Tuesday, January 24, 2006

Jumping Jack Flash

It's a gas, gas, gas.

Natural gas. The stuff from the ground, not out of, well, Washington, Canberra and other places.

The US Federal Guvmint owns heaps of gas producing lands, which they rent out to gas companies in return for a piece of what they take out, in the form of royalty payments which are based on market rates for gas.

With the price of heating oil and other petroleum products so high, people just cannot get enough natural gas. Look at the mess Europe got in because Russia was getting stingy with its gas.

In 2001, the Federal treasury got US$5.35 Billion from payment of these gas royalties.

Not surprisingly, with so much demand and so little supply at the moment, natural gas market prices have roughly doubled since 2001.

So, let's do a little back of the envelope computation: Prices doubled from 2001 to 2005; gas lessees paid the treasury $5.35 Billion in 2001,

so-o-o-o ... what did they pay the treasury in 2005???

Only $5.15 billion.

You got a problem with that? The New York Times does:
"At a time when energy prices and industry profits are soaring, the federal government collected little more money last year than it did five years ago from the companies that extracted more than $60 billion in oil and gas from publicly owned lands and coastal waters.

If royalty payments in fiscal 2005 for natural gas had risen in step with market prices, the government would have received about $700 million more than it actually did, a three-month investigation by The New York Times has found.

But an often byzantine set of federal regulations, largely shaped and fiercely defended by the energy industry itself, allowed companies producing natural gas to provide the Interior Department with much lower sale prices - the crucial determinant for calculating government royalties - than they reported to their shareholders.

As a result, the nation's taxpayers, collectively, the biggest owner of American oil and gas reserves, have missed much of the recent energy bonanza.


The disparities in gas prices parallel those uncovered just five years ago in a wave of scandals involving royalty payments for oil. From 1998 to 2001, a dozen major companies, while admitting no wrongdoing, paid a total of $438 million to settle charges that they had fraudulently understated their sale prices for oil.

Johnnie M. Burton, director of the Interior Department's Minerals Management Service, said the disparities were mostly the result of deductions that the regulations let companies take, reducing the sale prices they report to the government.

But Ms. Burton said she had not known and could not explain why companies were reporting higher sale prices to their shareholders and to the Securities and Exchange Commission than to her office.

"I can't answer because I don't know," she said in an interview. "We don't look at S.E.C. filings. We don't have enough staff to do all of that. If we were to do that, then we would have to have more staff and more budget. You know, there is such a thing as budget constraint, and it's been real tough, let me tell you." The contrasts between what companies are telling the government and what they are telling shareholders is stark.

The Interior Department, using the numbers given by companies paying royalties, said the average sale price of natural gas on federal leases was $5.62 per thousand cubic feet in fiscal 2005, which ended Sept. 30.

By contrast, Exxon told shareholders that it received about $6.88 per thousand cubic feet in the nine months that ended Sept. 30. Chevron said its average price in that period was $6.49. Kerr-McGee, which suffered huge losses from hedging against a drop in prices, nonetheless said it still received an average price of $6.59."

Now I can accept that there are differences in prices at wholesale, which presumably is how royalties are based, and prices at retail, which presumably is what the companies gloated about to their shareholders. And there may be other explanations for the apparent discrepancy: one apologist (Bush's Secty. of the Dept. of Interior, Gale Norton) was saying on CNBC today that the inablility to produce in the wake of Katrina and Rita were big factors.

Nevertheless, the energy companies do not have good form on this sort of thing, as the NYT article notes:
"The disparities in gas prices parallel those uncovered just five years ago in a wave of scandals involving royalty payments for oil. From 1998 to 2001, a dozen major companies, while admitting no wrongdoing, paid a total of $438 million to settle charges that they had fraudulently understated their sale prices for oil.

... Burlington Resources, admitted to shareholders last year that it might have underpaid about $76 million in gas royalties in the 1990's. And in Alabama, a jury ruled in 2003 that Exxon had cheated on $63.6 million worth of royalties from gas wells in state-owned waters. The jury awarded $11.9 billion in punitive damages, which a judge later reduced to $3.5 billion. Exxon disputes the charges and is appealing the verdict....

In the scandals over oil royalties in the 1990's, government investigators, aided by industry whistle-blowers and investigation by the Project on Government Oversight, found that companies were using a host of tricks to understate their sale prices.

These included buy-sell agreements in which producers swapped oil with each other at artificially low prices and then resold it at higher prices. Companies also sold oil at below-market prices to their own affiliates, classified high-priced "sweet" oil as much cheaper "sour" oil and padded their deductions for transportation costs.

