Mineral Revenues
A More Systematic Evaluation of the Royalty-in-Kind Pilots Is Needed Gao ID: GAO-03-296 January 9, 2003In fiscal year 2001, the federal government collected $7.5 billion in royalties from the sale of oil and gas produced on federal lands. Although most oil and gas companies pay royalties in cash, the Department of the Interior's Minerals Management Service (MMS) has the option to take a percentage of the oil and gas produced and either transfer this percentage to other federal agencies or to sell this percentage itself--known as "taking royalties in kind." GAO reviewed the extent to which MMS has taken royalties in kind since 1995, the reasons for taking royalties in kind, and MMS's progress in implementing management control over its Royalty-in-Kind Program.
From January 1995 through September 2001, the Minerals Management Service (MMS) took, in kind, 178 million barrels of oil and 213 billion cubic feet of gas, or 32 percent of the federal government's royalty share of all oil and 3 percent of the federal government's royalty share of all gas produced on federal lands. MMS sold the majority of this oil--143 million barrels--to small refiners in accordance with long-standing legislation. MMS also took 29 million barrels of federal royalty oil to fill the Strategic Petroleum Reserve. MMS took the remaining 6 million barrels of oil in kind and all the gas in kind under a series of pilot projects to evaluate whether there are additional circumstances under which taking royalties in kind is in the best interest of the federal government. MMS personnel have made progress in implementing some components of management control for its Royalty-in-Kind Program, such as addressing the risks associated with oil and gas sales and developing written procedures. However, MMS does not plan to complete and implement all management controls until 2004, when it will consider the Royalty-in-Kind pilots to have changed from a pilot stage to a fully operational stage and when it will have acquired additional systems support. To date, MMS has not developed clear strategic objectives linked to statutory requirements nor collected the necessary information to effectively monitor and evaluate the Royalty-in-Kind Program. Without clear objectives linked to statutory requirements and the collection of necessary information, MMS cannot systematically assess whether Royalty-in-Kind sales are administratively less costly, whether they generate fair market value or at least as much revenue as traditional cash royalty, payments, and thus whether MMS should expand or contract the Royalty-in-Kind Program.
RecommendationsOur 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: Team: Phone:GAO-03-296, Mineral Revenues: A More Systematic Evaluation of the Royalty-in-Kind Pilots Is Needed
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
January 2003:
MINERAL REVENUES:
A More Systematic Evaluation of the Royalty-in-Kind Pilots Is
NeededMineral Revenues:
GAO-03-296:
GAO Highlights:
Highlights of GAO-03-296, a report to Representative Nick J. Rahall,
Ranking Minority Member, House Committee on Resources, and
Representative Carolyn B. Maloney:
Why GAO Did This Study:
In fiscal year 2001, the federal government collected $7.5 billion in
royalties from the sale of oil and gas produced on federal lands.
Although most oil and gas companies pay royalties in cash, the
Department of the Interior‘s Minerals Management Service (MMS) has the
option to take a percentage of the oil and gas produced and either
transfer this percentage to other federal agencies or to sell this
percentage itself”known as ’taking royalties in kind.“ GAO reviewed
the extent to which MMS has taken royalties in kind since 1995, the
reasons for taking royalties in kind, and MMS‘s progress in
implementing management control over its Royalty-in-Kind Program.
What GAO Found:
From January 1995 through September 2001, the Minerals Management
Service (MMS) took, in kind, 178 million barrels of oil and 213 billion
cubic feet of gas, or 32 percent of the federal government‘s royalty
share of all oil and 3 percent of the federal government‘s royalty
share of all gas produced on federal lands. MMS sold the majority of
this oil”143 million barrels”to small refiners in accordance with
long-standing legislation. MMS also took 29 million barrels of
federal royalty oil to fill the Strategic Petroleum Reserve. MMS took
the remaining 6 million barrels of oil in kind and all the gas in kind
under a series of pilot projects to evaluate whether there are
additional circumstances under which taking royalties in kind is in
the best interest of the federal government.
MMS personnel have made progress in implementing some components of
management control for its Royalty-in-Kind Program, such as addressing
the risks associated with oil and gas sales and developing written
procedures. However, MMS does not plan to complete and implement all
management controls until 2004, when it will consider the
Royalty-in-Kind pilots to have changed from a pilot stage to a fully
operational stage and when it will have acquired additional systems
support. To date, MMS has not developed clear strategic objectives
linked to statutory requirements nor collected the necessary
information to effectively monitor and evaluate the Royalty-in-Kind
Program. Without clear objectives linked to statutory requirements
and the collection of necessary information, MMS cannot systematically
assess whether Royalty-in-Kind sales are administratively less costly,
whether they generate fair market value or at least as much revenue as
traditional cash royalty payments, and thus whether MMS should expand
or contract the Royalty-in-Kind Program.
Highlights Figure:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that MMS clarify its strategic objectives for the
Royalty-in-Kind Program and link these objectives to statutory
requirements. GAO also recommends that MMS gather key information to
monitor and evaluate the program prior to further expansion of the
program. In commenting on the draft report, the Department of the
Interior generally agreed with GAO‘s observations and recommendations
and emphasized MMS‘s future plans to improve management control over
the Royalty-in-Kind Program.
www.gao.gov/cgi-bin/getrpt?GAO-03-296.
To view the full report, including the scope and methodology, click on
the link above.For more information, contact Jim Wells at
(202) 512-6877 or wellsj@gao.gov.
Contents:
Letter:
Results in Brief:
Background:
MMS Has Taken Increasing Amounts of Royalties in Kind Since 1995 to
Meet Several Objectives:
MMS Takes Oil in Kind and Sells It to Small Refiners:
MMS Takes Oil in Kind to Fill the Strategic Petroleum Reserve:
MMS Is Studying the Increased Use of Royalties in Kind:
MMS Has Established Some Management Control over Its RIK Program, but
Additional Efforts Are Needed:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Scope and Methodology:
Appendix I: Comments from the Department of the Interior:
Appendix II: Objectives, Scope, and Methodology:
Appendix III: GAO Contacts and Staff Acknowledgments:
Figures:
Figure 1: Estimated Percentage of Federal Royalty Oil Taken in Kind by
Purpose, Calendar Years 1995 through 2000 and January through September
2001:
Figure 2: Estimated Value of Federal Royalty Oil Taken in Kind by
Purpose, Calendar Years 1995 through 2001 and January through July
2002:
Figure 3: Estimated Percentage of Total Federal Royalty Gas Taken in
Kind by Purpose, Calendar Years 1995 through 2000 and January through
September 2001:
Figure 4: Revenues Reportedly Collected from the Sale of Federal
Royalty Gas Taken in Kind, Calendar Years 1995 through 2001 and January
through July 2002:
Abbreviations:
DOE: Department of Energy:
GAO: General Accounting Office:
MMS: Minerals Mangement Service:
RIK: Royalty-in-Kind:
SPR: Strategic Petroleum Reserve:
January 9, 2003:
The Honorable Nick J. Rahall
Ranking Minority Member
Committee on Resources
House of Representatives:
The Honorable Carolyn B. Maloney
House of Representatives:
Federal lands supply about one-third of the oil and gas produced in the
United States. Companies that lease these lands traditionally pay
royalties to the Department of the Interior‘s Minerals Management
Service (MMS) based on a percentage of the value of the oil and gas
that the companies produce. In fiscal year 2001, oil and gas royalties
to MMS totaled about $7.5 billion. Determining proper royalty payments,
however, has been costly and administratively difficult for both the
companies that lease federal lands and MMS. The value of the oil and
gas, in particular, is often a source of dispute. For example, during
MMS‘s recently completed 4-1/2 year process of promulgating new
regulations for valuing oil, the oil industry strongly opposed these
regulations primarily because they would increase the industry‘s
royalty payments and increase their administrative burden. In
commenting on the regulations, industry officials suggested that
instead of accepting cash royalty payments, MMS should accept a
percentage of the actual oil and gas produced and sell this percentage
itself--known as ’taking royalties in kind.“:
The Mineral Leasing Act of 1920 and the Outer Continental Shelf Lands
Act of 1953 authorize taking royalties in kind and require that the
government obtain at least fair market value for royalty oil and gas it
sells. Under this authority, MMS has taken federal oil in kind, mainly
to fulfill congressional and executive directives. Specifically, the
Congress has directed taking oil in kind for the Small Refiners
Program, whose objective is to supply crude oil to small refiners that
do not have an adequate supply of their own. In more recent years, the
President has directed the taking of oil in kind to fill the Strategic
Petroleum Reserve as a safeguard against disruptions to the national
supply of crude oil. However, in 1995, MMS began to study whether there
are additional circumstances under which taking oil and gas in kind is
in the best interest of the federal government. MMS‘s efforts were
encouraged by the Congress as a means of avoiding disputes between MMS
and the oil and gas industry over the value of the oil and gas produced
as well as a way to simplify royalty administration. To this end, MMS
established Royalty-in-Kind (RIK) pilots and is developing management
controls for its RIK Program--a newly created program under which MMS
manages all its RIK activities. Management control is an integral
component of an organization‘s management that, if effective, can
provide for the effectiveness and the efficiency of operations, the
reliability of financial reporting, and compliance with applicable laws
and regulations. Key management controls include (1) identifying and
mitigating the risks that could prevent an agency from achieving its
objectives, (2) developing written procedures, and (3) monitoring and
evaluating program performance. In the 2001 and 2002 Appropriations
Acts for Interior and Related Agencies, the Congress provided
additional direction that MMS collect at least as much revenue from its
RIK pilots as it would have collected in cash royalty payments.
