Oil and Gas Royalty Accounting--Improvements Have Been Initiated but Continued Emphasis Is Needed To Ensure Success

GAO was requested to evaluate the development of the new royalty system and to determine the extent to which it will improve the collection of royalties due from Federal and Indian lands.

Royalty collections have increased rapidly in recent years, primarily because of substantial increases in oil and gas prices and, with oil prices decontrolled, this trend can be expected to continue. Historically, a high priority has not been placed on collecting oil and gas royalties, and major problems have gone unchecked for over 20 years. As a result, large sums of royalty income may be going uncollected each year, and significant amounts of royalty income have been uncollected when due, thus increasing the Government's interest costs. The current royalty accounting system is in disarray. Oil and gas companies are essentially on an honor system to report accurately and pay royalties when due, and the Department of the Interior has been unable to account for the information reported to it, much less to verify this information. Interior is attempting to correct these longstanding problems and has placed an emphasis on the need for an effective royalty management system, which it is designing. However, Interior has not adequately considered: (1) acquiring data on the number of leases and wells for which it is responsible; (2) verifying the royalty computation; (3) developing a comprehensive plan for audits and inspections; and (4) planning the production phase of the new system which will permit production and sales data to be matched. Some corrective action has been taken; however, the problems confronting Interior in this area cannot be solved immediately.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: John F. Simonette Team: General Accounting Office: Accounting and Financial Management Division Phone: (202) 275-1581