Bush Aides Gave Oil Firms Millions in Royalty Breaks

In its final weeks before leaving office, the George Bush Administration took a series of little-noticed steps to allow the petroleum industry to avoid hundreds of millions of dollars in additional royalty and interest payments to the government.

At the same time, Administration officials lowered the government fees for some ranchers who graze livestock on federal lands.

The actions were taken in late December and January as Bush Administration officials prepared to relinquish control to the Democrats. They are only now coming to light as Clinton Administration appointees sort through issues before their departments.

On Wednesday, Clinton Interior Secretary Bruce Babbitt rescinded one of the oil and gas decisions, which had forestalled government efforts to collect certain royalty payments. He said the government claim for the money was fully consistent with “existing departmental regulations and practice.”

The Bush Administration actions dealt with issues that in some cases had been under review by federal agencies for years. Several involved large sums for the parties involved.

Officials who served the Bush Administration say all the cases had been thoroughly considered at the appropriate levels and were ready for resolution.

Nevertheless, some acknowledge that they were conscious of their expiring authority and wanted to make sure the final decisions carried their stamps rather than their successors’.

“There was a group of people who basically felt that Republicans should stop governing after the election, and I happen to dispute that notion,” said John E. Schrote, a former Interior Department assistant secretary who was involved in many of the actions.

Indeed, he said, “I did particularly take a look at policies and things we could accomplish before we left office, and I set out to get those things done.”

He and other departing officials asserted that the issues were resolved strictly on their merits. But others are questioning the timing and possible political motivations.

For example, two key decisions benefiting the oil and gas producers came on Dec. 22 and Jan. 15. The action on behalf of the ranchers came in the Agriculture Department on Jan. 13. President Clinton was inaugurated Jan. 20.

Oil companies gave more than $1.3 million to the Republican National Committee and other GOP groups in the past two years. By comparison, they donated about $733,000 to Democrats. Ranchers are a well-organized and powerful lobby in traditionally GOP states.

“There was this mad dash at exit time and a lot of things were done that are going to have to be eviscerated,” said Rep. Mike Synar (D-Okla.), whose House Government Operations subcommittee on environment, energy and natural resources is reviewing some of the actions. “It may take us some time to piece together what happened” in the final days, he said.

The most controversial actions were taken at Interior, which oversees the management of the government’s stock of public lands and resources.

The Times learned details of the actions through documents obtained under the Freedom of Information Act and from congressional oversight committees and interviews.

Cabinet members are seeking to determine which, if any, should be rescinded and how difficult that might be to do.

Leon E. Panetta, Clinton’s budget director, has already ordered more than 100 proposed regulations held up for review and possible revision. Most pertain to natural resources, the environment, health and transportation.

In addition to the case Babbitt acted on Wednesday, officials said, the new Interior secretary is examining another recent, favorable decision for the oil and gas industry on a multimillion-dollar dispute with California.

Also receiving new scrutiny is an action taken in October, four days before the election, that allowed agribusinessmen in Arizona to delay the first installment payment on a $2.3-billion debt to the federal government for a massive water project.

Among the final agency actions that have prompted the most concern in federal agencies, on Capitol Hill and in affected states are:

* A Dec. 22 Interior Department decision on whether the government deserves royalties when private gas companies make “buy-down” agreements among themselves that cut gas production on federal leases. James R. Richards, the department’s inspector general, concluded that the government could demand such compensation since the contracts reduce the regular royalties it would receive otherwise. Schrote disagreed, saying a policy change would be necessary. Babbitt rescinded this decision.

* A Jan. 15 decision by the Interior Department’s Minerals Management Service on an appeal by California on the way interest is computed for oil and gas producers that underpay their royalties. The state charged that the Interior Department was allowing the companies to reduce their interest bills by applying improper credits. Top Interior Department officials ruled otherwise. One oil-state lawmaker estimated that states and other royalty recipients would lose several billion dollars over the next five years. Babbitt is now reviewing this action.

* A decision announced Jan. 13 by then-Agriculture Secretary Edward R. Madigan to change the way that grazing fees on 3.7 million acres in the Plains states are calculated. The change decreased rates that were already below market levels. Madigan said the action corrected an unjustified disparity between regions; critics say it increased a windfall for a favored business interest.

* A decision in late October by the Interior Department’s assistant secretary for water and science to delay Arizona agribusinessmen’s repayments to the federal government on the Central Arizona Project, which provides valuable water for farms in the region. The payments were to start last month. The water districts pleaded hardship and asked for more time. Richards concluded that they could afford to pay. His estimated additional cost for the federal Treasury this year: $51.2 million.

A number of other significant actions taken by top political appointees in the Bush Administration’s final weeks are also generating controversy and may be targeted for review, including a Jan. 19 Interior Department opinion that denied native Hawaiians the same legal status as American Indians.

However, they have stirred fewer suspicions about motivations because they did not involve politically powerful and active industries. At Interior, spokesman Jay Ziegler said a comprehensive review of recent decisions is under way.

The ‘Buy-Down’ Dispute

When gas producers contract with the government for leases on public lands, they in turn make deals to sell the gas to pipeline companies.

