[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
PART TWO: INTERIOR DEPARTMENT: A CULTURE OF MANAGEMENT IRRESPONSIBILITY 
                      AND LACK OF ACCOUNTABILITY?

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 14, 2006

                               __________

                           Serial No. 109-183

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of 
PATRICK T. McHENRY, North Carolina       Columbia
CHARLES W. DENT, Pennsylvania                    ------
VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont 
JEAN SCHMIDT, Ohio                       (Independent)
BRIAN P. BILBRAY, California

                      David Marin, Staff Director
                Lawrence Halloran, Deputy Staff Director
                         Benjamin Chance, Clerk
                         Michael Galindo, Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 14, 2006...............................     1
Statement of:
    Scarlett, P. Lynn, Deputy Secretary, U.S. Department of the 
      Interior, accompanied by Johnnie Burton, Director, Minerals 
      Materials Management Service, U.S. Department of the 
      Interior...................................................    43
Letters, statements, etc., submitted for the record by:
    Cummings, Hon. Elijah E., a Representative in Congress from 
      the State of Maryland, prepared statement of...............    37
    Davis, Chairman Tom, a Representative in Congress from the 
      State of Virginia:
        Prepared statement of....................................     3
        Prepared statement of POGO...............................    10
    Issa, Hon. Darrell E., a Representative in Congress from the 
      State of California, prepared statement of.................    33
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, prepared statement of...............    18
    Markey, Hon. Edward J., a Representative in Congress from the 
      State of Massachusetts, prepared statement of..............    41
    Scarlett, P. Lynn, Deputy Secretary, U.S. Department of the 
      Interior, prepared statement of............................    47
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, prepared statement of.................     7


PART TWO: INTERIOR DEPARTMENT: A CULTURE OF MANAGEMENT IRRESPONSIBILITY 
                      AND LACK OF ACCOUNTABILITY?

                              ----------                              


                     THURSDAY, SEPTEMBER 14, 2006,

                          House of Representatives,
                            Committee on Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:30 a.m. in 
room 2154, Rayburn House Office Building, Hon. Tom Davis 
(chairman of the committee) presiding.
    Present: Representatives Tom Davis, Waxman, Cummings, Davis 
of Illinois, Duncan, Gutknecht, Bilbray, Mica, Issa, Kucinich, 
Maloney, Norton, and Watson.
    Also present: Representative Markey.
    Staff present: David Marin, staff director; Larry Halloran, 
deputy staff director; Keith Ausbrook, chief counsel; Anne 
Marie Turner and Thomas Alexander, counsels; Michael Galindo 
and Benjamin Chance, clerks; Leneal Scott, computer systems 
manager; Larry Brady, subcommittee staff director; Phil 
Barnett, minority staff director/chief counsel; Karen 
Lightfoot, minority communications director/senior policy 
advisor; Alexandra Teitz, minority counsel; Shaun Garrison, 
minority professional staff member; Earley Green, minority 
chief clerk; and Jean Gosa, minority assistant clerk.
    Chairman Tom Davis. Good morning.
    Yesterday, our Subcommittee on Energy and Resources held 
its fourth hearing on natural gas royalties for the Federal 
offshore leases. Inspector General Earl Devaney discussed why 
price thresholds were omitted from deepwater leases in 1998 and 
1999. Mr. Devaney also cited numerous times during his 7-year 
tenure at the Department of examples of waste, fraud and abuses 
uncovered by the Office of the Inspector General and 
subsequently ignored by the Department.
    During Mr. Devaney's testimony, we learned of the massive 
departmental confusion surrounding the deepwater leases in 1998 
and 1999. Not only were price thresholds omitted from deepwater 
leases during those 2 years, those within the Department of 
Interior aren't even clear on when the omission was discovered. 
E-mails from 2000 show that upon the discovery, a decision was 
made at the Associate Director level of the Minerals Management 
Service to keep silent the omission, a silence that lasted for 
another 5 years.
    Despite the lack of managerial oversight, Devaney testified 
that no one within the Department of the Interior has been 
fired, suspended or reprimanded as a result of the multi-
billion dollar coverup. Unfortunately, as the Inspector General 
found, the deepwater lease issue is not an exception at the 
Department of the Interior. The OIG has issued countless 
reports citing cases of ethics failures and ineffective 
management and policies within the Department.
    These failings permeate employee morale, as the Inspector 
General's office found in 2004 that 46 percent of employees 
within the Department believe that discipline was administered 
fairly only sometimes, if ever. There are reasons to look on 
the bright side. In May, Dirk Kempthorne took the reins. In the 
4 shorts months of his tenure, Secretary Kempthorne has already 
shown signs that the status quo at Interior is unacceptable. 
Mr. Devaney testified that he met with Secretary Kempthorne on 
the Secretary's first day regarding the OIG's work.
    Additionally, the Secretary sent a memorandum to all 
Interior employees instructing them to cooperate with the 
Office of the Inspector General.
    Will changes be implemented? It is too soon to tell. I 
don't know. If the culture of waste, fraud and abuse continues 
in the Department of Interior, it will never be able to wrap 
its arms around the problems of deepwater leases. But I also 
know that for changes to occur, they have to start from the top 
down.
    I have a personal connection with the Department of the 
Interior. After serving as the Attorney General of Nebraska, my 
grandfather moved to DC to become Solicitor for the Interior 
Department. He subsequently went on to serve as the 
Department's Under Secretary and Acting Secretary. It is my 
grandfather's career at Interior that caused my family to move 
from Nebraska to northern Virginia. This move ultimately 
resulted in my career in the House of Representatives.
    It is with deep disappointment that I hold this hearing 
today, given my fond memories of the Department of the Interior 
and the hard work of those in decades past. I know they would 
also be disillusioned by the culture of waste, fraud and abuse 
at the Department and would echo my call for immediate reforms.
    I would now recognize our distinguished ranking member, Mr. 
Waxman, for his opening statement.
    [The prepared statement of Chairman Tom Davis follows:]

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    Mr. Waxman. Thank you very much, Mr. Chairman.
    Today, the committee has the opportunity to investigate 
several important problems at the Department of Interior. This 
shouldn't be the last of the series of hearings on what went 
wrong in 1998 and 1999 for leases. It should be the first in a 
series of hearings on how the Department of Interior is broken 
and how we can fix it.
    The majority has held four previous hearings investigating 
who was responsible for the omission of price thresholds for 
royalty relief in oil and gas drilling leases signed in 1998 
and 1999. I think we all recognize this was a huge and 
unacceptable mistake. Already the House has taken action to 
correct this costly mistake. Earlier this year, the House 
passed legislation barring the award of leases to any company 
that refuses to renegotiate its leases to include price 
thresholds for royalty relief. That is a powerful incentive for 
companies to come to the table.
    The Senate has included similar language in committee. 
While these provisions were sponsored by Democrats, every 
Member should insist that they be retained in the final 
Interior appropriations bill.
    Unfortunately, the 1998 and 1999 leases are only a small 
part of what is wrong at the Department. What we really need to 
focus on are the broader problems within Minerals Management 
Service and the Department of Interior as a whole that allowed 
this mistake and many, many others to happen. The Inspector 
General testified yesterday that the underlying problems still 
haven't been corrected. That is an invitation for future 
failures and losses.
    Since the late 1990's, 12 major oil companies have paid 
over $400 million to settle lawsuits brought by private parties 
alleging the companies had systematically cheated the 
Government on royalties. Why were all these claims left to 
private parties to initiate? Where was MMS? A Colorado oil 
executive currently has 73 lawsuits pending against more than 
300 energy companies. He is accusing them of cheating the 
Government out of roughly $30 billion in royalties. If they 
have merit, MMS should be pursuing these claims.
    And the problem isn't just that MMS is failing to act. MMS 
may actually be collaborating with the oil industry to 
discourage MMS's own auditors from recovering money owed to the 
Government. A former senior MMS auditor sued Kerr-McGee for $12 
million in unpaid royalties after MMS refused to pursue the 
claim. MMS fired that auditor a few weeks later.
    Another senior auditor fired by MMS alleges that under the 
Bush administration, agency managers pressured him not to 
collect on unpaid royalties when oil and gas companies 
complained. State and tribal auditors are protesting MMS 
pressure on them to scale back their auditing efforts in favor 
of more superficial compliance reviews which won't reveal 
deliberate cheating. This looks like an agency that has been 
captured by the industry it is supposed to oversee, with the 
American taxpayers footing the bill.
    I have been disappointed by the refusal thus far to hear 
from witnesses on these allegations. I hope that Chairman Davis 
and Chairman Issa will reconsider and investigate these issues. 
The Interior IG's explosive testimony yesterday highlights even 
greater problems at the very highest levels of the Interior 
Department. Inspector General Devaney stated that ``ethics 
failures on the part of senior Department officials, taking the 
form of appearances of impropriety, favortism and bias, have 
been routinely dismissed with the promise not to do it again.'' 
And he described how the former Secretary of Interior refused 
to hold high-level officials accountable for their misdeeds.
    This committee has the responsibility to investigate 
Government misconduct. We should not ignore what Inspector 
General Devaney said yesterday. There are serious problems at 
the top of the Department of Interior, and we have an 
obligation to investigate these matters and hold officials 
accountable for ethical lapses.
    In closing, I want to thank the chairman for holding 
today's hearing and request unanimous consent to insert into 
the record testimony from the Project on Government Oversight, 
which details some of the issues I have raised today.
    [The prepared statement of Hon. Henry A. Waxman follows:]

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    Chairman Tom Davis. We will include the POGO's comments in 
the record.
    [The information referred to follows:]

