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ROYALTY RELIEF AND PRICE THRESHOLDS III

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JULY 27, 2006

Serial No. 109–238

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

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

BRIAN P. BILBRAY, California

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

THOMAS ALEXANDER, Counsel

LORI GAVAGHAN, Clerk

SHAUN GARRISON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on July 27, 2006 ............................................................................... 1

Statement of:

Couvillion, J. Keith, deepwater land manager, Chevron North America

Exploration and Production Co., a division of Chevron U.S.A., Inc.;

Gordon R. Cain, deepwater land manager, Chevron North America

Exploration and Production Co., a division of Chevron U.S.A., Inc. ........ 5

Cain, Gordon R. ......................................................................................... 10

Couvillion, J. Keith ................................................................................... 5

Oynes, Chris C., Regional Director, Gulf of Mexico Region, Minerals

Management Service, U.S. Department of the Interior; and Charles

J. Schoennagel, Jr., Deputy Regional Director, Gulf of Mexico Region,

Minerals Management Service, U.S. Department of the Interior ............. 27

Oynes, Chris C. .......................................................................................... 27

Schoennagel, Charles J., Jr. ..................................................................... 34

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

Cain, Gordon R., deepwater land manager, Chevron North America Exploration and Production Co., a division of Chevron U.S.A., Inc., prepared statement of ........................................................................................ 11

Couvillion, J. Keith, deepwater land manager, Chevron North America

Exploration and Production Co., a division of Chevron U.S.A., Inc.,

prepared statement of ................................................................................... 7

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

California, prepared statement of ................................................................ 2

Oynes, Chris C., Regional Director, Gulf of Mexico Region, Minerals

Management Service, U.S. Department of the Interior, prepared statement of ........................................................................................................... 29

Schoennagel, Charles J., Jr., Deputy Regional Director, Gulf of Mexico

Region, Minerals Management Service, U.S. Department of the Interior, prepared statement of .......................................................................... 35

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 21

(1)

ROYALTY RELIEF AND PRICE THRESHOLDS

III

THURSDAY, JULY 27, 2006

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY AND RESOURCES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2154, Rayburn House Office Building, Hon. Darrell Issa (chairman

of the committee) presiding.

Present: Representatives Issa and Watson.

Staff present: Larry Brady, staff director; Lori Gavaghan, legislative clerk; Thomas Alexander, counsel; Dave Solan, Ph.D. and Ray

Robbins, professional staff members; Joe Thompson, GAO detailee;

Shaun Garrison, minority professional staff member; and Jean

Gosa, minority assistant clerk.

Mr. ISSA. Good morning. I will now call the meeting to order.

The Chair will make a couple of short announcements. One is

that with the consent of the ranking member, we will begin and

she will be arriving momentarily. Second, there are a number of

votes, both on the floor potentially and also in one of the judiciary

committees. So we may have to recess very briefly for those votes,

but we will continue until the completion of both panels.

Additionally, I am going to take the extraordinary measure of

asking unanimous consent, and we will ratify it when the ranking

member is here, to have all opening statements placed in the

record, and I will include my own. As many of you know, this is

the third in a series, really almost fourth in a series of hearings

including this one. I want to minimize for those who have already

heard the history of the Deepwater Relief Threshold hearing exactly the same thing. So that will be ratified when the ranking

member arrives.

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

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3

4

5

Mr. ISSA. With that, I would like to ask both our first and second

panel to stand and be recognized for the oath, which is required by

the committee’s rules, also the second panel and anyone who is

going to assist any panelist.

[Witnesses sworn.]

Mr. ISSA. And the record will reflect that all answered in the affirmative.

Briefly, and again, we will place the entire statement in the

record, this hearing today is the result of earlier hearings, including one that brought about the awareness by this committee of

communications between Chevron, which volunteered the information that we will hear more about today, and the Department of Interior. We followed up, received the record of that, and today we

will try to get more detail for the committee to make the record

complete.

With that, our first panel today starts with Mr. Keith Couvillion,

Deepwater Land Management, Chevron North America Exploration

and Production Co., a Division of Chevron USA; and Mr. Gordon

Cain, deepwater land manager, Chevron North American Exploration and Production Co., a Division of Chevron.

I want to thank you both for being here. Once again, your entire

statements will be placed into the record, and you are free to use

it or, to be quite candid, if you want to add, embellish or change,

that would be very much appreciated. We would like you to please

try to keep your opening remarks to about 5 minutes to leave time

for questions.

With that, Mr. Couvillion.

STATEMENTS OF J. KEITH COUVILLION, DEEPWATER LAND

MANAGER, CHEVRON NORTH AMERICA EXPLORATION AND

PRODUCTION CO., A DIVISION OF CHEVRON U.S.A., INC.;

GORDON R. CAIN, DEEPWATER LAND MANAGER, CHEVRON

NORTH AMERICA EXPLORATION AND PRODUCTION CO., A

DIVISION OF CHEVRON U.S.A., INC.

STATEMENT OF J. KEITH COUVILLION

Mr. COUVILLION. Thank you, Mr. Chairman. I do have a brief

statement that I would like to make.

Mr. Chairman, on behalf of Chevron, I wish to express our appreciation for this opportunity to appear before this subcommittee to

discuss the Department of Interior’s deepwater royalty relief program. As requested in your invitation to testify, my testimony addresses discussions with Mr. Chris Oynes, MMS regional director

for the Gulf of Mexico, and his staff, regarding deepwater royalty

relief and the omission of price thresholds in the 1998 and 1999

deepwater leases.

I am a member of the American Association of Professional

Landmen’s Outer Continental Shelf Committee, which is known

now as the OCS Advisory Board. This committee meets several

times per year to discuss the most important OCS issues. For many

years, members of the OCS committee have also met periodically

with MMS to discuss a variety of offshore topics. I participated in

a number of these meetings with MMS in the period from 1998

through 2000.

6

In 1998, after a review of the deepwater leases purchased that

year, we discovered that the addendum detailing the terms of royalty relief was not included in those leases. This issue was briefly

raised during a portion of a fall 1998 AAPL OCS committee meeting attended by representatives of MMS’ Gulf of Mexico regional office. Mr. Oynes advised that the addendum was no longer necessary because MMS had finalized its royalty relief regulations,

which were now incorporated by reference in the 1998 leases.

Until a meeting with MMS in 2000, when they advised us that

the 1998 and 1999 deepwater leases did not contain price thresholds, we were under the impression price thresholds applied to all

those leases.

It is important to understand that the price threshold issue was

only briefly discussed with MMS during the late 1990’s. Because oil

and gas prices were low, price thresholds were never a major topic

of discussion in this era. From my perspective, the most important

royalty relief issue at the time was whether or not MMS would extend the deepwater royalty relief program beyond the year 2000.

Consistent with Chevron’s previous commitment to meet with

MMS to discuss the price threshold issue, we are scheduled to meet

with MMS tomorrow. We look forward to working with them to

achieve a fair and equitable outcome for all concerned.

Thank you for the opportunity to be here to testify. I am happy

to answer any questions you may have.

[The prepared statement of Mr. Couvillion follows:]

7

8

9

10

Mr. ISSA. Thank you.

Mr. Cain.

STATEMENT OF GORDON R. CAIN

Mr. COUVILLION. Mr. Chairman, on behalf of Chevron, I wish to

express our appreciation at having the opportunity to appear before

the subcommittee to discuss certain aspects of the Department of

Interior’s deepwater royalty relief program.

I am not currently a member of the American Association of Professional Landmen’s Outer Continental Shelf Committee. Mr.

Couvillion is now the Chevron representative on the committee.