But when market prices plummeted in the last decade, the pipeline companies began renegotiating agreements for lower prices, less volume or to terminate deals altogether. To get the producers to agree, the pipelines routinely offered settlement bonuses.

In March, 1992, Richards concluded that the government was entitled to royalties based on the value of the settlement contracts because the “buyouts” were reducing royalties the government would have received from producing wells.

Richards estimated that $754 million could be claimed for leases in effect between 1982 and 1990. He said the money was not being paid only because the Minerals Management Service “had not established a policy on the collection” of it.

Top-level policy-makers at the Interior Department disputed Richards’ findings, as well as the $754-million estimate. They said royalties are collected for gas production; termination payments did not qualify.

On Dec. 22, an Interior Department memorandum says, Schrote issued a finding that collecting the money would require a policy change, which would mean hearings and other procedures that take two to five years.

That was how it stood when the Bush Administration ended. After Schrote left office, though, Richards appealed to Babbitt and asserted that the royalties were clearly “the lessees’ contractual obligations.” Waiting for years would involve major losses under a six-year statute of limitations.

On Wednesday, Babbitt said he had reached the same legal conclusion. Collecting the royalties “does not involve any change in policy” and is covered by “existing departmental regulations and practice,” he said in a memorandum.

The Underpayment Issue

This case involves the way royalties are calculated for oil and gas produced on public and Indian lands. When audits show that a company has underpaid the royalties it owes the government, it must remit the difference, plus interest. When audits show that a company has overpaid its royalties, it is entitled to a refund from the government, but no interest.

Under a Supreme Court ruling, the United States is immune from liability for interest on government debts unless Congress specifically authorizes it.

Last year, California, which splits royalty income with the federal government for gas produced there, for the first time calculated the interest it was owed and concluded that it was being shortchanged. The office of Controller Gray Davis said it determined that the Interior Department was allowing oil companies to deduct their total overpayments from their underpayments on a lease and to pay interest only on the difference. Since this had the effect of wiping out the interest obligation on some of the underpayment, California appealed.

On Jan. 15, David C. O’Neal, assistant Interior secretary for land and minerals management, rejected California’s challenge in a case involving an Amerada Hess gas lease. His opinion said such “offsets” are part of well-established procedures and conform with Interior’s interpretation of the law. Further, the department said in a regulation that it would begin allowing these offsets for different leases held by the same company.

Davis and other critics say this is unacceptable. “This is going to cost taxpayers in the states and tribes literally billions of dollars over the next five years,” said Synar, who contends that the procedure violates congressional intent and the Supreme Court decision.

Davis said, “The timing of Interior’s decision is a little suspicious. It smells like a last-minute favor for President Bush’s buddies in the oil industry.”

O’Neal angrily denied the suggestion of political motivation.

The Grazing Case

The fees the government charges for allowing ranchers to graze livestock on public land are set on two scales. One covers mostly land in national forests in 16 Western states and was established in a congressionally mandated formula in 1978. The other formula applies to grasslands in nine Great Plains states and was set by the Agriculture Department.

The latter rates were much higher--which some attributed to the better quality of the land. After strenuous lobbying by ranchers paying the higher fees, the Agriculture Department agreed to review the system. On Jan. 13, Madigan announced a new plan that rearranged the states covered and cut the higher rate from $3.42 to $2.04 per animal unit month, which is based on the amount of forage needed to sustain particular livestock per month. The cheaper rate also dropped, from $1.92 to $1.86.

In an interview, Madigan said the issue had been under review since early 1991--brought to his attention by Democratic senators--and was ready for resolution. Closing the disparity in rates was only fair, he said.

Environmentalists and other critics, though, maintain that it was a naked political favor for an influential, traditionally Republican constituency. “The fees that are charged for the privilege of grazing livestock on our public lands are far below fair market value,” said Dave Alberswerth, director of public lands and energy for the National Wildlife Federation.

The Central Arizona Project

The massive Central Arizona Project was built by the federal government over the last two decades to carry water from the Colorado River to farmland in central and southern Arizona and, eventually, to supply Indian tribes, Phoenix and Tucson.

Under an agreement approved with Congress, the Arizona consortium of water districts and municipalities agreed to repay the government $2.3 billion of the $3.6-billion cost. The first bill came due last month, when water was being delivered to virtually all of the lands to be served.

But farmers complained of losses from insect damage, declining crop prices, pipeline problems and high water prices and sought an extension. On Oct. 29, John M. Sayre, assistant Interior secretary for water and science, signed off on a one-year delay. The district agreed to come up with four payments totaling $20.5 million, or half the first installment.

In a subsequent assessment, Richards, the Interior inspector general, reported that the delay would be very costly for the federal Treasury and questioned how hard-up these agribusinesses really were. The water district “has sufficient capital and revenues to meet its repayment requirements,” he said.

Sayre said in an interview that forcing immediate repayment would have driven numerous farmers into bankruptcy. “This was just to try to help out a very critical situation.” Richards has asked Babbitt to reconsider the decision.