Interior Dept. sloppiness costs U.S. billions

NEW YORK (CNN) -- The sex and drugs scandal revealed earlier this week at the Interior Department may be just the start.

A Government Accountability Office study set for release Friday says the department lacks basic procedures for monitoring the oil industry, and that these shortfalls could be cheating taxpayers out of billions of dollars in revenue. CNN received a draft of the report on Thursday.

The Interior Department tracks production from the energy industry and collects royalties based on that output. Oil and gas royalties are the federal government's second-largest source of revenue, after tax collections.

In fiscal year 2007, the Department of Interior's Minerals Management Service (MMS) collected the equivalent of $9 billion in oil and gas royalties - some of which was shared with states as well as Native American tribes.

On Wednesday, a report by the Interior Department's Inspector General found MMS staffers in Colorado were having sex and engaging in illegal drug use with employees of some of those oil companies. The investigation also found an MMS supervisor had sex with two subordinates and engaged in illegal drug use with at least one of them.

But the GAO study suggests that scandal might be more far reaching.

The department's failure to consistently check oil-company supplied production data, the report found, "raises questions about the accuracy of royalty payments."

The study's author, Frank Rusco, acting director of natural resources and environment at the GAO, said, "there are significant risks when you're relying on self-reported information." Rusco added that there is third-party data they could use to check the production amounts.

The GAO report also found MMS is not inspecting many meters that measure oil and gas production, and sometimes doesn't know when oil companies fail to submit royalty reports. "As a result, MMS cannot be entirely confident that it is receiving all the royalties when they are due," the study concluded.

"This report shows that the U.S. has one of the most lenient royalty collection systems in the world and calls into question whether taxpayers are getting a fair return for the resources they own," said Rep. Nick Rahall, D-West Virginia and chairman of the House Natural Resources Committee.

GAO previously found MMS failed to properly track precisely how much oil was being transferred into the Strategic Petroleum Reserve.

"We found there isn't good coordination between the Department of Energy and MMS in terms of handover oil and the accounting for how much was handed over," said Rusco.