As a part of your interest in MMS‘s stewardship over federal oil and
gas royalties, you asked us to (1) determine the extent to which MMS
has taken oil and gas in kind since 1995 and the reasons for doing so
and (2) report on the status of MMS‘s efforts to implement management
controls for its RIK Program.
Results in Brief:
From January 1995 through September 2001, the Minerals Management
Service took 178 million barrels of oil and 213 billion cubic feet of
gas in kind, or about 32 percent of the federal government‘s royalty
share of all oil and 3 percent of the federal government‘s royalty
share of all gas produced on federal lands, and used these quantities
for various purposes. Of the 178 million barrels, MMS sold about 143
million barrels to small refiners under the Small Refiners Program. MMS
also complied with presidential directives to use federal royalty oil
to fill the nation‘s Strategic Petroleum Reserve at various times,
transferring about 29 million barrels to the Strategic Petroleum
Reserve from 1999 through 2000. In addition, MMS selectively took
federal oil and gas in kind with the intent of improving the
stewardship of federal resources. Specifically, MMS took both oil and
gas in kind to evaluate whether there are additional circumstances
under which taking oil and gas in kind is in the best interest of the
federal government. The amount of oil that MMS took in kind for these
pilot purposes was small from October 1998 through September 2001.
However, over the following 6 months, we estimate that the amount may
have approached 20 percent of the federal government‘s royalty share of
all oil produced on federal lands. Similarly, the amount of gas that
MMS took in kind beginning in 1998 was small until 2000 and has
averaged about 10 percent of the federal government‘s royalty share of
all gas produced on federal lands from January 2000 through September
2001.
MMS personnel have made progress in implementing some components of
management control, such as mitigating the risks associated with the
sale of oil and gas and developing written procedures. However, MMS
does not plan to complete and implement all management controls until
2004, when it will consider the Royalty-in-Kind pilots to have changed
from a pilot stage to a fully operational stage and when it will have
acquired additional systems support. To date, MMS has not developed
clear strategic objectives linked to statutory requirements or
collected the necessary information to effectively monitor and evaluate
the Royalty-in-Kind Program. Without clear objectives linked to
statutory requirements and the collection of necessary information, MMS
cannot systematically evaluate to what extent Royalty-in-Kind sales
should continue.
We are making recommendations to improve the management of the Royalty-
in-Kind Program. These recommendations include clarifying strategic
objectives and obtaining the necessary information to more effectively
monitor and evaluate the Royalty-in-Kind Program. We provided the
Department of the Interior with a draft of this report for comment.
Background:
In fiscal year 2001, the latest period for which data are available,
the Minerals Management Service reported that it collected about $5.2
billion in gas royalties and about $2.3 billion in oil royalties. There
are more than 20,000 producing federal leases located in the
continental United States and Alaska and more than 2,000 producing
federal leases in the waters off the shores of the United States.
Despite the larger number of onshore leases, offshore leases (most of
which are in the Gulf of Mexico) account for 81 percent of all federal
oil and gas royalty payments. In general, royalty rates for onshore
leases are 12-1/2 percent of the value of the oil and gas produced,
whereas royalty rates for most offshore leases are 16-2/3 percent. The
government generally distributes about half of the royalty payments
collected onshore back to the states in which the leases are located.
The government also shares with the coastal states a smaller portion of
the royalty payments collected from offshore leases located within 3
miles of the coast, known as the 8(g) zone. However, the government
does not share royalties from offshore leases beyond the 8(g) zone,
where the majority of offshore oil and gas is produced.
The collecting, reporting, and auditing of cash royalty payments have
been challenging for MMS. MMS relies upon royalty payors to self-report
the amount of oil and gas they produce, the value of this oil and gas,
and the cost of transportation and processing that they deduct from
royalty payments. There are concerns about the accuracy and reliability
of these data. Although MMS is responsible for auditing these data,
with more than 22,000 producing leases and often several companies
paying royalties on each lease each month, the auditing becomes a
formidable task. In addition, there has been considerable disagreement
between industry and MMS over the value of the oil and gas produced and
the cost of transportation and processing deductions, leading to time-
consuming and costly appeals and litigation.
While most companies that lease federal lands pay their royalties in
cash, the federal government can instead take a portion of the oil and
gas that these companies produce--known as ’taking royalties in kind.“
The Congress authorized royalties in kind under the Mineral Leasing Act
of 1920 and under the Outer Continental Shelf Lands Act of 1953.
Standard leases for the exploration of oil and gas on federal
properties reserve the right for the federal government to take its
royalties in kind.
The Federal Managers‘ Financial Integrity Act of 1982 directed federal
agencies to develop management control for safeguarding resources and
required GAO to prescribe standards for agencies to follow in
establishing management control.[Footnote 1] Management control plays a
significant role in helping managers achieve strategic and annual
performance goals that are required under the Government Performance
and Results Act of 1993. Management control consists of several
components: (1) an environment that sets a positive and supportive
attitude toward management control and conscientious management
(control environment); (2) an assessment of the risks that an
organization faces from both external and internal sources (risk
assessment); (3) procedures, techniques, and mechanisms that enforce
management‘s directives (management control activities); (4) recording
and communicating information to management and to others that need it
within the organization (information and communication); and (5)
monitoring the quality of performance over time (monitoring).
MMS Has Taken Increasing Amounts of Royalties in Kind Since 1995 to
Meet Several Objectives:
From January 1995 through September 2001, MMS took 178 million barrels
of oil and 213 billion cubic feet of gas in kind primarily for three
purposes: (1) to provide small refiners with a stable source of crude
oil, (2) to fill the Strategic Petroleum Reserve (SPR), and (3) to
study alternatives to the traditional system of cash royalty
payments.[Footnote 2] MMS sold the majority of the oil that it took in
kind to small refineries under the Small Refiners Program--a long-
standing program designed to assist small refiners that are having
difficulty obtaining an adequate supply of crude oil. MMS also
transferred substantial quantities of federal royalty oil to the SPR as
a safeguard against disruptions in the nation‘s supply of crude oil.
MMS takes lesser quantities of oil and gas in kind under a series of
pilot sales in Wyoming and the Gulf of Mexico to study alternatives to
the traditional system of cash royalty payments. In doing so, MMS has
been testing whether it can improve the administrative efficiency of
royalty collections and whether it can sell the federal royalty oil and
gas for at least as much as it would have collected from traditional
cash royalty payments.
MMS Takes Oil in Kind and Sells It to Small Refiners:
From January 1995 through September 2001, MMS sold to small refiners
about 143 million barrels of oil, or about 25 percent of the federal
government‘s royalty share of all oil produced on federal lands during
this time period. The amounts of oil taken in kind each year for small
refiners have ranged from about 10 to 40 percent of the total federal
royalty oil, as shown in figure 1. These amounts were worth from $138
million to $588 million, as shown in figure 2.[Footnote 3] The majority
of federal royalty oil sold to small refiners since 1995 was produced
in the Gulf of Mexico. Other purposes for which MMS took oil in kind,
such as for the Wyoming and Gulf pilots and the SPR, are also shown in
figures 1 and 2.
Figure 1: Estimated Percentage of Federal Royalty Oil Taken in Kind by
Purpose, Calendar Years 1995 through 2000 and January through September
2001:
[See PDF for image]
[End of figure]
Figure 2: Estimated Value of Federal Royalty Oil Taken in Kind by
Purpose, Calendar Years 1995 through 2001 and January through July
2002:
[See PDF for image]
[End of figure]
Under the Mineral Leasing Act, as amended by P.L. 79-506, if the
Secretary of the Interior determines that there are insufficient
supplies of crude oil available on the open market to refiners that do
not have their own supply, the Secretary is required to give preference
to these small refiners in selling federal royalty oil. Accordingly,
the Secretary provides small refiners with a stable source of crude oil
at equitable prices so that these small refiners can compete in areas
dominated by integrated oil companies and large refiners. Although the
Secretary has long held this authority, the Secretary conducted few
sales prior to 1970 because of little interest from small refiners. The
Secretary delegated the responsibility to administer small refiner
sales to MMS shortly after its formation in 1982. After MMS assesses
small refiners‘ needs for crude oil, MMS identifies federal royalty oil
to meet these needs, and then conducts sales. Often, more than one
small refiner wanted to purchase the same oil, so MMS in recent years
conducted a lottery to determine the purchaser.