However, in 1998, 1999 and 2000, Mr. Couvillion was the Texaco

representative and I was the Chevron representative. My recollection of what transpired at the AAPL OCS committee meetings is

consistent with Mr. Couvillion’s. In 1998 through 2000, a time of

low oil and gas prices, price thresholds were a non-issue.

I note that when Chevron acquired leases in 1998 and 1999, we

were under the impression that price thresholds applied. However,

we made significant investment decisions after 2000, following

MMS’ clarification that price thresholds did not apply.

As Chevron has committed, and Mr. Couvillion has told you

today, we look forward to meeting with the MMS tomorrow.

Thank you for the opportunity to be here to testify. I am happy

to answer any questions you may have.

[The prepared statement of Mr. Cain follows:]

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12

13

14

Mr. ISSA. Thank you. I want to thank both of you and your common company, previously two companies. Because I do think that

often in the public arena we don’t see companies, knowing that

they could tie something up in court, knowing that in fact they

might even prevail and not have to pay an amount because of a

technicality, come forward and say, as you have said here today,

that you bid on these contracts understanding that there was a

threshold, you made investments after being told there weren’t, but

you are still willing to negotiate an amicable middle ground in

order to maximize the fairness to the Government, in addition to

obviously being responsible to your stockholders. The ranking

member, when she arrives, I am sure will say the same thing she

did in the last hearing, it does our hearts good to see that kind of

proactive corporate behavior.

With that, I would like to go to a series of questions. I guess a

lot of it is basically, for today’s hearing between the two panels.

When you met with Mr. Oynes, what was his reaction when you

told him that only you could sort of give us, you and the others in

the room, when you said, ‘‘Look, we have a problem, we have discovered that you don’t have price thresholds, effectively a will of

Congress that we were all aware of?’’

Mr. COUVILLION. Well, the meetings that we had were all

through that AAPL OCS committee. The committee, as I said in

my testimony, we meet periodically to discuss major offshore issues

and have for years. We also meet periodically with the MMS.

At one of the MMS meetings, the 1998 meeting, is the first time

this issue came up. The reason it was brought up is, we normally

talk about a lot of topics. This one was a fairly insignificant topic,

and it was posed as a question to Mr. Oynes and his staff. The

question was, in the 1996 and 1997 leases, there was an addendum

attached to the leases that detailed the pricing thresholds, the volume suspensions and the field application of royalty relief. Those

are the three major components of the deepwater royalty relief program.

In the 1998 leases, the addendums were gone. So we questioned,

why were the addendums left off. And the response from Mr. Oynes

and his staff was, it was no longer necessary. They had completed

their finalization, they had completed their rewrite of the regulations or actually the writing of the regulations for deepwater royalty relief, and now they were referencing those regulations in the

leases. And they were referencing also the Deepwater Royalty Relief Act itself. So they didn’t see the need for it.

That was a very acceptable offer and answer for us.

Mr. ISSA. And perhaps more of an impression, this was said with

conviction, I know this to be true, got it handled, it wasn’t one of

those, ‘‘Well, it may be as high as it is tall and as broad as it is

wide?’’ It was, ‘‘No, you don’t have to because of this, next question?’’

Mr. COUVILLION. No, no. It was just a general question, the conversation maybe lasted, as I recall, a couple of minutes. It was insignificant and it wasn’t something that was—it was more of a

matter of fact, and we said fine. Agreed.

15

Mr. ISSA. Sure. I realize that if the price remained low, we

wouldn’t be having this hearing today, even though it had been left

out.

When was your next meeting? Or can you describe some of the

subsequent meetings in which anyone from MMS or Interior was

there but particularly Mr. Oynes?

Mr. COUVILLION. Well, we have, with the AAPL OCS committee,

we have subcommittees. The subcommittees tend to meet with

AAPL periodically, or excuse me, with MMS, more than the big

whole AAPL OCS committee. Normally the OCS committee itself,

the big committee, only meets once a year with the regional office

and once a year with the Washington office. But we do try to meet

as a smaller subcommittee, and we call that the liaison committee,

maybe three to four times a year. It varies, but normally at least

three times a year. That is made up of a smaller group of people.

I don’t recall if it was the larger committee meeting or one of the

smaller committee meetings, that in 1999, the next year, when

after going back through the leases in 1998 and some of the 1999

leases, we still noticed that there was no addendum, and we were

puzzled. And we brought up to the MMS a question. We reviewed

the Deepwater Royalty Relief Act, we reviewed the regulations

under Title 30 Part 260, that apply to this vintage of leases, and

we were struggling with where the pricing thresholds were.

We saw that the pricing thresholds were embedded in Title 30

of Part 203, which was the other regulations that had been written,

but we couldn’t find it in 260. So again, we posed a brief question

to Mr. Oynes and his staff, that, ‘‘Can you help us, show us where

the royalty relief pricing threshold language is?’’ We still think it

applies, we just don’t know where.

Mr. ISSA. OK. Do you remember anyone other than the second

panelists that were in those meetings? You said ‘‘and their staff.’’

Were there two or three or four or more?

Mr. COUVILLION. Well, on the first meeting, in the 1998 meeting,

we did, I did find some minutes from that particular meeting. They

were in November, I think November 13, 1998. And in that set of

minutes, it lists the members of the AAPL OCS committee that

participated and it also listed the MMS personnel that participated

in that meeting.

Mr. ISSA. OK. So that was a pretty large meeting?

Mr. COUVILLION. Yes, sir.

Mr. ISSA. So you are being as clear as can be, but the nature of

the beast, I am going to reflect it back to make sure that I get it

and the record gets it. In 1998, you bring up the fact that the

addendums are gone, you get told, ‘‘Don’t worry, it is in this other

part.’’ In 1999, you bring it up and say, ‘‘We are sure it is in the

other part, but can you show us, because we can’t find it?’’ Is that

roughly it?

Mr. COUVILLION. Yes, sir.

Mr. ISSA. OK. Did you or anyone to your knowledge do the sort

of the natural correspondence with other companies besides the

two of you that are now one about this particular area, whether directly or through your trade association?

Mr. COUVILLION. No, sir, I don’t remember discussing it in great

detail with the committee. But we did, at our committee meetings

16

without MMS, talk about the pricing threshold issue. It was not

just a Texaco, at the time, Chevron issue. This is one of the matter

that we would have talked about briefly and debated. Because I

had asked the question to the other people, too, ‘‘Can you help me

with finding the price thresholds?’’

Part of the reason it is, I am the one that was signing a lot of

these leases for Texaco. So I was very concerned about the provisions of the lease and any differences for year. We are signing a

standard form lease and the addendums are the changes to those

leases. So when we change the addendums, I am concerned.

Mr. ISSA. What you are saying is that when on behalf of your

company you signed on something that affects hundreds of millions

or even billions of dollars, you take it seriously?

Mr. COUVILLION. Yes, sir.

Mr. ISSA. I am not surprised that in the private sector that occurs. It is probably why you still have your job.

Mr. COUVILLION. I hope. [Laughter.]

Mr. ISSA. I am sure.

Obviously we have talked about 1998, and I asked about the reaction. In 1999, when this was brought up, same sort of thing, only

this time you are saying, ‘‘Where is it, what was the reaction?’’

Mr. COUVILLION. Well, the same thing happened, the staff said,

‘‘Well, we will look at it and check into it.’’ It was a very brief conversation. If I had to guess, well, I hate to speculate about capturing it in the minutes, because in 1998, it wasn’t captured because

it was insignificant. And I would know, I was the secretary of the

committee in 1998. That is why I have a copy of those minutes.

And it wasn’t in those minutes.

