropriations bill, and I hope that my colleagues will support this

provision in the final bill that will come in front of us soon.

This committee has heard much about larger problems at the Department of Interior over the many hearings, and we have an obligation to investigate them, certainly our subcommittee has.

So I want to thank the Chair again, and I want to thank the witnesses for being willing to come and address this problem. Thank

you so much, Mr. Chairman.

Chairman TOM DAVIS. Thank you very much.

Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman.

Chairman TOM DAVIS. You started all this.

Mr. ISSA. Thank you, Mr. Chairman.

I am very pleased that our subcommittee has been able to move

this discovery along, and thank you and Ranking Member Waxman

for holding this important hearing today on the Interior Department’s culture of managerial irresponsibility and lack of accountability. I also want to thank the witnesses for taking time to appear here before the full committee.

Over the past 7 months, the Subcommittee on Energy and Resources has conducted an investigation of the Interior Department

and the Minerals Management Service. I sought to find out how

and why the thresholds were missing in deepwater leases in 1998

and 1999. I conducted four hearings at which Interior Department

employees and oil company officials testified. These witnesses shed

a great deal of light on the issue and to a great extent the culture

of the Interior Department. I believe that is what we are here for

today.

I would again like to thank Chevron and its staff for their candor

before the subcommittee. It was in fact their testimony that was

a breakthrough in our discovery. Yesterday, we heard testimony

from the Interior Department’s Inspector General, Earl Devaney.

He detailed the results of his own investigations into the missing

price threshold issue. The fact that the thresholds were missing for

2 years was only the beginning of the problem. The central issue

from yesterday’s hearing was the coverup. I would paraphrase him

by saying, the multiple D’s: delay, denial. That is in fact part of the

culture that not only are there mistakes made, but there is inherently a pattern of coverup.

Department employees discovered the missing price thresholds

apparently through oil company executives telling them, in 2000.

Some e-mails even authenticated the fact that there was that disVerDate 11-MAY-2000 12:31 Oct 30, 2006 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 D:\DOCS\30328.TXT HGOVREF1 PsN: HGOVREF1
32

covery. Some personnel even told their executives and made

changes on their own. Yet, the Department made an affirmative

decision not to notify their superiors. Had they notified their superiors and amended the contracts at no cost to the oil companies, because the price thresholds at that time were low, we would have

no reason for this investigation. Instead, they allowed the problem

to fester and become a $10 billion-plus wound. As Mr. Devaney

said, this was but an example of the bureaucratic bungling and

stovepiping of responsibility.

We are here today to discuss the bigger issue. There appears to

be a culture of irresponsibility, unaccountability that pervades the

entire Department. Officials are here from the Interior Department

today. I regret, however, that the Secretary is not. I would hope,

very much hope, that we would soon have the ultimate responsible

cabinet officer here.

Make no mistake: The American people are watching today. The

Interior Department owes the American people a fiduciary duty to

them and holds this Nation’s valuable resources in trust for the

American people. The Department has let them down and they

have not accepted, and the American people will not accept, the

wink and the nod of, well, that was just a mistake.

Mr. Chairman, I want to thank you for this. I look forward to our

witnesses, but I hope that my opening statement has set a bipartisan tenor that this is something that has gone on before this President and if we don’t change it here and over the next several years,

it will go on after this administration.

With that, I yield back.

[The prepared statement of Hon. Darrell E. Issa follows:]

33

34

35

Chairman TOM DAVIS. Thank you very much.

The gentleman from Baltimore.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

I, too, thank you for holding this vitally important hearing to examine reports of mismanagement in the way the Department of Interior’s Minerals Management Service [MMS], collects royalties

from oil companies that drill on public property.

As you know, MMS is the Federal agency that is charged with

ensuring that all moneys derived from mineral leasing and production activities on Federal and Indian lands are collected properly,

accounted for, and distributed. This is no small task. Federal onshore and off-shore mineral leases generate almost $6 billion annually, comprising one of the Federal Government’s largest sources of

non-tax income.

This revenue supports a vast array of essential Government

functions providing 90 percent of funding for the Land and Water

Conservation Fund and 100 percent of funding for the National

Historic Preservation Fund. It also generates millions of dollars for

individual States. My home State of Maryland, for example, in fiscal year 2002 received $195.9 million. On average, States received

about $200 million annually.

Additionally, agency collections from off-shore leases called

Outer-Continental Shelf [OCS], lands, play a significant role in our

Nation’s energy picture. OCS lands provide more than 25 percent

of the natural gas and 30 percent of the oil produced in the United

States. In total, MMS administers about 7,300 active leases on 40

million acres of the OCS.

Given the important of the MMS royalty collection program, the

need for it to run as effectively and efficiently as possible is abundantly clear. Unfortunately, recent reports indicate that goal has

not been achieved and that mismanagement and waste are prevalent.

In this morning’s New York Times, Interior Department Inspector General Earl Devaney is quoted from his testimony at the hearing of the Subcommittee on Energy as saying ‘‘Simply stated, short

of crime, anything goes at the highest levels of the Department of

the Interior.’’ I find it troubling that MMS’s mismanagement is reportedly costing taxpayers millions of dollars or even billions of dollars.

Equally troubling are reports that MMS leadership has reacted

with hostility when employees have the courage to blow the whistle

on the problems that exist. Specifically, in 2003, two MMS auditors

who were reportedly among the agency’s most successful and aggressive, were fired. Others report that MMS management pressured auditors not to pursue companies that cheat on royalties. As

a long-time advocate for the rights of whistleblowers, I find these

reports to be deeply troubling and shocking to the conscience.

Pressure for reform has been applied through media publicity, investigations by the Office of Inspector General, as well as hearing

of the Subcommittee on Energy Resources. I look forward to hearing from today’s witnesses on how MMS has responded to that

pressure. In May, Dr. Kempthorne was appointed as the new Secretary of the Interior. I look forward to hearing what his response

36

to these reports has been and whether he has begun to implement

the reforms that are necessary to turn the agency around.

I want to thank our witnesses for being here today, and I look

forward to hearing your testimony.

[The prepared statement of Hon. Elijah E. Cummings follows:]

37

38

39

Chairman TOM DAVIS. Mr. Markey, would you like to make an

opening statement? Thanks for being with us.

Mr. MARKEY. Thank you, Mr. Chairman. I very much appreciate

your graciousness in allowing me to testify here today.

As you know, the Department of Interior admitted market-based

price thresholds for the suspension of royalty relief on leases issued

in the late 1990’s in the Gulf of Mexico. I am here today to remind

my colleagues that the House of Representatives has already acted

on a bipartisan basis to fix this problem when it passed the Hinchey-Markey amendment last May.

As long as we protect the House language in the Interior appropriations bill, and pass that bill this fall, we will head off yet another glaring subsidy to companies which already have incentives,

and more than they have ever dreamed of, in the spectactularly

high world oil prices of today.

This past May 18, just 3 months ago, a bipartisan majority of the

House voted 252–165 for the amendment which Mr. Hinchey and

I proposed on the House floor. Despite the controversy surrounding

the issue, the House recognized that this amendment threaded the

legislative needle by neither abrogating existing contracts nor ignoring a public rip-off. It does so by giving every affected company

a simple choice: either renegotiate the old royalty-free leases or accept the fact that your company will be barred from any future

leases from the Federal Government.

The amendment creates strong incentives for those companies to

renegotiate at a time when oil prices are high and oil companies

are making record profits, but will leave current contracts

unamended if the company chooses not to renegotiate. The Senate

has subsequently included similar language in their version of the

bill.

The recently reported discovery of the new reserves in the socalled Jack Field in the Gulf of Mexico, estimated by Chevron to

be between 3 million and 15 million barrels of oil, has further highlighted the need to take immediate action to correct those leases.

This week, as we know, the New York Times reported that Chevron and its partners hold six leases in the new Jack Field, two of

which would allow the companies to avoid royalties on as much as

87.5 million barrels of oil per lease. The Times estimated that those

leases alone could result in the loss of as much as $1.5 billion in

unpaid royalties at $70 a barrel.

However, the Bush administration and the oil companies have

been fighting the amendment, which has now passed the House

and the Senate. The oil industry has offered a number of arguments against our amendment, each of which has been demonstrated to be completely false. For example, the oil industry has

argued that our amendment would violate the sanctity of the contracts in question and force an abrogation of those contracts.

