U.S. Should End Royalty-in-Kind Oil Program, Watchdog Says

By Tina Seeley

Sept. 17 (Bloomberg) -- The U.S. Interior Department should end a program that allows companies to pay royalties for drilling on federal lands and water using ``in-kind'' deliveries of oil and natural gas, a watchdog group said.

An investigation of the department's Minerals Management Service by the inspector general revealed last week that certain employees in the ``royalty-in-kind'' program were accepting gifts and having sexual relationships with oil and gas company contacts with whom they were doing business.

Interior Secretary Dirk Kempthorne should begin phasing out the in-kind program, instead relying on cash royalty payments from the industry, the Project on Government Oversight said in a report. Congress also should move auditing of the royalty program to an independent agency, the group said.

The department collected about $9 billion in oil and gas royalties in the 2007 fiscal year. Most of the royalties from oil drilling in the Gulf of Mexico, which accounts for 26 percent of U.S. oil production, came in the form of barrels of oil in 2006. The program would then either sell the oil on the open market or deliver it to the U.S. Strategic Petroleum Reserve.

Royalties from companies that produce oil, gas or minerals from U.S. lands and offshore areas are ``the second largest source of revenue for the federal government,'' after taxes, Danielle Brian, head of the watchdog group, said at a press conference in Washington yesterday.

``I believe this was a system that was intended to fail,'' Brian said, noting industry support for the program. ``I don't believe there's a way to make it work.''

To contact the reporter on this story: Tina Seeley in Washington at tseeley@bloomberg.net.