Prior to 2000, MMS relied upon the producer of the oil to report its
sales value and subsequently billed the small refiner this amount plus
an administrative fee to cover the costs of running the program. After
billing the small refiners, however, MMS determined that the producers
had understated the value of the oil, so MMS sent additional bills to
the small refiners. These bills often surprised the small refiners, and
in some cases, large bills threatened their financial solvency. Because
small refiners were dropping out of the program owing to the
uncertainty over the value of the oil, MMS changed its small refiner
sales in 2000 from lottery-based sales to competitive auction-based
sales. The bidders and MMS now agree to the price before receiving the
oil, just as they do in sales of other federal royalty oil.
MMS Takes Oil in Kind to Fill the Strategic Petroleum Reserve:
The Congress established the Strategic Petroleum Reserve to provide
emergency oil in the event of a disruption in petroleum supplies. The
SPR consists of a series of underground salt caverns along the
coastline of the Gulf of Mexico that can store up to 700 million
barrels of oil. It is managed and maintained by the Department of
Energy (DOE). Largely to reduce the federal deficit, the federal
government withdrew and sold oil from the SPR in fiscal years 1996 and
1997.
To replace the amounts withdrawn from the SPR, MMS assisted with the
transfer of about 29 million barrels of federal royalty oil from the
Gulf of Mexico to DOE in 1999 and 2000. This amount represented about
17 percent of the federal government‘s royalty share of all oil
produced on federal lands in each of these 2 years, as shown in figure
1. By filling the SPR, the federal government had forgone the receipt
of royalty revenues that it would have otherwise collected in cash. The
Office of Management and Budget in February 1999 estimated that the
total cost of filling the SPR would be $370 million, but oil prices
rose since then, and the total cost was probably higher. Refilling
stopped in December 2000 but commenced again in April 2002 under
presidential directive and is expected to continue into 2005. From
April through July 2002, MMS assisted in transferring to DOE about 7.5
million barrels of oil, worth about $169 million. MMS plans to increase
deliveries to DOE from 63,000 barrels per day in July 2002 to about
130,000 barrels per day in 2003.
MMS Is Studying the Increased Use of Royalties in Kind:
MMS began studying the use of federal royalty oil as an alternative to
cash royalty payments through a series of pilot sales in Wyoming.
Through nine consecutive sales that began in October 1998, MMS and the
state of Wyoming collectively sold federal and state royalty
oil.[Footnote 4] In doing so, MMS acquired information on how to group
properties for sale and how to establish a price basis for bidding.
Although the federal portion of these volumes far exceeded the state
portion, we estimate that the federal oil that MMS sold during the 3-
year period from October 1998 through September 2001 accounted for
about 1 percent of the federal government‘s royalty share of all oil
produced on federal lands. MMS expanded its study of royalty oil to the
Gulf of Mexico with two competitive sales, the first of which delivered
oil to purchasers starting in November 2000. Unlike the pilots in
Wyoming, the amount of federal royalty oil that MMS sold in the Gulf of
Mexico reached significant quantities during the second pilot sale--
about 32 times the amount of oil sold in Wyoming during the same 6-
month period. We estimate that the federal royalty oil that MMS sold
during this second sale, which commenced in October 2001 and ended in
March 2002, might have accounted for about 20 percent of the federal
government‘s royalty share of all oil produced on federal lands during
the term of the sale.
MMS first began studying the taking of gas in kind by conducting a gas
pilot in 1995. This pilot assessed the administrative efficiency and
revenue impacts of taking gas in kind relative to cash royalty
payments. MMS accepted about 6 percent of the federal royalty gas in
the Gulf of Mexico and sold it through auctions for about $72.6
million. Although this pilot showed that MMS could execute the sale of
royalty gas, MMS estimated that these sales resulted in about 6 percent
less revenue than MMS would have received in cash royalty payments, or
more than a $4 million loss. MMS attributed this loss primarily to
unforeseen problems in securing transportation of the gas through
pipelines and to industry‘s volunteering the royalty gas for sale,
rather than to MMS‘s selecting this gas. MMS continued studying RIK and
issued a report in 1997 that concluded that RIK sales could be
administratively more efficient and could generate at least as much
revenue as traditional cash royalty payments. MMS began testing these
conclusions with a series of pilot sales in the Gulf of Mexico that
began in December 1998. The gas that MMS sold during these pilot sales
averaged about 10 percent of the federal government‘s royalty share of
all gas produced on federal lands from January 2000 through September
2001, as shown in figure 3. The annual revenues that MMS reported
collecting from the sale of this federal royalty gas are illustrated in
figure 4.[Footnote 5] MMS studied various methods of selling this
royalty gas, including negotiating the sales price, paying gas
marketers to aggregate smaller volumes of gas into larger volumes, and
auctioning the gas. As a result of these pilot studies, MMS decided to
sell federal royalty gas through auctions open to all buyers meeting
minimum standards of credit worthiness.[Footnote 6]
Figure 3: Estimated Percentage of Total Federal Royalty Gas Taken in
Kind by Purpose, Calendar Years 1995 through 2000 and January through
September 2001:
[See PDF for image]
[End of figure]
Figure 4: Revenues Reportedly Collected from the Sale of Federal
Royalty Gas Taken in Kind, Calendar Years 1995 through 2001 and January
through July 2002:
[See PDF for image]
[End of figure]
MMS Has Established Some Management Control over Its RIK Program, but
Additional Efforts Are Needed:
Management control is a necessary safeguard to protect against the
risks of fraud, waste, abuse, and mismanagement. MMS has made progress
in establishing some components of management control over its RIK
Program, such as (1) identifying and mitigating the risks associated
with oil and gas sales and (2) developing written procedures for these
sales and for collecting and reporting revenues. However, MMS has yet
to develop several key management control activities and does not plan
to develop them until 2004, when it will consider the RIK Program to
have changed from a pilot status to a fully operational status.
Specifically, MMS has not clearly defined its strategic objectives,
linked performance measures to these objectives, and collected the
necessary information to monitor and evaluate the RIK Program.
Management Control Is a Necessary Safeguard:
The Federal Managers‘ Financial Integrity Act of 1982 directs federal
agencies to develop management control for safeguarding resources
against the risks of fraud, waste, abuse, and mismanagement. Management
control is critical to ensure that revenues and expenditures from
agency operations are recorded and accounted for properly and that
financial and statistical reports are reliable. The act also directs us
to issue standards for management control within the federal
government. These standards provide broad criteria for agencies to use,
in conjunction with guidance issued by the Office of Management and
Budget. Management control includes (1) developing strategic
objectives, (2) linking performance measures to these objectives, (3)
collecting the necessary information to monitor and evaluate
performance, (4) identifying and mitigating risks, and (5) developing
written procedures and documenting compliance with these procedures.
Management control also plays an important role in helping managers
comply with the Government Performance and Results Act of 1993 (Results
Act), which requires federal agencies to establish strategic goals,
measure performance, and report on accomplishments. The Results Act
shifts the focus of federal agencies away from traditional concerns,
such as staffing and reporting on activities, toward achieving results.
There is no more important element in results-oriented management than
an agency‘s strategic-planning process, and establishing formal
strategic objectives can help clarify what the agency seeks to
accomplish and can help unify the agency‘s staff in achieving its
goals.
MMS Has Begun to Establish Management Control:
MMS has begun to establish management control over its RIK Program by
addressing the risk that oil and gas sales will be unsuccessful,
addressing inherent risks associated with the sale of oil and gas, and
developing written procedures for various activities within the
Royalty-in-Kind Program. These activities include conducting RIK sales,
collecting revenues, and reporting on revenues. MMS also has made
progress in documenting the results of its RIK sales.