However, the Congressional Research Service clearly stated in a

memo dated May 18, 2006 ‘‘enactment of this amendment would

not constitute a taking of existing leaseholders’ rights, but would

merely establish a new qualification for potential lessees. It has

long been recognized that the Government has broad discretion in

determining those firms with which it will enter into contractual

agreements.’’

40

The oil industry has also argued that blocking a large number

of companies from purchasing new leases would hinder production.

However, our amendment provides companies that still desire to

purchase new leases with a simple solution: renegotiate their old

leases to add a price threshold that cuts off royalty relief whenever

prices get high.

However, the administration and the Department of Interior

have opposed the amendment, seeking instead to attempt to cajole

oil companies to voluntarily come back to the table to renegotiate.

I will be sending a letter again, with Mr. Hinchey, to Secretary

Kempthorne and other sponsors of the amendment urging the Department of Interior to immediately support the amendment. We

must ensure that all oil companies holding these leases renegotiate,

not just the small percentage that are feeling particularly generous

and public spirited, leaving the bad actors in a position to take unfair advantage.

Our amendment is a very simple way to correct these leases and

recover the billions of dollars which American taxpayers stand to

lose in the coming decades, that received strong bipartisan support

in Congress. With gas prices hovering still between $2.50 and $3

a gallon, the American people are again watching today to see if

the administration, the Department of Interior, will again side with

big oil over the American people. It is time for big oil companies

to pay their fair share to drill on public land, and I urge Secretary

Kempthorne and the Interior Department to immediately come out

in support of the Hinchey-Markey amendment now pending before

the House and Senate.

I thank you, Mr. Chairman.

[The prepared statement of Hon. Edward J. Markey follows:]

41

42

43

Chairman TOM DAVIS. Thank you very much, Mr. Markey.

Members will have 7 days to submit opening statements for the

record. We are now going to get to our panel. We have the Honorable P. Lynn Scarlett, the Deputy Secretary of the Department of

the Interior, and the Honorable Johnnie Burton, the Director of the

Minerals Materials Management Service, Department of Interior.

Thanks for your patience.

I understand you have one statement for the two of you. We will

give you whatever time you need. It is our policy that witnesses be

sworn before you testify, so if you could just rise with me and raise

your right hands.

[Witnesses sworn.]

Mr. DAVIS. Thank you.

All right, who is going to give the statement? OK, Ms. Scarlett.

Thanks for being with us.

STATEMENT OF P. LYNN SCARLETT, DEPUTY SECRETARY, U.S.

DEPARTMENT OF THE INTERIOR, ACCOMPANIED BY

JOHNNIE BURTON, DIRECTOR, MINERALS MATERIALS MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE INTERIOR

Ms. SCARLETT. Thank you, Mr. Chairman and members of the

committee. Thank you for the opportunity to discuss the lack of

price thresholds for the 1998 and 1999 leases in the deepwater of

the Gulf of Mexico.

The committee has also asked that I address issues raised in testimony by our Inspector General regarding the Department’s ethics, accountability and management. With me today, as you have

noted, is Johnnie Burton, Director of the Minerals Management

Service, who also served, I might add, as Acting Assistant Secretary of the Land and Minerals Management.

On behalf of the 70,000 employees of the Department of the Interior, let me say that I believe the Department’s employees, both

senior managers and their staff, are dedicated public servants.

They put their lives at risk fighting wildland fires to save communities. They perform extraordinary search and rescue missions, including round-the-clock efforts after Hurricane Katrina. Often

when I come to work I find senior managers and their staff in the

budget and finance offices working 12, even 14 hours a day and on

weekends.

They are dedicated to the Department’s multifaceted mission and

to serving the American people. Our senior leaders share that dedication.

From his comments, there appear to be disagreements over recommendations that the Inspector General has made and subsequent decisions of the Department regarding those recommendations. Let me underscore that we take extremely seriously any and

all instances in which we find waste, fraud, ethical violations, and

other inappropriate actions. We strive to address these matters

consistent with statutory authorities, available resources, and requirements to treat employees fairly and through due process.

Secretary Kempthorne underscored during his very first day at

the Department his unwavering and unequivocal commitment to

maintaining an ethical, accountable and effective work force in

44

service to the American public. We are dedicated to fulfilling that

expectation.

Over the past 5 years, I believe our record is one of significant

management improvements and commitment to integrity in the

Department. We recognize that each day brings new challenges

and requires renewed vigilance. We remain today, as in the past,

committed to that vigilance.

Let me turn first to the matter of off-shore leases and the missing price thresholds in the 1998 and 1999 leases that occurred

under the previous administration. Royalty incentives were established in the Deepwater Royalty Relief Act passed by the Congress

in 1995 to encourage development of new supplies of energy by promoting investment, particularly in high-cost, high-risk areas.

Deepwater leases issued by the Minerals Management Service in

1996, 1997 and 2000, after the enactment of the act, included price

thresholds. Leases in the 1998 and 1999 leases during the previous

administration did not. All deepwater leases issued since March 15,

2000 do include price thresholds that eliminate royalty relief when

oil and gas prices are high. At today’s prices, royalties are due on

any production from these leases. Every lease issued in this program under this administration includes price thresholds.

The Inspector General’s investigative report may shed more light

on the timing and awareness by all relevant individuals of the actions taken in 1998 and 1999. We look forward, as you do, to that

report.

Under our supervision, the situation that occurred in 1998 and

1999 has not happened again, and we are working to make certain

that it will not happen during any future administration. Currently, under new practices that we have invoked, each proposed

and final notice of sale and associated royalty suspension provisions document now receive detailed review and scrutiny to ensure

completeness and accuracy, especially from a price-threshold perspective.

The Minerals Management Service has formalized a process of

conducting all reviews in writing through the use of e-mails and

places paper copies of those e-mails in its official lease sale file as

a record of these reviews and decisions. As Secretary Kempthorne

recently told Chairman Davis, the Department has no interest in

hindering in any way the investigation into this matter, which occurred under the previous administration and which we look forward to receiving the IG’s report on.

We believe we have in place a system today under which the

events of 1998 and 1999 would not occur. If there are recommended

improvements that we have not yet made, we certainly and absolutely will consider them. The Inspector General’s testimony uses

the 1998 and 1999 royalty relief issue as a context to raise broader

assertions about the Department of the Interior and its management culture. The Department takes seriously any matters in

which accountability and integrity of employees and the Department are questioned.

We strive to address these matters consistent with specific circumstances and in accordance with the law. We take seriously recommendations identified in audits. Let me give you some examples.

Consider financial management. In 2001, we inherited 170 mateVerDate 11-MAY-2000 12:31 Oct 30, 2006 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 D:\DOCS\30328.TXT HGOVREF1 PsN: HGOVREF1
45

rial weaknesses in program or financial controls. Since that time,

four new weaknesses have been identified, but we have corrected

or downgraded 170 weaknesses. In addition to financial audits, we

record all management and other recommendations generated by

Interior’s Office of the Inspector General, and we track those actions to address those recommendations. We strive to address these

recommendations issued by the Office of the Inspector General.

Recently, when the Inspector General raised to me personally

concerns whether corrective actions were being fully completed to

address his office’s findings, I immediately asked the department’s

Office of Financial Management, which tracks those recommendations, to provide a status of them for those recommendations issued

in 2004 and 2005, and to work with the IG to reconcile any differences.

Many issues raised by the Inspector General pertain to ethics.

When Secretary Norton assumed office in 2001, the Inspector General reported to her the results of a 1999 management assessment

of the ethics program. Subsequent to that, and in consultation with

the Office of Government Ethics, the department made significant

changes to its ethics program. A new director of the departmental

ethics office was selected and the office was moved to the Office of

the Solicitor.

During this administration’s tenure, the department’s ethics office has grown in stature from being an office centered on narrow

delivery of service to individual employee questions, to a broader

mission of ensuring soundness of all bureau ethics programs and

departmental initiatives. Under the leadership of Secretary Kempthorne, the Department continues to strengthen these efforts to

meet the highest standards of ethical conduct.

Among Secretary Kempthorne’s very first actions on day one in

the department was a meeting with the ethics office and with our

Inspector General. Over the past 5 years, I and other senior department leaders, have met regularly with the IG and have advanced many management improvements based on his reports and

our own initiative.

For example, in 2002 the Inspector General found fault with the

Department’s appraisal methodology for land transactions. The Department concluded that significant restructuring was necessary

and consolidated the appraisal functions performed by bureaus in

a new departmental office, responding to criticisms that have endured previously for some 50 years. The new unified Office of Appraisal Services enhances consistency and efficiency, and guards

against conflict of interest problems.

