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On a cold, blustery January 28, 2009, the newly appointed Secretary of the Interior of the United States, Ken Salazar, arrived at the headquarters of Minerals Management Service at the Federal Center in the Denver suburb of Lakewood, Colorado.

With him were two men: Interior’s Inspector General Earl Devaney, a former Secret Service agent and police officer, and Salazar’s chief of staff Tom Strickland, the former U.S. attorney for Colorado.

Minerals Management Service is, to the few people outside the energy industry who’ve ever heard of it, an obscure Interior Department agency. Yet it has an enormously important mission: leasing out onshore and offshore sites for exploitation by oil and gas companies, and collecting tens of billions of dollars in royalties from those companies. In fiscal 2008, those revenues came to a whopping $23.4 billion. Royalty payments are this country’s second largest source of income (the largest, of course, being taxes). And not incidentally, Wyoming, which gets 49 percenti of the federal royalties collected in the state, ii is the largest recipient of these revenues. In fiscal 2008, the Cowboy State received $1.27 billion dollars in federal oil, gas and coal royalties, almost twice as much as any other state.

The Department of Interior Oil and Gas Royalty Scandal and Its Wyoming Roots

Part One: The Wyoming Stage

On a cold, blustery January 28, 2009, the newly appointed Secretary of the Interior of the United States, Ken Salazar, arrived at the headquarters of Minerals Management Service at the Federal Center in the Denver suburb of Lakewood, Colorado.

With him were two men: Interior’s Inspector General Earl Devaney, a former Secret Service agent and police officer, and Salazar’s chief of staff Tom Strickland, the former U.S. attorney for Colorado.

Minerals Management Service is, to the few people outside the energy industry who’ve ever heard of it, an obscure Interior Department agency. Yet it has an enormously important mission: leasing out onshore and offshore sites for exploitation by oil and gas companies, and collecting tens of billions of dollars in royalties from those companies. In fiscal 2008, those revenues came to a whopping $23.4 billion. Royalty payments are this country’s second largest source of income (the largest, of course, being taxes). And not incidentally, Wyoming, which gets 49 percenti of the federal royalties collected in the state, ii is the largest recipient of these revenues. In fiscal 2008, the Cowboy State received $1.27 billion dollars in federal oil, gas and coal royalties, almost twice as much as any other state.

The Lakewood branch of Minerals Management operated differently from its parent in Washington, D.C. Following the Bush administration’s oft-expressed desire to run government like a business, the Lakewood office functioned like a quasi-business, collecting royalty payments not in cash, but in “kind,” that is, in actual oil and gas. The Lakewood office then sold this oil or gas on the open market, competing with private sector traders.

Lakewood’s operations were unique in another way. The office had become a rogue enterprise, a feds-gone-wild hotbed of sex, payola, cocaine and corruption.iii Which was why Salazar’s visit was no ordinary meet-and-greet. Eight days after taking office, Salazar and his colleagues had come to Colorado to lay down the law.

“We are no longer doing business as usual,” the Stetson-wearing secretary told reporters. “There’s a new sheriff in town.”

“The President has made it clear that the type of ethical transgressions, blatant conflicts of interest, wastes and abuses that we have seen over the past eight years will no longer be tolerated,” Salazar warned Lakewood employees. He vowed to re-open a two-year-old investigation into alleged corruption and mismanagement that critics—and former Interior Department employees—claim had cost Americans billions of dollars in lost revenue.

When you read Inspector General Devaney’s 2008 report on the office, the word “tawdry” leaps to mind, astonishment not so much that Minerals Management personnel were corrupt, but how cheap they were. Devaney’s report doggedly details hundreds of industry gifts to federal Royalty-in-Kind employees: golf games, tacky little sight-seeing tours, luggage, golf bags, silver-plated trays, dip bowls, boozy Christmas parties, visits to bars, ski lift tickets, snowboarding lessons, hotel rooms, country music concerts, tailgating parties, paintball outings, drunken dinners etc., etc. Sure, it all adds up to tens of thousands of dollars, but come on!

