Shooting the Whistle-blower.

• Author: UMANSKY, ERIC

How Congress is sabotaging an effort to stop oil companies from cheating taxpayers

IN 1986, ROBERT BERMAN, THEN A SENIOR economist at the Interior Department, got a memo from the office of Gray Davis, then the Controller for the state of California. California was concerned it was getting underpaid by oil companies who were drilling for oil on public land. Berman looked into the issue, and, as he puts, "was bothered by the result."

Oil companies are required to pay a royalty on any oil they take from public land, which amounts to billions of dollars per year. But it looked to Berman like the companies were purposely under-reporting the price of the oil they were extracting. Under the law, the government relied on oil companies to self-report the price of oil they took out of any public land, federal or state. There were a number of safeguards to make sure that oil companies reported a fair price. But the regulations were very complex and required expensive bird-dogging on the part of the government. Not exactly the perfect system. At the same time, Berman remembers, there was concern about the high costs of all the monitoring needed to make sure oil companies were paying the government a fair price. As a result, the Interior Department was getting some heat over its budget.

"I had an idea," says Berman, recalling his thinking 13 years ago, "Why don't we start looking at market prices, because the oil commodities market just opened up." In other words, Berman's suggestion was both radical and very simple: Forget about all the current complex regulations with their near-blind faith in oil companies billing themselves fairly, and just make them pay royalties based on what people would pay for the oil on the open market. This would ensure that the government got what it deserved and would reduce the cost of enforcement.

Perhaps as a result of standard bureaucratic inertia, the Interior Department did its best to ignore Berman's idea for years. According to Berman, when he finally did find hard evidence of oil companies purposely cheating on oil royalties, Interior issued a report agreeing with him, only to have the report revised and deny any underpayments. Finally, says Berman, "I was ordered not to work on oil valuations anymore."

But it turns out Berman was right. Over the past 13 years oil companies have had to pay billions of dollars in settlements to states and the federal government after it was discovered that they had underpaid for the oil they extracted. And though Berman somewhat exaggerates his role in identifying the problem, his idea to simplify the payment process has also proven to be right on. Many states have adopted the "market price" idea; and the Interior Department finally proposed adopting it early in 1997 (and billed oil companies $257 million in back payments).

The total savings from Berman's idea is $66 million a year. So you'd think he'd win an employee of the month award and bask in office glory for ferreting out fraud. Instead, Congress has blocked the Interior Department from adopting the new rules time and again. And now, led by oil-state congressmen, all of whom have gotten chunks of cash from the oil industry, Congress has launched a diversionary investigation against Berman. Like much of congressional action on this issue, the investigation is a favor to the oil industry, and the idea behind it is clear: If someone catches you stealing, and you can't question their testimony, attack their integrity as a witness.

Oil companies and Congress want you to think this is a complex story with "no easy answer." But it's really very simple: Oil companies have been cheating the government out of billions of dollars, and Congress is helping them do it.

Crude Cut

Oil companies have a great gig. When they take oil from federal land, they're supposed to pay a royalty to the government for every barrel they take. It's a fairly modest price, generally about 12.5 percent of the total value of the oil. But Big Oil (and given that it isn't all oil companies, but just the largest--or vertically integrated--ones, the term is more than just hyperbole) has been scamming the system for years. The government regulations around oil royalties were (and still are) so complex and weighted in favor of oil companies that it was easy to under-report the cost of oil taken from government land. The oil companies have taken advantage of that fact. Their self-reported prices, called "posted prices," are consistently significantly lower than what is being paid on the open market. And that's illegal.

There are plenty of smoking guns in this story, but this one, if not the...