Among matters of particular interest to the Inspector General

are those pertaining to conduct and discipline. We take seriously

workplace infractions and inappropriate conduct. The Inspector

General has noted a perception by employees that a significant

amount of misconduct is not being reported, and that discipline is

administered inconsistently and unfairly in the department. We

take these findings very seriously and have prepared a comprehensive action plan to address the Inspector General’s recommendations. With a large and dispersed work force, we know that we

must constantly strive for and we are dedicated to that effort.

46

We are also committed to maintaining an efficient work force

that operates with integrity. For example, the Interior Department

has created a detailed policy regarding Government-issued credit

cards. We have put system controls on all accounts, require training for all card-holding officials and established reports to monitor

activity.

We have a process in place to refer suspicious activity to the Inspector General. We have created account controls by placing authority and spending limits on accounts. The department’s chargecard management team also worked with a bank to create a series

of electronic reports that help us identify potential misuse, manage

delinquency and track spending.

When problems are identified, the Department takes the appropriate action, including removing employees from Federal service.

I believe that our overall record has yielded significant management improvements that benefit the American public. In an organization with the size and reach of the Interior Department, indeed

a size that rivals that of a small city, unanticipated and unacceptable decisions and actions may sometimes occur. We take those actions seriously and take actions to address them.

I would be happy to answer any questions you might have at this

time.

[The prepared statement of Ms. Scarlett follows:]

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

Chairman TOM DAVIS. Thank you very much.

In your written testimony, you state the price thresholds are discretionary for deepwater leases. If this is the case, what legal review occurred with the 1998 and 1999 deepwater leases? What I

am asking is were there attorneys at Interior who analyzed the

leases themselves to determine whether the Secretary had exercised his discretionary authority to include price thresholds? Or if

the Secretary had deliberately decided not do to so?

Ms. SCARLETT. Mr. Chairman, I will ask Johnnie Burton, the Director of Minerals Management Service, to answer the detailed

questions about the 1998 and 1999 leases.

Chairman TOM DAVIS. That is fine.

Ms. BURTON. Thank you, Mr. Chairman.

We are not sure what happened. We did look at it, and we arrived at some conclusions, but because we could not actually be

sure what happened in 1998 and 1999, this is why we asked the

Inspector General to run an investigation and tell us what he could

find. We don’t have his report yet, but I can tell you what we saw

from our perspective.

What we did see was in 1995, Congress passed a Deepwater Royalty Act and it had to be amended right away. There was an interim rule that was put together where the price threshold had to

be determined. That takes quite a bit for the Economics Division

to arrive at the proper level, and so they had decided at that time

in 1996, shortly after the bill was passed, to put the price threshold

in an addendum to the lease. By the way, someone asked who

writes the lease. The lease is a form we get from OMB. We don’t

write it. This is a standard Government form.

So if we have very specific provisions for that lease, which is the

case for royalty rate, for a cap on what is acceptable as a bid, for

rental, etc., we put that in an addendum to the lease. So in 1996,

it was put in an addendum to the lease prior to the rule, but as

the rule was being developed, it also was placed there in 1997.

By early 1998, January 1998, the rule was final. The rule was

issued. Now, this is all conjecture on our part, but what we can see

is that in 1998 when the rule was issued, there were no thresholds

in the rule. The staff had been used to putting the threshold in the

lease. However, when the rule became final, that same staff assumed that the threshold would be in the rule because it had been

discussed. What they didn’t know is that the associate director of

the off-shore program had made the decision not to have the

threshold in the rule, but continue having it in the lease. And there

was, so far as we can tell, miscommunication between those two

units.

What I wanted to know is whether or not that miscommunication

was intentional or not. This is why I asked the Inspector General

to run an investigation. He has kept me apprised.

Chairman TOM DAVIS. We had him up here yesterday.

Ms. BURTON. So you know he has not finalized it.

Chairman TOM DAVIS. A critical question that this just begs is

whether the Secretary at the time intended not to exercise his authority to include the thresholds. Do we know the answer to that?

Ms. BURTON. We do not, sir. I don’t know what Secretary Babbitt

decided at that time.

63

Chairman TOM DAVIS. OK. We have the IG report coming and

we are going to be doing more on that. You are present now at

lease negotiations, aren’t you?

Ms. BURTON. Yes, sir.

Chairman TOM DAVIS. Would you have been in a better negotiating position had you renegotiated the leases when the missing price

thresholds were discovered in 2000?

Ms. BURTON. I am not sure I can answer that question, sir. I

don’t know what the previous directors did.

Chairman TOM DAVIS. Let me ask you this. Would we have been

in a better position had we disclosed these problems in 2000 instead of hiding them for 5 years?

Ms. BURTON. I suppose we could have been in a better position

if they had realized what mistake had been made. It seems to me

that when they realized it in 2000, I don’t know how they handled

it. Did they think it was a mistake? Was that done by the Secretary? I don’t know.

Chairman TOM DAVIS. Can you give me the status? Mr. Markey

raised this in his comments. Mr. Issa has raised it. What is the status now of negotiations with oil companies concerning the lease

price thresholds? They came before the subcommittee under oath

and, oh yes, we will renegotiate. What is the status right now? Can

you give us a broad status?

Ms. BURTON. Yes, sir. I have been contacted either by phone, by

letter, or in person by roughly 20 companies. I think I have personally spoken, I mean, they came to the department maybe about 10

of them. We have developed an agreement, a standard agreement

for them to come to attach to their share of the lease. They are

thinking about it, and we are still talking to them, so we are right

in the middle of the discussions.

Chairman TOM DAVIS. Does this include all the companies? I

mean, some of these have leases that aren’t producing anything.

Some have leases that are producing a lot. Does this include everybody? Is there anybody who isn’t coming to the table?

Ms. BURTON. Out of 55 companies, we had about 20 that contacted us. Now, what I don’t know at this point is whether the others that did not contact us, whether their leases have been relinquished, whether they have expired, so I don’t know.

Chairman TOM DAVIS. We need an inventory of all these leases,

who is renegotiating, when they expire, and that will give us a

pretty quick line, and then Congress can decide if we need to take

action. We may not be able to come back and look at the current

leases, but we have power over future leases and other things we

can do.

I just think it is just, with the price of oil having gone up so significantly, and the companies making record profits and so on, that

this is an appropriate time for them to show some faith and give

back a little bit for the royalties and the omissions in the earlier

leases. We can exhaust it ad infinitum today, but what we need is

a chart showing the status of this, who is talking, who isn’t talking,

and then we will work with you I think to completion.

Ms. BURTON. And you might be interested, Mr. Chairman, in

knowing that about 17 of those leases are producing today. Roughly

27 have indication of discoveries, but we don’t know whether they

64

are producible or not, and nothing has happened on the others.

Over 400 have already been turned back into the pool, which

means they will be released.

Chairman TOM DAVIS. And all the new ones, of course, you have

priced thresholds in?

Ms. BURTON. Oh, yes, sir. And we have thresholds on all of them

since 2000.

Chairman TOM DAVIS. I would note there is an ongoing IG investigation on the Oregon issue, and GAO is doing an in-depth review

of raw data and assumptions in the MMS revenue projection, so

hopefully we can all work together to get to the bottom of this. This

literally is millions of dollars for the Federal treasury, literally, so

we are trying to get this resolved as quickly as possible.

Mr. Waxman.

Mr. WAXMAN. Thank you, Mr. Chairman.

Yesterday, the Inspector General for the Department of Interior,

Mr. Devaney, issued a scathing indictment of senior officials in

charge of the department. He discussed ethics failures on the part

of senior department officials. He discussed department leaders’ refusal to take any action against those officials or to change the ethical culture of the department. He discussed how top Interior officials disregard the IG’s findings, responding to serious allegations

by trying to discredit or undermine his office’s work. He discussed

the ongoing evasive and corrosive nature of these problems and

how they are destroying the morale of agency employees and the

trust of the American people.

Ms. Scarlett, in your testimony, you say you disagree with the

IG’s characterization of your department. Let’s take his concerns

about ethics failures in high-level officials. What has the department done in response to specific incidents raised by the Inspector

General?