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    Chairman Tom Davis. Mrs. Maloney.
    Mrs. Maloney. I want to thank the chairman for holding this 
very, very important hearing at a time when we have an $8 
trillion debt, soaring deficits, the largest trade deficit in 
history, to find out that we are missing billions and billions 
of dollars that are owed to the American taxpayers for oil 
extracted from land that is owned by the American people is 
inexcusable. It is wrong and we have to correct it.
    Yesterday's hearing was tremendously disturbing. The 
Department of Interior's Inspector General, Mr. Devaney, 
testified that at the top levels of the agency, widespread 
ethics failures and abuses, cronyism, have become commonplace. 
This is absolutely unacceptable. He testified that at the 
Interior Department's Office of Ethics, they dismissed 23 out 
of 25 potential ethical breaches, and then he noted that he 
found that investigators had missed millions of dollars in 
underpayments. His office uncovered evidence that agency 
auditors had lost key files, then tried to fool investigators 
by forging and back-dating the missing documents. He noted that 
the agency gave a bonus to the official who came up with the 
false papers.
    I find this outrageous. I request unanimous consent to 
place in the record two articles on MMS and the Interior 
Department from my hometown newspaper, the New York Times, and 
also on the huge royalties that Chevron is avoiding.
    Mr. Davis. Without objection, the articles will be placed 
in the record.
    Mrs. Maloney. I just want to say that MMS, as Mr. Waxman 
just said, they seem to be captured by the industry they are 
supposed to oversee. I had someone call me last night, Mr. 
Chairman, and say it is a revolving door, that half the people 
who work at MMS are from the oil industries. I don't know if 
that is true or not, but I would like to join you in a GAO 
report request to find out is it a revolving door. I would like 
to look at how many people presently and in the past have been 
put there by the oil industry, because they certainly are not 
serving Government. They are not serving ethics. They are not 
serving what they are supposed to be doing.
    The allegations that have been made are absolutely almost 
criminal. What I would like to know, and I find it difficult 
because I am supposed to be chairing or be ranking member at 
another meeting for the Democrats right now, but I want to 
know, and this is a question I want to know and I want to place 
it in writing. I will come back and hopefully have a chance to 
ask more question.
    But I want to know why since 2001, there has been a plunge 
in the royalty money collected from these companies. This has 
been found from the auditing and compliance review. How do you 
explain the differences in the average from 1989 through 2001 
at $176 million per year? And from 2002 through 2005, when it 
has been less than $50 million? How do you drop so much?
    Something is wrong. MMS is not doing its job. I 
specifically would like that question answered. I will get it 
to you in writing. It is based on auditing that I have read.
    I just want to add that the Government Accountability 
Office estimates that because price thresholds were not 
included in the deepwater leases from 1998 and 1999, the 
Government, that is the American taxpayers, will lose 
approximately $10 billion in revenue. The GAO further estimates 
that the Government could lose as much as $60 billion over the 
next 25 years if the Kerr-McGee Corp. wins its lawsuit 
challenging the price thresholds set on its leases from 1996, 
1997 and 2000.
    At a hearing that Mr. Issa had earlier in July, we learned 
from witnesses, from Chevron, that they had raised the issue of 
the missing price thresholds with officials from MMS on several 
occasions in 1998 and 1999, that for some reasons these 
officials took no action. We have to look into what happened 
there.
    These ``mistakes'' have cost the American taxpayers 
literally billions and billions of dollars. We as a Government 
cannot afford these types of errors. We must ensure that this 
never happens again. Personally, I believe the whole Department 
should be abolished and the whole oversight should be moved out 
of Interior to a different, independent department or some 
other place in Government because clearly they cannot get it 
right. This is just one of a long series of serious mistakes, 
possibly criminal actions, that have taken place where the 
American taxpayer has not been protected, and been abused on 
oil extracted from land owned by the American people.
    I look forward to the testimonies. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Carolyn B. Maloney 
follows:]

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    Chairman Tom Davis. Thank you.
    Mr. Kucinich.
    Mr. Kucinich. All across this country, the American people 
have been aware of the power of the oil companies. Over this 
past summer, however, they were able to squeeze consumers by 
raising the price of gasoline far over $3 per gallon. What is 
reflected here is that the Government has stood back while the 
oil companies have continued to aggregate, monopolize the 
restraint of trade necessarily has produced market conditions 
which have put a squeeze on the consumers, jacked up the price 
of oil, and people are basically at the mercy of the oil 
companies which are now anticipating the elections, trying to 
protect some of their friends, putting the price of oil down a 
little bit.
    You can look at this picture and you could find 100 things 
wrong with it. Let me just talk about a few of them. It is 
absolutely impossible to imagine that this condition could have 
been created without the oil companies being intimately 
involved in the construction of the system which resulted in 
them being able to basically steal $10 billion from the 
American people in terms of royalties which were not paid. I 
think it would be interesting for this committee to know who 
actually wrote the leases, and each iteration of a lease. 
Government attorneys or industry attorneys handing it over to 
the Government? It would be very interesting to find out.
    Also, I think that this committee in its work ought to come 
to a conclusion that says that these leases should be canceled 
and renegotiated. I mean, obviously, there is an element of 
either fraud or misfeasance here. That is something that needs 
to be done in order to protect the public interest.
    Furthermore, action ought to be taken by this Government, 
if it is capable of doing it, to sue to recover at least $10 
billion that was due the American people and not paid for. 
Furthermore, there should be a criminal investigation of those 
individuals who are responsible for overseeing the contracts. 
We can't just leave this to some idea of a ``mistake.'' How is 
it that mistakes are made and the oil industry ends up with $10 
billion more? That is a mistake? A mistake?
    If there was ever a call for a new energy policy, this is 
it. If we had invested a fraction of the amount of money that 
the American people have been deprived of here, and alternative 
energies, we would be less reliant on oil and wouldn't be in a 
situation where the oil companies are actively trying to cheat 
the Government out of royalties that are due to the American 
people.
    So Mr. Chairman, I am glad to see us reviewing this leasing 
process. There is a line in the Bible that says that which is 
crooked cannot be made straight. Nothing is going to be made 
straight about this energy policy until we start to move away 
from non-renewable sources of energy to more sustainable 
sources.
    Thank you, Mr. Chairman.
    Chairman Tom Davis. Thank you.
    Mr. Duncan.
    Mr. Duncan. Well, Mr. Chairman, very briefly, thank you for 
calling this hearing. This is a very important matter.
    You know, ever since I started following Government and 
political issues closely as a teenager, over all these years I 
have read so many examples of waste, fraud and abuse and 
mismanagement at the Federal level that you almost just get 
immune to it, so that almost nothing surprises us anymore.
    After so many years of reading and hearing about these 
types of things, you begin to wonder if the Federal Government 
can do anything in an economic, efficient way. People aren't 
held accountable for big mistakes. They don't even get worried 
about since it is not coming out of their own pockets, so we 
hear about mistakes all the time that, if they happened in the 
private sector, people would be fired and major changes would 
be made.
    But when I read, as I read in the Congressional Quarterly 
Today publication that came to us this morning, that the 
Inspector General of the Energy Department testified yesterday, 
saying that he ``conceded he has no evidence that the mistake 
over the royalties was anything more than classic bureaucratic 
bungling, with a process that required plenty of signatures, 
but no individual to assume final responsibility.''
    And then in another companion article, it says that 
Chairman Davis said it was unacceptable that the bungled leases 
failed to surface for 5 years. And it also says that nearly 30 
people signed off on all this. I mean, this is one of the worst 
cases I think I have ever heard of. I am just stunned.
    If we end up just letting this go by excusing it as classic 
bureaucratic bungling, then we have accepted something that we 
shouldn't accept.
    So I appreciate your holding this hearing and I hope that 
we determine or arrive at some really strong action to take in 
regard to this.
    Thank you very much.
    Chairman Tom Davis. Thank you.
    I would ask unanimous consent that Mr. Markey be allowed to 
sit in on today's hearing. Without objection, so ordered.
    Ms. Watson.
    Ms. Watson. I want to thank the chairman for convening this 
hearing. The Subcommittee on Energy and Natural Resources, 
which I am the ranking member, has held four hearings on this 
subject. So I am really pleased to see the Deputy Secretary of 
Interior and the Director of Minerals Management here in 
attendance. This should be a very informative session to 
finally start talking about how to fix the errors and the 
larger issues the Inspector General identified at yesterday's 
subcommittee hearing.
    I was unfortunately unable to attend yesterday's hearing, 
and we know of the major problems. Several of the oil companies 
were at the previous hearings and are ready to work with us to 
address the errors.
    I am particularly incensed when we know that in the year 
2005 oil companies registered over $110 billion in profits and 
oil prices are now close to $70 a barrel. This is the only 
industry here whose made those types of profits. And so our 
Government has given the oil companies tremendous benefits, and 
not to pay back in terms of the contractual agreement the kinds 
of sums that should have come to the U.S. Government is just 
unthinkable.
    So this problem still persists today. The American consumer 
is suffering and continues to suffer. We can't have these kinds 
of profits without some responsibility on the part of our 
Government to follow through. The errors that occurred during 
1998 and 1999 could cost our Government an estimated $20 
billion within the next 25 years. This should not be happening, 
but it is not the only problems at the Minerals Management 
Service and the Department of Interior.
    We have a duty as Congress to the American taxpayer. One of 
our duties is not to allow these companies to misuse public 
assets, and we must protect American people's money. So the 
House had passed the Hinchey amendment to fix this problem in 
the Interior appropriations bill, and I hope that my colleagues 
will support this provision in the final bill that will come in 
front of us soon.
    This committee has heard much about larger problems at the 
Department of Interior over the many hearings, and we have an 
obligation to investigate them, certainly our subcommittee has.
    So I want to thank the Chair again, and I want to thank the 
witnesses for being willing to come and address this problem. 
Thank you so much, Mr. Chairman.
    Chairman Tom Davis. Thank you very much.
    Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    Chairman Tom Davis. You started all this.
    Mr. Issa. Thank you, Mr. Chairman.
    I am very pleased that our subcommittee has been able to 
move this discovery along, and thank you and Ranking Member 
Waxman for holding this important hearing today on the Interior 
Department's culture of managerial irresponsibility and lack of 
accountability. I also want to thank the witnesses for taking 
time to appear here before the full committee.
    Over the past 7 months, the Subcommittee on Energy and 
Resources has conducted an investigation of the Interior 
Department and the Minerals Management Service. I sought to 
find out how and why the thresholds were missing in deepwater 
leases in 1998 and 1999. I conducted four hearings at which 
Interior Department employees and oil company officials 
testified. These witnesses shed a great deal of light on the 
issue and to a great extent the culture of the Interior 
Department. I believe that is what we are here for today.
    I would again like to thank Chevron and its staff for their 
candor before the subcommittee. It was in fact their testimony 
that was a breakthrough in our discovery. Yesterday, we heard 
testimony from the Interior Department's Inspector General, 
Earl Devaney. He detailed the results of his own investigations 
into the missing price threshold issue. The fact that the 
thresholds were missing for 2 years was only the beginning of 
the problem. The central issue from yesterday's hearing was the 
coverup. I would paraphrase him by saying, the multiple D's: 
delay, denial. That is in fact part of the culture that not 
only are there mistakes made, but there is inherently a pattern 
of coverup.
    Department employees discovered the missing price 
thresholds apparently through oil company executives telling 
them, in 2000. Some e-mails even authenticated the fact that 
there was that discovery. Some personnel even told their 
executives and made changes on their own. Yet, the Department 
made an affirmative decision not to notify their superiors. Had 
they notified their superiors and amended the contracts at no 
cost to the oil companies, because the price thresholds at that 
time were low, we would have no reason for this investigation. 
Instead, they allowed the problem to fester and become a $10 
billion-plus wound. As Mr. Devaney said, this was but an 
example of the bureaucratic bungling and stovepiping of 
responsibility.
    We are here today to discuss the bigger issue. There 
appears to be a culture of irresponsibility, unaccountability 
that pervades the entire Department. Officials are here from 
the Interior Department today. I regret, however, that the 
Secretary is not. I would hope, very much hope, that we would 
soon have the ultimate responsible cabinet officer here.
    Make no mistake: The American people are watching today. 
The Interior Department owes the American people a fiduciary 
duty to them and holds this Nation's valuable resources in 
trust for the American people. The Department has let them down 
and they have not accepted, and the American people will not 
accept, the wink and the nod of, well, that was just a mistake.
    Mr. Chairman, I want to thank you for this. I look forward 
to our witnesses, but I hope that my opening statement has set 
a bipartisan tenor that this is something that has gone on 
before this President and if we don't change it here and over 
the next several years, it will go on after this 
administration.
    With that, I yield back.
    [The prepared statement of Hon. Darrell E. Issa follows:]