The contempt in which the oilmen held the government officials shines up off the pages: references to Minerals Management marketers as the “MMS chicks;” e-mails damp with sexual innuendo, such as the Shell Pipeline Company official inviting the marketing specialist “girls” to “meet at my place at 6 a.m. for bubble baths and final prep. Just kidding…”

Yet the report also has its moments of pathos, as when Minerals Management marketing specialist Stacy Leyshon tells Devaney that, yes, she did sleep with a Shell Oil guy, but she didn’t have an improper “personal relationship” with him because a “one-night stand” isn’t personal.iv And what about the hurtful revelation to Minerals Management marketing specialist Crystal Edler? She thought she was dating a man from Hess Corporation, but Devaney found that the guy was putting her down on his expense account when they went out—he was working.

And then there was Greg Smith, the Lakewood office boss of the Royalty-in-Kind program. Devaney’s report observes, almost as an aside, that Smith used illegal drugs and had sex with his subordinates “in consort with industry,” which brings to mind a fairly unlovely picture. The statement that government was in bed with the oil and gas industry was not, in this case, metaphorical.

The September release of Devaney’s report brought a quick response from Wyoming Republican Senator John Barrasso, who with Ron Wyden (D-Oregon) co-sponsored a bill (S.3556) to rein in the agency.

Minerals Management Service “cannot be allowed to carry on like some corrupt Third World bureaucracy from a bad Hollywood movie,” Wyden explained in a press release announcing the bill, which would have suspended the royalty-in-kind program unless the Secretary of the Interior implemented all of Inspector Devaney’s recommendations within 60 days.v

“The recent investigation raises serious questions of public trust and illustrates a total disregard for personal, professional, and programmatic ethics,” Barrasso added, accurately if somewhat colorlessly.

“The Department of the Interior will raise the bar for ethics, and we will set the standard for reform,” Salazar promised last January. But he also said the scandal at the Minerals Management Service royalty-in-kind office in Lakewood was the fault of a “few individuals”—nearly a third of the royalty-in-kind office was involved—and “special interests” who exploited an “outdated and flawed royalty collection system.”

Exactly what was this “outdated” and “flawed” royalty collection system? Will it be changed now that the new sheriff is, so to speak, sitting tall in the saddle? Is the problem really just a “few individuals” in Lakewood, or is it a bigger mess? Since its inception in 1982 under the Reagan administration’s Interior Department, Minerals Management Service has not been an especially strict guardian of the people’s purse—quite the contrary. So what’s up with the billions the nation—and Wyoming—are owed for their precious, rapidly vanishing minerals?

Royalties: In Kind or in Value?

The royalty-in-kind program that Minerals Management Service administers in Lakewood is fairly new on the national scene, although Wyoming saw this arrangement in its trial stages in the mid-1990s and other places—Texas, Canada—have had their own versions for more than 20 years. Still, “royalty in kind” has an economically primitive, barter-ish air about it; writing in the April 2009 Harper’s magazine, David Bryant likened the practice to a landlord’s leasing a building to a grocer and letting him pay the rent in “fruit and steaks.” In this instance, the “landlord” is the citizenry, who have no way of knowing if the “grocer” is paying what’s due because he largely determines the quality and quantity of the fruit and beef he hands over.

It’s a mechanism designed and promoted by the energy companies to satisfy their obligations to the American people, and to the states where they do their inevitably destructive work of mining, drilling, pumping, and transporting the non-renewable resources that they sell back to us so we can live our lives and run our country. The alternative to royalty-in-kind payment is paying royalty “in value,” i.e. money, an old-fashioned method the federal government has been trying—and failing—to handle competently since the passage of the Mineral Lands Leasing Act of 1920.vi

The scandal at the royalty-in-kind program at Minerals Management Service is certainly not the only ethical problem the agency has encountered. There have been many, so many that one could be forgiven for laughing at the public-relations blurb that today opens the Ethics Office page of the Minerals Management website: “Welcome to the Home Page of the MMS Ethics Office! MMS Employees are Dedicated Stewardsvii for America; demonstrating Integrity and Excellence.”viii

James Watt’s Legacy

Minerals Management Service is a creature of James G. Watt, President Ronald Reagan’s first Secretary of the Interior. Watt, born in Lusk, educated in Wheatland and at the University of Wyoming, was secretary only two years,ix but he was a busy fellow during that time, zealously pursuing the anti-conservation, pro-exploitation agenda he pioneered as founding president of the Colorado-based non-profit Mountain States Legal Foundation, a conservative legal group prominent in the anti-environmental protection movement.x Until the 2006 appointment of Dirk Kempthorne as the Bush administration’s second Interior Secretary, Watt held the 20-year record for the fewest number of plants or animals placed on the Endangered Species list.