Ms. SCARLETT. Yes, thank you, Congressman. I meet regularly

with the IG every week or every other week. We go through various of his recommendations and vigorously strive to implement

them as fully as we can. While I can’t talk in this public setting

about the specific personnel matters which seem to be at the root

of some of his comments yesterday, concern about recommendations made on the disposition of investigations of individuals, I will

say, for example, that in one recent instance where he investigated

various people associated with a programmatic failure and recommended actions on eight individuals, three of the individuals actually left the department before we had an opportunity to act, but

in the other cases we took actions on all five.

Mr. WAXMAN. Let me ask you this. You say you can’t discuss

some of these matters because they are personnel matters and are

not public. But the Inspector General thought some of the conduct

was so egregious that it was appropriate to make the matter public

so the names and violations are already out there. Are you trying

to tell us that you can’t publicly discuss the department’s response

to some of these public allegations?

Ms. SCARLETT. I am not aware in his testimony that he addressed specific individuals.

Mr. WAXMAN. Well, let me tell you about specific cases. For example, in November 2005, the IG released a report on the tragic

65

death of a 16 year old at the Chemawa Indian Boarding School.

The IG found that the inaction on the part of senior officials was

a significant factor in the death, and he recommended administrative sanctions. According to the IG, there was a historical pattern

of inaction and disregard for human health and safety at this Government facility. He pointed to senior officials in the Bureau of Indian Affairs who were repeatedly told of these problems, but failed

to take action that might have prevented this death, as well as the

endangerment of countless other students. Was anyone fired in

that incident?

Ms. SCARLETT. That is the specific incident actually that I was

referring to. In that particular instance, there were eight individuals that were identified. As I noted, several left before the report

was completed, and we took action in the instance of the other five.

We proposed dismissal actions. As you are aware, through due

process requirements, employees have an opportunity to appeal,

and through that process some alterations in the ultimate disposition occurred, but we believe we followed through on the IG’s actions as appropriate.

Mr. WAXMAN. So none of them were actually fired because they

asked for their due process rights, and then you had a plea agreement with them?

Ms. SCARLETT. I believe that there were some recommendations

for dismissal, but I would have to go back and check specifically.

Mr. WAXMAN. Was anybody suspended without pay?

Ms. SCARLETT. I would have to check on that specific matter.

Mr. WAXMAN. Anyone demoted?

Ms. SCARLETT. Again, as I said, we took action on all eight, including recommendations for dismissal. I would have to go back

and see the specifics of how many were either dismissed and/or demoted.

Mr. WAXMAN. Well, it is curious that you knew about this specific

incident, but aren’t prepared to give us the facts of it. A girl died

and there were no real consequences. I think the IG’s concerns

about the Department’s lack of response are pretty compelling.

Let me ask you about another example. Earlier this year——

Ms. SCARLETT. Congressman, I have it right in front of me. Specifically, discipline actions were proposed on five of the eight employees named in the IG report. In the other three cases, no actions

could be taken because the subject employees no longer worked for

the Bureau of Indian Affairs. Indian Affairs proposed the removal

of two other supervisory employees in addition to those listed as

culpable in the IG report. After the appeal period, one was exonerated and the second was removed. So that is the detail of that specific case.

Mr. WAXMAN. So one was actually fired, successfully?

Ms. SCARLETT. No, sir. I said five of the eight had actions taken

against them. Of the two supervisory, one was found not culpable

and one was dismissed. The details of the five others, I would have

to find, sir, specifically the actions.

Mr. WAXMAN. Well, my time is up, so perhaps you could put it

into the record. I would like to know what actions were actually

taken in the incident.

Ms. SCARLETT. We will do that for you.

66

Mr. WAXMAN. Thank you.

Mr. ISSA [presiding]. Thank you, Mr. Waxman.

I am sure we are going to need a second round here. This is informative for us, and I hope you will understand that we share in

the responsibility. I don’t think on this side of the dais, anyone is

implying that your failures aren’t also the failures of our oversight

committee, of the laws and rules and regulations, even the process

for terminating employees.

On one question, though, on those eight employees, as far as you

know, all of those employees would be eligible to work in the Federal Government today? None of them are barred from starting

somewhere else and continuing their Federal career. The ones who

quit, the ones who had reprimands, even the one who was fired can

basically go somewhere else and be back in the Federal system in

a substantially similar role. Isn’t that true?

Ms. SCARLETT. Sir, I don’t know the details of that. In response

to Congressman Waxman’s larger question, we will add that response as well.

Mr. ISSA. I appreciate that, because that may be part of our oversight we need to change.

Director Burton, in what year did you learn of the failure of

these price thresholds to be in the contracts?

Ms. BURTON. In 2006.

Mr. ISSA. OK. So basically you were one of those high-ranking

executives that never got the word because it was sequestered at

a lower level. Is that correct?

Ms. BURTON. I am not sure I would phrase it that way, sir. I

think I would say that I didn’t know about it because I arrived at

the department in 2002, which was 4 years after this happened.

Mr. ISSA. And 2 years after the discovery had been made that

they were missing, at lower levels.

Ms. BURTON. But the people that knew about it were no longer

at the Department.

Mr. ISSA. Your Solicitor, Milo Mason, is at the Department today,

madam.

Ms. BURTON. Yes, he is. He doesn’t work for me. He works for

the Solicitor. I did not review all the contracts that were issued before I arrived at the Department and there was no reason for me

to ask of those specific years. I had no idea something was wrong

with them.

Mr. ISSA. Isn’t it true that, based on what the IG told us yesterday, that there were three people who were suspected of knowing

it? There was testimony that one of the three had been told. My

understanding is one of the individuals made a sworn statement,

took a polygraph and passed it, saying I am not the one who knew.

One made a sworn statement and refused to take a polygraph, and

one refused to make a sworn statement and refused to take a polygraph. Aren’t all three of those individuals, as far as you know, still

working, and in this case, they are under your side of this problem?

Ms. BURTON. I do not know who they are.

Mr. ISSA. We will get you the names.

Ms. BURTON. I found out about this by reading the IG’s testimony yesterday, but I don’t know who they are. I assume if he said

they are still working there, they are.

67

Mr. ISSA. This is one of my concerns, is that they continue to be

in a position. This is something for our committee to look at, I am

sure, as much as you. When somebody refuses to make a sworn

statement before this committee, we don’t let them testify. To be

honest, as far as we are concerned, they shouldn’t work any longer

for the Federal Government if they are not willing to tell the truth

under oath.

It appears as though that is not the case, under current rules of

some of your fiduciaries that you deal with every day that have

these responsibilities.

Mr. BILBRAY. Will the gentleman yield?

Mr. ISSA. Yes.

Mr. BILBRAY. It is not that they just refuse to testify. They are

at the epicenter of the coverup.

Mr. ISSA. Absolutely.

Mr. BILBRAY. They are at the epicenter of the coverup. They fingered three people. One did testify, not only under oath, but took

a lie detector. One testified, but wouldn’t take a lie detector, and

one refuses to do anything. I think the astounding thing to all of

us on both sides here is we have a multi-billion mistake, albeit it

was made before your watch, but nobody has been fired. Nobody

has been reprimanded.

Mr. ISSA. I will give you just two of the names. We are going to

get the third one for you, but Marshall Rose and Larry Slaznick.

Do you recognize those names?

Ms. BURTON. Marshall Rose, certainly. He is the chief of the Economics Division. The other person, sir?

Mr. ISSA. Larry Slaznick.

Ms. BURTON. Slavsky.

Mr. ISSA. Slavsky, yes.

Ms. BURTON. OK.

Mr. ISSA. We will get you the third name. We are concerned because when there is that kind of clout, and I am only talking about

the two who refused to take a polygraph, and certainly the one who

refused to even give a sworn statement. I would have a hard time,

and I have different rules for my employees, but I would have a

hard time allowing somebody to be in that kind of position of trust

when they basically say, oh no, I am not going to take a statement

for which I could be held to a perjury standard. I can understand

that. I just can’t understand them still working for me in those positions of trust.

I realize you don’t have the ability to terminate Milo Mason, but

I am very concerned about something that the Secretary said. I am

sorry, that Director Burton said, you said that a Deputy Director

made the decision not to put it into the regulations. What was the

name of that Deputy Director?

Ms. BURTON. The only thing I know, sir, is that I read a letter

that was written, I think in 2001, by a lady named Carlita Colauer,

who was there before I was there, so I don’t know her, but she was

Associate Director for OffShore. There is a paragraph in her letter

that says that the decision was made not to put the threshold in

the rule, to preserve flexibility to follow the market, so something

to that effect. I am paraphrasing because I don’t know the exact.

Mr. ISSA. OK. We would like to have that letter.