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    Chairman Tom Davis. Thank you very much.
    The gentleman from Baltimore.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    I, too, thank you for holding this vitally important 
hearing to examine reports of mismanagement in the way the 
Department of Interior's Minerals Management Service [MMS], 
collects royalties from oil companies that drill on public 
property.
    As you know, MMS is the Federal agency that is charged with 
ensuring that all moneys derived from mineral leasing and 
production activities on Federal and Indian lands are collected 
properly, accounted for, and distributed. This is no small 
task. Federal on-shore and off-shore mineral leases generate 
almost $6 billion annually, comprising one of the Federal 
Government's largest sources of non-tax income.
    This revenue supports a vast array of essential Government 
functions providing 90 percent of funding for the Land and 
Water Conservation Fund and 100 percent of funding for the 
National Historic Preservation Fund. It also generates millions 
of dollars for individual States. My home State of Maryland, 
for example, in fiscal year 2002 received $195.9 million. On 
average, States received about $200 million annually.
    Additionally, agency collections from off-shore leases 
called Outer-Continental Shelf [OCS], lands, play a significant 
role in our Nation's energy picture. OCS lands provide more 
than 25 percent of the natural gas and 30 percent of the oil 
produced in the United States. In total, MMS administers about 
7,300 active leases on 40 million acres of the OCS.
    Given the important of the MMS royalty collection program, 
the need for it to run as effectively and efficiently as 
possible is abundantly clear. Unfortunately, recent reports 
indicate that goal has not been achieved and that mismanagement 
and waste are prevalent.
    In this morning's New York Times, Interior Department 
Inspector General Earl Devaney is quoted from his testimony at 
the hearing of the Subcommittee on Energy as saying ``Simply 
stated, short of crime, anything goes at the highest levels of 
the Department of the Interior.'' I find it troubling that 
MMS's mismanagement is reportedly costing taxpayers millions of 
dollars or even billions of dollars.
    Equally troubling are reports that MMS leadership has 
reacted with hostility when employees have the courage to blow 
the whistle on the problems that exist. Specifically, in 2003, 
two MMS auditors who were reportedly among the agency's most 
successful and aggressive, were fired. Others report that MMS 
management pressured auditors not to pursue companies that 
cheat on royalties. As a long-time advocate for the rights of 
whistleblowers, I find these reports to be deeply troubling and 
shocking to the conscience.
    Pressure for reform has been applied through media 
publicity, investigations by the Office of Inspector General, 
as well as hearing of the Subcommittee on Energy Resources. I 
look forward to hearing from today's witnesses on how MMS has 
responded to that pressure. In May, Dr. Kempthorne was 
appointed as the new Secretary of the Interior. I look forward 
to hearing what his response to these reports has been and 
whether he has begun to implement the reforms that are 
necessary to turn the agency around.
    I want to thank our witnesses for being here today, and I 
look forward to hearing your testimony.
    [The prepared statement of Hon. Elijah E. Cummings 
follows:]

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    Chairman Tom Davis. Mr. Markey, would you like to make an 
opening statement? Thanks for being with us.
    Mr. Markey. Thank you, Mr. Chairman. I very much appreciate 
your graciousness in allowing me to testify here today.
    As you know, the Department of Interior admitted market-
based price thresholds for the suspension of royalty relief on 
leases issued in the late 1990's in the Gulf of Mexico. I am 
here today to remind my colleagues that the House of 
Representatives has already acted on a bipartisan basis to fix 
this problem when it passed the Hinchey-Markey amendment last 
May.
    As long as we protect the House language in the Interior 
appropriations bill, and pass that bill this fall, we will head 
off yet another glaring subsidy to companies which already have 
incentives, and more than they have ever dreamed of, in the 
spectactularly high world oil prices of today.
    This past May 18, just 3 months ago, a bipartisan majority 
of the House voted 252-165 for the amendment which Mr. Hinchey 
and I proposed on the House floor. Despite the controversy 
surrounding the issue, the House recognized that this amendment 
threaded the legislative needle by neither abrogating existing 
contracts nor ignoring a public rip-off. It does so by giving 
every affected company a simple choice: either renegotiate the 
old royalty-free leases or accept the fact that your company 
will be barred from any future leases from the Federal 
Government.
    The amendment creates strong incentives for those companies 
to renegotiate at a time when oil prices are high and oil 
companies are making record profits, but will leave current 
contracts unamended if the company chooses not to renegotiate. 
The Senate has subsequently included similar language in their 
version of the bill.
    The recently reported discovery of the new reserves in the 
so-called Jack Field in the Gulf of Mexico, estimated by 
Chevron to be between 3 million and 15 million barrels of oil, 
has further highlighted the need to take immediate action to 
correct those leases. This week, as we know, the New York Times 
reported that Chevron and its partners hold six leases in the 
new Jack Field, two of which would allow the companies to avoid 
royalties on as much as 87.5 million barrels of oil per lease. 
The Times estimated that those leases alone could result in the 
loss of as much as $1.5 billion in unpaid royalties at $70 a 
barrel.
    However, the Bush administration and the oil companies have 
been fighting the amendment, which has now passed the House and 
the Senate. The oil industry has offered a number of arguments 
against our amendment, each of which has been demonstrated to 
be completely false. For example, the oil industry has argued 
that our amendment would violate the sanctity of the contracts 
in question and force an abrogation of those contracts.
    However, the Congressional Research Service clearly stated 
in a memo dated May 18, 2006 ``enactment of this amendment 
would not constitute a taking of existing leaseholders' rights, 
but would merely establish a new qualification for potential 
lessees. It has long been recognized that the Government has 
broad discretion in determining those firms with which it will 
enter into contractual agreements.''
    The oil industry has also argued that blocking a large 
number of companies from purchasing new leases would hinder 
production. However, our amendment provides companies that 
still desire to purchase new leases with a simple solution: 
renegotiate their old leases to add a price threshold that cuts 
off royalty relief whenever prices get high.
    However, the administration and the Department of Interior 
have opposed the amendment, seeking instead to attempt to 
cajole oil companies to voluntarily come back to the table to 
renegotiate. I will be sending a letter again, with Mr. 
Hinchey, to Secretary Kempthorne and other sponsors of the 
amendment urging the Department of Interior to immediately 
support the amendment. We must ensure that all oil companies 
holding these leases renegotiate, not just the small percentage 
that are feeling particularly generous and public spirited, 
leaving the bad actors in a position to take unfair advantage.
    Our amendment is a very simple way to correct these leases 
and recover the billions of dollars which American taxpayers 
stand to lose in the coming decades, that received strong 
bipartisan support in Congress. With gas prices hovering still 
between $2.50 and $3 a gallon, the American people are again 
watching today to see if the administration, the Department of 
Interior, will again side with big oil over the American 
people. It is time for big oil companies to pay their fair 
share to drill on public land, and I urge Secretary Kempthorne 
and the Interior Department to immediately come out in support 
of the Hinchey-Markey amendment now pending before the House 
and Senate.
    I thank you, Mr. Chairman.
    [The prepared statement of Hon. Edward J. Markey follows:]

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    Chairman Tom Davis. Thank you very much, Mr. Markey.
    Members will have 7 days to submit opening statements for 
the record. We are now going to get to our panel. We have the 
Honorable P. Lynn Scarlett, the Deputy Secretary of the 
Department of the Interior, and the Honorable Johnnie Burton, 
the Director of the Minerals Materials Management Service, 
Department of Interior. Thanks for your patience.
    I understand you have one statement for the two of you. We 
will give you whatever time you need. It is our policy that 
witnesses be sworn before you testify, so if you could just 
rise with me and raise your right hands.
    [Witnesses sworn.]
    Mr. Davis. Thank you.
    All right, who is going to give the statement? OK, Ms. 
Scarlett. Thanks for being with us.

     STATEMENT OF P. LYNN SCARLETT, DEPUTY SECRETARY, U.S. 
  DEPARTMENT OF THE INTERIOR, ACCOMPANIED BY JOHNNIE BURTON, 
     DIRECTOR, MINERALS MATERIALS MANAGEMENT SERVICE, U.S. 
                   DEPARTMENT OF THE INTERIOR