James Watt created Minerals Management Service by secretarial order in January 1982 out of the old Conservation Division of the U.S. Geological Survey, which previously had been responsible for collecting and managing royalties.

The Conservation Division had not done well. There had been scandal, theft, massive fraud, waste, and astronomical losses of revenues, particularly for Wyoming Indian tribes. There had been appointment of a special commission, and six months of investigation. There had been the conclusion, as the commission chairman David Linowes reported to President Reagan at a press conference,xi that “the financial management of the Nation’s energy resources had failed to do its job” for more than 20 years.

“As a result,” Linowes went on, “hundreds of millions of dollars”—no one knew the exact amount— in federal revenues were lost each year because royalty collections were conducted on an “honor system” that let oil companies decided for themselves what royalties they would pay, without any government verification— only a handful of audits had ever been conducted. In addition, oilfield security was lax and theft of oil was “quite common” throughout the country. All this had been going on for more than 20 years; nothing had been done about it.

“Mr. President, this is the kind of fraud and waste that we can stop by investigating problems that now exist and installing improved management systems that will prevent fraud and waste in the future,” opined the press conference chairman Edwin L. Harper, who headed the President’s Council on Integrity and Efficiency.

Secretary Watt also attended this press conference and he spoke up, announcing that his department had adopted all 60 of the commission’s recommendations before they were made, and that he had two days previously created the Minerals Management Service agency to take care of the royalty problems.

“And we think that we have already started stemming the loss of funds—the unbelievable loss of funds to the taxpayers —that has been going on for these many years,” Watt bragged. “And within the next weeks, we will have really cut that flow off and saved the taxpayers these monies.”

He added that the royalties problem was a “tremendous example, unfortunately, of how the Department of the Interior has mismanaged a multi-million dollar problem for 20-plus years,” adding that the private citizens of the Linowes Commission had helped save the day, thanks also to his own almost incredible efficiency.

“Not many government reports get acted on like that,” he said of his speedy, before-the-fact response. “This one hasn’t been sitting around.”

“Yes, I know,” Reagan agreed. “Most people are cynical and think reports like this go on a shelf someplace.”

So the president was prescient; Watt was not.

“Accountability” in the 1980s

The Linowes Commission had strongly recommended that the energy industry be brought to heel by vigorous federal oversight that would include independent audits, internal controls, site security standards, and strong sanctions for failure to pay royalties fully and on time. “Accountability,” the commission said, must be the watchword.

Minerals Management Service began its life as the bringer of accountability with an annual budget of $298 million, 1,639 employees, and a mandate to manage federal leases and royalties both onshore and off.

In January 1983, a year after the new agency was born, Congress passed the Federal Oil and Gas Royalty Management Act, a piece of legislation intended to correct the “archaic and inadequate” system of accounting for oil and gas royalties due from leases on federal and Indian lands. Besides admonishing Secretary Watt to “aggressively carry out his trust responsibility,” the act noted that “it is essential that the Secretary initiate procedures to improve methods of accounting” for royalty payments. Among other things, the new law gave federal auditors and their agents some police powers, and added a provision allowing citizens to sue recalcitrant mineral companies and force them to pay up, for a share of the take.

The Minerals Management Service started collecting oil and gas royalties, but contrary to Watt’s prediction, theft, fraud and gross underpayment continued unabated, and pretty soon another blue-ribbon panel was convened to look into the matter.

The 1989 report of the Committee on Investigations of the Senate Select Committee on Indian Affairs noted that fraud, corruption and mismanagement of Indian natural resources had not significantly lessened during the 1980s. As a result, tribes had lost many more millions of dollars in revenue from their non-renewable natural resource base.

The Senate committee observed that while simple “smash-and-grab” theft–stealing entire tanks of crude oil by force–was rare, “sophisticated and premeditated theft by mismeasurement and fraudulently reporting the amount of oil purchased has been has been the practice for many years.” Chief among the victims were the Arapaho and Shoshone tribes of Wyoming’s Wind River Reservation.