68

Ms. BURTON. Sir, it was sent to you.

Mr. ISSA. OK. We would like to have a copy of it so we can compare it with the stack of papers, because it appears as though we

are, and I will tell you specifically that Milo Mason did not under

oath, was not able to give us the name of somebody who said that

this wasn’t to be included. Just the opposite, he talked in terms of

policy as though policy preempted the orders of the Congress. He

wasn’t able to give us the names. He talked in terms of, and to be

honest, this is, Madam Secretary, why your statement that you

have made reforms doesn’t work.

The Solicitor today is still basically telling us when he testified

here that you walk down the hall and you tap somebody on the

shoulder and you ask them for a legal opinion, they give it to you,

and you record nothing in writing. That is what was said here. I

am paraphrasing, but that is what was said here. No, there are no

e-mails. No, there are no memorandums of record. No, we don’t

keep paper on it. That is part of our problem at this committee.

When we ask for a paper trail or something from the fiduciary, the

lawyer who works for the U.S. Government, for the people of America, says, no, as a matter of course, we don’t keep the paper.

So that is our challenge, is that is not corrected as of testimony

before my subcommittee just a matter of about a month ago, with

Congresswoman Watson who, since my time is up, I am going to

grab a second round, but I very much want her to ask her questions because we have worked on this together hand in hand. I am

going to close just by reminding you, from this Member’s perspective, this is not about the oil. It is not about the money. It is about

the trust of the American people in the agency that you operate.

We will work with you hand in hand to recover substantially all

of the money that might otherwise have been lost in whatever way

necessary, working within contract sanctity, with the oil companies. That is a promise from this person, and I have a better than

average chance of being reelected, so I expect to be here. But we

have to move beyond the question of the money on both sides of

the aisle. This is about you leaving the agency that you are responsible for, and the entire Department of Interior as a place in which

people can be proud, that coverups don’t happen, that when a problem occurs, a mistake happens, it is quickly rectified.

With that, I would yield to the gentlelady from California, Ms.

Watson.

Ms. WATSON. Mr. Chairman, I just want to thank you for identifying the issue. You remember we had that conversation several

weeks ago. We got on it. We have had four hearings. What is confounding me is that this goes back 8 years. Why have we not corrected this and addressed this issue? And why have we not been

able to recap those dollars that belong to the public?

I just can’t understand why this bureaucracy cannot resolve this

issue and get the money back. Can one of you respond? What is

the inertia there?

Ms. SCARLETT. Congresswoman, I believe we are responding.

There are several issues that you allude to. First, all leases——

Ms. WATSON. Wait a minute. Would you address the 8 years that

it has taken to come to today, please?

Ms. SCARLETT. Yes, that is exactly what I intend to do.

69

As soon as it was discovered that the 1998 and 1999 leases had

no price thresholds in them, all subsequent price leases have included, since 2000, price thresholds. So that part of the issue, as

soon as it was illuminated, has been rectified. All leases that we

now undertake do address that.

With respect to any renegotiation of the past leases, we do not

have authority in a mandatory way to do that. But what we did

do as soon as we, again, found that those 1998 and 1999 leases had

no price thresholds, we began to appeal for the companies to come

in and discuss with us renegotiation of those leases. That process,

as Johnnie Burton described, is underway. So those are the two

issues.

Ms. WATSON. Again, let me ask about that, because in our last

hearing I was very pleased that at least one of the large oil companies did step forward. I mentioned it after their testimony. If several of the companies are willing to start sitting down and negotiating, what is your perspective on the time it would take? It just

seems to me irresponsible that it has taken so long. We know the

issue. We hear it over and over, every time we have had a hearing,

the same thing.

I am getting a little tired of it. Tell us when we can resolve this?

Ms. SCARLETT. I appreciate the concern. Let me say that we are

actively at the table discussing renegotiation of the leases as we

speak. Because we are doing this in a voluntary context, it is a

back and forth, and I cannot give you a precise date. We are actively in those negotiations. I will turn to Johnnie to give you more

detail.

I will also underscore that when the 1998 and 1999 lease issue

came to our attention, which was, as Johnnie Burton said, just in

2006, we immediately asked for an IG investigation so that we

could understand what went wrong and rectify or remedy the processes that led to that.

Ms. WATSON. Let me just stop you. We know all that. We have

heard it over and over again. I am wondering why the administration is opposing giving Congress, or giving you the right to leverage, to be able to renegotiate? Where is the inertia? Who is stopping you? Why is it that the witnesses would not come and testify?

What do you think?

Ms. SCARLETT. Well, we are actively renegotiating on a voluntary

basis those leases. The administration has significant concerns, and

indeed sent up a statement of administration position opposing

mandatory renegotiation.

Ms. WATSON. Hold on. Why do you think they have done that?

Ms. SCARLETT. I am about to describe the justification for that.

These contracts, like all contracts, reside at the bedrock of a reliable Federal Government as they enter into, whether it be a contract to supply weaponry equipment, whatever it might be. It is

very important that we uphold the sanctity of those contracts so

that the Federal Government and its word when it signs a contract

can be relied upon.

Now, we are very actively engaged in voluntary negotiations.

Ms. WATSON. Yield, please, on that point, the sanctity of these

negotiations. Explain what you mean.

70

Ms. SCARLETT. No, I said, the negotiations. Of the contract itself,

a contract is a written and signed agreement, and it is extraordinarily important because those contracts are part of many, many,

many other contracts that the Federal Government makes. As a reliable business partner, anybody who enters into any future contracts with us has some sense of security that contract in fact will

be honored.

Ms. WATSON. Yield, please. On that issue, we are talking about

1998 and 1999.

Ms. SCARLETT. And on the 1998 and 1999 leases, we are actively

working on renegotiating on a voluntary basis those leases.

Ms. WATSON. Yes, Johnnie.

Ms. BURTON. May I add something, Congresswoman? As I said,

I have been talking to several companies. I didn’t want to give any

names because when you are in negotiation, it is not always smart

to do that. However, I know one of the companies is very close to

signing an agreement, and that is Shell Oil. They are one of the

major owners of leases offshore. The lawyers are now finalizing the

agreement. So we are working on it.

The reason it takes so long is because it is such a complex type

of contract that has many partners in it. So the companies have to

check with their, you know, they have to worry about their shareholders. They have to worry about their partners, etc.

Ms. WATSON. I need to ask the Chair a question.

Chairman TOM DAVIS [presiding]. Sure.

Ms. WATSON. Does the renegotiation void old contracts? Would

not the old contract apply? We just want to be back——

Chairman TOM DAVIS. Well, the old contract is law. That was the

underlying law that governs at this point. Should they renegotiate

and reach a new agreement, of course, that would abrogate the old

agreement. There is no legal obligation to do that. There are certain incentives that either we or Interior can offer them.

Plus, I think the light that shines on this can be a great disinfectant on this whole thing, and bring them back to the table. I

mean, they are making record profits at this point, if they have a

loophole in here that they claim under oath here they didn’t intend,

that this didn’t come from them. So hopefully, they are in good

faith.

Did you want to add anything to that, Ms. Burton?

Ms. BURTON. I think you are absolutely right, Mr. Chairman. We

are not renegotiating the contract. We are having a separate agreement that will be attached to that contract, and the agreement will

be that the company agrees to come back under the threshold and

pay royalties.

Ms. WATSON. Yes, what I understand, and I can be corrected on

this, the Markey legislation would say, well, if you don’t want to

renegotiate, then you shouldn’t get a new contract.

Chairman TOM DAVIS. That is right, but current contracts would

stay in effect. What we are working on right now is trying to look

at the current contracts and come back. The oil companies, many

of them have expressed a willingness to do this. So that is why I

asked where it was. That is why I have asked for the chart.

Before I proceed, I just want to share my grave concern that we

have employees who may or may not have made the mistake, eiVerDate 11-MAY-2000 12:31 Oct 30, 2006 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 D:\DOCS\30328.TXT HGOVREF1 PsN: HGOVREF1
71

ther in the original negotiations or in the coverup. But people make

mistakes, OK? I make mistakes. I know Mr. Issa, I don’t know if

you do, but the rest of us, I mean, we make mistakes.

The key here is it is done, but what we are trying to find out

is what happened and get information. If an employee who has

been fingered as being part of that mistake then refuses to give a

statement under oath or to take a lie detector test, that is a grave

concern to us. I understand their lawyers are probably telling them

a lot of different things, but at the end of the day we have to be

able to govern accordingly. We have to have employees to fess up,

then we can move on, that’s all, and somebody can be fired.