So in 1999, again, it was an insignificant thing and we were

waiting to hear back from MMS.

Mr. ISSA. And it was fairly insignificant, but you remember it

and your staff that were present remember it?

Mr. COUVILLION. Yes, sir.

Mr. ISSA. And this is conjecture, but I think it is appropriate, although insignificant, would you expect staff that were there on behalf of MMS remembered it, too?

Mr. COUVILLION. I can’t speak for MMS.

Mr. ISSA. Let me ask you another question in a different way, because I want to be fair. In the past, when you have mentioned

things like this, but in other examples, anecdotally, does the staff

generally followup, even though it is not in the minutes, to questions that come up? Do you typically get followup and response

from things that would be similar but not this example?

Mr. COUVILLION. As an example, when we have meetings with

the MMS, at the committee level, we normally talk about, and I am

just going to speculate here, from 8 to 20 topics. Some of those topics are extremely important to us.

In the 1998 timeframe, we had very important issues in the OCS

that we were dealing with. And this was not one of them. On

things that are not that significant, when MMS gets back to us,

they get back to us. It is not that important. On those issues that

are of major concern to us, especially at the time, Texaco, then

there is followup questions, followup meetings.

17

Mr. ISSA. Thank you. In 1998, 1999, level one, I don’t see it in

the addendum, level two in 1999, I don’t see it in all the places

that you said it was going to be, or at least in the place it would

need to be. How about beyond that? What was the next opportunity

that you remembered this being brought up?

Mr. COUVILLION. Well, in the year 2000, after the first 2000 lease

sale in early 2000, we noticed when we were issued our leases, that

the addendum was attached again. I thought that was kind of

strange. But I looked at the addendum, and it was a little bit different from the addendum that was attached to the 1996 and 1997

leases. It now referenced the Code of Federal Regulations, Title 30

Part 260, which is where the volumetric thresholds are and where

the field application piece is. But that didn’t have pricing thresholds in it.

But in that addendum, it did list now the specifics of the pricing

thresholds. So at a meeting with MMS, and again, I don’t have any

notes that say when, I don’t have my day planner any more from

that year, we discussed that, we asked, OK, what happened. Now

we have 1998, 1999, we didn’t have the addendums. Now we have

the addendums, but the addendum references the regulations, references the Deepwater Royalty Relief Act, and now it has pricing

thresholds. That is when we first learned that the 1998 and 1999

leases, the pricing thresholds, it was an oversight in the way the

regulations were written, and pricing thresholds did not apply to

those leases.

Mr. ISSA. I am not responsible for trying to make the private sector work. So as much as I appreciate a lot of the things we are

learning here, I have to focus on what makes Government work.

That is why we get the title Government Reform.

So I will ask you a question as somebody who works with Government, just intimately. Would it surprise you that MMS didn’t

know and that they never talked between the two parties, the solicitor on the other side that was doing this work, so that the statement made that, it is in the other document, was not based on

checking or an actual conversation, or reading the document, but

rather an assumption? And then the people who didn’t put it in

who knew they weren’t putting it in, who made a decision not to

put it in even though it was clear that they could and perhaps

should, never talked? Would that surprise you, knowing the Department of Interior?

Mr. COUVILLION. Mr. Chairman, I have dealt with the various offices of the MMS here in Washington and in Virginia. I have dealt

extensively with the office in New Orleans. I can believe with the

size of the operation that is conducted in New Orleans, with over

8,000 leases, and oh, by the way, Chevron and its affiliates own

over 1,000 of those leases——

Mr. ISSA. Congratulations.

Mr. COUVILLION. I can almost guarantee you that there is some

breakdowns in communications. There just has to be. The operation

running this business for the Government is tremendous. It is

large. And something like this could slip under the radar screen

until it became an issue.

18

Mr. ISSA. Let me ask you just a couple more questions. I want

to note that the ranking member has arrived, and we will look forward to her round of questioning in just a moment.

How many people viewed and initialed or in some other way

signed off on these leases besides yourself?

Mr. COUVILLION. Mr. Chairman, OCS leases are not negotiable.

They are a form. If we are fortunate enough to be awarded a lease

after we are the high bidder, then by specific regulation and by the

final sale notice, we are required to sign the lease and return it

within 11 working days. If we don’t, we lose the lease and we forfeit our deposit of one-fifth of the bonus. So I am the one that signs

the leases. There is no one else that initials off on it.

Mr. ISSA. But how about the checking of the form itself, particularly when there is a change? Because you mentioned that it was

brought to your attention that this addendum was gone and so on.

Mr. COUVILLION. Normally we just review a lease and make sure

it complies with what the final sale notice said.

Mr. ISSA. OK. So I want to paraphrase you one last time. One

person looking at the lease, yourself, perhaps checking for whether

the grid coordinates that are in there that describe the section that

you have leased, makes a decision that this is good to go on this

non-negotiable contract and signs it. And yet, one person, without

anyone else double-checking, so to speak, discovered and brought

multiple times to the attention of MMS that there was a problem

relative to the price thresholds?

Mr. COUVILLION. Mr. Chairman, let me address this.

Because——

Mr. ISSA. I am not doubting you, I am complimenting you.

Mr. COUVILLION. When you said initial off, in our process of approving contracts that we create, in the Chevron organization, in

the Texaco organization, we had a whole series of people that

would sign off on the leases, initial, as you termed, before it was

executed by an officer of the company or someone with power of attorney. In my world, we check to ensure, I have staff that do just

this, they check to ensure that the lease that has been awarded to

us is properly fill out, that all the description is correct, that the

addendums are on there.

Now, as to substance of the addendums, no. But they check to

make sure that the lease is complete before they present it to me

for execution.

Mr. ISSA. The reason I asked the question is that we discovered,

and you have looked at these leases when you get your executed

copy back, there are signatures and initials just endlessly on these

pieces of paper by various Department of Interior employees. It

might or might not surprise you to know that in testimony we discovered that everyone was only dealing with a tabbed insert that

they would be told to look at, and only if it was there, that in fact

we were told that they initialed simply to say, it passed by my

desk.

And even more interesting, since they sometimes can be a foot

deep, they may have only gotten the cover page they signed. So

that is why I wanted to sort of see how it happens in the private

sector, since you have the private sector and the Government, and

19

it appears as though you have two different standards of check to

make sure this is real money.

Mr. COUVILLION. Mr. Chairman, like I said earlier, the issue with

the Federal leases, since they are non-negotiable, it is a take it or

leave it, if we don’t sign it, we lose our one-fifth, we don’t get the

lease. So that is the reality of it.

Mr. ISSA. OK. And I might note for your edification and the

record, a little reminder is up on the board of just how many signatures the Government managed to have and only have apparently

one person reading it and knowing what wasn’t there on the Government side. Just in case you have ever been intimidated by all

those signatures in Government, basically, and I will close off here,

those signatures don’t mean much, is what we have discovered.

But thank you for your signature mattering, and for your bringing this to the attention of the Government, even if they failed to

act.

With that, I would like to recognize the gentlelady from California for her opening statement and a round of questions.

Ms. WATSON. Thank you, Mr. Chairman. Let me be excused for

being late.

I know this is the third in a series of hearings on this matter

that you have called for. I do appreciate the opportunity to discover

the root causes of the problem at hand and address workable solutions. I would like to thank the witness that again have come from

Chevron and Minerals Management Services for appearing today.

We can put you on the hot seat.

I hope that with your help we can move forward in finding concrete answers and solutions to the oil and gas royalty leases during

the years 1998, 1999. Energy use has become a huge issue in this

Congress. And Americans depend on oil and natural gas in our

workplaces and in our homes. They are among our most valuable

natural resources, and efficient management of these resources by

both the public and private sectors is critically importantly to society.