In the wake of the scandals, the outgoing Clinton administration pushed through tough new rules for valuing crude oil, which relied on comparing company reports with an index of spot market prices.

But the Bush administration did not close any loopholes for valuing natural gas. Indeed, in March 2005 it expanded the list of deductions and decided against valuing sales at spot-market prices when companies were selling to their own affiliates.

The industry-friendly stance was intentional. Mr. Bush and top White House officials also placed a top priority on promoting domestic energy production. Vice President Dick Cheney's energy task force called for giving lucrative new incentives to companies that drill in the Gulf of Mexico and other high-risk areas.

The Bush administration also took a much more relaxed approach to auditing and fraud prevention. In 2003, the Interior Department's inspector general declared that the auditing process was "ineffective" and "lacked accountability" and that many of the auditors were unqualified.

In one instance, inspectors discovered that auditors had lost the working papers for an important audit and tried to cover up their blunder by creating and back-dating false documents. Rather than punish anybody, the inspector general recounted, the minerals service gave the employee who produced the new documents a financial bonus for "creativity."

Administration officials said last week that they had addressed most of the criticisms and that the inspector general had since said its corrective actions were "sufficient."

The Interior Department also fired two of its most aggressive and successful auditors. One of them was Bobby L. Maxwell, a veteran auditor who had recovered hundreds of millions of dollars in underpayments over a 22-year career and received an award for meritorious service in 2003 from Interior Secretary Gale A. Norton.

Mr. Maxwell was fired in early 2005 after clashing with superiors over his belief that Kerr-McGee had shortchanged the government $12 million. Mr. Maxwell charged that he had been wrongfully fired, and the government paid him an undisclosed amount of money to settle out of court.

Perhaps the most striking example of sluggish auditing is the government's effort to collect back royalties from companies that blatantly ignored one of the government's basic rules.

Under current rules aimed at promoting energy production in deep waters, companies can produce large volumes of oil and gas without paying royalties at all. But the rules also require companies to start paying royalties if market prices climb above certain "threshold" levels.

As it happens, market prices have been above those levels since the 2003 fiscal year. But even though dozens of companies never bothered to start paying, Ms. Burton said earlier this month that the government had yet to demand repayment three months into the 2006 fiscal year.

"It's more complicated than you might think," said Lucy Querques Dennett , associate director of the Minerals Management Service in charge of the issue.

But enforcing the rules about price thresholds is easy compared with verifying the actual sale value of natural gas.

Over the last four years, the Bush administration has ordered its auditors to move away from detailed inspections in favor of a more cursory approach of looking for anomalies in company reports. If a company in Louisiana, say, reported prices that differed from those of other companies in the same region, it would attract closer scrutiny.

Mr. Etchart, the agency's spokesman, said that the number of full-scale audits had declined slightly over the past few years and that the budget for compliance had fallen.

But he said the government still took a "close look" at 71 percent of oil and gas production. "Our strategy would obviously be to focus on anomalies," he said, "but it is also to focus on large producing areas."

The agency's strategy has drawn protests, however, from many states, which are entitled to a share of federal royalties, and from some of the Interior Department's most aggressive auditors.

One of those auditors was Kevin Gambrell, director of the Federal Indian Minerals Office in Farmington, N.M. Mr. Gambrell fought with his superiors over many issues, one of which was their demand that he do fewer audits and simply monitor posted prices of companies in the same area.

"Where the M.M.S. approach falls short is that there are so many different types of deductions you can take in getting gas and oil to the market, and there are so many premiums and bonuses in the contracts," Mr. Gambrell said in a recent interview. "You have to take a detailed look at the contracts to know what's going on."

The Interior Department forced Mr. Gambrell out in 2003, charging that he had improperly destroyed office documents. Mr. Gambrell sued for wrongful termination, arguing that he had discarded only copies of documents. He also presented evidence that his office had recovered eight times as much money as offices that used the administration's preferred approach.

The government settled his case in 2004 by clearing him of any wrongdoing and paying him an undisclosed amount of money.

For practical purposes, the biggest cost to taxpayers may have less to do with cheating and fraud than with the government's inscrutable rules.

Consider the case of Burlington Resources, a Houston-based producer that ConocoPhillips acquired in December for $35.6 billion. Burlington paid $8.5 million in 2001 to settle charges of cheating related to its oil royalties. Last March, Burlington disclosed that it might also have underpaid gas royalties by about $76 million during the 1990's. It set aside $81 million to cover possible litigation costs.