Somebody who refuses to cooperate in investigating a coverup,

that is a major, major problem that I think may be systemic

throughout the Department, and may not be just to these leases.

All right. We are ready for a second round. I will start with you,

Mr. Issa, and then I have more questions.

Ms. ISSA. Thank you. I will just pick up where we left off. I appreciate this, Mr. Chairman.

Just a quick statement. From my recollection, some of the oil

companies who were most willing to renegotiate explained to us,

and Ms. Watson probably will remember this as I say it, that they

have in fact entered into some negotiations where these thresholds

not being there meant that their partner in the actual drilling or

in some other aspect, had a contractual expectation of receiving

money from dollar-one that envisioned not having a 12.5 percent

payment to us.

So I certainly can understand why it is complex, that they have

to either get their partners onboard or in some cases I imagine, I

don’t want you to disclose your negotiations, but I would imagine

they maybe saying we can’t give you a royalty on the part that we

have already given away to a sub, but we will pay you on everything else. I can understand that. When we make a contract that

is faulty, they may have in good faith, up until 2000, we could have

just said, look, it is faulty; let’s fix it.

Unfortunately, we reiterated in a sense that they were good with

those contracts for a number of years. They relied on, oh, it’s OK

to act on those contracts the way they are, looking back. That is

why we are having this investigation now, it is that in 2000, when

it was discovered, nobody said, oops, we are going to have to renegotiate that; we are going to have to figure out a way.

Because as a businessman, 20 years in business, when it would

have cost me nothing, and I am on the board of a public company,

when it would have cost the company nothing other than a hypothetical what if, because the price threshold hadn’t been met, it

would have been easy to say, oh, we always thought it was; let’s

correct it. I am not even sure it would have come to a public company’s board to make those corrections.

I can imagine in no uncertain terms that every public company’s

board is dealing with this personally on every one of these leases.

There is no chance under Sarbanes-Oxley that the board is not figuring out who is going to sue them for settling with us, which I

do expect that some lawyer will sue these companies for giving in

to the Government the 12.5 percent that they really do owe.

72

I have a couple of questions. First of all, the third name, so you

have it, is Dan Henry.

Ms. BURTON. That doesn’t ring a bell. I am sorry.

Mr. ISSA. Well, that is the third name, from our records, of the

three that we are dealing with. I think publicly we will not say

which ones took and didn’t take, but obviously there is one good,

one mediocre, and one bad out of that crowd, in our view.

I want to go back to the policy question, though. This letter,

which I checked with my staff, I am sure we received it, but in the

pile we did not pick out that one paragraph, and we now want to

focus on that paragraph, of that letter. If an associate at some

level, upper-management, but certainly not in 1996 and 1997,

1998, 1999, the Secretary of the Interior, said that was policy. If

I understand correctly, at that level, you don’t make policy. Policy

comes from the top down. Is that correct?

Ms. BURTON. Associate directors are really upper-management.

They usually run their policy calls to the director. If it is a substantial policy call, it is run up through the Secretary. At least that is

the way we work now.

Mr. ISSA. Exactly. So in light of what we see today and how you

work today, the idea of not putting something in that clearly Congress said we want to have these price thresholds, we want to empower you to have them, but basically saying you get a free ride,

period, no matter where the price went, at least potentially in the

rulemaking, that policy could well have gone to Secretary Babbitt

at the time. Is that right?

Ms. BURTON. Yes.

Mr. ISSA. So we need to find out where that policy came from,

and that is why it is helpful if we can have this associate director’s

name, which we will get out of it. To be honest, we now want to

continue up and find out where that policy decision was made.

Ms. BURTON. Mr. Congressman, we have not been able to trace

it beyond that letter. That is the only thing we found.

Mr. ISSA. Is that person still alive?

Ms. BURTON. No.

Mr. ISSA. Oh.

Ms. BURTON. She wrote that letter to a company in response to

a company complaining that we, the Government, Department of

Interior, did not have the right to put thresholds in. She answered

saying they are not in the rule because we made the decision not

to have them in the rule. They would be in the leases, but the Secretary has the discretion to decide what the thresholds will be and

whether there will be any.

Mr. ISSA. Was that Kerr-McGee that sent the letter?

Ms. BURTON. No, but it was the same issue. It was before KerrMcGee, and this was another company.

Mr. ISSA. OK.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you very much.

Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

Ms. Scarlett, I have a list of the 56 companies that hold 576

leases let in 1998 and 1999 that remain active. Which of these 56

73

companies are the 20 that you say have actually responded to your

letter inviting them to renegotiate?

Ms. SCARLETT. Yes, I will turn to Johnnie for that, who has been

actively discussing with those companies that issue.

Ms. BURTON. Congressman, I think I was asked by another member to provide, and by the chairman, to provide a matrix of all

those companies and where we stand.

Mr. MARKEY. We have asked for that, but if you can answer that.

Ms. BURTON. Off the top of my head, I can give you some names,

but I know I am going to leave some out.

Mr. MARKEY. Let’s move down to the next level. Which of the 20

who have responded favorably so far, of the 20 who did respond,

how many of them have responded favorably to you? Yes, they will

renegotiate?

Ms. BURTON. I know Shell Oil is ready to sign. That is Shell. BP

is close behind. I can’t really tell you because the others we are still

talking. I don’t know how close they are. It is difficult when you

are negotiating.

Mr. MARKEY. I understand. But you are saying that, who are the

10 of the nearly 10 that have actually met with you on scheduled

meetings? Do you have those off the top of your head?

Ms. BURTON. I can give you some names, but I am not sure that

it is appropriate to give you names when I am still negotiating

with them. They may walk away. I don’t know.

Mr. MARKEY. I guess what I am trying to get at here, there are

56 companies altogether, and they range from A, Amerada Hess, to

W, Woodside Energy. So you have 56 companies, 20 have responded, 10 have met with you, and what you have said so far, 2

it sounds like, are renegotiating with you, out of 56.

Ms. BURTON. We are talking to nearly 20. We have been contacted by nearly 20 companies. We are talking to about 10.

Mr. MARKEY. Yes, so less than half have responded, and of those

so far you are only able to name two who are renegotiating.

Ms. BURTON. The only reason I named two is because I know

these two companies have told me I could say it. The others have

not given me that permission, and because I am negotiating——

Mr. MARKEY. Well, tell me, how many other companies are renegotiating, without giving their names? Are actually renegotiating, how many others?

Ms. BURTON. Those 10 are at the table.

Mr. MARKEY. Are all negotiating?

Ms. BURTON. Yes.

Mr. MARKEY. OK. So one-fifth of the companies are renegotiating, and I guess you could say 10 out of 56, maybe 1 out of 5 ain’t

bad in some realms of life, but here when you are talking about

potentially billions of dollars of taxpayers’ money, if all they recover is 1 in 5, that would not be a good situation.

So I guess what, in response to a question from Chairman Davis,

you said right now 17 of the leases that lacked priced thresholds

are producing today, and an additional 27 leases have indications

of oil or natural gas being present, meaning that they could start

producing soon. How many of these 44 leases have been renegotiated to include price thresholds?

74

Ms. BURTON. I am sorry. I am not sure I understood your question. You want to know how many have been renegotiated? Well,

none. We are talking right now.

Mr. MARKEY. Exactly. OK.

Ms. BURTON. You know, some of the folks we are talking to hold

a good deal of those leases, so it depends on who we are going to

reach an agreement with that may cover more or less of the production in the leases. They don’t have exactly the same amounts.

Mr. ISSA. Would the gentleman yield?

Mr. MARKEY. I would be glad to yield.

Mr. ISSA. Would you give us an estimate of the 700 leases, because you said 400 of the 1,100 were turned back in, of the 700

leases, these 10 companies roughly, how big a part of those 700

leases do they represent? A substantial portion, disproportionate

perhaps for the total number?

Ms. BURTON. It is probably a fairly good amount of the leases are

represented by those. The ones that have been relinquished obviously are no longer in play. The companies we are dealing with are

most likely the ones holding the leases that are still active, or most

of them active, but I can’t give you a number at this point.

Mr. MARKEY. I thank the gentleman.

So we are looking at 1998 and 1999. We are trying to find out

what went wrong, and that is very important to us, to find out

what went wrong. Now, you have less than 20 percent of these oil

companies who are negotiating with you. So my question to you,

Ms. Scarlett, is why does the Department of Interior and the Bush

administration continue to object to the Markey-Hinchey amendment, to give you the leverage you need to get every one of these

companies to the table, so that you can provide the relief?