Today, the American consumer is facing record prices for oil and

gas while the oil and gas industries are making record profits. I

saw on TV, did you see it this morning, that ExxonMobil’s profit

was almost over $400 billion.

Mr. ISSA. And to think I sold my stock to come to Congress.

Ms. WATSON. Something was wrong with you, sir. [Laughter.]

Adding insult to injury, the U.S. Government cannot collect the

royalties due for leasing public land to the private oil and gas companies. Errors in the 1998 and 1999 lease contracts could cost our

taxpayers close to $20 billion over the next 25 years. Already the

lack of price thresholds in these leases has reduced $2 billion in

lost royalties owed to the American public. The American people

deserve an explanation for this costly error and maybe a reduction

at the pump, since the profit is so great, and since you made an

error that has not been filled in some time ago. I think you could

give the relief to the American people.

So during this subcommittee’s last hearing, it was alleged that

employees of the Minerals Management Services were made aware

of the error in the 1998 and 1999 leases, yet failed to formally report the problem or take corrective action. So I am sure that those

20

who are testifying today will give us some insight on how we can

implement reform. And hopefully, I hope that you can shed light

on how such a fundamental element of the royalty relief program

could be overlooked for so long, and why it took 2 years to address

this problem.

Whether our work is managing public assets, distributing vital

products or overseeing the services they depend upon, the American public has the right to expect each of us to perform our duties

responsibly. The parties responsible for the faulty leases in 1998

and 1999 have committed a gross injustice to the American people.

This expensive mismanagement of public lands and public money

is unacceptable. We must work together to uncover the origin of

this event, rectify the situation and make sure that this never happens again.

So with that said, I hope that seat doesn’t get too hot for you.

But now that these mistakes have been brought to your attention,

what are your companies doing and what is the Management Institute doing to rectify and to set a limit? And what are you doing

for the American people?

Now, I know that in the kind of industry that is represented here

that the bottom line is the most important thing. But our responsibility is good public policy. So I would like both of you to speak

to what we can do to rectify 1998 and 1999, and what we can do

to go forward.

[The prepared statement of Hon. Diane E. Watson follows:]

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Mr. CAIN. Congresswoman, we are scheduled to have our first

meeting with MMS tomorrow morning on this issue. We are hopeful that a satisfactory resolution for al parties can be arrived at.

Ms. WATSON. Would you let them know tomorrow that you have

two concerned Members of Congress, and others, too, they are just

not here today, that are going to be watching and listening. We

hope you can become a good corporate citizen and relieve American

people, American drivers, American families somewhat.

Mr. Couvillion.

Mr. COUVILLION. Similar to Mr. Cain, we are looking forward to

meeting with MMS to try to resolve this issue and work toward

and equitable and fair resolution. We have not talked with MMS

about this issue yet, so we don’t know what the MMS has to propose.

Like I had mentioned earlier, since the lease is a take it or leave

it proposition, we are assuming that the Government has something to offer, and we are looking forward to seeing what that is.

Ms. WATSON. Also, would you discuss a threshold, should you put

into the provision, some kind of threshold?

Mr. COUVILLION. Ms. Watson, again, we don’t know what the

Government yet is going to propose.

Ms. WATSON. Just bring it up, would you?

Mr. COUVILLION. Oh, yes, ma’am. That is the main reason for the

meeting. We just don’t know what else.

Ms. WATSON. Thank you, Mr. Chairman.

Mr. ISSA. Thank you.

I will just do a quick second round. Because the gentlelady

wasn’t here for the one part, and it is very important that I think

all of us understand that there is kind of an oddity in business, in

that although you assumed that there were price thresholds and

planned on it in your bidding process, Chevron, Chevron-Texaco,

has now made investments and partnerships in some cases where

you have extended dollars based on the assumption there were

none because of that period 2000 until some time more or less

when we began the inquiries.

Is that roughly accurate?

Mr. COUVILLION. Yes, sir.

Mr. ISSA. And I don’t expect you to be a walking green-shaded

budgeteer, but you haven’t drilled yet, at least you haven’t come up

with yielding wells yet. Do you have an estimate of just how significant those post-2000 investments and partnerships, based on

not having a price level, might be? Do you have a feel for the scope

of that?

Mr. COUVILLION. No, sir, I don’t have a feel, but we have approximately 100 leases between Chevron and Union Oil Co. of California, which is now an affiliate of Chevron in the Gulf of Mexico

right now. We have 8 discoveries on those leases, 8 projects, 14

leases, that are involved with the 1998 and 1999 leases.

So the value to us is significant in the Gulf of Mexico. And we

are going to talk about that with the MMS tomorrow. But I cannot

give you a number. I just don’t have that number.

Mr. ISSA. But $20 million or more have been expended in researching, drilling, exploring, putting platforms out, or is that too

low, and it is much greater?

25

Mr. COUVILLION. It would be a lot greater.

Mr. ISSA. Give me a number.

Mr. COUVILLION. I hate to speculate, Mr. Chairman.

Mr. ISSA. Curiosity killed the cat, but satisfaction brought him

back.

Mr. COUVILLION. But I hate to speculate. What I can tell you is

that one of our projects that has been sanctioned by our corporation, we are moving forward, it is a multi-billion project. And it is

only one. And we have eight of them with discoveries.

Mr. ISSA. I can certainly understand why you are so sensitive to

the investment you made at a time in which the Government chose

to tell you that they had made a mistake, but they weren’t going

to ask you to correct it, even though they had discovered it. I want

to close with just that sort of a question. Since you bid based on

the assumption that there were price thresholds, and then when

you discovered suddenly the document you had complained about

multiple times for not appearing to have those thresholds had the

thresholds, suddenly it is back in there with this language that

makes it very clear, when that happened, the Government basically

told you, MMS told you, you don’t owe for thresholds over here.

That was more or less what they said?

Mr. COUVILLION. More or less. It just said the pricing thresholds

do not apply to the 1998 and 1999 leases.

Mr. ISSA. If at that time the kind of meeting you are having tomorrow had occurred, if I understand correctly, if in 2000 when you

saw this new lease, had occurred, at that time, would you have in

fact had made no real investment based on the assumption it

wasn’t in there, because until that day you thought it was in there?

Mr. COUVILLION. That is going back in history and speculating,

Mr. Chairman. But we would have to have talked about it with

MMS. Since I am not aware, at least in my tenure in Offshore, I

am not aware of any leases being amended.

Mr. ISSA. No, I wasn’t speaking to the amending. And I apologize. Between 1998 and 2000, you acted in good faith and bid based

on price thresholds being assumed by your company because you

kept asking and they kept saying, they are in there. It was like the

Prego where you are looking for the meat but you can never find

it in that tomato sauce. But they say it is in there.

In 2000, they came to you and said, it is not in there. On that

day, you had made no investments, on that day you had made no

investments which were assuming that there were no price thresholds, because that was the day they told you, well, the reason this

thing is there is that there are no price thresholds for those 2

years.

So if I can recap sort of the logical thinking, the change in investment occurred when the Government said, we made a mistake

for 2 years, they may not have called it that, and we are not going

to try and do anything about it, just wanted to let you know from

now on it will be there. That is basically what they said, because

they didn’t say, oh, by the way, we need to talk about this 2-year

error.

Mr. COUVILLION. I can’t be that specific. Because we have, like

I said earlier, a thousand leases. The way we explore is normally

26

by multiple leases together with different vintages. We look at all

the leases.

