Minerals Management Service ‘royalty in kind’ program to end

The Interior Department is ending a controversial program that was at the center of a sex and drug scandal in the federal Minerals Management Service, Interior Secretary Ken Salazar said Wednesday.

Testifying before the House Natural Resources Committee, Salazar said that he would phase out the program, which allows energy companies drilling on federal lands to pay royalties in the form of oil or gas instead of cash.

The program, known as “royalty in kind,” has been rocked by scandal, and auditors have questioned its effectiveness. The Interior Department inspector general issued a report last year describing a “a culture of substance abuse and promiscuity” over a five-year period at the Denver-based office of the Minerals Management Service, which deals with royalty-in-kind payments.

Allegations included cocaine use and sex with industry contacts.

“Clearly, the department’s energy leasing and royalty programs have not been working as they should,” Salazar said.

Until now, some oil and gas extracted from public lands was paid for in cash or in the form of oil and gas products delivered to the government. Salazar announced Wednesday that when they expire, existing in-kind contracts would not be renewed.

In addition to the allegations of personal misconduct by government workers, an audit report issued this week by the Government Accountability Office concluded that the Interior Department had lost at least $21 million by failing to collect royalty-in-kind payments that it was owed.

The report described one instance in which a firm had avoided making any payments for more than two years by disputing the amount of its $900,000 bill.

Salazar’s announcement upset oil interests and some congressional Republicans, who contend that the government will get less money.

The lobbying arm of the oil industry, the American Petroleum Institute, said the decision would create new bureaucracy and cost taxpayers money.

“The program is an effective means of ensuring that the American people receive fair compensation for development of federal resources,” institute President Jack Gerard said in a statement.

The royalty-in-kind program collected the equivalent of $4.3 billion in royalties in fiscal 2007, the latest period for which data were available, an Interior Department spokesman said. He indicated that the program would run through September 2010, when the last of the contracts expire.

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jtankersley@latimes.com

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