Wyoming Goes Bust

Wyoming’s fortunes were in sharp decline by the end of the ’80s, although the 1970s had been pretty good. The 1973 OPEC oil embargo had caused price hikes for all American fuels, not just oil and gas,xii and in minerals-rich Wyoming employment boomed.xiii Casper, long known as the “Oil Capital of the Rockies,” had refineries that processed millions of barrels of oil annually—a drop in the bucket on a world scale, but fairly substantial for Wyoming. Drilling rigs sprang up like sunflowers across the state. Wyoming strip mines produced the most coal in the country.

The strain on the state’s ability to house the new workers, educate their children, and even dispose of their sewage was soon apparent. A mineral production tax — a so-called “severance tax” — had been passed in 1969, and to meet the new demands of the 1970s it was increased as fuel mineral prices rose. In 1974, voters approved the Wyoming Mineral Trust Fund, bankrolled by a 1.5 percent severance tax on all minerals extracted in the state. The tax rate on coal rose from 3 percent in 1973 to 10.5 percent in 1979. Rates went up and down, but by 1985, the state of Wyoming imposed severance taxes ranging from 4 percent of gross value for crude oil and natural gas stripper wells, to 6 percent for non-stripper wells, to 10.5 percent for surface coal and 7.25 percent of gross value for underground coal.

Wyoming, without corporate or personal income taxes, became increasingly dependent on natural resources for money to fund government and social services. The percent of state revenues from severance taxes rose from 20.1 percent of total taxes in 1977 to 52.8 percent in 1983. When Wyoming’s half share of federal royalties was added, levies on the state’s natural resources made up 62.32 percent of the state’s income.

In early 1980s, the value of energy minerals began to drop as oil prices headed to a 1986 worldwide crash. The drop in state severance tax income was not immediate (Wyoming’s energy tax revenues grew at an annual rate of 61.2 percent from 1977 to ’83), but certainly was on the way: from 1982 to 1983, the state’s severance tax revenues experienced what bankers euphemize as “negative growth” of -0.1 percent.

Three levels of government—federal, state and local—assess charges on mineral production in Wyoming. Grossly over-simplifying, we can say the feds, through Minerals Management Service, collect leasing royalties and give Wyoming about half the take; the state, through the Department of Revenue, imposes severance taxes at varying rates, as well as Oil and Gas Conservation taxes; and Wyoming’s counties, through their Boards of Commissioners, levy ad valorem property taxesxiv on the value of the previous year’s production assessed by the state Department of Revenue. Each government entity may offer the industry various tax breaks, bonuses, “royalty relief,” and other features designed to let businesses legally pay less than the tax law would otherwise require. Each of the three tax systems gives a financial nod to the existence of the others; taxes levied by one entity may be deductible expenses for another.xv The taxing governments may also share information, and even some duties, such as auditing or site inspection. The three systems are not supposed to be antagonists, but as it turns out, they often are.

Audits and Bounty Hunters

In the mid-1980s, state Auditor Jim Griffith and state Senator Tom Stroock (R-Natrona County)xvi began looking at state and federal royalties as a means of bolstering Wyoming revenue. Stroock, then Senate chairman of the Joint Appropriations Committee, had been in the oil business in Casper more than 30 years by this time, and had a good idea of how things worked.

“Jim Griffith and Tom Stroock had the foresight to look into mineral reporting at public lands, and later on, we initiated a joint federal-state audit,” recalled Rich Ryan, an auditor who worked under Griffith, the first state official in the nation to audit mineral production. Ryan told WyoFile that the two men were particularly interested in the federal leases because the state got “vastly greater” revenues from its 50 percent share of federal royalties than from the state’s 100 percent of state royalties, because the feds held “seven to eight times the acreage” owned by the state.

“Fifty million dollars was collected in the first two years of the [joint audit] program,” he said.

But the results could have been better. By the end of the decade, some state officials were concerned that Wyoming did not have enough auditors on staff to do the job, and Washington wasn’t coming to the rescue. Mike McCune, a senior examiner with Wyoming Department of Revenue and Taxation, observed in a 1988 report that “unfortunately” for Wyoming, taxes on mineral extraction were not being fully collected, so that “enormous amounts of precious minerals have been removed over the years at great benefit to mineral development companies, but at little or no benefit to the citizens of Wyoming.” Lost revenues reached “billions of dollars. And the losses continue,” he wrote.

