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<DIV class=timestamp>December 30, 2006</DIV>
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<H1><NYT_HEADLINE type=" " version="1.0">U.S. Official Overseeing Oil Program
Faces Inquiry </NYT_HEADLINE></H1><NYT_BYLINE type=" "
version="1.0"></NYT_BYLINE>
<DIV class=byline>By <A title="More Articles by Edmund L. Andrews"
href="http://topics.nytimes.com/top/reference/timestopics/people/a/edmund_l_andrews/index.html?inline=nyt-per">EDMUND
L. ANDREWS</A></DIV><NYT_TEXT></NYT_TEXT>
<DIV id=articleBody>
<P>WASHINGTON, Dec. 29 — The Justice Department is investigating whether the
director of a multibillion-dollar oil-trading program at the <A
title="More articles about Interior Department, U.S."
href="http://topics.nytimes.com/top/reference/timestopics/organizations/i/interior_department/index.html?inline=nyt-org">Interior
Department</A> has been paid as a consultant for oil companies hoping for
contracts. </P>
<P>The director of the program and three subordinates, all based in Denver, have
been transferred to different jobs and have been ordered to cease all contacts
with the oil industry until the investigation is completed some time next
spring, according to officials involved.</P>
<P>The officials, who spoke on condition of anonymity because the investigation
had not been announced publicly, said investigators were worried that senior
government officials had been steering huge oil-trading contracts to favored
companies. </P>
<P>Any such favoritism would probably reduce the money that the federal
government receives on nearly $4 billion worth of oil and gas, because it would
reduce competition among companies that compete to sell the fuel on behalf of
the government.</P>
<P>If the allegations prove correct, they would constitute a major new blot on
the Interior Department’s much-criticized effort to properly collect royalties
on vast amounts of oil and gas produced on land or in coastal waters.</P>
<P>The Interior Department’s Minerals Management Service, which oversees royalty
collections, is now the target of multiple investigations by Congress and the
Interior Department’s inspector general. </P>
<P>Those investigations are focused on allegations that the agency ordered its
own auditors to abandon claims of cheating by large oil companies; that the
agency’s arcane rules for calculating sales value and royalties make it easier
for companies to understate their obligations; and that the agency’s basic
sources of data are riddled with inaccuracies and are unreliable.</P>
<P>Interior officials have promoted “royalties in kind” as a much simpler and
more efficient way for the government to get its proper share, because it
eliminates much of the arcane accounting and reduces the opportunities for
sleight-of-hand bookkeeping. </P>
<P>About a quarter of all oil and gas produced in the United States comes from
federal property, and the Interior Department collected about $10 billion in
royalties last year on about $60 billion in oil and gas.</P>
<P>At issue is the “royalty in kind” program, a fast-growing program under which
companies pay their royalties in the form oil or gas rather than in the
traditional form of cash. </P>
<P>For the 12 months ending last April, the government collected about $3.7
billion in oil and gas. Until recently, most of the oil simply went to the
government’s Strategic Petroleum Reserve. But the strategic reserve was
essentially filled this year, so the Interior Department hires private companies
to resell the fuel on the open market.</P>
<P>To ensure that it gets the best price, the Interior Department takes bids for
contracts in which companies typically offer to pay a specific premium over the
daily spot-market prices quoted on the Nymex commodity exchange. The companies
offering the biggest premium over the spot market get the contracts.</P>
<P>People familiar with the investigation said it had begun several months ago,
but had picked up speed in the last few weeks.</P>
<P>The most prominent figure in the inquiry is Gregory W. Smith, who was
director of the royalty-in-kind program at the Minerals Management Service in
Denver. Mr. Smith oversaw the entire program, which now covers 75 percent of
royalties for all oil and 30 percent of royalties for all natural gas produced
in the Gulf of Mexico.</P>
<P>One person familiar with the investigation said it originally had focused on
potentially improper social ties between some of Mr. Smith’s subordinates and
executives at companies vying for contracts. The subordinates include two women,
including one who is said to be in charge of oil marketing, and a second man.
</P>
<P>All four people were transferred out of the royalty-in-kind office several
weeks ago. Mr. Smith was reassigned as a “special assistant” to Lucy Querques
Dennett, associate director of the Mineral Management Service in Washington. He
was given strict orders to avoid any contact with industry executives, according
to one official.</P>
<P>One official said investigators were now looking at possible consulting
arrangements between the Denver officials and oil companies. The official said
the most recent information had, if anything, hardened the suspicions of
investigators, and said the potential ramifications could turn out to be
far-reaching. </P>
<P>Mr. Smith did not return calls to his office in Denver. Spokesmen for the
Interior Department in Washington as well as in the inspector general’s office,
which began the investigation before referring the matter to the Justice
Department, refused to comment on the matter.
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