WASHINGTON — Government workers in Denver engaged in secret sex and drug abuse with oil company employees and accepted thousand of dollars in gifts while handling billions of dollars worth of energy contracts, federal investigators said today.

Employees at the Minerals Management Service including the former head of the Denver division repeatedly and “without remorse” violated ethics rules over a four-year period, the Interior Department’s Inspector General said.

The three reports released today describe a widespread pattern of abuse as well as a pervasive belief that the rules didn’t apply.

In the Royalty in Kind division of Minerals Management Service, the report said, “between 2002 and 2006, nearly one-third of the staff socialized with, and received a wide array of gifts and gratuities from oil and gas companies with whom RIK was conducting official business…these employees accepted gifts with prodigious frequency.”

Gifts included ski and golf trips and dinners.

The Inspector General found ethics breeches by 19 employees, but focused on 13 workers.

In addition to the sex, drugs, and gifts, the employees are accused of rigging contracts, improperly helping oil company workers fix problems with their contracts, and working part-time as private oil consultants g to three reports released today by the Interior Department’s Inspector General.

The employees argued that they needed to socialize with oil company executives in order to gain information, and “when confronted by our investigators,” the IG report said, “none of the employees involved displayed remorse.”

One report from the Inspector General focuses on Gregory W. Smith, the former head of the Denver Minerals Management Service. In charge of 65 employees, Smith “served as the public face of RIK as its senior-most representative to the oil and gas industry.”

The report alleges that Smith had sex and took illegal drugs with subordinates.

Democrats immediately seized on the allegations. From House Speaker Nancy Pelosi to Colorado Gov. Bill Ritter, they issued statements arguing that a too-cozy relationship between oil companies hurts taxpayers.

“The investigation also must closely examine how much this type of corruption has cost American – and Colorado – taxpayers,” Ritter said. “The oil-and-gas industry already benefits from taxpayer-funded subsidies, so the question is: how much has this scandal cost us in lost revenue?”

Pelosi, who Wednesday unveiled new energy legislation, tied in President Bush and Vice-President Dick Cheney.

“Little did we know how cozy the relationship between Big Oil and the Administration’s regulators have been,” Pelosi said. “This report documents the ‘pervasive culture of exclusivity’ that has cheated the American taxpayer out of billions of dollars owed them by the oil companies.

Last month, The Denver Post reported on the pending release of the Inspector General’s report, saying it was expected to help explain breakdowns in accountability in government energy deals and other questionable activities discovered by the office’s investigators and whistle-blowers in recent years.

Many of the alleged misdeeds occurred when Gale Norton worked as Interior Department Secretary. Now working as a general counsel with Royal Dutch Shell in Denver, Norton declined comment.

“It’s appropriate for me to let the Shell public affairs people discuss it,” Norton said.

She declined to address the issue from the standpoint of the department she once headed.

Shell is one of the oil companies named in the report, along with Chevron, Hess Corporation and Denver-based Gary Williams Energy Corporation.

During the past year, in September and again in May, inspector general reports have portrayed MMS as a nest of conflict, lapsed controls and potential criminal conduct. Last year, the division collected $11 billion from fees charged to oil, gas and mining companies for extracting offshore minerals in addition to production on federal and Indian lands. The report notes that MMS is one of the federal government’s largest sources of non-tax revenues.

MMS officials have allowed certain oil companies to skirt bidding procedures, modify sales contracts and avoid paying interest on royalties owed to the government, according to documents.

The MMS’s royalty-in-kind program is at the center of the scrutiny.

The oil-and-gas lobby long pushed for such a system before it was implemented in 2004 under Norton.

The RIK program allows energy companies to pay the government a share of the actual oil product for the right to drill, instead of cash, avoiding accounting rules.

Such sales are held to fill the nation’s Strategic Petroleum Reserve or to make oil available on the open market.

Executives at Denver-based Gary-Williams Energy were among those who paid for meals, drinks and golf outings for MMS officials, according to the report. A review of industry expense reports showed that Stacy Leyshon, who served as a minerals revenue specialist for the interior department’s RIK office, received gifts valued at $1,068 from Gary-Williams from 2002 to 2006, the report states. The gifts included tickets to PGA events.

Don Hamilton, vice president of raw materials supply for Gary-Williams, offered the following philosophy about RIK employees attending industry events: “(You) cannot market oil and get top dollar sitting in an ivory tower.”

Gary-Williams bought products through Royalty-in-Kind’s Small Refiner Program.

Gary-Williams assistant treasurer Rob Saunders confirmed that he purchased meals for MMS officials, according to the report. Saunders said he felt taking individuals out for meals helped build rapport with them and made them more comfortable “assigning open credit” to Gary-Williams in conjunction with the oil the company purchased.

Sally Allen, a Gary-Williams spokeswoman, said today that the company had not seen the report.

While many oil-industry experts view the RIK program as potentially simpler than paying the government cash, Interior managers have allowed energy companies to twist rules at transaction levels generally unseen by the public, investigators say.

Oil corporations have frequently won changes to sales contracts and been allowed to submit bids after deadlines, tilting deals to their financial favor, without explanation and with little or no scrutiny of government lawyers, examiners have found.

Such practices, the inspector general concluded, lead to potential favoritism for certain energy companies, still unnamed, as well as taxpayer losses. An examination this year of 718 bid packages turned up changes to 118 that appeared to inappropriately benefit corporations by $4.4 million — at the expense of the government.

Hints of unethical and potentially illegal activity were threaded through the May and September reports. “RIK staff had inappropriate relationships with industry executives. RIK personnel still meet,” one report said. “Potential criminal conduct of managers” needs to be explored, according to the other report.

Denver Post Staff Writer Andy Vuong contributed to this report.