I mean, there was a big mistake that was made. We have to get

to the bottom of that. But you also need a solution. What I am

hearing today is I don’t hear a solution. I hear something that is

very nice, but without the leverage that the Government would

need in order to bring them all to the table.

Why do you continue to object to this language that was passed

in a bipartisan manner in the House and in the Senate?

Ms. SCARLETT. Congressman, let me first underscore a point that

Congressman Issa made and that Johnnie Burton was making.

While there are 55 companies and 20 of them have come forward

to us and we are actively discussing with 10 of them, that does not

represent 1 in 5 of the actual production activity.

We believe that the companies we are negotiating with, of the active leases still covered by the absence of price thresholds, that we

have likely the majority of production. So this constitutes significant progress if we successfully renegotiate these leases.

Mr. MARKEY. I think that is the key phrase: If you successfully

conclude negotiations. So what I am asking you is, why don’t you

want this additional leverage? That will help your negotiating position. It won’t affect any of these companies since they are going to

reach an agreement with you anyway. Why do you object to getting

this extra leverage? Otherwise, these negotiations could go on for

years before you actually resolve it.

You don’t have any guarantee that you are going to reach a deal

with any of these companies. In fact, it is very likely they are tryVerDate 11-MAY-2000 12:31 Oct 30, 2006 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 D:\DOCS\30328.TXT HGOVREF1 PsN: HGOVREF1
75

ing to run out the legislative clock this year so that this bill doesn’t

pass. They stop it, and then they just drag it on for another 2

years. Why don’t you want the leverage? What is it about the Bush

administration’s relationship with oil companies that stops you

from saying, give us the leverage to correct this huge injustice

against the American taxpayer?

Ms. SCARLETT. Congressman, I appreciate your concerns. We are

actively renegotiating the leases. We believe we will be successful.

Mr. MARKEY. Why are you objecting to this additional leverage?

Why don’t you want it?

Ms. SCARLETT. We do have concerns, as indicated in the statement of administration policy, about any actions that would in a

mandatory fashion either directly undermine contracts. We think

the honoring of contracts itself is an important bedrock principle of

law.

Mr. MARKEY. Again, let me just re-state it one more time. This

does not change any existing contract. It only deals with future

contracts. OK? You keep saying that this is going to deal with the

reliability of existing contracts. It does not. This amendment only

says that you now have the discretion in future contracts as to

which companies you are going to deal with. Why don’t you want

that leverage?

Chairman TOM DAVIS. I think you have asked, and I think she

has given the answer she is going to give, but I appreciate the

question. The gentleman’s time has expired.

Your testimony describes common tensions between centralized

control of the bureaus and their mission-specific needs. That is

something the IG has dwelt on. Would a more centralized control

at Interior be beneficial to managing the department’s programs?

Ms. SCARLETT. As I indicated in my written testimony, the tension in any large organization between deciding how much centralization and how much decentralization is a constant and common management challenge.

Chairman TOM DAVIS. It is. But look, at Interior you have had

problems on the Indians in terms of Indian recognition rights. This

has been well documented. You have had problems here. I mean,

it just looks to me like there needs to be adult supervision across

the board here. Am I missing something?

Ms. SCARLETT. Congressman, we have many, many, many different programs, some of them very specific to particular statutes

and particular missions. We have taken steps to centralize those

activities where we believe the activity would benefit from that

kind of coordination. Specifically, through 25 recommendations

made by our Inspector General, we actually created a centralized

department Office of Law Enforcement and Security to bring common practices and procedures for all of our law enforcement entities within the department, which number some close to 4,000.

I did not the appraisal services, which used to be distributed

throughout our bureaus. We centralized that into a single office.

Likewise, with our information technology, we have done significant centralization of purchasing and management, again to address some of the IT security issues that have been noted.

76

So we are looking at specific management problems and taking

that management tack, whether it be centralization or strengthened coordination, that seems appropriate to the task at hand.

Chairman TOM DAVIS. I believe we have expressed the concerns

in terms of what has happened. We haven’t really satisfactorily explained the coverup. Ms. Burton, when did you first learn about

this? You came in 2002, right?

Ms. BURTON. I came in 2002, and I heard about those 2 years

with no threshold in early 2006, maybe at the very end of 2005.

Chairman TOM DAVIS. Did you ask why it took so long to come

up to you through the ranks?

Ms. BURTON. I don’t think the ranks realized that they needed

to tell me about it. This was an issue that happened previously,

and they felt the Secretary, it was not an illegal issue.

Chairman TOM DAVIS. No, but it cost Americans billions of dollars.

Ms. BURTON. Absolutely.

Chairman TOM DAVIS. And let me just say this, on something

like this as you go through a review, to me it is incredible that

someone wouldn’t have brought this to the attention. Evidently,

they brought it to the New York Times before they brought it up

through the ranks. Maybe they felt they couldn’t do it with the current department structure.

Ms. BURTON. Oh, no.

Ms. TOM DAVIS. Well, tell me about it. The earlier you learn

about this, the earlier you can renegotiate. In fact, if we were renegotiating in 2004 instead of 2006 before the oil prices came up,

think of the billions of dollars that we would have gotten.

I also want to add, for Mr. Markey, we have asked for a chart

in terms of all of the different leases, which ones are actively being

drilled, which ones aren’t, and we will be happy to share that with

you when we get it, and then have an idea of whose negotiating,

just to try to get some handle on this.

I guess the concern is ordinarily we would say that the department do what it will, but in this particular case, obviously, without

I think additional congressional oversight, a lot of this would not

have been done, without the increased scrutiny.

It is difficult for us to get up here and have to make tough

choices over money for school lunch programs, over money for student loans, over money for additional transportation, just by the

way, because someone somewhere within the Department of Interior decided they didn’t want to have price thresholds on this thing

and billions of dollars are now out the window. That is the concern.

I think we would not be doing our job if we weren’t here asking

the questions.

To me, the fact that some of the employees involved in this won’t

at least come forward and talk about what happened so that we

can figure out and make it quit from happening again. And then

what Mr. Markey is talking about is if you can’t get these leases

renegotiated, I think Congress is going to have to re-think, House

and Senate, in terms of putting pressure on these companies to do

something else.

If you come forward and you renegotiate the leases without Mr.

Markey’s amendment, that is great. I mean, I think we can preVerDate 11-MAY-2000 12:31 Oct 30, 2006 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 D:\DOCS\30328.TXT HGOVREF1 PsN: HGOVREF1
77

serve the contract integrity and everything else. But if you are unsuccessful, believe me, with this much money on the table, I think

the legislation may be even more to your un-liking, because this is

just a lot of money. Do you understand what I am saying?

Ms. BURTON. I certainly do, Mr. Chairman. We share your concern, believe me.

Chairman TOM DAVIS. Ms. Burton, look, we are both aware that

GAO is conducting an in-depth review of the royalty revenue projections and the loss of royalties as a result of the 1998 and 1999

mistakes. GAO is doing that. The projections you have made are

based upon raw data and assumptions provided to GAO. My understanding is that an initial read of those data and assumptions

probably does not bode well for the department.

You tell me today that you are going to do whatever is necessary

so the American people get what is owed to them in this course,

because these resources at the end of the day, these are the American people’s resources. Will you tell me you will do everything you

can to try to get this right?

Ms. BURTON. Absolutely, sir. And we are working hard on it, and

we appreciate your help to get there.

Chairman TOM DAVIS. OK. Thank you.

We have another round. Mr. Markey.

Mr. MARKEY. I thank the chairman very much.

Again, I just want to zero in on this issue. We have to look to

discover whether or not there was a coverup. But we also have to

make sure that we don’t have an ongoing stick-up of the American

taxpayers. We have to solve this and solve it now. The Department

of Interior only began this process under pressure from the Congress. This had sat there as an issue for years.

So I remain perplexed at the reluctance of the administration to

accept this leverage, which the Congressional Research Service

makes quite clear does not violate in any way the contract and

would serve as the answer to the question which you have in terms

of this problem. Let me read to you again on this issue. The Congressional Research Services says this on May 18th: ‘‘As we stated

in our telephone conversation of May 17, there do not appear to be

any constitutional impediments to the proposed amendment. Enactment of this amendment would not constitute a taking of existing leaseholders rights, but would merely establish a new qualification for potential leases. It has long been recognized that the Government has broad discretion in determining those firms with

which it will deal.’’