McCune suggested that hiring 100 new state auditors “would be just a start, and every one of them could recover many times their cost for the citizens of this state.”xvii

The state didn’t hire more auditors and the data used to compute a corporation’s tax liability continued to be unreliable. The feds were no help. Astoundingly, after all the investigations, the new Minerals Management Service agency still ran the federal royalties program on the “honor system” that had caused so much waste and fraud in the bad old days. Minerals Management let the energy companies tell the state and Management Service how much gas or oil they’d taken from a field—word of honor! —and pay royalties accordingly. Nobody sent auditors out into the field to see if producers were telling the truth.

Counties Cut Their Losses

At this time Wyoming’s counties didn’t have mineral production auditors on staff, but a pair of private mineral auditing companies had recently appeared on the scene, headed by former state revenue department auditors and ready to take on recalcitrant ad valorem taxpayers. The auditing companies took their fees contingently—that is, upon success. Contingent fee arrangements are popular with tort lawyers and common in personal injury lawsuits, but the idea applied to mineral audits was new and attractive to county government, as the private contractors bore the upfront costs and the risks. Rocky Mountain Auditing Services, founded by Rich Ryan, and Wyoming Royalties, Inc., led by the late Randy Fetterolf, contracted with 18 of 23 Wyoming counties to recover delinquent minerals taxes and interest.

“We were quite successful,” Ryan told WyoFile recently. “Collections exceeded $100 million in delinquent ad valorem and severance taxes, and interest for the counties and the state.”

The energy companies resisted vigorously and tenaciously with legal challenges both before the Board of Equalization and in the courts—one case lasted more than 16 years, according to Ryan.

In 1992, independent auditors Ryan and Fetterolf were witnesses for Uinta County against Union Pacific Resourcesxviii, which was suing the county and the state, claiming the county had no right to hire minerals production auditors for contingent fees, and disputing the taxes on the company’s oil and gas production in the county. Ryan told WyoFile that when he and Fetterolf showed up to give their depositions in the case, he was shocked to find that state Senator Cynthia Lummis, a Laramie County Republican, was the company’s lawyer.

“Cynthia, are you here to represent your constituents or Union Pacific?” Ryan says he asked.

“I represented Union Pacific Resources Co. in a declaratory judgment action that went to the Wyoming Supreme Court,” Lummis told WyoFile, adding that the court made no decision on the merits of the case, but sent it back to the Board of Equalization.

Cynthia Lummis, who is now Wyoming’s sole U.S. Representative in Congress, has been a politician for more than 30 years, and a lawyer for nearly a quarter of a century. When she was working for Union Pacific Resources in the 1990s, she was a partner in the Cheyenne firm of Wiederspahn, Lummis & Liepas PC. Her husband and law partner, real estate developer Alvin Wiederspahn, is a former state representative and senator on the Democratic side of the aisle. In the ’90s, the firm’s clients included Amoco Production Company and Union Pacific Resources. Wiederspahn was also a leader of the Wyoming Taxpayers’ Association, a group with a populist-sounding name that is an energy industry lobby.

The companies also sought direct legislative relief from their political allies, of whom they had many. For example, Representative Eli D. Bebout of Riverton, a “hereditary” Democrat who became a Republican in the 1990s, in the 1995 session of the Legislature introduced a bill, HB225, to ban private auditors from working for counties for contingent fees. At the time, Bebout was president of Nucor Oil and Gas, Inc.,xix and his 1994 campaign had been 60-percent financed by mineral interests. His Senatorial co-sponsor of the bill was one of his business associates in the uranium industry and the radioactive waste disposal business, Riverton newspaper publisher Robert Peck.

Bebout likened the private auditors to “headhunters.”

“Can you imagine the IRS coming in and getting a salary based on what they can get out of you?” he asked. “The IRS would be after all of us.”

