Monday, January 23, 2006

If this is what they do in the U.S. imagine what they did in Venezuela 

Today the New York Times published a front page detailing how U.S. oil and gas companies have been carrying out various fraudulent activities to minimize the amount of taxes and royalties paid to the U.S. government. Although this is somewhat off topic for this blog I found the article to be both stunning and fascinating for one reason. And that is that these transgressions carried out in the United States by oil companies almost exactly matched a lot of the accused wrongdoings of oil companies in Venezuela.

I recently finished reading the speach by Venezuelan energy minister Rafael Ramirez before the National Assembly. In that speech he talked a great deal about the various mechanisms that the foreign oil companies operating in Venezuela, and even the former management of PDVSA, used to cheat the Venezuelan government out revenue it was entitled to. Of course, although Mr. Ramirez's accusations were quite serious and seemed plausible there was no independent corroboration of them. Although past events have made me inclined to believe Venezuelan government officials there was no way to know if maybe these accusations weren't being embellished.

So today when I read the very detailed and corraborated accusations against the U.S. oil companies I was literally stunned - virtually all the things the oil companies did in the U.S. to avoid royalty payments were the exact same things that Rafael Ramirez accused the oil companies of doing in Venezuela. In the not too distant future I hope to publish some extended exerpts from Ramirez's speech. And when I do try to keep in mind the following from the NYT article:

As Profits Soar, Companies Pay U.S. Less for Gas Rights

WASHINGTON, Jan. 22 - 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.


Royalties for natural gas have climbed sharply in the last three years. But while prices nearly doubled from 2001 to 2005, the $5.15 billion in gas royalties for 2005 was less than the $5.35 billion in 2001. When oil and gas are combined, royalties were about $8 billion in 2005, almost the same as in 2001.

Because much of the information about specific transactions is kept secret, it remains unclear to what extent, if at all, the weakness in royalty payments stems from deliberate cheating or from issues with the rules themselves.

But one major producer, 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.


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.

"There's no reason why what the companies report to their shareholders should be higher than what they report" to the Minerals Management Service, said Lee Helfrich, a lawyer who has represented California in many battles with the industry over royalties. "The ultimate goals or mission of the S.E.C. and the M.M.S. are different, but the information reported to each should be the same."


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.


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."


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.

So just a few of the tricks to avoid paying the government money were underreporting the sale prices, selling to affiliates at phoney prices, and taking dozens of deductions no matter how absurd many of them were. And a pliant government colludes in this fraud by allowing absurd deductions, cutting back on audits and oversight, and by simply refusing to enforce laws.

And PDVSA and foriegn oil companies, with the collusion of the Venezuelan government, did precisely the same things before Chavez showed up and cleaned house. To give an example, recall the article showed how the Bush administration has cut back on the auditing of oil companies. Well under the Carlos Andres Perez administration PDVSA successfully lobbied the government to have the tax authorities, who had always had offices directly in PDVSA headquarters to carry out ongoing oversite and audits, removed from the building. And the Perez administration gladly complied and had the tax agency office closed. PDVSA also bought a number number of overseas affiliates to which it sold oil at discounted prices as a way of avoiding having to pay royalties to the Venezuelan government. According to the Times article that is straight out of the Exxon-Mobil play book.

One has to wonder how these scams could have been so simliar. Could it be that the fired PDVSA executives got jobs at big U.S. oil companies and started this? No, Big Oil in the U.S. was doing this long before the PDVSA executives came onto the market. Or could it be that the PDVSA executives were largely culled from the ranks of big foreign oil companies so they just continued with all the same tricks of the trade they had learned while working for them? I think that is probably it. They were good students who learned from true pros.

In fact this turns on its head one of the main arguements that has always been advanced in favor of the former PDVSA "meritocracy". That is, that these were highly trained professionals and managers who had learned from the best and brightest and ran a world class oil company. What we see is that the oil executives from whom they would have learned were no paradigm of morality and ethics. Rather, in spite of their fancy atire and polished presentation, they are lieing, theiving, crooks. And if Exxon and Shell were the parents of PDVSA then all we can say is that the apple didn't fall far from the tree.


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