    Ms. Scarlett. Thank you, Mr. Chairman and members of the 
committee. Thank you for the opportunity to discuss the lack of 
price thresholds for the 1998 and 1999 leases in the deepwater 
of the Gulf of Mexico.
    The committee has also asked that I address issues raised 
in testimony by our Inspector General regarding the 
Department's ethics, accountability and management. With me 
today, as you have noted, is Johnnie Burton, Director of the 
Minerals Management Service, who also served, I might add, as 
Acting Assistant Secretary of the Land and Minerals Management.
    On behalf of the 70,000 employees of the Department of the 
Interior, let me say that I believe the Department's employees, 
both senior managers and their staff, are dedicated public 
servants. They put their lives at risk fighting wildland fires 
to save communities. They perform extraordinary search and 
rescue missions, including round-the-clock efforts after 
Hurricane Katrina. Often when I come to work I find senior 
managers and their staff in the budget and finance offices 
working 12, even 14 hours a day and on weekends.
    They are dedicated to the Department's multifaceted mission 
and to serving the American people. Our senior leaders share 
that dedication.
    From his comments, there appear to be disagreements over 
recommendations that the Inspector General has made and 
subsequent decisions of the Department regarding those 
recommendations. Let me underscore that we take extremely 
seriously any and all instances in which we find waste, fraud, 
ethical violations, and other inappropriate actions. We strive 
to address these matters consistent with statutory authorities, 
available resources, and requirements to treat employees fairly 
and through due process.
    Secretary Kempthorne underscored during his very first day 
at the Department his unwavering and unequivocal commitment to 
maintaining an ethical, accountable and effective work force in 
service to the American public. We are dedicated to fulfilling 
that expectation.
    Over the past 5 years, I believe our record is one of 
significant management improvements and commitment to integrity 
in the Department. We recognize that each day brings new 
challenges and requires renewed vigilance. We remain today, as 
in the past, committed to that vigilance.
    Let me turn first to the matter of off-shore leases and the 
missing price thresholds in the 1998 and 1999 leases that 
occurred under the previous administration. Royalty incentives 
were established in the Deepwater Royalty Relief Act passed by 
the Congress in 1995 to encourage development of new supplies 
of energy by promoting investment, particularly in high-cost, 
high-risk areas.
    Deepwater leases issued by the Minerals Management Service 
in 1996, 1997 and 2000, after the enactment of the act, 
included price thresholds. Leases in the 1998 and 1999 leases 
during the previous administration did not. All deepwater 
leases issued since March 15, 2000 do include price thresholds 
that eliminate royalty relief when oil and gas prices are high. 
At today's prices, royalties are due on any production from 
these leases. Every lease issued in this program under this 
administration includes price thresholds.
    The Inspector General's investigative report may shed more 
light on the timing and awareness by all relevant individuals 
of the actions taken in 1998 and 1999. We look forward, as you 
do, to that report.
    Under our supervision, the situation that occurred in 1998 
and 1999 has not happened again, and we are working to make 
certain that it will not happen during any future 
administration. Currently, under new practices that we have 
invoked, each proposed and final notice of sale and associated 
royalty suspension provisions document now receive detailed 
review and scrutiny to ensure completeness and accuracy, 
especially from a price-threshold perspective.
    The Minerals Management Service has formalized a process of 
conducting all reviews in writing through the use of e-mails 
and places paper copies of those e-mails in its official lease 
sale file as a record of these reviews and decisions. As 
Secretary Kempthorne recently told Chairman Davis, the 
Department has no interest in hindering in any way the 
investigation into this matter, which occurred under the 
previous administration and which we look forward to receiving 
the IG's report on.
    We believe we have in place a system today under which the 
events of 1998 and 1999 would not occur. If there are 
recommended improvements that we have not yet made, we 
certainly and absolutely will consider them. The Inspector 
General's testimony uses the 1998 and 1999 royalty relief issue 
as a context to raise broader assertions about the Department 
of the Interior and its management culture. The Department 
takes seriously any matters in which accountability and 
integrity of employees and the Department are questioned.
    We strive to address these matters consistent with specific 
circumstances and in accordance with the law. We take seriously 
recommendations identified in audits. Let me give you some 
examples. Consider financial management. In 2001, we inherited 
170 material weaknesses in program or financial controls. Since 
that time, four new weaknesses have been identified, but we 
have corrected or downgraded 170 weaknesses. In addition to 
financial audits, we record all management and other 
recommendations generated by Interior's Office of the Inspector 
General, and we track those actions to address those 
recommendations. We strive to address these recommendations 
issued by the Office of the Inspector General.
    Recently, when the Inspector General raised to me 
personally concerns whether corrective actions were being fully 
completed to address his office's findings, I immediately asked 
the department's Office of Financial Management, which tracks 
those recommendations, to provide a status of them for those 
recommendations issued in 2004 and 2005, and to work with the 
IG to reconcile any differences.
    Many issues raised by the Inspector General pertain to 
ethics. When Secretary Norton assumed office in 2001, the 
Inspector General reported to her the results of a 1999 
management assessment of the ethics program. Subsequent to 
that, and in consultation with the Office of Government Ethics, 
the department made significant changes to its ethics program. 
A new director of the departmental ethics office was selected 
and the office was moved to the Office of the Solicitor.
    During this administration's tenure, the department's 
ethics office has grown in stature from being an office 
centered on narrow delivery of service to individual employee 
questions, to a broader mission of ensuring soundness of all 
bureau ethics programs and departmental initiatives. Under the 
leadership of Secretary Kempthorne, the Department continues to 
strengthen these efforts to meet the highest standards of 
ethical conduct.
    Among Secretary Kempthorne's very first actions on day one 
in the department was a meeting with the ethics office and with 
our Inspector General. Over the past 5 years, I and other 
senior department leaders, have met regularly with the IG and 
have advanced many management improvements based on his reports 
and our own initiative.
    For example, in 2002 the Inspector General found fault with 
the Department's appraisal methodology for land transactions. 
The Department concluded that significant restructuring was 
necessary and consolidated the appraisal functions performed by 
bureaus in a new departmental office, responding to criticisms 
that have endured previously for some 50 years. The new unified 
Office of Appraisal Services enhances consistency and 
efficiency, and guards against conflict of interest problems.
    Among matters of particular interest to the Inspector 
General are those pertaining to conduct and discipline. We take 
seriously workplace infractions and inappropriate conduct. The 
Inspector General has noted a perception by employees that a 
significant amount of misconduct is not being reported, and 
that discipline is administered inconsistently and unfairly in 
the department. We take these findings very seriously and have 
prepared a comprehensive action plan to address the Inspector 
General's recommendations. With a large and dispersed work 
force, we know that we must constantly strive for and we are 
dedicated to that effort.
    We are also committed to maintaining an efficient work 
force that operates with integrity. For example, the Interior 
Department has created a detailed policy regarding Government-
issued credit cards. We have put system controls on all 
accounts, require training for all card-holding officials and 
established reports to monitor activity.
    We have a process in place to refer suspicious activity to 
the Inspector General. We have created account controls by 
placing authority and spending limits on accounts. The 
department's charge-card management team also worked with a 
bank to create a series of electronic reports that help us 
identify potential misuse, manage delinquency and track 
spending.
    When problems are identified, the Department takes the 
appropriate action, including removing employees from Federal 
service. I believe that our overall record has yielded 
significant management improvements that benefit the American 
public. In an organization with the size and reach of the 
Interior Department, indeed a size that rivals that of a small 
city, unanticipated and unacceptable decisions and actions may 
sometimes occur. We take those actions seriously and take 
actions to address them.
    I would be happy to answer any questions you might have at 
this time.
    [The prepared statement of Ms. Scarlett follows:]