MMS has addressed the risk that RIK sales will be unsuccessful by
ensuring that prior to these sales, certain conditions exist for the
properties from which MMS will sell royalty oil and gas. In 1998, we
identified the conditions necessary for successful oil and gas sales by
surveying state governments, universities, and the Province of Alberta,
which, at various times, had programs that took oil and gas in
kind.[Footnote 7] We identified several conditions that made these
programs feasible. In particular, these programs seemed successful if
these entities had (1) relatively easy access to pipelines, (2)
properties that produce relatively large volumes of oil or gas, (3)
favorable arrangements for processing gas, and (4) expertise in
marketing oil and gas. MMS has considered these conditions in
addressing risk. Specifically, MMS‘s practice of negotiating the cost
of transporting gas through pipelines helps to secure relatively easy
access to pipelines. Similarly, MMS‘s practice of grouping the
properties that produce royalty oil or gas according to the pipelines
to which they are connected helps ensure that properties produce
relatively large volumes of oil or gas. MMS has also arranged for the
processing of natural gas and has increased its knowledge of oil and
gas marketing by hiring consultants and interviewing oil and gas
marketers and representatives of pipeline companies in Wyoming and the
Gulf Coast.
MMS has also developed procedures to manage the inherent risks, or
uncertainties, in the selling of oil and gas. Such risks include
fluctuating oil and gas prices, the varying amount of oil and gas that
wells produce, and the credit worthiness of purchasers. To manage the
risk associated with fluctuating prices, for example, MMS does not try
to maximize revenues by guessing which way the market will move but,
instead, accepts bids relative to the fluctuating market prices. Thus,
MMS avoids substantial losses that could result from wrong guesses. MMS
also manages the risk due to the inability of properties to deliver
consistent quantities of gas, which could require that MMS purchase or
supply more costly alternative gas in the event of a shortfall. MMS
manages this risk by guaranteeing that it will deliver only a portion
of the gas (base volume) at a stable price and offering the other
portion (swing volume), without guarantee, at published prices that
vary daily. MMS has also developed procedures to monitor the credit
worthiness of oil and gas purchasers and can terminate their sales
contract or demand additional credit guarantees, if necessary. These
procedures led MMS to promptly cancel its contract with Enron, thereby
limiting losses to 1 month‘s worth of gas production from the Enron
contract.
MMS has developed written procedures for conducting RIK sales
activities, collecting revenues from these sales, and reporting on
these revenues. Sales activities include identifying properties from
which to take oil and gas in kind, announcing the oil and gas for sale,
determining a minimum acceptable bid, analyzing bids, and awarding
contracts. We examined documents for sales that MMS conducted from
October 1998 through October 2002 and found documentation of these
activities in all sales in which they were appropriate. However, we did
not determine the adequacy of MMS‘s procedures for collecting and
reporting on revenues, nor did we assess the degree to which MMS
complied with these procedures.[Footnote 8]
MMS Has Not Developed Clear Objectives and Linked Performance Measures
to These Objectives:
MMS developed the following seven strategic objectives for the RIK
Program:
* Implement RIK where applicable and when it is an improvement over
traditional cash royalty payments (royalty in value).
* Leverage MMS‘s position as an asset holder.
* Take advantage of potential interagency synergies.
* Minimize the cost of royalty administration.
* Reduce business cycle time (the time to collect, disburse, audit, and
reconcile revenues).
* Accelerate timing of revenue collections.
* Adopt energy industry business practices and controls wherever
feasible.
Overall, none of the seven objectives address the revenue impacts of
the RIK sales. The seven objectives do not address requirements in the
law that MMS (1) collect at least as much revenue from the RIK pilots
as it would have from traditional cash royalty payments and (2) obtain
fair market value. The Congress directed MMS in the fiscal years 2001
and 2002 Appropriations Acts for Interior and Related Agencies to
collect at least as much revenue from the sale of royalties in kind as
MMS would have collected from traditional cash royalty payments.
Moreover, the Congress had previously directed the Secretary of the
Interior in the Mineral Leasing Act of 1920 and the Outer Continental
Shelf Lands Act of 1953 to obtain fair market value for oil and gas
taken in kind.[Footnote 9] The Congress defined ’fair market value“ in
the Outer Continental Shelf Lands Act as the average unit price for the
mineral sold either from the same lease or, if such sales did not
occur, in the same geographic area.
Furthermore, the first three objectives are not expressed in either a
quantitative or measurable form. The last four objectives, although
being quantitative, address administrative efficiency only. Without
objectives to guide agency staff in the quantitative evaluation of the
revenue impacts of RIK sales, MMS will be unable to determine whether
RIK sales generate more or less revenue than traditional cash royalty
payments; whether MMS obtains fair market value; and hence, whether it
should convert the RIK pilots to an operational status.
MMS has also not developed any performance measures that it linked to
the seven strategic objectives for its RIK Program. However, MMS has
developed two performance measures--(1) confirm and reconcile, within
90 days, all production royalties taken in kind and (2) accelerate the
timing of revenue receipt by 5 days over traditional cash royalty
payments (royalty in value)--that are linked to the broader agency-wide
objective of ’collecting royalties in the shortest time possible.“ In
addition to supporting the broad agency-wide objective, these two
performance measures support RIK Program objectives that are designed
to improve administrative efficiency. MMS officials told us that they
intend to develop performance measures that are specific to the RIK
Program in 2004, when the RIK Program changes from the pilot status to
a fully operational status and they acquire and fully implement new
information systems that can better measure performance.
MMS Has Not Obtained the Necessary Information to Monitor and Evaluate
the RIK Program:
After 5 years of conducting pilot programs and completing 24 oil and
gas pilot sales, MMS‘s ability to effectively and efficiently monitor
and evaluate its RIK Program is limited because it has not obtained the
necessary information to do so. This information includes the
administrative costs of the RIK Program, the savings from avoiding
potential litigation and appeals, the savings in auditing properties,
and the revenue impacts of all sales. MMS lacks information largely
because it has not developed an information systems infrastructure to
rapidly and efficiently collect this information. Without quantitative
costs, savings, and revenue information, MMS is unable to determine the
program‘s overall cost and effectiveness, whether RIK generates at
least as much revenue as traditional cash royalty payments, and whether
the RIK Program should be expanded or contracted.
MMS Has Not Quantified Anticipated Costs and Savings from Implementing
the RIK Program:
MMS has not quantified the costs of administering the RIK Program. Such
costs, which MMS incurs when selling RIK but does not incur when
collecting traditional cash royalty payments, result from identifying
properties from which to sell oil and gas, calculating minimum
acceptable bids, analyzing bids, awarding and monitoring contracts,
billing purchasers, negotiating transportation rates, reconciling
discrepancies in volume, and comparing RIK revenues with traditional
cash royalty payments. MMS has not quantified these costs because its
current personnel, payroll, and budgeting systems do not capture data
in sufficient detail. Although MMS tracks employees‘ time charges with
these systems, MMS does not distinguish between time charges that
support only the RIK Program and time charges that support both the RIK
Program and the traditional system of collecting cash royalties.
Similarly, MMS has not decided how to assign the cost of MMS‘s
financial system and other significant overhead costs to the RIK
Program and to the traditional cash royalty system. MMS officials told
us, however, that they plan to implement an activity-based cost-
accounting system in fiscal year 2003 that will assist in resolving
these issues.
MMS also has not quantified anticipated savings from avoiding potential
appeals and litigation by selling oil and gas in kind. MMS officials
explained that MMS anticipates that it can avoid substantial costs
associated with appeals and litigation involving primarily the
valuation of natural gas and the transportation of both oil and gas.
MMS officials have not estimated the costs of appeals because of
problems with implementing the information system that tracks these
costs and because of their uncertainty that these costs are recorded in
a consistent manner. In addition, the Office of the Solicitor within
the Department of the Interior, which is responsible for litigation
concerning MMS‘s activities, does not have an automated system to track
litigation costs.
Although MMS anticipates that the cost of auditing revenues will
decrease because of taking RIK, MMS has not quantified these savings.
MMS anticipates substantial savings because verifying the value of oil
and gas is much easier when taking RIK because the purchaser and MMS
agree to the sales price before the sale occurs. Similarly, when MMS
negotiates transportation costs itself, it knows the exact
transportation rate that companies can charge MMS, unlike when
companies pay royalties in cash. In addition, MMS does not need to
audit transportation costs when MMS sells royalty oil or gas at the
location of the lease because there are no transportation costs, since
the buyer assumes the responsibility for transportation. Although MMS
has projected decreases in the number of staff auditors as a result of
future RIK sales, MMS has not finalized these estimated savings because
MMS is uncertain of how much oil and gas it will take in kind in the
future. MMS officials also question the reliability of the time that
auditors have charged to the RIK Program in the past--information that
formed the baseline for their projections.