Ron Trowbridge, an auditor with Rich Ryan’s Rocky Mountain Energy, told Casper Star-Tribune reporter Joan Barron at the time that “contingent fees are the only practical way to pay for audits, as counties strapped for cash don’t have the money” to pay the private auditors up front.

“Fetterolf acknowledged that he and other private sector mineral auditors are not popular with industry,” Barron wrote in January 1995.

“They call us bounty hunters and mercenaries, but we wear the badge proudly because the beneficiaries of the findings are school kids primarily,” Fetterolf told her.

“We were called everything under the sun, including ‘opportunists,’ ‘odious mercenaries,’ and ‘bounty hunters,’” Rich Ryan recalled recently for WyoFile.

Unpopular as the auditors were with the industry, Bebout’s bill was even less popular with county governments, and was firmly squashed in a committee-of-the-whole vote, 43-14.

But 1994 had been a watershed year in Wyoming politics, when twenty years of Democratic governorship ended with the election of Republican Jim Geringer, who followed two-term Democrat Michael J. Sullivan. Sullivan, a petroleum engineer by education and an oil-and-gas lawyer by trade, definitely knew the industry well when he took office after more than two decades of law practice in Casper.xx Although not hostile to the industry, Sullivan vetoed several measures that the oil and gas interests had backed in the legislature. In his campaign, Geringer promised to make Wyoming “friendlier” to operators.

Just a couple of months into his first term, Geringer signed into law four measures lowering taxes on energy companies, including some that Sullivan had vetoed in 1993. Sullivan also signed SB-96, a bill giving mineral companies an environmental “self-audit” privilege that granted the companies immunity from Department of Environmental Quality fines and penalties if they reported their environmental violations and filed cleanup plans.

In a March 1995 article by Nancy Moore, Platt’s Oilgram noted that besides quickly signing the drilling incentives into law, Geringer also scheduled an April 20-21, 1995 meeting in Casper “to get the industry’s ideas.”

Moore wrote that Karen Kennedy, then the executive director of the Wyoming Independent Producers Association,xxi had observed that “Wyoming’s legislature has always been friendly to the oil and gas industry, but the state’s former Democratic governor had stopped many initiatives in their tracks.”

“Oil and gas producers in Wyoming are saying ‘what a difference an election makes,’” wrote Moore.

One of those differences was Geringer’s cabinet appointment of Rejane Medinger “Johnnie” Burton to head the Wyoming Department of Revenue, where she served from January 1995 through early March 2002. Burton, a staunch Republican, had a background that oil industry lawyer Gale Norton, George W. Bush’s first Secretary of the Interior, described as a “solid mix” of experience in state government and the oil and gas industry.

Born of French parents in colonial Algeria, Burton fled the country during its independence struggle, arriving in the U.S. as a 22-year-old refugee in 1963. She began her career in the petroleum industry as an oil scout in Casper for Rinehart Oil News of San Antonio, Texas, then started her own oil industry news service, Hotline Energy Reports Inc., which later merged with Dwights Energydata Inc. She and her husband, geologist Guy C. Burton, Jr., also owned a Casper-based oil exploration company, TCF Inc. Guy Burton also partnered with Bill Hawks, a Republican politician from Casper, in Burton/Hawks, Inc., an oil and gas exploration and drilling company.xxii Johnnie Burton served in the Independent Petroleum Association’s Mountain States Speaker’s Bureau from 1977 through 1979, then in the Wyoming state House of Representatives from 1982 to 1988.

Taking up her appointment in 1995, Burton as director of the Wyoming Department of Revenue was supposed to ensure that the department established a “fair market value” for minerals taken from state lands. She also believed, according to transcripts of administrative hearings, the department was supposed to make policy decisions on implementing mineral valuation laws. Inevitably her department clashed with the county governments, because her interpretations of the laws seemed to favor the energy companies. At times, she even surprised her own employees with her pro-industry enthusiasm.

“I recall one informal administrative meeting with an oil company taxpayer to discuss audit findings,” Richard J. Marble, who at the time was Department of Revenue’s Mineral Tax director, told WyoFile. “I was conducting the meeting when Johnnie walked into the room, interrupted the meeting, and told the taxpayer that under her leadership the Department would bend over backwards, within the limits of her fiduciary responsibility, to support the taxpayer [i.e., the oil company]. Everybody in the room just kind of looked at each other.”