Not having pricing thresholds in some of these leases was not a

major issue for Texaco at the time, because we never thought the

thresholds would be reached. We thought we would enjoy royalty

relief. We were surprised when they were, and very pleased when

the price of oil started to go up, because we were really struggling

in 1998 and 1999 with the price of oil.

So it is a little more complicated than trying to say, just for 1998

or 1999, because very rarely do we drill just one lease. It is normally a lease within what we call a prospect.

Mr. ISSA. Sure. I certainly understand that.

And before we go to the next panel, Mr. Cain, you have been very

fortunate, contrary to the ranking member’s statement, you probably have a very cool seat there. But can you illuminate us any further on particular subjects? Particularly, do you know, and this is

for both of you, do you know of any other contacts made by your

companies or other companies during any of this period that might

have caused someone else at the Department of Interior at any

level to be aware that there was a potential problem?

Mr. CAIN. I am not aware of any other contacts.

Mr. COUVILLION. Mr. Chairman, as far as I know, Texaco didn’t

make an other contacts, but to the regional office. I can’t speak for

my colleagues, because I haven’t quizzed them about this.

Mr. ISSA. OK. And the gentlelady would like do a second round

also. Thank you.

Ms. WATSON. Thank you, Mr. Chairman.

I don’t know if the Markey bill was mentioned earlier. But there

is a bill that has been introduced and you might want to take that

proposal to your meetings tomorrow. The bill would suspend royalty relief when oil and natural gas prices exceed a threshold price:

$34.71 per barrel of oil, or $4.34 per thousand cubic fee of natural

gas.

With respect to existing leases, the bill would require the Minerals Management Service to renegotiate the leases to include

these price thresholds. Any company that refused to renegotiate an

existing lease would not be eligible for any new lease for oil or natural gas on Federal lands. So you might want to think about that,

you might want to respond or just hold, make that presentation to

your various groups and then get back to us on that.

Mr. COUVILLION. Yes, ma’am.

Mr. CAIN. Yes, ma’am.

Ms. WATSON. Smart guys.

Mr. ISSA. I want to thank both of you once again on behalf of this

committee on a bipartisan basis. I want to thank Chevron for volunteering information that has led to, I think, a fuller understanding of what occurred during this period. Although as a member of

Judiciary, I personally am very committed, and I believe the committee is very committed, to maintaining contract sanctity, essentially saying that a properly induced and accepted contract is the

underpinning of American law and American business.

And I, like the gentlelady from California, we have chastised

Russia and some of their former satellites for saying a deal is a

deal unless we want to change the deal, and we will deliver you

27

gas unless we don’t want to deliver you gas, and we will keep you

warm unless you don’t behave right and so on.

I certainly think on a bipartisan basis that you will find that the

Congress wants to maintain what has made our economy so incredibly well, and that is the predictability that an honestly negotiated

contract is in fact a contract that will be upheld, even if it is a benefit to one side or another. I realize that there are a lot of nuances

to this particular set of contracts, but I wanted to make sure that

was on the record.

And one last time, I want to thank Chevron for their willingness

to be a very active and positive participant in this process. With

that, the first panel is excused, and I look forward to hopefully not

having to have any more panels, because I think you have been so

forthcoming with information.

I will ask one unanimous consent, and that is that other members of the committee be able to submit in writing questions to

both of our panelists that could be responded to. Is that agreed to?

Mr. COUVILLION. Yes, sir.

Mr. ISSA. Without objection, it is so ordered. Thank you.

We will take about a minute while the other panel comes up.

I want to thank our second panel for being here today. We have

already dispensed with the swearing-in process. Once again, I want

to thank the Department of Interior for making both of you available. Again, if you can try to have your opening comments to about

5 minutes, a little red light will come on when we would like you

to wrap up.

Mr. Oynes, if you would go first.

STATEMENTS OF CHRIS C. OYNES, REGIONAL DIRECTOR,

GULF OF MEXICO REGION, MINERALS MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE INTERIOR; AND CHARLES J.

SCHOENNAGEL, JR., DEPUTY REGIONAL DIRECTOR, GULF

OF MEXICO REGION, MINERALS MANAGEMENT SERVICE,

U.S. DEPARTMENT OF THE INTERIOR

STATEMENT OF CHRIS C. OYNES

Mr. OYNES. Thank you, Mr. Chairman.

It is a pleasure to be here today. I hope that we can provide some

additional elucidation on how the process worked, or did not work,

as the case may be.

My name is Chris Oynes. My current position is as the Regional

Director for the Minerals Management Service [MMS], in the Gulf

of Mexico Region in New Orleans. I have been the Regional Director or the Acting Regional Director since my appointment in 1993.

This position is part of the Senior Executive Service.

Prior to 1993, I served as the Deputy Regional Director in the

Gulf of Mexico Region in New Orleans. That position I held since

October 1986. I have been an employee of MMS or its predecessor

agencies for about 30 years. In my position as Regional Director,

I manage a staff of approximately 550 employees. As was alluded

to a little bit by the previous panel, the scope of the operations that

I manage is quite extensive. It involves not only leasing but also

approval of plans, inspections for safety and environmental compliance, violation notices and penalties, operations, evaluation of geoVerDate 11-MAY-2000 09:40 Jul 16, 2007 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 C:\DOCS\35339.TXT HGOVREF1 PsN: HGOVREF1
28

logic or resource potential, acceptance of bids from lease sales and

environmental reviews and environmental studies.

Mr. Chairman, that the leases in 1998 and 1999 were issued

without price thresholds was a serious mistake. It is a mistake I

believe that happened because of poor processes in MMS and not

because of any intentional or calculated act. I have provided, and

as you noted, I submitted my testimony for the record. At this

point, this concludes my statement, and I would be happy to answer any questions.

[The prepared statement of Mr. Oynes follows:]

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Mr. ISSA. Thank you.

Mr. Schoennagel, please.

STATEMENT OF CHARLES J. SCHOENNAGEL, JR.

Mr. SCHOENNAGEL. Thank you. It is also a pleasure to be here

today to try and answer any questions that the panel has, and to

try and clear anything up.

My name is Charles J. Schoennagel, Jr. My current position is

Deputy Regional Director for the Minerals Management Service in

the Gulf of Mexico Region in New Orleans. I have been the Deputy

Regional Director since my appointment in August 1998. This position is at the GS–15 level. Prior to August 1998, I served in the

Gulf of Mexico Region for the Regional Supervisor for Field Operations as the Chief of the Office of Safety Management since November 1992.

I have been an employee of MMS and its predecessor agency,

U.S. Geological Survey, since 1973. My 25 years of experience prior

to becoming the Deputy Regional Director were all on the operational side of the house.

I assist Mr. Oynes in managing the approval of plans, the inspection of safety and environmental compliance, violation notices and

penalties, operations, evaluation of geologic or resource potential,

acceptance of bids from lease sales and environmental reviews and

environmental studies.

I will be glad to answer any questions I can.

[The prepared statement of Mr. Schoennagel follows:]

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Mr. ISSA. Thank you.

I must admit that when we ask people to please abbreviate and

their full statement is in the record, we seldom get such great cooperation. Thank you.

Mr. Oynes, in your testimony you used the term ‘‘no overarching

system,’’ and the ‘‘system was totally broken down,’’ as if someone

in the system is at fault for the missing price thresholds, ‘‘I take

exception to that statement. It is individuals that cause a problem

by not following basic procedures or meeting minimum requirements of their job descriptions.’’ There were about 30 surname signatures, they are up there on the screen, on each lease sale, and

you signed more than 600 leases that you knew did not have the

price threshold. I am actually reading it as thought it was still a

quote.