MMS Has Not Fully Determined the Revenue Impacts of RIK Sales:
MMS also has not fully quantified the revenue impacts of all the
royalty oil and gas that it sold, preventing a comprehensive comparison
between RIK sales revenues and the revenues that MMS would have
received under the traditional cash royalty system. MMS does analyze
factors that affect the revenues of upcoming RIK sales, including
current oil and gas prices; anticipated market conditions; and
transportation and processing, if applicable. However, MMS does not
systematically compare RIK sales revenues with what it would have
received in traditional cash royalties after these gas sales are
completed. Of the 15.8 million barrels of federal royalty oil sold in
pilot sales from October 1998 through July 2002, MMS quantified the
revenue impacts of about 9 percent. Of the approximately 241 billion
cubic feet of federal royalty gas that MMS sold from December 1998
through March 2002, we estimate that MMS quantified, either in whole or
in part, the revenue impacts resulting from the sale of about 44
percent of this gas. Although MMS analyzed revenue impacts from 44
percent of the federal royalty gas it sold, almost none of this
analysis was done in a timely manner, thereby precluding the use of
this information to improve or modify subsequent sales. For example,
MMS did not complete the evaluation of the gas that it sold
competitively each month over a 19-month period until after it had
discontinued selling gas in this manner. Similarly, MMS did not
evaluate the revenue impacts of using a gas marketer to aggregate gas
volumes until 1 year after it terminated these sales. If MMS had
evaluated these aggregated sales earlier, it might have discontinued
this method of selling royalty gas because it would have confirmed
employees‘ suspicions during the initial sale that the manner in which
gas was being sold was disadvantageous to MMS. Instead, MMS let another
three contracts with similar terms, resulting in an overpayment of
almost $3 million on transportation valued at about $13 million.
MMS‘s information systems hinder the timely monitoring and evaluation
of the RIK Program and the evaluation of the revenue impacts from
individual sales. The RIK Program‘s current system for managing RIK
sales revenues consists of a series of unlinked computer spreadsheets
into which personnel manually enter RIK data. Such a manual system is
prone to errors, which could lead to inaccurate information. Prior to
September 2002, RIK Program personnel did not compile basic monthly
reports on revenues collected and royalty volumes sold, which could
have been used to monitor the RIK Program on a periodic basis. Also,
limitations of MMS‘s agency-wide financial system--the system that
generates agency-wide accounting reports and maintains and manages all
royalty data--currently hamper the timely comparison of RIK sales
revenues with cash royalty payments. MMS personnel were unable to use
the financial system to produce summary data that were more current
than 1-year old. As of October 2002, for example, MMS personnel were
unable to use the financial system to determine how much total revenue
MMS collected and how much oil and gas had been produced from federal
lands since September 2001. MMS personnel also said that because of
missing or erroneous data in the agency-wide financial system, data
extracted from this system cannot be used in revenue comparisons
without time-consuming checks for accuracy and reasonableness.
Furthermore, it will be more difficult to use RIK gas data in this
system to calculate revenue impacts because MMS personnel do not enter
these data at the lease level.[Footnote 10] Lastly, RIK Program
personnel said that because they have to manually acquire data to
evaluate federal properties for prospective sales, the growth of the
RIK Program has slowed.
MMS officials also said that they have not evaluated the revenue
impacts from the sales of all royalty oil and gas largely because they
have delayed the development of performance measures for the RIK
Program until 2004. These performance measures will incorporate
benchmarks against which to compare RIK sales revenues. MMS personnel
said that MMS has generally encountered difficulty in establishing
benchmarks against which to measure the revenue impacts of RIK oil and
gas sales because once it takes all federal royalty oil or gas in kind
in a specific area, it no longer receives any traditional cash royalty
payments for comparison. However, MMS officials explained that by 2004,
MMS expects to acquire and fully implement two additional information
systems dedicated to the RIK Program that will automate the acquisition
of necessary information for attempting revenue comparisons. MMS
personnel said that they had not acquired these automated systems
earlier because they believed that they first needed to process a large
number of transactions and sell a large volume of oil and gas before
they could justify the expense of acquiring these systems.
Conclusions:
MMS has begun to establish management control over its RIK Program. It
has initiated positive steps to address the risks that affect its oil
and gas sales and has developed written procedures for various
activities within the RIK Program. MMS has also made progress in
documenting the results of its RIK sales. However, MMS has not
established clear objectives for the program that are linked to
statutory requirements. MMS‘s current objectives for its RIK Program
are not clearly linked to requirements in the law that MMS (1) collect
at least as much during pilot sales as it would have collected in cash
royalty payments and (2) obtain fair market value.
In addition to the lack of objectives linked to statutory requirements,
MMS is not systematically collecting the necessary information to
monitor and evaluate the RIK program. Such information includes the
administrative costs of the RIK program, anticipated savings from
reductions in audit efforts and from avoiding appeals and litigation,
and the revenue impacts of all sales. Without clear objectives and the
systematic collection of evaluative information, MMS cannot assess and
ultimately determine whether it should expand or contract the use of
royalty in kind sales.
Recommendations for Executive Action:
To continue the further development of management control for the
Minerals Management Service‘s Royalty-in-Kind Program, we recommend
that the Secretary of the Interior instruct the appropriate managers
within the Minerals Management Service to do the following:
* Clarify the Royalty-in-Kind Program‘s strategic objectives to
explicitly state that goals of the Royalty-in-Kind pilots include
obtaining fair market value and collecting at least as much revenue as
MMS would have collected in cash royalty payments.
* Prior to expanding the Royalty-in-Kind Program, identify and acquire
key information needed to monitor and evaluate performance. Such
information, as identified by the Minerals Management Service, should
include the revenue impacts of all Royalty-in-Kind sales,
administrative costs of the Royalty-in-Kind Program, estimates of
savings in avoiding potential litigation, and expected savings in
auditing revenues.
Agency Comments and Our Evaluation:
We provided the Department of the Interior with a draft of this report
for review and comment. Interior fundamentally agreed with our
observations and recommendations and emphasized MMS‘s future plans for
improving management control over the RIK Program. Where appropriate,
we have included additional references to the activities that Interior
mentions in its comments. Interior‘s comments and our response to these
comments are reproduced in appendix I.
Scope and Methodology:
In reviewing MMS‘s RIK Program, we reviewed congressional directives in
pertinent legislation; standards for the development of management
control issued by us and the Office of Management and Budget; and prior
reports and documentation on the Small Refiners Program, Strategic
Petroleum Reserve, and RIK pilots. We also obtained statistical
information from MMS on oil and gas volumes taken in kind and the
revenue that MMS generated by selling these volumes. In addition, we
reviewed documentation pertaining to management control and interviewed
MMS personnel about their efforts to establish management control over
the RIK Program.
We conducted our work from January to November 2002 in accordance with
generally accepted government auditing standards. For a more detailed
discussion of the scope and methodology of our review, see appendix II.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 7 days
from the date of this letter. At that time, we will send copies of this
report to the Secretary of the Interior; the Director, Office of
Management and Budget; and other interested parties. We will also make
copies available to others upon request. This report will be available
at no charge on GAO‘s Web site at http://www.gao.gov.
If you have any questions about this report, please call Mark Gaffigan
or me at (202) 512-3841. Key contributors to this report are listed in
appendix III.
Signed by Jim Wells:
Jim Wells
Director, Natural Resources
and Environment:
[End of section]
Appendix I: Comments from the Department of the Interior:
United States Department of the Interior:
OFFICE OF THE SECRETARY WASHINGTON, D.C. 20240:
Mr. Mark Gaffigan Assistant Director, Natural Resources and Enviromnent
U.S. General Accounting Office 441 G Street, N.W. Washington D.C.
20548:
Dear Mr. Gaffigan:
We appreciate the opportunity to review your Draft Audit Report,
’MINERAL REVENUES: A More Systematic Evaluation of the Royalty-in-Kind
Pilots Is Needed.“ Our general and specific comments are enclosed for
you to incorporate into the final report (Appendix I).
Since 2001, the Minerals Management Service (MMS) has been advancing
its Royalty In Kind (RIK) Pilot Program to implement RIK as a permanent
part of its royalty asset management strategy. In compliance with
statutes and regulations, MMS has devoted significant attention to
monitoring and evaluating the RIK pilots. We believe the RIK management
control process has evolved and is functioning at a level sufficient to
effectively manage the current scale of the pilot program. We
appreciate the recognition of this progress in the draft report.
In the draft report, the General Accounting Office (GAO) recommends
that MMS clarify strategic objectives linked to performance measures
and gather information to monitor and evaluate performance prior to
further expansion of the RIK program. We fundamentally agree and, to
that end, have already taken steps to ensure these and other management
control enhancements are an integral part of the larger-scale,
permanent RIK program.
We believe a Federal RIK program is an important vehicle to ensure fair
market values for large segments of the Nation‘s mineral royalty
assets. With the continuing assistance of the GAO and others, we can
continue to build and implement a Federal RIK program for which all
Americans can be proud.