The Geringer administration early in its life started hearing complaints from the energy industry about Marble, who was promoting in the Department new auditing practices similar to those employed by Ryan’s and Fetterolf’s private auditing companies, according to the Casper Star-Tribune. The Ryan-Fetterolf method was not a field audit, but a fairly straightforward comparison of reported figures. Instead of just accepting the energy company’s data as fact, however, the auditors compared sales numbers the companies reported to the Wyoming Oil and Gas Conservation Commission with the numbers given to the counties.xxiii

Johnnie Burton fired Marble within a month of taking office, and Marble told WyoFile he was “kind of expecting it.”

“I always felt it was Geringer’s call,” he said.

The industry “got some help … with the administration of the royalty program when Geringer’s new director of revenue, Johnnie Burton, fired Rich Marble,” Platt’s Oilgram observed at the time.

Witness for the Oil Companies

Chevron U.S.A., Inc. in its longxxiv dispute of an audit assessment by the Mineral Division of the Department of Revenue, was one of several companies during this period that actually presented Burton as a witness against her own department.

Chevron’s case involved the “proportionate profits formula” used to compute taxes due on natural gas taken from the Painter/East Painter fields in Uinta County in 1996-98. State auditors believed that under a 1990 mineral valuation law, Chevron’s “direct costs” of production should include production taxes and royalties, which would have increased the company’s ad valorem taxable value by over $18 million— $18,270,508.00 to be exact. If, as Chevron argued, the production taxes and royalties were excluded as direct costs, then a natural gas producer-processor could take a processing deduction three to four times the actual costs the company had incurred.

Burton, in a memo dated August 6, 1996, at first agreed with her auditors, basing her decision at least in part on legal advice from a senior assistant attorney general. But the oil and gas industry, as the Board of Equalization observed, “reacted sharply,” and Burton began looking for a way to accept the companies’ view.

During the summer, Burton—who as a Republican state representative from Natrona County had served on the House Revenue Committee with Rep. Cynthia Lummis—consulted Lummis and former state Sen. Dan Sullivan, who were co-chairmen of the legislature’s Joint Interim Revenue Committee that had reported on the 1990 law. Sullivan, the Republican brother of former Democratic Gov. Michael Sullivan, was by 1996 working for Chevron. He assured Burton that Chevron was correct, the production taxes and royalties should be excluded.xxv Burton met with Governor Jim Geringer three times on the subject, and he finally told her, she said, “Do what you think is right.”

What she thought was right (Burton consulted the state attorney general to see if she was about to break the law; he said no) was to accept Chevron’s view of the matter, overrule her auditors and herself, and exclude production taxes and royalties from the direct cost formula. She issued a new memo in October 1996 to “supercede” and “cancel” her previous memo. The Equalization Board later found this October memo to be “contrary to law.”

“The Department is never free to ignore the proper interpretation of the statute simply because the Department’s Director prefers a result other than that required by the statute and the Department’s regulations,” the Board ruled. “Ms. Burton was not free to ignore the statute and regulations because she preferred an alternative result.”

In one of the many interim appeals in the case as it made its way through the administrative process, the Board of Equalization had in 2001 ruled against Burton. The Board noted that she decided not to appeal (the companies tried to insist that she do so) because, after discussing the matter with the governor and his staff, “Ms. Burton felt an appeal would not be appropriate, would not be a politically ‘good thing to do.’”

The oil companies, of course, had no such political qualms and continued the fight in the state court system, at the same time seeking the help of sympathetic lawmakers.

Sen. Robert Peck (R-Riverton) who earlier had sponsored the Senate version of Rep. Eli D. Bebout’s bill to curtail private auditors working for the counties, in 2002 introduced Senate File 69, which would have made into law the valuation formula favored by Chevron, RME (formerly known as Union Pacific Resources, Cynthia Lummis’ client,), Amoco (a client of Lummis’ husband, Alvin Wiederspahn) and other energy companies. SF-69 failed on a tie vote on third reading, in part because, according to a Chevron spokesman, the industry lobbyist stopped pushing the bill because Geringer was “probably going to veto” it if it passed.xxvi

The issue in all these legal and legislative fights, and the issue in the battle over Royalty-in-Kind, is “value,” and how it is to be determined for tax purposes. There are other issues—the reliability of industry self-reporting, for example—but value comes first, and brings with it the hardest feelings and most intense struggles. Value, one could say, is where the money is.

