* Agency ripe for fraud and abuse, auditor says
* Officials reluctant to sanction drillers-review (Adds background of reform moves at Interior)
By Patrick Rucker
WASHINGTON, March 6 (Reuters) - Outdoor retail executive Sally Jewell, President Barack Obama's pick to lead the U.S. Interior Department, will face her first big public test Thursday in a Senate confirmation hearing as the agency faces criticism of its management of oil and gas lands.
Jewell's appearance before the Senate Committee on Energy and Natural Resources comes as government auditors have faulted Interior for lax oversight and cozy dealings with the oil and gas industry.
Among lapses tallied by investigators: Agency officials who find violations, for example in record keeping or environmental management, rarely hand out fines. Important paperwork routinely goes missing at the sprawling agency.
The Government Accountability Office, the investigative arm of Congress, has singled Interior out as among the agencies most vulnerable to fraud, waste or abuse.
Obama has drawn mostly praise for his choice of the conservation-minded chief executive of outdoor equipment retailer REI to lead an agency that oversees more than 80 million acres (32 million hectares) of recreation area under the National Park Service.
But since about a third of U.S. oil and gas comes from Interior-managed land as well as about 40 percent of the nation's coal, Jewell would also be a key member of Obama's energy team.
If Jewell is confirmed to succeed departing Secretary Ken Salazar, former agency officials said, getting the most out of oil, gas and coal sales will be one of her biggest tests.
"Being a steward of public lands means protecting taxpayers," said Bob Abbey, who was director of the Interior Department's Bureau of Land Management from 2009 to 2012. "At a time of tight budgets, that's an even bigger part of the job."
Interior reorganized some enforcement work after the Deepwater Horizon oil spill in the Gulf of Mexico in 2010 and eliminated a controversial program that allowed oil and gas companies to settle royalties in fuel rather than cash.
A new agency, the Office of Natural Resources Revenue, is tasked with collecting royalty payments in another reform, but independent reviews point to persistent weaknesses.
Senator Ron Wyden, Democratic chairman of the energy panel, has said more needs to be done to protect taxpayers, and he has welcomed Jewell's nomination.
Senator Lisa Murkowski, the panel's top Republican, has also called for taxpayer protections but separately has threatened to put a hold on the nomination unless Jewell promises to address a pending issue in Murkowski's home state of Alaska.
Some lawmakers are likely to push Jewell to open more land for drilling while others call for her to preserve more terrain - a potent illustration of the types of competing forces at work in taking over the agency and its roughly 70,000 employees in some 2,400 locations.
Obama will expect Jewell to promote the White House agenda of cutting the nation's dependence on carbon fuels blamed for climate change while eking out more federal revenue.
Interior has been roundly criticized as doing a poor job collecting royalties.
The GAO in 2009 said botched records probably cost taxpayers more than $150 million in two instances of flawed revenue tallies. Two years later, GAO said Interior "does not have reasonable assurance that it is collecting its share of billions of dollars of revenue from oil and gas produced on federal lands." (Full report: http://link.reuters.com/bud56t)
Serious problems are routinely found at drill sites but officials often do not keep records and ask companies to fix the problem rather than issue fines, an internal review found in 2011. (Full report: http://link.reuters.com/bed56t)
At the urging of Murkowski and Wyden, Interior is now investigating whether coal companies are skirting royalty payments on lucrative exports top Asia. (Full report: http://link.reuters.com/cud56t)
"Without accountability this program will continue to bleed taxpayer money," said Autumn Hanna of Taxpayers for Common Sense which has investigated the Interior Department's royalty program.
Still, if Interior wants to get serious about reform, said one former official, it should shield officials from the influence of lawmakers.
"About an hour after I ordered sheep off an overgrazed plot in Wyoming, I got a call from a U.S. senator questioning my actions," said Jim Baca, President Bill Clinton's first Bureau of Land Management director.
"That happens all the time with state offices."
Interior's independent investigative arm has for months been examining how the agency handles royalty payments and whether improvements are needed. (Reporting By Patrick Rucker; Editing by Cynthia Osterman)