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    Chairman Tom Davis. Thank you very much.
    In your written testimony, you state the price thresholds 
are discretionary for deepwater leases. If this is the case, 
what legal review occurred with the 1998 and 1999 deepwater 
leases? What I am asking is were there attorneys at Interior 
who analyzed the leases themselves to determine whether the 
Secretary had exercised his discretionary authority to include 
price thresholds? Or if the Secretary had deliberately decided 
not do to so?
    Ms. Scarlett. Mr. Chairman, I will ask Johnnie Burton, the 
Director of Minerals Management Service, to answer the detailed 
questions about the 1998 and 1999 leases.
    Chairman Tom Davis. That is fine.
    Ms. Burton. Thank you, Mr. Chairman.
    We are not sure what happened. We did look at it, and we 
arrived at some conclusions, but because we could not actually 
be sure what happened in 1998 and 1999, this is why we asked 
the Inspector General to run an investigation and tell us what 
he could find. We don't have his report yet, but I can tell you 
what we saw from our perspective.
    What we did see was in 1995, Congress passed a Deepwater 
Royalty Act and it had to be amended right away. There was an 
interim rule that was put together where the price threshold 
had to be determined. That takes quite a bit for the Economics 
Division to arrive at the proper level, and so they had decided 
at that time in 1996, shortly after the bill was passed, to put 
the price threshold in an addendum to the lease. By the way, 
someone asked who writes the lease. The lease is a form we get 
from OMB. We don't write it. This is a standard Government 
form.
    So if we have very specific provisions for that lease, 
which is the case for royalty rate, for a cap on what is 
acceptable as a bid, for rental, etc., we put that in an 
addendum to the lease. So in 1996, it was put in an addendum to 
the lease prior to the rule, but as the rule was being 
developed, it also was placed there in 1997.
    By early 1998, January 1998, the rule was final. The rule 
was issued. Now, this is all conjecture on our part, but what 
we can see is that in 1998 when the rule was issued, there were 
no thresholds in the rule. The staff had been used to putting 
the threshold in the lease. However, when the rule became 
final, that same staff assumed that the threshold would be in 
the rule because it had been discussed. What they didn't know 
is that the associate director of the off-shore program had 
made the decision not to have the threshold in the rule, but 
continue having it in the lease. And there was, so far as we 
can tell, miscommunication between those two units.
    What I wanted to know is whether or not that 
miscommunication was intentional or not. This is why I asked 
the Inspector General to run an investigation. He has kept me 
apprised.
    Chairman Tom Davis. We had him up here yesterday.
    Ms. Burton. So you know he has not finalized it.
    Chairman Tom Davis. A critical question that this just begs 
is whether the Secretary at the time intended not to exercise 
his authority to include the thresholds. Do we know the answer 
to that?
    Ms. Burton. We do not, sir. I don't know what Secretary 
Babbitt decided at that time.
    Chairman Tom Davis. OK. We have the IG report coming and we 
are going to be doing more on that. You are present now at 
lease negotiations, aren't you?
    Ms. Burton. Yes, sir.
    Chairman Tom Davis. Would you have been in a better 
negotiating position had you renegotiated the leases when the 
missing price thresholds were discovered in 2000?
    Ms. Burton. I am not sure I can answer that question, sir. 
I don't know what the previous directors did.
    Chairman Tom Davis. Let me ask you this. Would we have been 
in a better position had we disclosed these problems in 2000 
instead of hiding them for 5 years?
    Ms. Burton. I suppose we could have been in a better 
position if they had realized what mistake had been made. It 
seems to me that when they realized it in 2000, I don't know 
how they handled it. Did they think it was a mistake? Was that 
done by the Secretary? I don't know.
    Chairman Tom Davis. Can you give me the status? Mr. Markey 
raised this in his comments. Mr. Issa has raised it. What is 
the status now of negotiations with oil companies concerning 
the lease price thresholds? They came before the subcommittee 
under oath and, oh yes, we will renegotiate. What is the status 
right now? Can you give us a broad status?
    Ms. Burton. Yes, sir. I have been contacted either by 
phone, by letter, or in person by roughly 20 companies. I think 
I have personally spoken, I mean, they came to the department 
maybe about 10 of them. We have developed an agreement, a 
standard agreement for them to come to attach to their share of 
the lease. They are thinking about it, and we are still talking 
to them, so we are right in the middle of the discussions.
    Chairman Tom Davis. Does this include all the companies? I 
mean, some of these have leases that aren't producing anything. 
Some have leases that are producing a lot. Does this include 
everybody? Is there anybody who isn't coming to the table?
    Ms. Burton. Out of 55 companies, we had about 20 that 
contacted us. Now, what I don't know at this point is whether 
the others that did not contact us, whether their leases have 
been relinquished, whether they have expired, so I don't know.
    Chairman Tom Davis. We need an inventory of all these 
leases, who is renegotiating, when they expire, and that will 
give us a pretty quick line, and then Congress can decide if we 
need to take action. We may not be able to come back and look 
at the current leases, but we have power over future leases and 
other things we can do.
    I just think it is just, with the price of oil having gone 
up so significantly, and the companies making record profits 
and so on, that this is an appropriate time for them to show 
some faith and give back a little bit for the royalties and the 
omissions in the earlier leases. We can exhaust it ad infinitum 
today, but what we need is a chart showing the status of this, 
who is talking, who isn't talking, and then we will work with 
you I think to completion.
    Ms. Burton. And you might be interested, Mr. Chairman, in 
knowing that about 17 of those leases are producing today. 
Roughly 27 have indication of discoveries, but we don't know 
whether they are producible or not, and nothing has happened on 
the others. Over 400 have already been turned back into the 
pool, which means they will be released.
    Chairman Tom Davis. And all the new ones, of course, you 
have priced thresholds in?
    Ms. Burton. Oh, yes, sir. And we have thresholds on all of 
them since 2000.
    Chairman Tom Davis. I would note there is an ongoing IG 
investigation on the Oregon issue, and GAO is doing an in-depth 
review of raw data and assumptions in the MMS revenue 
projection, so hopefully we can all work together to get to the 
bottom of this. This literally is millions of dollars for the 
Federal treasury, literally, so we are trying to get this 
resolved as quickly as possible.
    Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman.
    Yesterday, the Inspector General for the Department of 
Interior, Mr. Devaney, issued a scathing indictment of senior 
officials in charge of the department. He discussed ethics 
failures on the part of senior department officials. He 
discussed department leaders' refusal to take any action 
against those officials or to change the ethical culture of the 
department. He discussed how top Interior officials disregard 
the IG's findings, responding to serious allegations by trying 
to discredit or undermine his office's work. He discussed the 
ongoing evasive and corrosive nature of these problems and how 
they are destroying the morale of agency employees and the 
trust of the American people.
    Ms. Scarlett, in your testimony, you say you disagree with 
the IG's characterization of your department. Let's take his 
concerns about ethics failures in high-level officials. What 
has the department done in response to specific incidents 
raised by the Inspector General?
    Ms. Scarlett. Yes, thank you, Congressman. I meet regularly 
with the IG every week or every other week. We go through 
various of his recommendations and vigorously strive to 
implement them as fully as we can. While I can't talk in this 
public setting about the specific personnel matters which seem 
to be at the root of some of his comments yesterday, concern 
about recommendations made on the disposition of investigations 
of individuals, I will say, for example, that in one recent 
instance where he investigated various people associated with a 
programmatic failure and recommended actions on eight 
individuals, three of the individuals actually left the 
department before we had an opportunity to act, but in the 
other cases we took actions on all five.
    Mr. Waxman. Let me ask you this. You say you can't discuss 
some of these matters because they are personnel matters and 
are not public. But the Inspector General thought some of the 
conduct was so egregious that it was appropriate to make the 
matter public so the names and violations are already out 
there. Are you trying to tell us that you can't publicly 
discuss the department's response to some of these public 
allegations?
    Ms. Scarlett. I am not aware in his testimony that he 
addressed specific individuals.
    Mr. Waxman. Well, let me tell you about specific cases. For 
example, in November 2005, the IG released a report on the 
tragic death of a 16 year old at the Chemawa Indian Boarding 
School. The IG found that the inaction on the part of senior 
officials was a significant factor in the death, and he 
recommended administrative sanctions. According to the IG, 
there was a historical pattern of inaction and disregard for 
human health and safety at this Government facility. He pointed 
to senior officials in the Bureau of Indian Affairs who were 
repeatedly told of these problems, but failed to take action 
that might have prevented this death, as well as the 
endangerment of countless other students. Was anyone fired in 
that incident?
    Ms. Scarlett. That is the specific incident actually that I 
was referring to. In that particular instance, there were eight 
individuals that were identified. As I noted, several left 
before the report was completed, and we took action in the 
instance of the other five. We proposed dismissal actions. As 
you are aware, through due process requirements, employees have 
an opportunity to appeal, and through that process some 
alterations in the ultimate disposition occurred, but we 
believe we followed through on the IG's actions as appropriate.
    Mr. Waxman. So none of them were actually fired because 
they asked for their due process rights, and then you had a 
plea agreement with them?
    Ms. Scarlett. I believe that there were some 
recommendations for dismissal, but I would have to go back and 
check specifically.
    Mr. Waxman. Was anybody suspended without pay?
    Ms. Scarlett. I would have to check on that specific 
matter.
    Mr. Waxman. Anyone demoted?
    Ms. Scarlett. Again, as I said, we took action on all 
eight, including recommendations for dismissal. I would have to 
go back and see the specifics of how many were either dismissed 
and/or demoted.
    Mr. Waxman. Well, it is curious that you knew about this 
specific incident, but aren't prepared to give us the facts of 
it. A girl died and there were no real consequences. I think 
the IG's concerns about the Department's lack of response are 
pretty compelling.
    Let me ask you about another example. Earlier this year----
    Ms. Scarlett. Congressman, I have it right in front of me. 
Specifically, discipline actions were proposed on five of the 
eight employees named in the IG report. In the other three 
cases, no actions could be taken because the subject employees 
no longer worked for the Bureau of Indian Affairs. Indian 
Affairs proposed the removal of two other supervisory employees 
in addition to those listed as culpable in the IG report. After 
the appeal period, one was exonerated and the second was 
removed. So that is the detail of that specific case.
    Mr. Waxman. So one was actually fired, successfully?
    Ms. Scarlett. No, sir. I said five of the eight had actions 
taken against them. Of the two supervisory, one was found not 
culpable and one was dismissed. The details of the five others, 
I would have to find, sir, specifically the actions.
    Mr. Waxman. Well, my time is up, so perhaps you could put 
it into the record. I would like to know what actions were 
actually taken in the incident.
    Ms. Scarlett. We will do that for you.
    Mr. Waxman. Thank you.
    Mr. Issa [presiding]. Thank you, Mr. Waxman.
    I am sure we are going to need a second round here. This is 
informative for us, and I hope you will understand that we 
share in the responsibility. I don't think on this side of the 
dais, anyone is implying that your failures aren't also the 
failures of our oversight committee, of the laws and rules and 
regulations, even the process for terminating employees.
    On one question, though, on those eight employees, as far 
as you know, all of those employees would be eligible to work 
in the Federal Government today? None of them are barred from 
starting somewhere else and continuing their Federal career. 
The ones who quit, the ones who had reprimands, even the one 
who was fired can basically go somewhere else and be back in 
the Federal system in a substantially similar role. Isn't that 
true?
    Ms. Scarlett. Sir, I don't know the details of that. In 
response to Congressman Waxman's larger question, we will add 
that response as well.
    Mr. Issa. I appreciate that, because that may be part of 
our oversight we need to change.
    Director Burton, in what year did you learn of the failure 
of these price thresholds to be in the contracts?
    Ms. Burton. In 2006.
    Mr. Issa. OK. So basically you were one of those high-
ranking executives that never got the word because it was 
sequestered at a lower level. Is that correct?
    Ms. Burton. I am not sure I would phrase it that way, sir. 
I think I would say that I didn't know about it because I 
arrived at the department in 2002, which was 4 years after this 
happened.
    Mr. Issa. And 2 years after the discovery had been made 
that they were missing, at lower levels.
    Ms. Burton. But the people that knew about it were no 
longer at the Department.
    Mr. Issa. Your Solicitor, Milo Mason, is at the Department 
today, madam.
    Ms. Burton. Yes, he is. He doesn't work for me. He works 
for the Solicitor. I did not review all the contracts that were 
issued before I arrived at the Department and there was no 
reason for me to ask of those specific years. I had no idea 
something was wrong with them.
    Mr. Issa. Isn't it true that, based on what the IG told us 
yesterday, that there were three people who were suspected of 
