Oil, sex & money: Federal agency accused of sleazy antics Memo: Federal oil lease employees had sex with industry reps

Top watchdog at Interior says one agency rife with corruption

WASHINGTON — A program director allegedly snorts crystal meth off a toaster oven. A marketing supervisor sells sex toys to her employees, while senior executives allegedly rig contract bids for a pal.

Such is the culture the Interior Department's Inspector General says he found at the Minerals Management Service, the federal agency responsible for handling $8 billion a year in revenue from offshore oil and gas leases.

As lawmakers on Capitol Hill Wednesday were taking up bills that could throw open new areas offshore to oil and gas drilling, Inspector General Earl Devaney released a series of blistering, even lurid, reports on the alleged behavior of the federal employees who deal with those offshore operators.

Agency employees, a number of whom still work for the federal government, received frequent gifts from industry players, had sexual encounters with oil and gas company employees, consulted for energy firms on the side and threw contracts to friends, Devaney found.

Devaney, who had once famously declared that "short of a crime, anything goes at the highest levels of the Department of the Interior," spent two years and $5.3 million on the probe, with his investigators interviewing 253 witnesses and combing through 470,000 pages of documents.

Devaney took direct aim at the agency's much-vaunted Royalty In Kind program — and its former program director, Gregory Smith.

The Minerals Management Service's Royalty In Kind program allows oil companies to pay royalties owed to the federal government in actual oil and gas rather than cash.

The agency then sells that oil and gas to other industry players.

Just last week, the agency was boasting it had received $63 million more in revenue for the federal government by taking royalties in kind than it would have by demanding cash.

But in a memorandum to Interior Secretary Dirk Kempthorne released Wednesday, Devaney said his investigators had "discovered a culture of substance abuse and promiscuity in the RIK program."

Kempthorne issued a statement reacting to the scandal today.

“I am outraged by the immoral behavior, illegal activities, and appalling misconduct of several former and current long-serving career employees in the Minerals Management Service’s Royalty in Kind program," he said. " These individuals have eroded the trust the American citizens deserve to have in their public servants."

Minerals Management Service Director Randall Luthi promised to try to root out the problems at the agency before he leaves in January.

"We take the report very seriously," he said, "I don't see where the American people have been hurt, dollarwise."

But Devaney insists a former senior executive, Lucy Querques Denett, manipulated the contracting process to ensure her special assistant, Jimmy Mayberry, received a lucrative contract from the agency when he retired.

Mayberry has pleaded guilty to a criminal charge, but the Justice Department has declined to prosecute Denett, Devaney said.

Neither Denett nor Mayberry could be reached for immediate comment.

Between 2002 and 2006, Devaney said, nearly a third of the employees in the Royalty In Kind program received an array of gifts from Chevron Corp., Shell, Gary Williams Energy Corp. and Hess Corp.

Devaney blasted Chevron for refusing to cooperate with the investigation.

Five Chevron employees declined to be interviewed by the federal investigators, while a former Shell employee also refused to speak with agents, one of Devaney's reports noted.

Chevron spokesman Don Campbell said company officials "have cooperated with the government investigation and produced all of the documents that the government requested months ago," while Shell spokeswoman Marnie Funk said the company has "cooperated fully" with the probe.

Hess spokeswoman Maripat Sexton said her company had "cooperated fully" with the investigation but found no wrongdoing by a Hess employee. Gary Williams officials could not be reached.

Part of marketing culture

While many of the gifts were lunches and drinks, they also included golf outings, snowboarding rentals and lodging.

When asked about the gift taking, "none of the employees involved displayed remorse," Devaney said.

Gift-giving is part of the oil and gas marketing culture, Deborah Gibbs Tschudy, deputy associate director of the agency's Minerals Revenue Management office, told investigators. And while Tschudy argued federal employees don't need to accept gifts, employees in the agency's Royalty In Kind office clearly viewed themselves as part of that world.

Indeed, one marketer described it as "the RIK way of doing business."

Two agency employees — who Shell employees had dubbed the "MMS chicks" — conceded they had romantic encounters with men from the industry.

One had liaisons with a Shell Pipeline Co. employee and an oil scheduler for Chevron, one report noted. But she did not "think there was a reason to recuse herself from dealing with Shell or Chevron," the report said.

Devaney disagreed: "Sexual relationships with prohibited sources cannot, by definition, be arms-length."

The two marketers also allegedly stayed overnight at Shell's Dutchman Haus lodge in a Colorado resort because they had had too much to drink to get home safely.

Cocaine, crystal meth

One of the two women also owned a sex toy business on the side known as Passion Parties. Some of her fellow employees had purchased her products, but she denied passing out business cards at work.

Some of Devaney's harshest criticism was directed at one-time RIK program director Smith.

A former subordinate, Devaney relates, accused Smith of using cocaine, even directing her to buy these "office supplies" while at work, snorting crystal methamphetamine and engaging in sex with the employee.

The report also alleged that an environmental and engineering firm paid Smith more than $30,000 to market the firm to various oil and gas companies, even though those companies had business dealings with the Royalty In Kind program.

The Justice Department has declined to prosecute, Devaney noted.

Smith attorney Steve Peters said his client "was a loyal, dedicated employee of the federal government for more than 28 years prior to his retirement.

"Under Greg's watch, profits from the RIK program totaled more than $150 million over a four-year period," Peters said. "Greg's efforts in running the Royalty In Kind program resulted in one of the most profitable government programs in American history."

The Devaney reports were made public as the House and Senate are considering legislation that would open portions of the eastern Gulf of Mexico, as well as the waters off the Atlantic coast from Virginia to Georgia, to oil and gas drilling.

"Little did we know how cozy the relationship between Big Oil and the administration's regulators have been," said House Speaker Nancy Pelosi, D-Calif.

david.ivanovich@chron.com