In early 2000, Johnnie Burton as head of Wyoming’s Department of Revenue observed at a meeting of the Select Mineral Taxation and Valuation Committee (co-chaired by Sen. Bill Hawks, her late husband’s business partner) that “the relationship between counties and the state administration has deteriorated over the years due to a conflict of jurisdiction on valuation of minerals.” No one disagreed. State-county relations remained strained through the remainder of the Geringer administration, but the spotlight was shifting now to the players on the federal stage, where soon enough Johnnie Burton would make her entrance.

True Value

On the morning of August 13, 1996, at a ceremony at the Teton Science School in Jackson Hole, President Bill Clinton signed into law the Federal Oil and Gas Simplification and Fairness Act. The bill had had strong bipartisan support, the backing of the Clinton administration, and the agreement of 33 state governors—including Gov. Geringer—as well as wide support in the energy industry.

“I hope that this is an omen of things to come, “ the president said, “because this is the way America moves forward. When we tone our rhetoric down and work together and roll up our sleeves and try to meet our legitimate interests and protect our values, come to grips with these challenges, we can do it.”

The president’s hope that rhetoric would tone down and people would work together with their sleeves rolled up did not come to pass. The Republican victories in the legislative elections of 1994 had meant that the Democratic administration’s policies met stout resistance from a Republican-controlled Congress that was, most definitely, feeling its oats. Implementation proposals from the Clinton administration, attempting to address the touchy issue of mineral value—which the new statute had not resolved—met stout resistance from industry.

Basically, the new law simplified the way royalties were collected by reducing paperwork and accounting obligations associated with the tax collection process. Most of the law’s provisions became effective on September 1, 1996, but the critically important question of developing regulations from the law was, as is usual, assigned to the agency in charge, Minerals Management Service. The agency was then headed by Cynthia L. Quarterman, an engineer and oil-and-gas lawyer whom Clinton had named Management Service deputy director in 1993 and then appointed director in March 1995.xxvii

Minerals Management was smarting from yet another negative Congressional assessment, this time from the Republican Congress—the House Government Reform and Oversight Committee’s 1996 report, Crude Oil Undervaluation: the Ineffective Response of the Minerals Management Service, which had concluded that undervaluation of federal royalties had seriously shortchanged the United States Treasury, with millions of dollars in royalties undervalued and up to $2 billion unpaid. Responding, Minerals Management in 1998 under Clinton’s appointee Quarterman issued revised rules for valuing oil and gas to reflect “true market value.”

Previously, the Department of the Interior had based royalties on a value defined as “the gross proceeds realized by … lessees under arm’s-length sales.” The enormous changes in the world petroleum market made this method unworkable. Then there was a period of “posted prices” as a value yardstick, but that quickly became a way for the industry to game the system, since the “posted price” in reality was a starting price, which no one in the business paid. In the years following passage of the “Simplification and Fairness Act,” Minerals Management Service proposed several different methods—none were “simple” — to determine “fair valuation.” Finally in 1998 the agency determined that royalty payment would be based on a “price determined between an oil producer and a willing buyer”—in other words, market value.

The oil and gas industry resisted fiercely, and for the next two years a prolonged, acrimonious debate between the industry and Minerals Management Service played out in meetings and hearings in the House and Senate, while implementation of the new valuation rules was delayed at the behest of the oil and gas industry, usually through a legislative bit of budgetary legerdemain.

The focus of the issue became the choice of collection system, whether to take royalties “in kind” or “in value,” and here Wyoming’s Congressional delegation stepped into the national spotlight.

Click here for end notes referenced above.

Correction: This story has been altered to correct the Colorado town Secretary Ken Salazar visited earlier this year and talked to employees about the royalty in kind program.

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One comment

  1. This is maybe the best piece of circumnavigational investigative reporting I have read about my home state of Wyoming in a long, long time… I’m gonna lobby the Casper Star Trib to publish this verbatim ( wish me luck on that ).

    If you had any prior doubts that the state of Wyoming was anything other than a colonial brothel for the mineral industry…