knowing it? There was testimony that one of the three had been 
told. My understanding is one of the individuals made a sworn 
statement, took a polygraph and passed it, saying I am not the 
one who knew. One made a sworn statement and refused to take a 
polygraph, and one refused to make a sworn statement and 
refused to take a polygraph. Aren't all three of those 
individuals, as far as you know, still working, and in this 
case, they are under your side of this problem?
    Ms. Burton. I do not know who they are.
    Mr. Issa. We will get you the names.
    Ms. Burton. I found out about this by reading the IG's 
testimony yesterday, but I don't know who they are. I assume if 
he said they are still working there, they are.
    Mr. Issa. This is one of my concerns, is that they continue 
to be in a position. This is something for our committee to 
look at, I am sure, as much as you. When somebody refuses to 
make a sworn statement before this committee, we don't let them 
testify. To be honest, as far as we are concerned, they 
shouldn't work any longer for the Federal Government if they 
are not willing to tell the truth under oath.
    It appears as though that is not the case, under current 
rules of some of your fiduciaries that you deal with every day 
that have these responsibilities.
    Mr. Bilbray. Will the gentleman yield?
    Mr. Issa. Yes.
    Mr. Bilbray. It is not that they just refuse to testify. 
They are at the epicenter of the coverup.
    Mr. Issa. Absolutely.
    Mr. Bilbray. They are at the epicenter of the coverup. They 
fingered three people. One did testify, not only under oath, 
but took a lie detector. One testified, but wouldn't take a lie 
detector, and one refuses to do anything. I think the 
astounding thing to all of us on both sides here is we have a 
multi-billion mistake, albeit it was made before your watch, 
but nobody has been fired. Nobody has been reprimanded.
    Mr. Issa. I will give you just two of the names. We are 
going to get the third one for you, but Marshall Rose and Larry 
Slaznick. Do you recognize those names?
    Ms. Burton. Marshall Rose, certainly. He is the chief of 
the Economics Division. The other person, sir?
    Mr. Issa. Larry Slaznick.
    Ms. Burton. Slavsky.
    Mr. Issa. Slavsky, yes.
    Ms. Burton. OK.
    Mr. Issa. We will get you the third name. We are concerned 
because when there is that kind of clout, and I am only talking 
about the two who refused to take a polygraph, and certainly 
the one who refused to even give a sworn statement. I would 
have a hard time, and I have different rules for my employees, 
but I would have a hard time allowing somebody to be in that 
kind of position of trust when they basically say, oh no, I am 
not going to take a statement for which I could be held to a 
perjury standard. I can understand that. I just can't 
understand them still working for me in those positions of 
trust.
    I realize you don't have the ability to terminate Milo 
Mason, but I am very concerned about something that the 
Secretary said. I am sorry, that Director Burton said, you said 
that a Deputy Director made the decision not to put it into the 
regulations. What was the name of that Deputy Director?
    Ms. Burton. The only thing I know, sir, is that I read a 
letter that was written, I think in 2001, by a lady named 
Carlita Colauer, who was there before I was there, so I don't 
know her, but she was Associate Director for OffShore. There is 
a paragraph in her letter that says that the decision was made 
not to put the threshold in the rule, to preserve flexibility 
to follow the market, so something to that effect. I am 
paraphrasing because I don't know the exact.
    Mr. Issa. OK. We would like to have that letter.
    Ms. Burton. Sir, it was sent to you.
    Mr. Issa. OK. We would like to have a copy of it so we can 
compare it with the stack of papers, because it appears as 
though we are, and I will tell you specifically that Milo Mason 
did not under oath, was not able to give us the name of 
somebody who said that this wasn't to be included. Just the 
opposite, he talked in terms of policy as though policy 
preempted the orders of the Congress. He wasn't able to give us 
the names. He talked in terms of, and to be honest, this is, 
Madam Secretary, why your statement that you have made reforms 
doesn't work.
    The Solicitor today is still basically telling us when he 
testified here that you walk down the hall and you tap somebody 
on the shoulder and you ask them for a legal opinion, they give 
it to you, and you record nothing in writing. That is what was 
said here. I am paraphrasing, but that is what was said here. 
No, there are no e-mails. No, there are no memorandums of 
record. No, we don't keep paper on it. That is part of our 
problem at this committee. When we ask for a paper trail or 
something from the fiduciary, the lawyer who works for the U.S. 
Government, for the people of America, says, no, as a matter of 
course, we don't keep the paper.
    So that is our challenge, is that is not corrected as of 
testimony before my subcommittee just a matter of about a month 
ago, with Congresswoman Watson who, since my time is up, I am 
going to grab a second round, but I very much want her to ask 
her questions because we have worked on this together hand in 
hand. I am going to close just by reminding you, from this 
Member's perspective, this is not about the oil. It is not 
about the money. It is about the trust of the American people 
in the agency that you operate.
    We will work with you hand in hand to recover substantially 
all of the money that might otherwise have been lost in 
whatever way necessary, working within contract sanctity, with 
the oil companies. That is a promise from this person, and I 
have a better than average chance of being reelected, so I 
expect to be here. But we have to move beyond the question of 
the money on both sides of the aisle. This is about you leaving 
the agency that you are responsible for, and the entire 
Department of Interior as a place in which people can be proud, 
that coverups don't happen, that when a problem occurs, a 
mistake happens, it is quickly rectified.
    With that, I would yield to the gentlelady from California, 
Ms. Watson.
    Ms. Watson. Mr. Chairman, I just want to thank you for 
identifying the issue. You remember we had that conversation 
several weeks ago. We got on it. We have had four hearings. 
What is confounding me is that this goes back 8 years. Why have 
we not corrected this and addressed this issue? And why have we 
not been able to recap those dollars that belong to the public?
    I just can't understand why this bureaucracy cannot resolve 
this issue and get the money back. Can one of you respond? What 
is the inertia there?
    Ms. Scarlett. Congresswoman, I believe we are responding. 
There are several issues that you allude to. First, all 
leases----
    Ms. Watson. Wait a minute. Would you address the 8 years 
that it has taken to come to today, please?
    Ms. Scarlett. Yes, that is exactly what I intend to do.
    As soon as it was discovered that the 1998 and 1999 leases 
had no price thresholds in them, all subsequent price leases 
have included, since 2000, price thresholds. So that part of 
the issue, as soon as it was illuminated, has been rectified. 
All leases that we now undertake do address that.
    With respect to any renegotiation of the past leases, we do 
not have authority in a mandatory way to do that. But what we 
did do as soon as we, again, found that those 1998 and 1999 
leases had no price thresholds, we began to appeal for the 
companies to come in and discuss with us renegotiation of those 
leases. That process, as Johnnie Burton described, is underway. 
So those are the two issues.
    Ms. Watson. Again, let me ask about that, because in our 
last hearing I was very pleased that at least one of the large 
oil companies did step forward. I mentioned it after their 
testimony. If several of the companies are willing to start 
sitting down and negotiating, what is your perspective on the 
time it would take? It just seems to me irresponsible that it 
has taken so long. We know the issue. We hear it over and over, 
every time we have had a hearing, the same thing.
    I am getting a little tired of it. Tell us when we can 
resolve this?
    Ms. Scarlett. I appreciate the concern. Let me say that we 
are actively at the table discussing renegotiation of the 
leases as we speak. Because we are doing this in a voluntary 
context, it is a back and forth, and I cannot give you a 
precise date. We are actively in those negotiations. I will 
turn to Johnnie to give you more detail.
    I will also underscore that when the 1998 and 1999 lease 
issue came to our attention, which was, as Johnnie Burton said, 
just in 2006, we immediately asked for an IG investigation so 
that we could understand what went wrong and rectify or remedy 
the processes that led to that.
    Ms. Watson. Let me just stop you. We know all that. We have 
heard it over and over again. I am wondering why the 
administration is opposing giving Congress, or giving you the 
right to leverage, to be able to renegotiate? Where is the 
inertia? Who is stopping you? Why is it that the witnesses 
would not come and testify? What do you think?
    Ms. Scarlett. Well, we are actively renegotiating on a 
voluntary basis those leases. The administration has 
significant concerns, and indeed sent up a statement of 
administration position opposing mandatory renegotiation.
    Ms. Watson. Hold on. Why do you think they have done that?
    Ms. Scarlett. I am about to describe the justification for 
that. These contracts, like all contracts, reside at the 
bedrock of a reliable Federal Government as they enter into, 
whether it be a contract to supply weaponry equipment, whatever 
it might be. It is very important that we uphold the sanctity 
of those contracts so that the Federal Government and its word 
when it signs a contract can be relied upon.
    Now, we are very actively engaged in voluntary 
negotiations.
    Ms. Watson. Yield, please, on that point, the sanctity of 
these negotiations. Explain what you mean.
    Ms. Scarlett. No, I said, the negotiations. Of the contract 
itself, a contract is a written and signed agreement, and it is 
extraordinarily important because those contracts are part of 
many, many, many other contracts that the Federal Government 
makes. As a reliable business partner, anybody who enters into 
any future contracts with us has some sense of security that 
contract in fact will be honored.
    Ms. Watson. Yield, please. On that issue, we are talking 
about 1998 and 1999.
    Ms. Scarlett. And on the 1998 and 1999 leases, we are 
actively working on renegotiating on a voluntary basis those 
leases.
    Ms. Watson. Yes, Johnnie.
    Ms. Burton. May I add something, Congresswoman? As I said, 
I have been talking to several companies. I didn't want to give 
any names because when you are in negotiation, it is not always 
smart to do that. However, I know one of the companies is very 
close to signing an agreement, and that is Shell Oil. They are 
one of the major owners of leases offshore. The lawyers are now 
finalizing the agreement. So we are working on it.
    The reason it takes so long is because it is such a complex 
type of contract that has many partners in it. So the companies 
have to check with their, you know, they have to worry about 
their shareholders. They have to worry about their partners, 
etc.
    Ms. Watson. I need to ask the Chair a question.
    Chairman Tom Davis [presiding]. Sure.
    Ms. Watson. Does the renegotiation void old contracts? 
Would not the old contract apply? We just want to be back----
    Chairman Tom Davis. Well, the old contract is law. That was 
the underlying law that governs at this point. Should they 
renegotiate and reach a new agreement, of course, that would 
abrogate the old agreement. There is no legal obligation to do 
that. There are certain incentives that either we or Interior 
can offer them.
    Plus, I think the light that shines on this can be a great 
disinfectant on this whole thing, and bring them back to the 
table. I mean, they are making record profits at this point, if 
they have a loophole in here that they claim under oath here 
they didn't intend, that this didn't come from them. So 
hopefully, they are in good faith.
    Did you want to add anything to that, Ms. Burton?
    Ms. Burton. I think you are absolutely right, Mr. Chairman. 
We are not renegotiating the contract. We are having a separate 
agreement that will be attached to that contract, and the 
agreement will be that the company agrees to come back under 
the threshold and pay royalties.
    Ms. Watson. Yes, what I understand, and I can be corrected 
on this, the Markey legislation would say, well, if you don't 
want to renegotiate, then you shouldn't get a new contract.
    Chairman Tom Davis. That is right, but current contracts 
would stay in effect. What we are working on right now is 
trying to look at the current contracts and come back. The oil 
companies, many of them have expressed a willingness to do 
this. So that is why I asked where it was. That is why I have 
asked for the chart.
    Before I proceed, I just want to share my grave concern 
that we have employees who may or may not have made the 
mistake, either in the original negotiations or in the coverup. 
But people make mistakes, OK? I make mistakes. I know Mr. Issa, 
I don't know if you do, but the rest of us, I mean, we make 
mistakes.
    The key here is it is done, but what we are trying to find 
out is what happened and get information. If an employee who 
has been fingered as being part of that mistake then refuses to 
give a statement under oath or to take a lie detector test, 
that is a grave concern to us. I understand their lawyers are 
probably telling them a lot of different things, but at the end 
of the day we have to be able to govern accordingly. We have to 
have employees to fess up, then we can move on, that's all, and 
somebody can be fired.
    Somebody who refuses to cooperate in investigating a 
coverup, that is a major, major problem that I think may be 
systemic throughout the Department, and may not be just to 
these leases.
    All right. We are ready for a second round. I will start 
with you, Mr. Issa, and then I have more questions.
    Ms. Issa. Thank you. I will just pick up where we left off. 
I appreciate this, Mr. Chairman.
    Just a quick statement. From my recollection, some of the 
oil companies who were most willing to renegotiate explained to 
us, and Ms. Watson probably will remember this as I say it, 
that they have in fact entered into some negotiations where 
these thresholds not being there meant that their partner in 
the actual drilling or in some other aspect, had a contractual 
expectation of receiving money from dollar-one that envisioned 
not having a 12.5 percent payment to us.
    So I certainly can understand why it is complex, that they 