The document up there has all of those signatures on it. But I

believe that in the 600 or so leases that you signed, that you knew

that those signatures were mostly pro forma and that you were the

operating person that had to be responsible for that. Is that pretty

correct?

Mr. OYNES. To a degree, Mr. Chairman. If I might try to clarify.

The document that you had up on the screen previously is what we

call a decision memo. That is, it is a record of the policy level decisionmakers in our Washington office as they make decisions about

the character, that is, what is the area to be offered in an individual lease sale, and the terms and conditions of that lease sale. A

decision memo like that is prepared for both the so-called proposed

notice of lease sale and for the final notice of lease sale.

So the surnames as an example that you referred to I believe are

all Washington level officials. Whereas, once the decision has been

made, that is, the structure of the lease sale has been put together

and the authorization to go ahead with either a proposed notice of

sale or a final notice of sale has been made, then it falls upon the

staff in the Gulf of Mexico region to execute that.

I hope that clarifies things.

Mr. ISSA. A little bit. Sort of like Louisiana mud that is in the

water, you know there is water there, but it looks mostly like

brown mud.

Again, my basic question was, you signed these documents. You

were the one who was in the November 13, 1998 meeting in which

it was asked if these price thresholds, why these price thresholds

weren’t there, and answered that they were essentially in another

part of the implied document by the regulations, and that there

was no problem. And again in 1999, when you were asked, ‘‘Where

are they, we can’t find them?’’ And you and your staff apparently

implied that you would get back with an answer, because you knew

they were there.

All those Washington names that we saw, and we are not going

to put it back up again, we have had testimony that those were pro

forma, that people only looked at them if people before them had

tabbed something particular to look at. Because we have had testimony that these are take it or leave it documents, that even

though they don’t say Ohio standard legal form number 201, that

in fact they are all the same, except for location.

40

So I again want to understand, you said the system was broken.

But I have to ask, the system appears to have been you, your assistant, whoever was signing a particular lease, saying that something was there when it wasn’t, and implying that you knew when

it wasn’t. Tell me why I am wrong here. I really want to know.

Mr. OYNES. First of all, Mr. Chairman, let me go back to the two

meetings with the members of the AAPL. The comments that they

made about what was discussed in the meeting about the price

thresholds, as I indicated in my testimony, I have no recollection

in either one, in the 1998 or 1999, that issue was discussed like

that. I have no recollection that they have made those presentations as they stated that they did.

Mr. ISSA. Mr. Schoennagel, is that the same for you? You were

also in those meetings?

Mr. SCHOENNAGEL. Yes, it is. And let me just state that I had

never seen the 1996 or 1997 leases. The first time I got involved

in this was in August 1998. So my understanding of the leasing

process was extremely minimal when I first got into the job as the

Deputy Regional Director. All of my experience before that was in

the operational side of the house.

Mr. ISSA. Mr. Oynes, you are not saying that Chevron was saying

when they said a question was asked?

Mr. OYNES. Absolutely not. I am just saying that I have no recollection of that conversation as they have laid out.

Mr. ISSA. And you previously answered to this committee, not in

hearing, but answered to the committee that you didn’t remember

anyone bringing it up, until, if I recall from that meeting, the year

2000 when you checked and that is when it got put in the addendum, is that correct?

Mr. OYNES. Right. I didn’t recall that anyone had brought it up

at any meetings. I believe what I indicated to the staff when we

talked, not in testimony, was that some time in late 1999 or early

2000 is when I first became aware that it was missing from the

leases.

Mr. ISSA. Maybe you can just give me an understanding of one

thing, though. If we assume that Chevron has no reason whatsoever to be telling us anything but the truth, they came forward

with this from their own recollection and documentation, November

13, 1998, a fairly large gathering brings this up, because they are

concerned, they want to make sure, it is a lot of money, potentially,

even though it is down the road. And on that date, and it is important for me to understand this, that meeting was at about 8 o’clock

in the morning, it finished off some time during the day.

On that date, 11/13/98, you signed seven leases that didn’t have

a threshold in them. So let me understand, if you signed seven that

day, in order to sign seven that day after they brought up the question, you would have to have said, oh, no, it is taken care of in the

other part of the document. Is there any other way that if you were

asked that question that you wouldn’t have checked before signing

seven of them, even though you don’t remember today?

Mr. OYNES. Mr. Chairman, I don’t remember them saying that

at the meeting. So I would be totally speculating as to what would

be appropriate or not appropriate. I don’t recall that was raised at

the meeting.

41

Mr. ISSA. OK, but you do not dispute it?

Mr. OYNES. No, I do not dispute it. The only other thing I would

add, as I indicated in my testimony, these meetings usually covered

a wide range of issues. And there were many, many issues that

were of significant importance to the members of the committee,

AAPL group, that they raised to us in these various meetings.

Mr. ISSA. We are probably going to have to come back after the

vote. I just want to make sure the record is complete, because this

is where the difference between my background in business and my

understanding of Government breaks down. I think it is important

we make the record complete, because we are trying to make Government work more like business. On that day, you happened to

sign seven documents, seven leases. During that week, you signed

17. Between November 13th and the time that Chevron—and we

have no reason to doubt them, you have no reason to doubt them—

brought it up again in a similar forum, you signed 71, for a total

actually of 160 leases, you signed after being told twice that they

could not find the thresholds in them.

I have to ask, if you don’t remember the first time, you don’t remember the second time, but others remember it, and as we go

through this process and we discover other staff that were in these

meetings and other companies and representatives, how do you explain that you and/or some staff member, the two of you being on

the hot seat here today, would not have checked at some level to

discover exactly how they were there? Because you had companies

bringing it up at least twice in two different veins. First of all,

where is it, then second of all, we can’t find it where you said it

should be.

Mr. OYNES. Well, Mr. Chairman, it keeps coming back to the

same thing. I do not recall that this issue was raised at either the

meetings in 1998 or in 1999.

Mr. ISSA. I am going to ask just one more quick question, then

I would like the ranking member to get 5 or 10 minutes before we

run to the vote. Did you or your staff, the two of you or any one

that you know that works for you, read the interim and final rules

on new leases? There were never price thresholds in either of the

rules. If no one read it, how do you explain that you would have

the responsibility that the two of you have, in the 30 years plus or

minus that you have, and you wouldn’t have read them?

Mr. OYNES. Mr. Chairman, my best recollection is I did not read

that final rule. I was probably at the time of my understanding relying on staff representations about what was in the rule. And as

to whether other staff people had read the rule, I can’t speak for

that.

Mr. ISSA. OK. I am going to pause now and let the gentlelady

get hers in, then we will come back.

Ms. WATSON. I am going to ask a couple of questions and I would

like you to respond to them both at the same time. Then I am

going to have to run, we both will have to run.

My first question is, how many audits of oil and gas royalties

were done in the year 2003, if you know? You have been there

since 1986. So how many were done in 2003, 2004, and 2005? Were

there any mistakes found? If so, were they rectified? And what

wasn’t done for the 1998 and 1999 period?

42

It has been suggested that MMS can only implement what Congress has written into law, that is why I mentioned the Markey

bill. But do you feel that Congress should create legislation to define collection actions for the leases between that period of time,

and should Congress create legislation to handle collections from

this year one?

That kind of goes to what I mentioned before. You are going to

go to your respective institutes, so these are some things that we

are going to be talking about. So can you respond, please, both of

you?

Mr. OYNES. On the question of audits, I assume you mean a formal audit.

Ms. WATSON. Yes.

Mr. OYNES. The auditing function is handled by a different part

of the Minerals Management Service that is headquartered in our

Denver field office, and is handled by what we call Minerals Revenue Management. I am not a part of that, and I therefore would

not be aware of any scope or details of the dates of any audits. So

I just don’t know.