Once again, thank you for the opportunity to review and comment on this
report. We stand ready to assist GAO in answering further questions or
providing data that would help in its review of the RIK program. If you
have any questions, please contact Bettine Montgomery, Minerals
Management Service‘s Audit Liaison Officer, on (202) 208-3976.
Sincerely,
Signed by Rebecca W. Watson:
Rebecca W. Watson
Assistant Secretary
Land and Minerals Management:
Enclosure:
Response to December 2002 General Accounting Office (GAO) Draft Report
Titled ’A More Systematic Evaluation of the Royalty-in-Kind Pilots is
Needed“:
Summary Comments:
The Department of the Interior‘s Minerals Management Service (MMS) is
responsible for the administration of royalty-in-kind (RIK) pilot
projects and other RIK operational activities. For many years now, MMS
has been utilizing the RIK approach to manage oil and gas royalty
assets. Historically, the RIK approach has been used to supply crude
oil to the small refiner sector of the Nation‘s petroleum industry.
Recently, MMS has been pursuing the development of an operational RIK
program with the capability to not only manage the Small Refiner
Program but to also manage the competitive sale of oil and gas and the
delivery of crude oil production to the Strategic Petroleum Reserve
(SPR). Since 2001, MMS has been aggressively pursuing an implementation
plan to make RIK a permanent part of MMS‘s royalty asset management
strategy to be used in tandem with the traditional royalty in value
(RIV) approach. MMS has made substantial progress in this
implementation and appreciates GAO‘s acknowledgment of this progress in
the draft report.
We appreciate the insights and suggestions offered by the GAO to assist
us in implementing a Federal RIK program that operates on sound and
industry proven business principles with strong management controls. In
the December draft report, the GAO addresses the importance of
strategic goals, performance measurements, and information needed for
consistent and effective monitoring of future RIK program performance.
MMS fundamentally agrees with these tenets for success and, as
discussed later in this response, is poised to implement enhancements
in these areas.
In evolving the RIK program, MMS has implemented a business model and
operational processes based on industry best practices. This has been
done in close consultation with state governments, expert consultants,
and the oil and gas industry. The MMS RIK pilots and other operations
are premised in significant ways on advice provided by GAO in 1998.
This early advice set forth conditions and approaches to be used in the
successful marketing of royalty oil and gas volumes. This advice has
been extensively applied by MMS in managing the Federal RIK portfolio
and has proven to be successful in an operational environment. MMS has
also acquired industry experts to assist in developing automated gas
and liquids management systems to support RIK asset management
decisions and operations. These important systems development projects
are on schedule and in budget with staged implementation of
functionality beginning next month.
The GAO draft report documents the substantial progress MMS has made to
implement RIK controls in the areas of risk management and written
procedures. MMS believes the RIK management control process has evolved
and is functioning at a level sufficient to effectively manage the
current scale of the pilot program. At the same time, we agree with the
GAO that more emphasis will be needed on financial analysis and
performance measurement in the permanent, full-scale RIK program. To
ensure compliance with statutes and regulations, MMS has devoted
significant attention to monitoring and evaluating the RIK pilots at
the pre-sale, concurrent, and post-sale levels. These in-depth
analytical assessments document that RIK revenues are at least equal to
RIV revenues and that in several circumstances the revenue stream is
increased. Although the assessment reports do not quantify
administrative cost savings of utilizing the RIK approach as compared
to the RIV approach, such savings are observed in the areas of royalty
accounting, regulatory reporting and audit. In October 2002, MMS
implemented an activity-based cost accounting system that provides the
cost-capture tools and foundation to effectively assess the RIK
program, particularly in the area of administrative cost savings.
The joint Department of Energy (DOE)/Department of the Interior (DOI)
initiative to utilize RIK oil to fill the remaining capacity of the
Nation‘s SPR is, far and away, the dominant activity in the current MMS
RIK program. This presidential initiative was successfully launched
with first deliveries of RIK crude oil being made in April 2002 and
will continue through 2005.This significant achievement in crude oil
logistics is accomplishing a non-monetary transfer of oil volumes to
the DOE with minimal costs in commodity transportation. The 5-year RIK
strategic business plan being developed by MMS for the period 2004-2008
will provide objectives and measures to ensure completion of the SPR
initiative and the timely collection of proper royalty payments,
whether they are paid in value or in kind.
In its draft report, GAO provides two recommendations that relate to
the setting of strategic objectives for the RIK program and acquisition
of information to support measurement of progress in achieving those
objectives. The GAO correctly notes that MMS will not fully develop
certain management controls until 2004 when RIK activities move from
pilot to operational status. However, GAO‘s conclusion that MMS does
not have clearly defined strategic objectives linked to performance
measures or information to evaluate performance does not take into
account the substantial progress MMS has already made in these areas.
MMS is aware that more controls are needed for an expanded program. In
partnership with industry experts and other stakeholders, MMS is
developing and will implement a 5-year strategic business plan to guide
the continued development and expansion of the Federal RIK program
through 2008. This new Business Plan for 2004 and Beyond will be the
vehicle to assure that a full-range of management and internal controls
are in place to effectively administer the future RIK program at the
highest levels of integrity.
In 2001, MMS published its first strategic RIK plan (Road Map) to build
operational RIK processes and for acquisition of supporting technology
and automated support systems. This Road Map did not address the scale
of the Federal RIK program nor did it provide strategic direction
beyond 2003. MMS‘s new 5-year RIK plan will translate the political and
business priorities of the DOI into meaningful strategic business
objectives to guide future RIK operations and expansion efforts. To
assist in building and implementing the 5-year plan, MMS plans to award
a contract in early 2003 to a private-sector company with special
expertise in oil and gas marketing and strategic business planning for
the energy industry. These experts will assess current RIK program
capabilities and provide improvement recommendations. More
specifically, this initiative will address:
management and internal control processes:
RIK performance measurement tools and metrics Processes and tools to
optimize RIK revenues Strategies for acquisition of transportation and
processing services Approaches for aggregating and marketing expanded
RIK volumes:
In a fully operational status, the Federal RIK program will have
enhanced business objectives and expansion goals that can be measured.
The MMS‘s stated objective has always been to utilize the RIK asset
management approach when it is equal to or better than taking royalties
in value.The permanent RIK program will have the information and means
needed to comprehensively measure revenue impacts, evaluate overall
performance, and determine cost savings and other program benefits.
The following sections of this response provide specific comments on
the findings, conclusions, and recommendations presented in the GAO
draft report.
GAO Highlights Page:
Under the caption …Why GAO Did This Study,“ the draft report indicates
that royalties taken in kind are always sold. The draft report should
be changed to reflect the fact that royalties taken in kind can also be
transferred or sold to other Federal agencies. Currently, the majority
of the hydrocarbon production royalties taken in kind are dedicated to
the SPR Fill Initiative. In this initiative the DOI takes Gulf of
Mexico oil royalties in kind and transfers the oil to the DOE at no
cost, thus there is no sale.
Similarly, the chart titled ’Estimated Revenues Collected by the
Minerals Management Service from Selling Royalties in Kind, January
1995 to July 2002“ incorrectly describes SPR royalty oil as being sold
and that revenues are being received by MMS. The chart needs to be
changed to reflect the fact that SPR royalty oil is transferred by MMS
to the DOE without payment by DOE. This reduction in royalty receipts
to the Treasury is offset by lower expenditures from the Treasury for
purchase of oil on commercial markets.
Background:
Page 3:
Offshore royalty payments share with states are limited to those
associated with leases located in the 8(g) zone, or the 3-mile-wide
band beyond the Federal/state boundary. States do not share in royalty
revenues associated with Federal leases located beyond the 8(g) zone
where the vast majority of offshore oil and gas production occurs. A
clarification to this effect is recommended.
Page 5:
We recommend that footnote 3 be clarified to provide the reader with
the reason for data not being available beyond September 2001. In
December 2001, the MMS, in response to a Court Order issued by the U.
S. District Court for the District of Columbia, shutdown all of its
royalty and production accounting systems. The systems remained
shutdown until March 23, 2002, when approval was received to restore
the systems and connect them with the Internet. During the shutdown
period, lessees were unable to report royalty and production data, and
MMS was unable to process such data. However, during the shutdown,
royalty revenues continued to be received by MMS from cash royalty
payors as well as purchasers who continued to be timely billed for
sales of oil and gas royalty in kind production. With the restoral of
the systems, MMS proceeded with its recovery plan which will continue
into 2003.
Page 6:
Figure 2 incorrectly describes SPR royalty oil as being sold and that
revenues are being received by MMS. The chart needs to be changed to
reflect the fact that SPR royalty oil is transferred by MMS to the DOE
at no cost.