have to either get their partners onboard or in some cases I 
imagine, I don't want you to disclose your negotiations, but I 
would imagine they maybe saying we can't give you a royalty on 
the part that we have already given away to a sub, but we will 
pay you on everything else. I can understand that. When we make 
a contract that is faulty, they may have in good faith, up 
until 2000, we could have just said, look, it is faulty; let's 
fix it.
    Unfortunately, we reiterated in a sense that they were good 
with those contracts for a number of years. They relied on, oh, 
it's OK to act on those contracts the way they are, looking 
back. That is why we are having this investigation now, it is 
that in 2000, when it was discovered, nobody said, oops, we are 
going to have to renegotiate that; we are going to have to 
figure out a way.
    Because as a businessman, 20 years in business, when it 
would have cost me nothing, and I am on the board of a public 
company, when it would have cost the company nothing other than 
a hypothetical what if, because the price threshold hadn't been 
met, it would have been easy to say, oh, we always thought it 
was; let's correct it. I am not even sure it would have come to 
a public company's board to make those corrections.
    I can imagine in no uncertain terms that every public 
company's board is dealing with this personally on every one of 
these leases. There is no chance under Sarbanes-Oxley that the 
board is not figuring out who is going to sue them for settling 
with us, which I do expect that some lawyer will sue these 
companies for giving in to the Government the 12.5 percent that 
they really do owe.
    I have a couple of questions. First of all, the third name, 
so you have it, is Dan Henry.
    Ms. Burton. That doesn't ring a bell. I am sorry.
    Mr. Issa. Well, that is the third name, from our records, 
of the three that we are dealing with. I think publicly we will 
not say which ones took and didn't take, but obviously there is 
one good, one mediocre, and one bad out of that crowd, in our 
view.
    I want to go back to the policy question, though. This 
letter, which I checked with my staff, I am sure we received 
it, but in the pile we did not pick out that one paragraph, and 
we now want to focus on that paragraph, of that letter. If an 
associate at some level, upper-management, but certainly not in 
1996 and 1997, 1998, 1999, the Secretary of the Interior, said 
that was policy. If I understand correctly, at that level, you 
don't make policy. Policy comes from the top down. Is that 
correct?
    Ms. Burton. Associate directors are really upper-
management. They usually run their policy calls to the 
director. If it is a substantial policy call, it is run up 
through the Secretary. At least that is the way we work now.
    Mr. Issa. Exactly. So in light of what we see today and how 
you work today, the idea of not putting something in that 
clearly Congress said we want to have these price thresholds, 
we want to empower you to have them, but basically saying you 
get a free ride, period, no matter where the price went, at 
least potentially in the rulemaking, that policy could well 
have gone to Secretary Babbitt at the time. Is that right?
    Ms. Burton. Yes.
    Mr. Issa. So we need to find out where that policy came 
from, and that is why it is helpful if we can have this 
associate director's name, which we will get out of it. To be 
honest, we now want to continue up and find out where that 
policy decision was made.
    Ms. Burton. Mr. Congressman, we have not been able to trace 
it beyond that letter. That is the only thing we found.
    Mr. Issa. Is that person still alive?
    Ms. Burton. No.
    Mr. Issa. Oh.
    Ms. Burton. She wrote that letter to a company in response 
to a company complaining that we, the Government, Department of 
Interior, did not have the right to put thresholds in. She 
answered saying they are not in the rule because we made the 
decision not to have them in the rule. They would be in the 
leases, but the Secretary has the discretion to decide what the 
thresholds will be and whether there will be any.
    Mr. Issa. Was that Kerr-McGee that sent the letter?
    Ms. Burton. No, but it was the same issue. It was before 
Kerr-McGee, and this was another company.
    Mr. Issa. OK.
    Thank you, Mr. Chairman.
    Chairman Tom Davis. Thank you very much.
    Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Ms. Scarlett, I have a list of the 56 companies that hold 
576 leases let in 1998 and 1999 that remain active. Which of 
these 56 companies are the 20 that you say have actually 
responded to your letter inviting them to renegotiate?
    Ms. Scarlett. Yes, I will turn to Johnnie for that, who has 
been actively discussing with those companies that issue.
    Ms. Burton. Congressman, I think I was asked by another 
member to provide, and by the chairman, to provide a matrix of 
all those companies and where we stand.
    Mr. Markey. We have asked for that, but if you can answer 
that.
    Ms. Burton. Off the top of my head, I can give you some 
names, but I know I am going to leave some out.
    Mr. Markey. Let's move down to the next level. Which of the 
20 who have responded favorably so far, of the 20 who did 
respond, how many of them have responded favorably to you? Yes, 
they will renegotiate?
    Ms. Burton. I know Shell Oil is ready to sign. That is 
Shell. BP is close behind. I can't really tell you because the 
others we are still talking. I don't know how close they are. 
It is difficult when you are negotiating.
    Mr. Markey. I understand. But you are saying that, who are 
the 10 of the nearly 10 that have actually met with you on 
scheduled meetings? Do you have those off the top of your head?
    Ms. Burton. I can give you some names, but I am not sure 
that it is appropriate to give you names when I am still 
negotiating with them. They may walk away. I don't know.
    Mr. Markey. I guess what I am trying to get at here, there 
are 56 companies altogether, and they range from A, Amerada 
Hess, to W, Woodside Energy. So you have 56 companies, 20 have 
responded, 10 have met with you, and what you have said so far, 
2 it sounds like, are renegotiating with you, out of 56.
    Ms. Burton. We are talking to nearly 20. We have been 
contacted by nearly 20 companies. We are talking to about 10.
    Mr. Markey. Yes, so less than half have responded, and of 
those so far you are only able to name two who are 
renegotiating.
    Ms. Burton. The only reason I named two is because I know 
these two companies have told me I could say it. The others 
have not given me that permission, and because I am 
negotiating----
    Mr. Markey. Well, tell me, how many other companies are 
renegotiating, without giving their names? Are actually 
renegotiating, how many others?
    Ms. Burton. Those 10 are at the table.
    Mr. Markey. Are all negotiating?
    Ms. Burton. Yes.
    Mr. Markey. OK. So one-fifth of the companies are 
renegotiating, and I guess you could say 10 out of 56, maybe 1 
out of 5 ain't bad in some realms of life, but here when you 
are talking about potentially billions of dollars of taxpayers' 
money, if all they recover is 1 in 5, that would not be a good 
situation.
    So I guess what, in response to a question from Chairman 
Davis, you said right now 17 of the leases that lacked priced 
thresholds are producing today, and an additional 27 leases 
have indications of oil or natural gas being present, meaning 
that they could start producing soon. How many of these 44 
leases have been renegotiated to include price thresholds?
    Ms. Burton. I am sorry. I am not sure I understood your 
question. You want to know how many have been renegotiated? 
Well, none. We are talking right now.
    Mr. Markey. Exactly. OK.
    Ms. Burton. You know, some of the folks we are talking to 
hold a good deal of those leases, so it depends on who we are 
going to reach an agreement with that may cover more or less of 
the production in the leases. They don't have exactly the same 
amounts.
    Mr. Issa. Would the gentleman yield?
    Mr. Markey. I would be glad to yield.
    Mr. Issa. Would you give us an estimate of the 700 leases, 
because you said 400 of the 1,100 were turned back in, of the 
700 leases, these 10 companies roughly, how big a part of those 
700 leases do they represent? A substantial portion, 
disproportionate perhaps for the total number?
    Ms. Burton. It is probably a fairly good amount of the 
leases are represented by those. The ones that have been 
relinquished obviously are no longer in play. The companies we 
are dealing with are most likely the ones holding the leases 
that are still active, or most of them active, but I can't give 
you a number at this point.
    Mr. Markey. I thank the gentleman.
    So we are looking at 1998 and 1999. We are trying to find 
out what went wrong, and that is very important to us, to find 
out what went wrong. Now, you have less than 20 percent of 
these oil companies who are negotiating with you. So my 
question to you, Ms. Scarlett, is why does the Department of 
Interior and the Bush administration continue to object to the 
Markey-Hinchey amendment, to give you the leverage you need to 
get every one of these companies to the table, so that you can 
provide the relief?
    I mean, there was a big mistake that was made. We have to 
get to the bottom of that. But you also need a solution. What I 
am hearing today is I don't hear a solution. I hear something 
that is very nice, but without the leverage that the Government 
would need in order to bring them all to the table.
    Why do you continue to object to this language that was 
passed in a bipartisan manner in the House and in the Senate?
    Ms. Scarlett. Congressman, let me first underscore a point 
that Congressman Issa made and that Johnnie Burton was making. 
While there are 55 companies and 20 of them have come forward 
to us and we are actively discussing with 10 of them, that does 
not represent 1 in 5 of the actual production activity.
    We believe that the companies we are negotiating with, of 
the active leases still covered by the absence of price 
thresholds, that we have likely the majority of production. So 
this constitutes significant progress if we successfully 
renegotiate these leases.
    Mr. Markey. I think that is the key phrase: If you 
successfully conclude negotiations. So what I am asking you is, 
why don't you want this additional leverage? That will help 
your negotiating position. It won't affect any of these 
companies since they are going to reach an agreement with you 
anyway. Why do you object to getting this extra leverage? 
Otherwise, these negotiations could go on for years before you 
actually resolve it.
    You don't have any guarantee that you are going to reach a 
deal with any of these companies. In fact, it is very likely 
they are trying to run out the legislative clock this year so 
that this bill doesn't pass. They stop it, and then they just 
drag it on for another 2 years. Why don't you want the 
leverage? What is it about the Bush administration's 
relationship with oil companies that stops you from saying, 
give us the leverage to correct this huge injustice against the 
American taxpayer?
    Ms. Scarlett. Congressman, I appreciate your concerns. We 
are actively renegotiating the leases. We believe we will be 
successful.
    Mr. Markey. Why are you objecting to this additional 
leverage? Why don't you want it?
    Ms. Scarlett. We do have concerns, as indicated in the 
statement of administration policy, about any actions that 
would in a mandatory fashion either directly undermine 
contracts. We think the honoring of contracts itself is an 
important bedrock principle of law.
    Mr. Markey. Again, let me just re-state it one more time. 
This does not change any existing contract. It only deals with 
future contracts. OK? You keep saying that this is going to 
deal with the reliability of existing contracts. It does not. 
This amendment only says that you now have the discretion in 
future contracts as to which companies you are going to deal 
with. Why don't you want that leverage?
    Chairman Tom Davis. I think you have asked, and I think she 
has given the answer she is going to give, but I appreciate the 
question. The gentleman's time has expired.
    Your testimony describes common tensions between 
centralized control of the bureaus and their mission-specific 
needs. That is something the IG has dwelt on. Would a more 
centralized control at Interior be beneficial to managing the 
department's programs?
    Ms. Scarlett. As I indicated in my written testimony, the 
tension in any large organization between deciding how much 
centralization and how much decentralization is a constant and 
common management challenge.
    Chairman Tom Davis. It is. But look, at Interior you have 
had problems on the Indians in terms of Indian recognition 
rights. This has been well documented. You have had problems 
here. I mean, it just looks to me like there needs to be adult 
supervision across the board here. Am I missing something?
    Ms. Scarlett. Congressman, we have many, many, many 
different programs, some of them very specific to particular 
statutes and particular missions. We have taken steps to 
centralize those activities where we believe the activity would 
benefit from that kind of coordination. Specifically, through 
25 recommendations made by our Inspector General, we actually 
created a centralized department Office of Law Enforcement and 
Security to bring common practices and procedures for all of 
our law enforcement entities within the department, which 
number some close to 4,000.
    I did not the appraisal services, which used to be 
distributed throughout our bureaus. We centralized that into a 
single office. Likewise, with our information technology, we 
have done significant centralization of purchasing and 
management, again to address some of the IT security issues 
that have been noted.
    So we are looking at specific management problems and 
taking that management tack, whether it be centralization or 
strengthened coordination, that seems appropriate to the task 
at hand.
    Chairman Tom Davis. I believe we have expressed the 
concerns in terms of what has happened. We haven't really 
satisfactorily explained the coverup. Ms. Burton, when did you 
first learn about this? You came in 2002, right?
    Ms. Burton. I came in 2002, and I heard about those 2 years 
with no threshold in early 2006, maybe at the very end of 2005.
    Chairman Tom Davis. Did you ask why it took so long to come 
up to you through the ranks?
    Ms. Burton. I don't think the ranks realized that they 
needed to tell me about it. This was an issue that happened 
previously, and they felt the Secretary, it was not an illegal 
issue.
    Chairman Tom Davis. No, but it cost Americans billions of 
dollars.
    Ms. Burton. Absolutely.
    Chairman Tom Davis. And let me just say this, on something 
like this as you go through a review, to me it is incredible 