Ms. WATSON. Well, Mr. Chairman, who should we have here next

time who can answer some of these questions?

Mr. ISSA. If the gentlelady would yield, that was why I was kind

of taking a deep breath when you said this might be our last hearing, I do suspect that as we followup the train of audit, we are

going to have to have follow-on.

Ms. WATSON. I didn’t mean last hearing, I meant my last chance

to ask questions.

Mr. ISSA. Oh, yes. We will undoubtedly have to have the audit

function looked at by this committee.

Mr. OYNES. Ms. Watson, as to the second part of your question,

on the legislation and the bill that was introduced, I would have

to defer to that. Again, I work in a regional office. Our headquarters office is the one that would speak as to the use of any of

the bills and the concepts in any bills and the support or lack of

support for any particular bill.

Ms. WATSON. Yes, then let me ask you, are you going to actually

do some negotiation or renegotiation tomorrow?

Mr. OYNES. As far as I am aware of, I am not a part of the negotiations. It is going to be handled by our Washington office.

Ms. WATSON. OK. Well, you heard what we asked the first panel,

so you might want to raise some of these issues, because we certainly are going to.

Mr. OYNES. I will make that a point to do that. I think that they

are well aware of that already, though.

Ms. WATSON. All right, and then I just want to say to the chairman that I am going to have to leave and I can’t come back. But

I do appreciate you holding these, and I certainly expect to have

more of these hearings until we get to the bottom, until we can

come up with some kind of authority, some kind of legislation that

would look at this problem and be a resolution to the problem.

Thank you so much, witnesses, for coming, and thank you, Mr.

Chairman.

Mr. ISSA. I thank the gentlelady. I would like to now ask unanimous consent that the letters submitted by Chevron be inserted

43

into the record as well as a briefing memorandum prepared by the

staff and other relevant materials. Without objection, so ordered.

Additionally, I ask unanimous consent that the record be held

open for 2 weeks from this date, so that those who may want to

forward submissions for possible inclusion be allowed to. Without

objection, so ordered.

Last but not least, we will be recessed for this very quick series

of votes. Those are the last votes of the day, I am pleased to report.

As a result, when I come back, we will be able to conclude at a reasonable pace. Thank you very much, and we stand in recess.

[Recess.]

Mr. ISSA. Thank you all for your patience. This hearing comes

back to order.

I will be brief. I have kept you much later than I had planned.

The good news that there are no further votes probably is of little

consolation to you.

But let me just wrap up with a couple of questions that came

from the first round. Mr. Oynes, you testified that you did not read

the regulations governing the leases. You were the main person in

charge of MMS and the Gulf Office for that entire period until

today.

How can you sign leases worth billions of dollars without being

familiar with the regulations MMS is charged to enforce?

Mr. OYNES. Mr. Chairman, as I indicated earlier, I had also been

briefed by staff on the content of the regulations. MMS issues a

wide variety and lots of regulations. I don’t profess to be an expert

on every single one of them. As I indicated, I have a staff of 550.

I have a leasing group that is presumably made aware of that.

Mr. ISSA. Mr. Oynes, who on your staff briefed you to tell you

that in fact there was no need for the addendum, so that you participated in removing it?

Mr. OYNES. Mr. Chairman, I did not participate in its removal.

I know that it was removed. I don’t know who removed it.

Mr. ISSA. Let’s go back through the time line. There was a time

when there was an addendum. When the addendum came out, did

you question why the addendum came out?

Mr. OYNES. I didn’t know it had been removed.

Mr. ISSA. Until it was brought to your attention by Chevron?

Mr. OYNES. Until it was brought to my attention some time in

late 1999, 2000, by staff.

Mr. ISSA. Well, Chevron has testified that they brought it to your

attention.

Mr. OYNES. They have testified to that, and I am not aware of

those meetings.

Mr. ISSA. OK, so to your recollection, and I should ask both of

you, because you both at various times had this, did anyone ever

brief you as to the change in the lease in the 1998, and I realize

that Mr. Schoennagel, you were not there in the previous time, but

were either of you ever briefed as to the change causing the addendum not to be there?

Mr. OYNES. When it was brought to my attention in late 1999 or

early 2000.

Mr. ISSA. No, that is not the question. I really want to ask——

Mr. OYNES. I was not briefed.

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Mr. ISSA. No one on your staff, to your recollection, ever briefed

you about the change in the addendum?

Mr. OYNES. That is correct.

Mr. ISSA. And the same for you, sir? I realize you came in at that

transition time.

Mr. SCHOENNAGEL. That is correct, yes.

Mr. ISSA. And to your recollection, who briefed you about what

was in the regulations that by reference are included in these

leases?

Mr. OYNES. Mr. Chairman, I don’t recall who was the one that

briefed me on that.

Mr. ISSA. You have 500 people who work for you. It was one of

them.

Mr. Schoennagel, when you came in, you have a lot of experience

here, who briefed you on these leases and how it worked and how

the references represented the rest of the body of the document?

Mr. SCHOENNAGEL. I do not know, and I do not know if I was

really ever briefed, because the regulation changed in January

1998, before I was even in that position, and I came in after the

first——

Mr. ISSA. But you signed leases?

Mr. SCHOENNAGEL. Yes, I did, for the second sale in 1998, I believe I signed some.

Mr. ISSA. Did you ever request a briefing, so you would understand the document you were signing?

Mr. SCHOENNAGEL. No, I didn’t.

Mr. ISSA. Mr. Oynes, did you ever request a briefing? Because I

think you would remember if you requested a briefing, did you ever

request a briefing as to the meaning of these documents?

Mr. OYNES. Your question, Mr. Chairman, and I am not trying

to be evasive, your question is very broad. There are a large number of issues brought up in the decision process and in the leases.

So yes, I was briefed on several issues contained in the leases in

1998 and 1999. I could go into specific issues but——

Mr. ISSA. Well, the ones we are obviously concerned about——

Mr. OYNES. Right. I was not briefed on this issue, no.

Mr. ISSA. Did you ever request a briefing on that?

Mr. OYNES. No.

Mr. ISSA. When the interim or the final regulations were issued,

did you ever request a briefing on either the interim of the final,

so you would have an understanding of these fairly voluminous

documents prepared elsewhere?

Mr. OYNES. No, I did not.

Mr. ISSA. Chevron testified that after notifying you, Mr. Oynes,

in 1998 and again in 1999 in a meeting you were both in that you

would have your staff check into the price thresholds that weren’t

in the regulations or the leases. I am going to ask this one last

time, who did you ask or who would you have asked to check into

this?

Mr. OYNES. Since I don’t recall that they asked or presented that

information, I did not ask the staff to check into anything. And it

would be pure speculation as to who I would have asked to check

into that.

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Mr. ISSA. But you know your org chart, both of you do. Who are

the people, to your recollection, it is not unreasonable—500 people

don’t run an organization. Three or four or five report to you.

Mr. OYNES. I would have probably asked Mr. John Rodey, who

at that time was head of the sales unit.

Mr. ISSA. Mr. Rodey. And Mr. Schoennagel, who would you have

asked, if you had been carrying that for your boss?

Mr. SCHOENNAGEL. Probably the same person, John Rodey.

Mr. ISSA. OK. And this goes to both of you, again. Did you contact anyone at headquarters after you found out the price thresholds weren’t in the leases or the regulations? This would have been

apparently 1999, end of the year, or 2000.

Mr. OYNES. Yes. I remember that I contacted my immediate superior, Carlita Calor.