Page 8:
The draft report states that MMS plans to increase SPR royalty oil
deliveries to about 130,000 barrels per day by the end of 2002. The
established fill schedule does not anticipate the fill rate to increase
to 130,000 barrels per day until April 2003. This fill rate is expected
to be sustained for the remainder of the fill initiative, which is
expected to be completed in the latter part of 2005.
The draft report describes royalty oil and gas sales volumes in
percentage relationships that are misleading and not reflective of
actual RIK sales activities. We recommend that instead of using
percentage relationships, the draft report be augmented with actual
volumetric deliveries. For example, the state of Wyoming/MMS oil pilot
has, over the nine consecutive sales, involved the delivery of between
2,000 barrels and 6,000 barrels of crude oil per day. The variability
in delivery rates between sales is the result of the rejection of bids
by MMS and the State as inadequate to assure that RIK revenues were at
least equal to RIV revenues. In the same respect, the OCS Gulf of
Mexico competitive RIK oil pilot began in November 2000 with the sale
of 7,000 barrels per day. For the second sales period beginning in
October 2001, the RIK oil volume deliveries increased to approximately
60,000 barrels per day and remained at that level until the end of the
sale term in March 2002 when the volumes were redirected to the SPR
Fill Initiative.
Page 9:
The draft report attributes the revenue reductions associated with the
1995 gas RIK sales to unforeseen problems in securing transportation of
gas through pipelines. We would note that other factors played a role
in impacting revenues realized in the 1995 prototype pilot.
Particularly
noteworthy was the selection of properties based on the voluntary
nominations of producers rather than selecting properties based on the
underlying economics and the physical flow of commercially attractive
volumes to market centers.
More importantly, the draft report is silent on a major study of
national scope that was conducted by MMS in 1997. This study assessed
the feasibility of a truly competitive RIK program that, unlike the
1995 prototype, would be based on commercial industry standard
practices. The feasibility study report served as the springboard for
today‘s RIK pilot program.
MMS Has Bequn to Establish Management Control:
Page 13:
The draft report includes the statement ’These procedures led MMS to
cancel its contract with Enron within days after Enron‘s bankruptcy,
thereby limiting losses to 1 month‘s worth of gas production from the
Enron contract.“To more accurately describe the circumstances, this
statement should read ’These procedures led MMS to cancel its contract
with Enron within days before Enron‘s bankruptcy, thereby limiting
exposure to 1 month‘s worth of gas production from the Enron contract.“
Also, MMS‘s claim against Enron is now in a collection action before
the bankruptcy court. It is worthy of note that MMS also terminated
four additional contracts thus avoiding exposure to loss with
purchasers experiencing financial difficulties.
Footnote 8 in the draft report states that ’The Department of the
Interior‘s Inspector General recently reported a problem in complying
with payment procedures.“ This statement is incorrect. In fact, the OIG
identified an issue in the timeliness of reconciliation of natural gas
volume imbalances. The OIG recommended instituting for natural gas the
same procedures as used by MMS for oil volume imbalance
reconciliations. MMS has completed implementation of this and several
other OIG recommendations. A relevant and noteworthy conclusion made by
the OIG in the same report comparing the underpayment vulnerability of
the RIK and RIV approaches, was that ... °RIK is substantially less
susceptible because valuation is established by fair-market sale, MMS
receives actual proceeds from sales, MMS negotiates and pays actual
transportation and processing costs.“:
MMS Has Not Developed Clear Objectives and Linked Performance Measures
to These Objectives:
Pages 13-14:
The draft report asserts that MMS‘s business objectives for the RIK
program do not (1) address requirements in the leasing statutes that
MMS collect fair market value, and (2) that they do not address
requirements of the fiscal years 2001 and 2002 Appropriations Acts for
Interior and Related Agencies that MMS analyze and document the
expected return in advance of any royalty-in-kind sales to assure to
the maximum extent practicable that royalty income under the pilot
program is equal to or greater than royalty income recognized under a
comparable royalty-in-value program. We do not believe the facts
support these assertions.
The first RIK business objective cited in the draft report is clear in
its statement that the MMS will ’Implement RIK where applicable and
when it is an improvement over traditional cash royalty payments
(royalty in value).“ The Outer Continental Shelf Lands Act and the
Minerals Leasing Act provide the foundational requirement for the
royalty value to be collected for production removed from Federal
lands. For decades, the MMS, and its predecessors, have promulgated
implementing regulations that define the methodology to be used in
determining ’fair market value“ or ’market value‘ for payment of
production royalties. The MMS takes very seriously its responsibilities
under the law in enforcing its regulations to collect proper royalty
value whether paid in cash or in kind. The codified valuation
regulations serve as the foundation for determining fair market value
for oil and gas production and the revenue baseline which the RIK
option must meet or exceed before lease royalties are converted to the
RIK option.
Furthermore, regarding the fiscal years 2001 and 2002 Appropriations
Acts for Interior and Related Agencies, the specific language provides:
’That MMS may under the royalty-in-kind pilot program use a portion of
the revenues from royalty-in-kind sales, without regard to fiscal year
limitation, to pay for transportation to wholesale market centers or
upstream pooling points, and to process or otherwise dispose of royalty
production taken in kind: Provided further, That MMS shall analyze and
document the expected return in advance of any royalty-in-kind sales to
assure to the maximum extent practicable that royalty income under the
pilot program is equal to or greater than royalty income recognized
under a comparable royalty-in-value program.“:
While not described in the GAO report, MMS undertakes as a matter of
standard business practice extensive economic analysis prior to all
conversions of leases from royalty in value to royalty in kind. This
economic analysis establishes the baseline revenues from RIV. For crude
oil competitive sales, minimum acceptable bids (MAB) are established
prior to each sale based on the revenues expected to be received under
the effective oil valuation regulations. These MABs must be exceeded
for an award to be made. MMS rejects bids not meeting MABs and
consequently does not convert such properties to RIK. Similarly for
natural gas, prior to the conversion of leases from royalty in value to
royalty in kind, detailed analyses of commodity sales, transportation
and processing scenarios are conducted to ascertain the revenue
impacts. MMS pursues conversion of lease production royalties to in
kind only when the revenues will equal or exceed what would otherwise
be expected if paid in value. MMS is confident that it has met and
continues to meet, in every respect, the subject appropriations law
requirements related to RIK.
Furthermore, the MMS is conducting ongoing assessments of RIK pilots to
evaluate performance based on success in meeting the following
criteria:
*Simplicity, accuracy, certainty for lessees and government.
*Revenue neutral (or better) for the government;
*Reduced administrative burden for lessees and government.
Evaluations of the Wyoming oil pilot and the Texas 8(g) gas pilot have
been completed and found each pilot to have performed favorably. An
assessment is currently underway to evaluate the Gulf of Mexico Federal
natural gas pilot. This assessment is expected to be completed in early
2003.
The MMS conducts additional ongoing analyses, again as a matter of
standard business practice, to monitor the status of the RIK sales
program. These analyses are described on page 9 of these comments.
In Fiscal Year 2002, MMS initiated the development of industry-based
systems support tools with which to manage the RIK program. These tools
are critical to the efficient management of a permanent RIK business
activity as well as for the efficient management of performance
information related to the business activity. In addition to providing
the needed support for ongoing logistics and sales activities, the
installed systems will support the efficient monitoring of RIK sales
revenues and comparisons against benchmark revenues that would be
expected with in value collections. This capability will provide more
current information than the manual processes and pilot assessment
study approach now being utilized. The first systems implementation
related to natural gas will occur in January 2003. The second
implementation for crude oil will occur in September 2003.
In managing the oil and gas royalty asset, the MMS has established
strategic goals consistent with the Government Performance and Results
Act. These goals and the associated measures focus on (1) the timely
collection and verification of the proper amount of royalty whether
collected in value or in kind, and (2) providing program beneficiaries
with early access to their revenues. MMS is in the process of
finalizing its strategic goals for 2004-2008 which will include
specific focus on the RIK business activity. We are confident that
these strategic goals and associated measures will capture an ongoing
comparative monitoring of RIK revenues to RIV benchmark values.
The MMS will also continue to perform its intensive economic analysis
prior to the conversions of leases from royalty in value to royalty in
kind to determine revenue neutrality.
While cost data has not been captured for a detailed quantification and
comparison of the administrative costs of collecting royalties in kind
versus in value, the RIK pilots have demonstrated that efficiencies and
cost savings can be realized in the areas of royalty accounting,
regulatory reporting and audit. This is particularly true for Outer
Continental Shelf leases involving large volumes of production,
relatively few leases, and a well-developed and highly competitive
marketplace far oil and natural gas. As described in the draft report,
MMS has concluded that the cost of compliance work associated with in
kind collections for OCS leases is significantly less than for in value
collections, and is in the pmcess of projecting associated savings.