Unlike others, Burlington executives provided information to The Times on the royalties it paid for natural gas and on the sale prices that it has reported to the Interior Department since 2002.

During those four years, Burlington said it paid $627 million in gas royalties and that its annual payment shot up from $89 million in 2002 to $233 million in 2005.

That surge in royalties does track closely with the rise in market prices. But Burlington's numbers also highlight the essential issue raised by many critics: the rules let companies understate the value of their gas sales by taking scores of deductions.

Those deductions include the cost of transportation, processing, brokerage fees, pipeline reservation fees and even certain "theoretical losses" for companies that own their own pipelines.

In 2001, Burlington reported an average price of $1.98 per thousand cubic feet to the government but an average sale price of $3.20 to its shareholders. In 2005, the company reported an average sale price of $5.75 to the government and $6.46 to shareholders.

James Bartlett, a spokesman for Burlington, said part of the discrepancy resulted from the fact that much of Burlington's production is in the Rocky Mountains, where natural gas fetches lower prices.

The federal government does not require companies to divulge the amount of royalties they pay or what they tell the government about sale prices. And unlike Burlington Resources, Exxon and most other major oil companies refused to disclose the information when asked.

"It's not required information," said Mr. Davis of Exxon, echoing responses from Chevron, Royal Dutch/Shell and other big producers. "We're not going to publish it"."

Thursday, January 19, 2006

Contaminated wheat, indeed

The story of the AWB's involvement in corrupt dealings with the Saddam Hussein regime in contradiction to the UN's sanctions and Oil-for-Food program (see, and, and) has gotten only more sordid. It now looks like the bribery and duplicity has continued into its dealings with the post-Saddam regime, as well.

The Herald reports:
SENIOR executives from Australia's wheat exporter, AWB, have been accused of discussing paying bribes to "influential people" in Iraq with the help of a BHP-linked company within weeks of the toppling of Saddam Hussein's regime by coalition forces.

Evidence pointing to AWB plans to resume paying kickbacks in the newly liberated Iraq emerged yesterday at the royal commission on the oil-for-food scandal and will be deeply embarrassing to the Howard Government, which committed 1200 Australian defence lives to help overthrow the regime it labelled corrupt and dangerous.

Recall this bit when the UN investigation first suggested the possibility that the AWB had been naughty:

"[Australian Prime Minister John Howard said,] "My dealings with the people in the AWB in the past have always been such that I've found them a very straight up and down group of people and I can't imagine for a moment that they would have knowingly been involved in anything improper." Trade Minister Mark Vaile has also defended AWB. "I wouldn't imagine for a moment that any of the management or the board of AWB would have knowingly been involved," he said. Mr Vaile says the AWB followed all UN guidelines while taking part in the program. Mr Vaile has blamed the United Nations, saying it oversaw the contract." (http://www.abc.net.au/news/newsitems/200510/s1492749.htm)

"These [DFAT]officers were not corrupt," Mr Downer told parliament during a fiery exchange with his Labor counterpart Kevin Rudd. But Mr Rudd said DFAT's evidence before the Senate estimates committee showed "inexcusable negligence" by the government. DFAT laid responsibility for policing the corruption-ridden oil-for-food program squarely with the UN." (http://smh.com.au/news/NATIONAL/DFAT-approved-AWB-oilforfood-request/2005/11/03/1130823328054.htm)

If not corrupt, then what? Marian Wilkinson writes in the Herald,
"We know from internal documents uncovered by the Cole inquiry that Foreign Affairs officials discussed the pros and cons of some AWB schemes to pay fees, in violation of UN sanctions, to the Iraqi regime. The close relationship between the department and AWB is best illustrated by the role of the former AWB chairman, Trevor Flugge. There is already evidence that Flugge took part in talks in Baghdad which resulted in an inflated contract, designed secretly, to pay a kickback to Iraq. Foreign Affairs officials accompanied Flugge and his AWB colleagues to Baghdad at this time, but their role in the negotiations, if any, has yet to be revealed.

Significantly, at the end of the Iraq war, the department turned to Flugge to establish Australia's presence in the occupation government when the war was over in April 2003. The Minister for Foreign Affairs, Alexander Downer, personally announced the appointment of Flugge as a senior agricultural adviser who was to help reform the Iraqi agricultural ministry."