Mr. ISSA. Do you remember any conversations with superiors,

Mr. Schoennagel?

Mr. SCHOENNAGEL. No, I don’t.

Mr. ISSA. Did either of you change or give orders to change the

final notices of the sale to reference 30 C.F.R. 203 instead of 30

C.F.R. 260?

Mr. OYNES. I did not, Mr. Chairman, in fact, I did not know that

change had been made.

Mr. SCHOENNAGEL. Neither did I.

Mr. ISSA. Do either of you know of anyone who did give that

order or is knowledgeable of that order change?

Mr. OYNES. I am unaware of who made the change or order to

change.

Mr. SCHOENNAGEL. I am also unaware of that.

Mr. ISSA. Do you believe that this is a change that within the

purview of your job description as the No. 1 and yours as the No.

2, you should have been informed of?

Mr. OYNES. I believe it should have been brought to my attention, yes.

Mr. SCHOENNAGEL. Yes.

Mr. ISSA. So would it be fair to say that people in your organization made changes in leases without your authority?

Mr. OYNES. Without my knowledge, yes.

Mr. SCHOENNAGEL. That is correct.

Mr. ISSA. Now, I asked authority rather than knowledge for a

reason. You are a hierarchical organization, that change is going to

cost the Government hundreds of millions, probably billions, even

after good corporate citizens come back and make some adjustments, that we the people are not going to be made whole. So back

to the question of authority, wasn’t it your decision to make, and

wasn’t that decision one that if you had made you also would have

ensured that the lease reflected it properly, with the addendum

never being dropped out?

Mr. OYNES. I think the broad, the answer to that question is in

general, yes, Mr. Chairman. The only thing I would add is that the

way our process works, as I mentioned to your staff when we had

a briefing, is that other individuals and groups are involved in the

finalization process of that. So as an example, some of the other divisions in our headquarters group could have been involved in this.

I don’t know that they were, but that is a possibility. But yes, in

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terms of the broad question, it is something I should have been

briefed on, and it would have been in my authority to at least investigate if not to decide the issue.

Mr. ISSA. Mr. Schoennagel.

Mr. SCHOENNAGEL. I would agree for that, for the sale that was

held in 1998, although I was only in for before I guess even this

final sale notice was probably issued, before I took the office. But

certainly for the 1999 sales.

Mr. ISSA. You remind me a little bit of a brand new second lieutenant who reports to the company on the day the shotgun is lost

by an MP, but unfortunately, he’s the second lieutenant in charge

of that MP that day.

Mr. SCHOENNAGEL. It is a very steep learning curve to go from

just the operational side to the lease, to the pre-lease side, from the

post-lease side to the pre-lease side.

Mr. ISSA. I have little doubt that we are offering you some addition to your learning curve here today.

Mr. SCHOENNAGEL. You are.

Mr. ISSA. Now, you both said that you did not read the interim

or final regulations. I want to understand. What is the role of the

New Orleans office in implementing and enforcing regulations?

And this is obviously relevant to those regulations. Are you the organization that has to implement and enforce those regulations?

Mr. OYNES. We certainly are the implementer, the regional office,

and in terms of the enforcer, we are certainly part of the enforcer.

It probably goes broader than that, but ultimately, we are certainly

part of the enforcement of that.

Mr. ISSA. Do you believe that the MMS policy to include price

thresholds in the leases issued by your region between 1995 and

2000, in other words, do you believe there were supposed to be

price thresholds the entire period from 1995 to 2000 in the Deepwater Royalty Relief Act? Obviously 1995 isn’t a relevant part, but

a little later.

Mr. OYNES. Yes, absolutely.

Mr. SCHOENNAGEL. I’ve read the act, and I believe that it probably requires that. But again, I am not an attorney that can look

at the act and then determine whether or not it is required.

Mr. ISSA. I guess I will ask just one or two more questions and

let you off the supposed hot seat, although we announced that it

was Chevron in those seats. But I suspect they haven’t cooled

down.

What has been changed, as of today, that would cause me to feel

that the Congress should sleep well at night, that this couldn’t happen again? Just the briefest answer, if possible, so that I can understand it, simple enough for Congress.

Mr. OYNES. The staff has been instructed many years ago to

bring significant issues as they come up in the sale process to me.

As we speak, a draft has been presented to me on my desk of

changes in procedures which will create a formal process for review

of these types of changes and significant issues, if you will.

Mr. ISSA. And would you make that draft available to us so we

can see your progress?

Mr. OYNES. Surely. It still needs some work, it is a work in

progress, but it is a draft.

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[NOTE.—Mr. Oynes has been contacted and never submitted answers to the chairman’s questions for the record.]

Mr. ISSA. We would appreciate that.

I am going to close, and I am not going to read exactly the prepared statement on this last question, but I want to paraphrase it

and maybe tone it down just a little. Chevron testified that they

told you about the missing price thresholds in 1998 and 1999. And

you both say you don’t remember or it didn’t happen. I have to tell

you, by Chevron telling us this, volunteering the information in the

previous round, coming forward, negotiating as early as tomorrow

with MMS, they stand to lose billions of dollars for their stockholders, rather than just not mentioning it, not volunteering it.

This is something which has at a minimum cost them in the

court of public opinion a great deal. Because of their willingness to

try to meet the intent minus in negotiations the cost as a result

of the misdirection, and whatever that ends up, they are still going

to give up billions of dollars over the life, or at least hundreds of

millions, that they otherwise believed that in good conscience they

were told in 2000 they had.

So I am not going to read the rest of it, and I am not going to

say I don’t believe you. But I will ask you, why is it I should believe your lack of memory over a period in which others seem to

have good memory, good dates, and they have nothing to lose but,

in a sense everything to gain by forgetting?

Mr. OYNES. Mr. Chairman, I don’t think there is anything else

I can really add that hasn’t been already put in the record. There

are a very large number of issues that are dealt with in the regional office, in these meetings with the AAPL. We discuss a number of other significant issues, and I don’t have any better explanation other than that, simply that what I am telling you is the

truth. I do not recall that we discussed those matters.

Mr. ISSA. OK. The same for you, sir?

Mr. SCHOENNAGEL. I don’t recall that, and perhaps part of my

issue is that I really did not understand the leasing process, so

something that was mentioned may have just gone right over my

head. Because I was very new to the job at the time.

Mr. ISSA. As I have described, I was a butterbar at one time, too.

I understand, and I had been a private before that. So the transition was significant for me, and I certainly appreciate your comments.

I am going to ask one more question along a slightly different

line, probably because of sensitivity here in the Congress and what

affects things, I feel this has to be put in the record. Have either

of you accepted a trip, a gift or attended an event paid for by an

oil or natural gas company, or an individual with an interest in

them? Have you accompanied, and this is all of the above, any of

the above, have you accompanied industry representatives on trips

on which you didn’t pay the fair market value of the trip? Any of

those. Is that part of your job?

Mr. OYNES. I would say the answer is I have not done any of

those actions.

Mr. SCHOENNAGEL. Absolutely not.

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Mr. ISSA. Well, then I have to report that you are better off than

most Members of Congress. I appreciate your answer on the record

on that.

I am going to close briefly by just putting into the record that

I am deeply disappointed that this kind of mistake could happen,

that as of today, subject to material changes in how the Department of Interior works broadly, not just in New Orleans but here

in Washington, it is likely that these mistakes are happening

again.

This committee will continue, with the ranking member and

other members of the committee, to explore this event in hopes

that we can see how it can be prevented in the future.

I want to thank you for your testimony today. The record will remain open for 2 weeks from this date, so that others may forward

submissions. With that, we stand adjourned.

[Whereupon, at 4:55 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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