Again, I continue to hear your objection to receiving this leverage, while I don’t hear from you any agreed-upon deals with any

of these oil companies. From a taxpayer’s perspective, I just think

that it is irresponsible to refuse to support the additional leverage

which would enhance the likelihood that these oil companies would

come to the table, so that you can protect the taxpayers.

It just seems inexplicable from a public interest perspective that

you would oppose having this additional leverage, because the oil

companies are still in a situation where they only have to voluntarily come in, knowing that a terrible deal was cut back in the

1990’s. I still haven’t heard a good explanation from you why you

don’t want to do that.

78

Ms. BURTON. Congressman, we agree this is not a taking. What

it is is a strong leverage, as you call it, to essentially change the

terms of a contract in order to continue business in this country.

And this administration feels that this goes to the heart of the

sanctity of contracts.

Mr. MARKEY. Again, I just read to you from the Congressional

Research Service.

Ms. BURTON. You are talking about two things, sir.

Chairman TOM DAVIS. This is a policy call. I mean, their policy

call is, as I understand it, is the inequality of bargaining power balanced here. Is that the administration’s view?

Ms. BURTON. That is correct, sir.

Chairman TOM DAVIS. I think it boils down to, if they can renegotiate these leases without it, great. But let’s see what happens.

Mr. MARKEY. We have already seen the results. They are sitting

there. They have no results.

Chairman TOM DAVIS. They are still working on it.

Ms. SCARLETT. I think the most important results we have to underscore are, from 2000 and forward, including every single lease

in this administration, we have had those price thresholds. Therefore, for the taxpayers, those revenues are forthcoming as we speak

on all those issues. And that is a critical point.

Mr. MARKEY. I will say this right now. We will have a solution

to the Middle East crisis before you get BP and Shell to agree to

a $36 a barrel threshold. That will never happen unless you accept

this additional leverage. Never.

I think you are sitting down there continuing a policy that allows

the oil companies to maintain the whip hand in the negotiations

with the public. I think that this administration should put their

thumb on the scale to even-out this negotiation process because

otherwise they are enjoying windfall profits that are historic and

unlikely to be discontinued unless you accept this additional power

on behalf of the public.

I just think that you are operating in a completely delusional

way, reflecting the likelihood of these oil companies surrendering

these huge profits. In fact, they have a fiduciary relationship. They

have a fiduciary responsibility to their shareholders not to surrender those profits. Whereas you have a fiduciary responsibility to

the American taxpayers to reclaim them.

I don’t think in the absence of your accepting this power and removing your objection to the passage of the legislation, just waiting

for your say-so, that you will have to show a little responsibility of

losing billions of additional dollars that could have been used to

provide education and healthcare for the American people. I think

that will be on your shoulders.

Chairman TOM DAVIS. Let me ask, before I let Mr. Issa sum up,

let me ask very briefly. Are we close to any agreements with these

companies?

Ms. BURTON. I believe we are very close with Shell and BP. I

don’t know about the others yet.

Chairman TOM DAVIS. OK. How much active drilling are they

doing at this point?

79

Ms. BURTON. They are very active in the Gulf, both companies.

I don’t know how many on those particular leases. I am trying to

get all the companies who have leases——

Chairman TOM DAVIS. That is fine. We need the chart. We just

need to have a chart so we can follow it.

Ms. BURTON. Yes. I will get that to you, Mr. Chairman.

Chairman TOM DAVIS. And the leases that have been negotiated

from 2004 is great, but most of those aren’t being used at this

point. It takes time once the lease is signed, doesn’t it, and to get

the oil from the ground. Is that right? So this would be in the future.

Mr. Issa.

Mr. ISSA. Thank you. I will try to sum up.

There is a famous quote: What did you know and when did you

know it? We certainly remember that from our youth. I know you

are too young to remember the 1960’s, but I sort of do.

Ms. SCARLETT. I might even remember the 1950’s. Thank you,

Congressman.

Mr. ISSA. It doesn’t show.

I would appreciate if, as you are going through your own evaluation, Director Burton, you told me that you didn’t know until 2006.

I would like to know, and I would really appreciate it if you would

provide us with a similar chart of who knew when. Now, the IG

is going to provide quite a bit, but I think the fact that people

clearly knew and made the changes, and yet we have this whole

void of people who, between the ones who made the changes when

the discovery was made, and the time it got to you in 2006. I find

it hard to believe that there wasn’t a chain bubbling up of an

awareness by more and more and more people of this, even if it

was at the water cooler.

So I would appreciate if we could get an understanding of how

this thing morphed to where in 2000, people figured out there was

a change, under the previous administration, a problem. They

changed it, and it took until 2006 to bubble up to you. So I would

appreciate understanding that better because that has been one of

the illusive things is who knew what and when, and we would like

to fill in what we don’t have.

Madam Secretary, I think particularly, the Solicitor does fall

under your watch. Is that correct?

Ms. SCARLETT. The Solicitor is in the Office of the Secretary, of

which I am a part.

Mr. ISSA. OK. I need to know when you are going to do the reform of that office, because this committee and my subcommittee

found it very clear that reform has not happened yet, that they are

still doing water cooler, no memo for the record, kind of dealing.

That clearly was one of the points at which this failure occurred

and would not otherwise have occurred in spite of all the other

things that happened.

Ms. SCARLETT. Congressman, we are in fact looking at the Office

of the Solicitor and its management and those processes, and how

to improve them in terms of that approval process.

Mr. ISSA. And now I will use one other quote that I am probably

not qualified for, and that is, and now the other part of the story.

I voted against Mr. Markey’s amendment, as I recall. I believe in

80

contract sanctity and I don’t believe his solution is fair. What I do

believe, though, from the discovery of our committee, is that this

is much less like a contract that you negotiated, and now you are

back saying, but the deal changed because the price changed. This

is much more like a triple-net lease for a building, and then the

roof falls in, and you are trying to figure out, well, did you think

the triple-net meant you fix the roof? Or did you think this was a

triple-net where you thought the landlord was going to fix the roof?

Before our committee, multiple oil companies, perhaps some of

the largest by far, testified that they thought the thresholds were

in the contracts when they signed them, meaning that they paid

a price to the Government, sort of like how much you lease a building for, depending upon whether or not you think you are going to

have to fix the roof. They bid on these contracts transparently as

though they were still in, because the bidding prices in their own

testimony didn’t change.

So when you are negotiating, and Johnnie, I think you are probably face to face with these people, I disagree with Mr. Markey because I don’t think it is about whether the price went in. I don’t

think it is about cajoling them. I think it is about saying, come on,

folks, if you believe that it was in there, you believe you signed it.

We believe that the Government was supposed to have it in. We

believe this is the kind of a failure that should not be taken advantage by either party.

I would hope that in your negotiations, you would say, look, if

the Government thought it was supposed to work this way, and it

was to your favor, and you came back to us, we would be having

the discussion exactly the same, which is, the intent of a contract

is part of the contract. And you go back often, even though you

have a written agreement, and I was recently deposed on one

where I had an agreement in court codified by a U.S. Federal judge

in which I gave a license to somebody. And wouldn’t you know it,

they wanted to have me testify as to what I thought I gave them

8 years later, because it does matter. What you think you got and

what you think you gave matters.

So I believe that is a strong point, and that is the reason I didn’t

vote for Mr. Markey’s amendment, is I believe you have the ability

to negotiate in good faith, based on original intent of both parties.

I believe you will be successful, and I also believe world peace will

come in the Middle East. But I believe that your settlements will

come sooner because I believe one company signs, that will be the

model for all of them.

Thank you, Mr. Chairman. And thank you for holding this important hearing.

Chairman TOM DAVIS. Thank you.

And Mr. Markey, thank you as well.

I would just add, I am not sure where I was on Mr. Markey’s

amendment. As I recall, I had other interests to protect in that bill.

You did vote for it? OK. I get it right once in a while.

The purpose here is to give you some leverage as you sit down,

and also to give the companies, who I think want to do the right

things, but have that fiduciary duty he talked about to their shareholders, to be able to come forward and get the right thing done.

81

But good luck as we move forward. I look forward to getting the

charts from you.

Ms. BURTON. Yes.

Chairman TOM DAVIS. This is an issue we are going to continue

to, well, we will watch it, continue to investigate, and probably do

further hearings.

Thank you very much. The hearing is adjourned.

[Whereupon, at 12:30 p.m. the committee was adjourned.]

Æ