In a prior report, Wilkinson reported,
"One memo bluntly advised senior [AWB] staff: "We have to keep the lid on this." Several other memos indicate officials in the Department of Foreign Affairs and Trade discussed the sanction-busting deal with AWB managers, along with another proposal to pay the Iraqi Government a secret rebate on a contaminated wheat shipment by inflating transport fees. "According to DFAT there is no clear UN protocol for debt repayment that we can find. It is a grey area we would ideally not like to test openly," one memo read.

A later memo in February 2003 indicated the AWB chief executive, Andrew Lindberg, was supposed to personally inform the Howard Government of a scheme to funnel the secret rebate through an Iraqi front company in Jordan, called Alia. "Managing Director only to convey our intentions to the Australia Government at the appropriate time prior to Shipment," read the memo. It also warned that the Government would be "obliged to prevent AWB" from paying the Iraqis directly.

But Mr Lindberg said he could not recall ever approaching the Government on the deal.

In the witness box yesterday, Mr Lindberg often failed to recall key elements of the deal involving Tigris Petroleum and kickbacks paid as trucking fees on the Iraq contracts. This included details of a meeting he attended in Baghdad in 2002 with the Iraqi Minister for Trade. At that meeting, according to several memos, he and other AWB executives agreed with the Iraqis to inflate the wheat price to repay $8 million owed by the Iraqis to Tigris Petroleum, a BHP partner investing in oil in Iraq. The Iraqis also agreed to settle a $2 million contract dispute with the AWB over iron filings in one of its shipments.

Counsel for the inquiry, John Agius, SC, asked Mr Lindberg whether he believed AWB had "deceived" the UN over the Tigris deal. He replied: "I don't know."

Asked if it was "ethical behaviour" to inflate the wheat price and mislead UN officials about its contracts with Iraq, Mr Lindberg replied: "I think it would be better if that was disclosed."

Mr Lindberg said his role was to make every attempt to keep the Iraq wheat contracts, which were "treasured" in the AWB. He said he believed an Iraqi claim about iron filings contaminating a wheat shipment was "a complete hoax" to punish the Howard Government for its pro-US stance in the lead up to the war."

It bears keeping in mind that the AWB is a specially formulated government entity, only fairly recently "corporatised". What is does is hold monopoly power over the sale of Australian wheat. No wheat farmer can export wheat unless the sale is conducted through the AWB. Obviously, given that governments generally abhor monopolies, this one only exists by the grace and legislation of government. It is this closer than usual relationship to the government that is a political scud missile.

As Wilkinson again puts it,
"The problem for the Howard Government is that these illicit payments began before the Australian Wheat Board was corporatised. And AWB, even after it was listed on the stock exchange, continued to see the Department of Foreign Affairs and Trade as its ally in shoring up the claims that it was complying with UN sanctions.

But the evidence of AWB's behaviour raises serious questions for the Government. If officials have any knowledge that AWB was circumventing the UN sanctions, it is not just politically embarrassing. It means the Government was complicit in allowing AWB to rip money off the UN's Iraq escrow account, which was intended to purchase food and medicine for malnourished Iraqis."

The shere audacity of the parties to deny, stonewall, prevaricate and "forget" is exemplified by this action yesterday:
"Australian wheat export monopoly AWB has apologised to the Australian Stock Exchange for a statement it released about its involvement in kickback payments to the regime of Saddam Hussein. In a short statement, company secretary Richard Fuller said it was inappropriate for the company to release the two-page statement, which sheeted home much of the blame over $300 million in payments to Saddam's regime to the United Nations and the Iraqi Grains Board.

"AWB Ltd apologises for the unauthorised release of the statement made by the managing director, Andrew Lindberg," he said in the statement. "Due to the fact that an inquiry into the UN oil-for-food program is currently in progress, it was inappropriate that the statement be lodged."

The statement was released while Mr Lindberg was giving evidence for a second straight day to a Commission of Inquiry, which is examining the role of certain companies in the oil-for-food program and kickback payments to the then Iraq government. In the original statement, Mr Lindberg appeared to contradict evidence presented to the inquiry. Mr Lindberg said in the original statement to the stock exchange that AWB did not know where the $300 million in extra payments eventually finished up, even though it had been revealed the money went into the coffers of Saddam Hussein.

Head of the inquiry, Terence Cole, QC, took serious issue with the statement."

Meanwhile, back at the business-as-usuall AWB, the Herald noted, tucked away at the end of a story buried in the business section,
"AWB also confirmed yesterday that its annual meeting would be brought forward to February 23. The company will use the meeting to ask shareholders to vote on increasing the total amount payable to directors by $400,000 to $1.6 million".