that someone wouldn't have brought this to the attention. 
Evidently, they brought it to the New York Times before they 
brought it up through the ranks. Maybe they felt they couldn't 
do it with the current department structure.
    Ms. Burton. Oh, no.
    Ms. Tom Davis. Well, tell me about it. The earlier you 
learn about this, the earlier you can renegotiate. In fact, if 
we were renegotiating in 2004 instead of 2006 before the oil 
prices came up, think of the billions of dollars that we would 
have gotten.
    I also want to add, for Mr. Markey, we have asked for a 
chart in terms of all of the different leases, which ones are 
actively being drilled, which ones aren't, and we will be happy 
to share that with you when we get it, and then have an idea of 
whose negotiating, just to try to get some handle on this.
    I guess the concern is ordinarily we would say that the 
department do what it will, but in this particular case, 
obviously, without I think additional congressional oversight, 
a lot of this would not have been done, without the increased 
scrutiny.
    It is difficult for us to get up here and have to make 
tough choices over money for school lunch programs, over money 
for student loans, over money for additional transportation, 
just by the way, because someone somewhere within the 
Department of Interior decided they didn't want to have price 
thresholds on this thing and billions of dollars are now out 
the window. That is the concern. I think we would not be doing 
our job if we weren't here asking the questions.
    To me, the fact that some of the employees involved in this 
won't at least come forward and talk about what happened so 
that we can figure out and make it quit from happening again. 
And then what Mr. Markey is talking about is if you can't get 
these leases renegotiated, I think Congress is going to have to 
re-think, House and Senate, in terms of putting pressure on 
these companies to do something else.
    If you come forward and you renegotiate the leases without 
Mr. Markey's amendment, that is great. I mean, I think we can 
preserve the contract integrity and everything else. But if you 
are unsuccessful, believe me, with this much money on the 
table, I think the legislation may be even more to your un-
liking, because this is just a lot of money. Do you understand 
what I am saying?
    Ms. Burton. I certainly do, Mr. Chairman. We share your 
concern, believe me.
    Chairman Tom Davis. Ms. Burton, look, we are both aware 
that GAO is conducting an in-depth review of the royalty 
revenue projections and the loss of royalties as a result of 
the 1998 and 1999 mistakes. GAO is doing that. The projections 
you have made are based upon raw data and assumptions provided 
to GAO. My understanding is that an initial read of those data 
and assumptions probably does not bode well for the department.
    You tell me today that you are going to do whatever is 
necessary so the American people get what is owed to them in 
this course, because these resources at the end of the day, 
these are the American people's resources. Will you tell me you 
will do everything you can to try to get this right?
    Ms. Burton. Absolutely, sir. And we are working hard on it, 
and we appreciate your help to get there.
    Chairman Tom Davis. OK. Thank you.
    We have another round. Mr. Markey.
    Mr. Markey. I thank the chairman very much.
    Again, I just want to zero in on this issue. We have to 
look to discover whether or not there was a coverup. But we 
also have to make sure that we don't have an ongoing stick-up 
of the American taxpayers. We have to solve this and solve it 
now. The Department of Interior only began this process under 
pressure from the Congress. This had sat there as an issue for 
years.
    So I remain perplexed at the reluctance of the 
administration to accept this leverage, which the Congressional 
Research Service makes quite clear does not violate in any way 
the contract and would serve as the answer to the question 
which you have in terms of this problem. Let me read to you 
again on this issue. The Congressional Research Services says 
this on May 18th: ``As we stated in our telephone conversation 
of May 17, there do not appear to be any constitutional 
impediments to the proposed amendment. Enactment of this 
amendment would not constitute a taking of existing 
leaseholders rights, but would merely establish a new 
qualification for potential leases. It has long been recognized 
that the Government has broad discretion in determining those 
firms with which it will deal.''
    Again, I continue to hear your objection to receiving this 
leverage, while I don't hear from you any agreed-upon deals 
with any of these oil companies. From a taxpayer's perspective, 
I just think that it is irresponsible to refuse to support the 
additional leverage which would enhance the likelihood that 
these oil companies would come to the table, so that you can 
protect the taxpayers.
    It just seems inexplicable from a public interest 
perspective that you would oppose having this additional 
leverage, because the oil companies are still in a situation 
where they only have to voluntarily come in, knowing that a 
terrible deal was cut back in the 1990's. I still haven't heard 
a good explanation from you why you don't want to do that.
    Ms. Burton. Congressman, we agree this is not a taking. 
What it is is a strong leverage, as you call it, to essentially 
change the terms of a contract in order to continue business in 
this country. And this administration feels that this goes to 
the heart of the sanctity of contracts.
    Mr. Markey. Again, I just read to you from the 
Congressional Research Service.
    Ms. Burton. You are talking about two things, sir.
    Chairman Tom Davis. This is a policy call. I mean, their 
policy call is, as I understand it, is the inequality of 
bargaining power balanced here. Is that the administration's 
view?
    Ms. Burton. That is correct, sir.
    Chairman Tom Davis. I think it boils down to, if they can 
renegotiate these leases without it, great. But let's see what 
happens.
    Mr. Markey. We have already seen the results. They are 
sitting there. They have no results.
    Chairman Tom Davis. They are still working on it.
    Ms. Scarlett. I think the most important results we have to 
underscore are, from 2000 and forward, including every single 
lease in this administration, we have had those price 
thresholds. Therefore, for the taxpayers, those revenues are 
forthcoming as we speak on all those issues. And that is a 
critical point.
    Mr. Markey. I will say this right now. We will have a 
solution to the Middle East crisis before you get BP and Shell 
to agree to a $36 a barrel threshold. That will never happen 
unless you accept this additional leverage. Never.
    I think you are sitting down there continuing a policy that 
allows the oil companies to maintain the whip hand in the 
negotiations with the public. I think that this administration 
should put their thumb on the scale to even-out this 
negotiation process because otherwise they are enjoying 
windfall profits that are historic and unlikely to be 
discontinued unless you accept this additional power on behalf 
of the public.
    I just think that you are operating in a completely 
delusional way, reflecting the likelihood of these oil 
companies surrendering these huge profits. In fact, they have a 
fiduciary relationship. They have a fiduciary responsibility to 
their shareholders not to surrender those profits. Whereas you 
have a fiduciary responsibility to the American taxpayers to 
reclaim them.
    I don't think in the absence of your accepting this power 
and removing your objection to the passage of the legislation, 
just waiting for your say-so, that you will have to show a 
little responsibility of losing billions of additional dollars 
that could have been used to provide education and healthcare 
for the American people. I think that will be on your 
shoulders.
    Chairman Tom Davis. Let me ask, before I let Mr. Issa sum 
up, let me ask very briefly. Are we close to any agreements 
with these companies?
    Ms. Burton. I believe we are very close with Shell and BP. 
I don't know about the others yet.
    Chairman Tom Davis. OK. How much active drilling are they 
doing at this point?
    Ms. Burton. They are very active in the Gulf, both 
companies. I don't know how many on those particular leases. I 
am trying to get all the companies who have leases----
    Chairman Tom Davis. That is fine. We need the chart. We 
just need to have a chart so we can follow it.
    Ms. Burton. Yes. I will get that to you, Mr. Chairman.
    Chairman Tom Davis. And the leases that have been 
negotiated from 2004 is great, but most of those aren't being 
used at this point. It takes time once the lease is signed, 
doesn't it, and to get the oil from the ground. Is that right? 
So this would be in the future.
    Mr. Issa.
    Mr. Issa. Thank you. I will try to sum up.
    There is a famous quote: What did you know and when did you 
know it? We certainly remember that from our youth. I know you 
are too young to remember the 1960's, but I sort of do.
    Ms. Scarlett. I might even remember the 1950's. Thank you, 
Congressman.
    Mr. Issa. It doesn't show.
    I would appreciate if, as you are going through your own 
evaluation, Director Burton, you told me that you didn't know 
until 2006. I would like to know, and I would really appreciate 
it if you would provide us with a similar chart of who knew 
when. Now, the IG is going to provide quite a bit, but I think 
the fact that people clearly knew and made the changes, and yet 
we have this whole void of people who, between the ones who 
made the changes when the discovery was made, and the time it 
got to you in 2006. I find it hard to believe that there wasn't 
a chain bubbling up of an awareness by more and more and more 
people of this, even if it was at the water cooler.
    So I would appreciate if we could get an understanding of 
how this thing morphed to where in 2000, people figured out 
there was a change, under the previous administration, a 
problem. They changed it, and it took until 2006 to bubble up 
to you. So I would appreciate understanding that better because 
that has been one of the illusive things is who knew what and 
when, and we would like to fill in what we don't have.
    Madam Secretary, I think particularly, the Solicitor does 
fall under your watch. Is that correct?
    Ms. Scarlett. The Solicitor is in the Office of the 
Secretary, of which I am a part.
    Mr. Issa. OK. I need to know when you are going to do the 
reform of that office, because this committee and my 
subcommittee found it very clear that reform has not happened 
yet, that they are still doing water cooler, no memo for the 
record, kind of dealing. That clearly was one of the points at 
which this failure occurred and would not otherwise have 
occurred in spite of all the other things that happened.
    Ms. Scarlett. Congressman, we are in fact looking at the 
Office of the Solicitor and its management and those processes, 
and how to improve them in terms of that approval process.
    Mr. Issa. And now I will use one other quote that I am 
probably not qualified for, and that is, and now the other part 
of the story. I voted against Mr. Markey's amendment, as I 
recall. I believe in contract sanctity and I don't believe his 
solution is fair. What I do believe, though, from the discovery 
of our committee, is that this is much less like a contract 
that you negotiated, and now you are back saying, but the deal 
changed because the price changed. This is much more like a 
triple-net lease for a building, and then the roof falls in, 
and you are trying to figure out, well, did you think the 
triple-net meant you fix the roof? Or did you think this was a 
triple-net where you thought the landlord was going to fix the 
roof?
    Before our committee, multiple oil companies, perhaps some 
of the largest by far, testified that they thought the 
thresholds were in the contracts when they signed them, meaning 
that they paid a price to the Government, sort of like how much 
you lease a building for, depending upon whether or not you 
think you are going to have to fix the roof. They bid on these 
contracts transparently as though they were still in, because 
the bidding prices in their own testimony didn't change.
    So when you are negotiating, and Johnnie, I think you are 
probably face to face with these people, I disagree with Mr. 
Markey because I don't think it is about whether the price went 
in. I don't think it is about cajoling them. I think it is 
about saying, come on, folks, if you believe that it was in 
there, you believe you signed it. We believe that the 
Government was supposed to have it in. We believe this is the 
kind of a failure that should not be taken advantage by either 
party.
    I would hope that in your negotiations, you would say, 
look, if the Government thought it was supposed to work this 
way, and it was to your favor, and you came back to us, we 
would be having the discussion exactly the same, which is, the 
intent of a contract is part of the contract. And you go back 
often, even though you have a written agreement, and I was 
recently deposed on one where I had an agreement in court 
codified by a U.S. Federal judge in which I gave a license to 
somebody. And wouldn't you know it, they wanted to have me 
testify as to what I thought I gave them 8 years later, because 
it does matter. What you think you got and what you think you 
gave matters.
    So I believe that is a strong point, and that is the reason 
I didn't vote for Mr. Markey's amendment, is I believe you have 
the ability to negotiate in good faith, based on original 
intent of both parties. I believe you will be successful, and I 
also believe world peace will come in the Middle East. But I 
believe that your settlements will come sooner because I 
believe one company signs, that will be the model for all of 
them.
    Thank you, Mr. Chairman. And thank you for holding this 
important hearing.
    Chairman Tom Davis. Thank you.
    And Mr. Markey, thank you as well.
    I would just add, I am not sure where I was on Mr. Markey's 
amendment. As I recall, I had other interests to protect in 
that bill. You did vote for it? OK. I get it right once in a 
while.
    The purpose here is to give you some leverage as you sit 
down, and also to give the companies, who I think want to do 
the right things, but have that fiduciary duty he talked about 
to their shareholders, to be able to come forward and get the 
right thing done.
    But good luck as we move forward. I look forward to getting 
the charts from you.
    Ms. Burton. Yes.
    Chairman Tom Davis. This is an issue we are going to 
continue to, well, we will watch it, continue to investigate, 
and probably do further hearings.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 12:30 p.m. the committee was adjourned.]

                                 
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