October 31, 2006

Remember this when you pay YOUR taxes...

Or, God forbid, get audited. This article represent the Bush administration's relationship to Big Oil in a nutshell. Lots of sweetheart deals, toothless enforcement of the law, Enron style accounting, and plenty of secrecy to boot.

U.S. Drops Bid Over Royalties From Chevron

The Interior Department has dropped claims that the Chevron Corporation systematically underpaid the government for natural gas produced in the Gulf of Mexico, a decision that could allow energy companies to avoid paying hundreds of millions of dollars in royalties.

The agency had ordered Chevron to pay $6 million in additional royalties but could have sought tens of millions more had it prevailed. The decision also sets a precedent that could make it easier for oil and gas companies to lower the value of what they pump each year from federal property and thus their payments to the government.


In return for the right to drill on federal lands and in federal waters, energy companies are required to pay the government a share of their proceeds. Last year, businesses producing natural gas paid $5.15 billion in government royalties.

But the Bush administration has come under fire on Capitol Hill for its record on collecting payments. While the Interior Department has sweetened incentives for exploration and pushed to open wilderness areas for drilling, it has also cut back on full-scale audits of companies intended to make sure they are paying their full share.


The Chevron case offers a glimpse into what is normally a secretive process. To protect what energy companies consider proprietary information, the Interior Department does not announce that it is accusing companies of underpaying royalties nor does it announce its settlements in these disputes. The government also does not disclose how much money each company pays in royalties.


In 1996, Chevron sold its holdings in more than 50 processing plants to Dynegy in exchange for a 26 percent stake in the natural gas company, which is based in Houston. For the next seven years, Chevron sold virtually all its domestic natural gas to Dynegy for processing.

In their original accusations, dating to 2001, the auditors asserted that Chevron had understated sales, and hence its royalty obligations, by inflating costs for processing gas at Dynegy.

Companies are allowed to deduct processing costs from their sales revenues when they calculate their royalty obligations.


From 2001 to 2003, after detailed audits of several Chevron leases, the Interior Department said the company was reducing its “sales value” by exaggerating processing costs at six of Dynegy’s many plants. At one plant, auditors estimated Chevron had claimed five times the actual costs.

Let's see if I understand this. Chevron used to process it's own natural gas, but in 1996 sold a bunch of its processing plants to Dynegy, which in turn began to process virtually all of Chevron's natural gas. So nothing really changed here, except the name on the company letterhead. But, what it allows Chevron to do is say is that it cost more to process the natural gas than it actually did. And, since Dynegy is not Chevron, the audit trail gets harder to navigate.

It appears that again, the Feds want to look like they are enforcing the law, when in practice, they do not. One ruling against a similar suit and they roll over. States who had fought similar suits and had won were willing to share their information with the Feds and the Feds either ignored them or actively refused their information.
On July 11, three weeks before the department dropped its case against Chevron, Mr. Dorman and other lawyers involved in a Texas lawsuit against Chevron wrote to Interior Department officials. The lawyers, who represent a whistle-blower seeking to recover money for the federal government, said they were suing Chevron over the same issues the department had raised.

“All we were saying was that they should wait to see what evidence we turned up, and that we would gladly share everything we had with them,” Mr. Dorman said. His firm faxed a letter to the policy appeals division. Getting no response, the lawyers sent a copy by U.P.S. Six days later, it was returned. The reason, according to the U.P.S. label: “Receiver did not want, refused delivery.”

The agency confirmed in a statement that it knew of the lawyers’ case. Asked why it refused to accept their letter, the Minerals Management Service said it could not comment “because these matters are the subject of pending litigation.”
Well, of course.

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