WASHINGTON, Jan. 16 — A top Interior Department official was told nearly three years ago about a legal blunder that allowed drilling companies to avoid billions of dollars in payments for oil and gas pumped from publicly owned waters, a report by the department’s chief independent investigator has found.
The report, which was sent lawmakers on Tuesday, suggested that Interior officials could have fixed the mistake far more easily if they had taken action when they first recognized it. Oil and gas prices were far lower than they are today.
The report contradicts statements by the official, Johnnie M. Burton, the director of the department’s Minerals Management Service, who told a House hearing last September that she first learned about the royalties problem in January 2006.
Confronted by e-mail messages from subordinates from early 2004, the report said, Ms. Burton conceded that she probably had been told earlier, but “did not remember putting a great deal of thought into the matter.”
Investigators calculated that the government could have collected an additional $865 million in the last three years alone if officials had told companies drilling in the Gulf of Mexico that they owed all the royalties required on oil and coal extracted from federal waters.
Unless the leases are changed, administration officials expect the mistake to cost billions of dollars in royalties that drilling companies usually are required to pay the federal government for oil and gas pumped from the gulf.
The report is the result of a nine-month investigation by the Interior Department’s inspector general in response to questions raised by the Senate Energy Committee and the House Natural Resources Committee. It will be the focus of a hearing Thursday by Senator Jeff Bingaman, Democrat of New Mexico and chairman of the Senate Energy Committee.
And while the report confirms that the original leasing blunders were made under the Clinton administration, it provides new details about the reluctance of the Bush administration to discuss the issue publicly or find a fix for the problem for nearly six years.
At issue are more than 1,000 offshore drilling leases for the gulf that the Interior Department signed in 1998 and 1999, during the Clinton administration.
The government offered drillers lucrative “royalty relief,” a holiday from the standard 12 percent royalty, as an incentive to increase exploration and production in waters that were thousands of feet deep.
But as a result of what investigators believe was bureaucratic bumbling, the leases for 1998 and 1999 omitted a standard escape clause that rescinded the special inducements if oil prices climbed above $34 a barrel.
Midlevel officials at Interior spotted the omission in 2000, and quietly made sure to include the escape clause in all subsequent leases. But no one tried to fix the leases that had already been signed, and almost no one talked about them until oil prices started to climb above $34 a barrel in 2004.
At a hearing of the House Government Reform Committee last September, Ms. Burton testified that she had first learned about the problem in late 2005 or January 2006. Ms. Burton and other senior officials publicly confirmed the error in February 2006, after The New York Times published an article about it.
But investigators have unearthed a series of e-mail messages by officials working under Ms. Burton in March 2004. At the time, energy prices had recently climbed above the thresholds that were supposed to stop the incentives, and oil companies were pressing the Interior Department to confirm how it would treat the leases from 1998 and 1999.
Marshall Rose, chief economist for the Minerals Management Service, wrote the agency’s associate director at the time, Thomas Readinger, that the decision had to be made by the “directorate” — Ms. Burton and her top deputies.
Mr. Rose told Mr. Readinger that he believed the leases entitled companies to the incentive regardless of oil price levels, and that he had told his own subordinates that “you and the director were aware of the need to make a decision on this matter.” Mr. Readinger, who retired last year, responded to Mr. Rose a few hours later by writing, “Sounds like we have an answer. Let’s go with it.”
According to the report, Mr. Readinger told investigators “he was sure” that he had discussed the issue with Ms. Burton.
Ms. Burton, after seeing the e-mail messages from her subordinates and with Mr. Readinger’s recollections, told the investigators that Mr. Readinger “must have mentioned the issue to her at that time,” the report said.
In a written statement Tuesday night, the Minerals Management Service said Ms. Burton did not deny but could not remember being told about the mistake three years ago.
“Director Burton responded that if an employee said that to her, it was likely true but she could not remember the event nor the circumstances,” the agency said.
Walter Cruickshank, Ms. Burton’s deputy director, originally told investigators he had first learned about the problem around January 2006. But investigators found an e-mail message by Mr. Cruickshank from 2000 in which he said the provisions had been “inadvertently omitted” from leases in 1998 and 1999.
Shown his own messages, Mr. Cruickshank told investigators that “he did not remember” the discussion, but he was “probably in the room during the meeting” at which it took place.
On Thursday, House Democrats hope to pass a bill that would put a heavy tax on companies that refuse to change their leases and would repeal several other tax breaks and royalty incentives for companies that drill in deep waters.