MMS Has Not Fully Determined the Revenue Impacts of RIK Sales:
Pages 16-18:
The draft report states that the MMS has not fully quantified the
revenue impacts of all the royalty oil and gas that is sold, preventing
a comprehensive comparison between RIK sales revenues and the revenues
that MMS would have received under the traditional cash royalty system.
The draft report states that this condition exists because MMS‘s
current information systems do not permit timely monitoring and
evaluation of the RIK program. MMS agrees with GAO that an information
systems infrastructure is needed to do such comprehensive analysis on
every commodity sale. Early next year MMS will begin implementation of
the automated information systems to provide this functionality. As
previously noted, the MMS RIK Business Plan for 2004 and Beyond will
implement a full range of management and internal controls to evaluate
the performance of the permanent full scale RIK program.
While we agree with the draft report‘s statement that the RIK Pilot
Assessments have not addressed and fully quantified the revenue impacts
on every RIK sale, it is important to note that MMS performs additional
analyses to quantify and monitor the revenue impacts of RIK sales.
These analyses address at in-depth levels all of the factors that
influence and impact revenue receipts. Examples of these analyses
follow.
The relationship of RIK revenues to commercial benchmarks of fair
market value used in the industry is known for every RIK sales package
for every month.
Consistent with statutory requirements, pre-sale analyses and/or
minimum acceptable bid evaluations compare proceeds to occur for all
RIK sales to those estimated to occur under RIV, ensuring that sales
are made only if RIK sales will result in greater estimated revenues.
Transportation and processing costs under RIK and RIV are compared
comprehensively for all sales packages prior to sale.
Post-sales contract assessments are made for natural gas sales
examining all aspects of the transactions to determine if changes to
the sales structure are needed.
These measurements, in addition to routine market intelligence
gathering on all pipeline systems and markets where RIK sales are
occurring, are made in a timely manner that supports real-time
decisions on current and future sales.
The draft report concludes by describing several circumstances in which
adverse impacts have been experienced by MMS due to its current
information systems and lack of timeliness in evaluating natural gas
sales. These issues include transportation costs under gas aggregation
contracts, access to financial system information for in value
comparisons, and the compromise of RIK natural gas data. Each issue is
discussed in the remainder of these comments.
Regarding the draft report‘s description of MMS‘s natural gas
aggregation contracts, we are unaware of how the alleged overpayment of
transportation costs in the draft report was calculated, and thus
consider it unsubstantiated at this point. Contrary to the draft
report, MMS was aware of all aspects of the operation of its
aggregation contracts for gas RIK, including the fact that
transportation underpayments in times of falling commodity prices
within such contracts would ultimately offset short-lived
transportation overpayments during rising markets. Such contracts were
terminated, not because of untimely assessments as the draft report
asserts, but because (1) the Federal Energy Regulatory Commission
opined that they were inconsistent with their regulations, and (2) MMS
received new authority in appropriations language allowing us to
arrange for transportation in a less risky manner. The MMS is in the
process of completing its assessment of the Gulf of Mexico RIK gas
pilot, including the aggregation contracts, and expects to issue the
draft report early in 2003.
The draft report describes MMS‘s difficulties in gaining access to in
value royalty data in its financial system and that this has limited
MMS‘s ability to compare in kind and in value receipts. The draft
report is referring to the adverse impacts of the shutdown of all DOI
systems in response to a Court Order. While the effects of this order
were in fact adverse, MMS‘s financial systems are now operational and
relevant data are being timely captured and used.
We do not believe the facts support the GAO conclusion that natural gas
data in MMS‘s systems are compromised due to sales data being entered
into the MMS financial system under single monthly entries. In fact,
the sales data are entered into the financial system under multiple
sales contract entries allocated to single property number(s). Further,
MMS retains all data necessary to allocate sales volumes and values to
individual leases where there is a valid reason to do so. There is not
a routine need to allocate 100 percent Federal revenues to lower levels
than necessary to ensure contract compliance and distribute such
revenues.
Note: GAO‘s comments supplementing those in the report‘s text appear at
the end of this appendix.
See comment 1.
Note: Page numbers in the draft report may differ from those in the
report.
See comment 1.
See comment 1.
See comment 1.
See comment 3.
See comment 1.
See comment 1.
See comment 2.
See comment 1.
See comment 1.
See comment 1.
See comment 5.
See comment 4.
See comment 5.
See comment 5.
See comment 7.
See comment 7.
See comment 6.
The following are GAO‘s comments on the Department of the Interior‘s
letter dated December 13, 2002.
GAO‘s Comments:
1. We clarified our report to reflect these comments.
2. We acknowledge that the Mineral‘s Management Service‘s (MMS)
difficulties in obtaining royalty data from its financial system may be
due, in part, to the court-ordered shutdown of this financial system in
December 2001. However, 9 months had passed since operation of the
financial system was restored on March 23, 2002. Additionally, MMS
personnel said that the statistical subsystem designed to generate
routine summary data that we requested for October 2001 through July
2002 had not yet been deployed and was not expected to be deployed
until April 2003 at the earliest.
3. We expressed Royalty-in-Kind (RIK) volumes as a percentage of total
federal royalty oil and gas volumes to show the overall significance of
taking royalties in kind compared with receiving cash royalty payments.
Using percentages also made it easier to show that large percentages of
oil were taken in kind for the Strategic Petroleum Reserve (SPR) and
for the Small Refiners Program relative to the small percentages taken
for pilot purposes. In expressing RIK volumes as percentages, we used
actual RIK sales volumes supplied by MMS but had to estimate the total
federal royalty volumes because MMS does not maintain these data.
4. In this report, we state that MMS‘s strategic objectives do not
address the requirements in the law because nowhere in the seven
strategic objectives is there reference to the terms ’fair market
value“ or ’collecting at least as much revenue as would have been
collected in cash royalty payments.“ In its response, Interior states
that it has intended to accomplish these legislative mandates, and
Interior apparently believes that these intentions are implied by the
strategic objective stating that MMS will implement RIK ’when it is an
improvement over traditional cash royalty payments.“ In light of
Interior‘s agreeing with us that the objectives for the RIK Program
should include achieving fair market value and collecting revenues at
least equal to what MMS would have collected in cash royalty payments,
we continue to recommend that MMS clarify the language in its strategic
objectives to reflect these intentions.
5. We acknowledge that MMS performs substantial analysis prior to
converting leases from traditional cash royalty status to RIK. For oil
sales, MMS generally calculated a minimum acceptable bid that bidders
had to exceed before MMS made an award. For gas sales, MMS relied upon
gas indexes to assess bids. While relying on minimum acceptable bids
and gas indexes prior to a sale is a first step in ensuring that RIK
revenues will equal or exceed cash royalty payments, MMS cannot
determine actual revenue impacts until after the sales are completed.
To effectively monitor and evaluate the performance of the RIK pilot
sales, MMS should calculate revenue impacts in a timely manner after
sales are completed and adjust future sales on the basis of these
results.
Relying on codified valuation regulations as an indicator of what MMS
would have collected in cash royalty payments is not as straightforward
as Interior implies, and the application of valuation regulations is
often a source of dispute between MMS and industry. For example, MMS
often does not know which provision of the valuation regulations will
apply to future royalty collections from a given lease until after the
sale. Also, MMS‘s market analyses suggests that many of the provisions
for valuing oil and gas sold to affiliated companies may no longer
reflect the manner in which many companies buy and sell oil and gas
today. To compensate for these uncertainties, MMS must use considerable
judgment in estimating revenue impacts prior to RIK sales.
While MMS has evaluated the revenue impacts after some completed sales,
MMS has not evaluated the revenue impacts of all sales. We point out in
this report that MMS evaluated the revenue impacts, either in whole or
in part, of about 9 percent of the oil sold in kind and about 44
percent of the gas sold in kind. With regards to the Wyoming oil pilots
and the Texas 8(g) gas pilots that Interior mentions in commenting on
this report, MMS evaluated and published the results of 3 of the 8
completed pilot sales in Wyoming and 19 of the 29 monthly Texas 8(g)
sales. Furthermore, only a few of MMS‘s analyses were done in a timely
manner, precluding MMS from using this information to modify subsequent
sales. For example, MMS did not analyze the revenue impacts of the
Texas 8(g) monthly sales or its aggregated gas sales until after it had
discontinued selling gas by these methods. However, we encourage MMS to
analyze the revenue impacts of its Gulf of Mexico oil pilots despite
these sales‘ current suspension because the oil from these properties
is being transferred to the SPR. The results of such a study could be
useful, should MMS continue the Gulf of Mexico oil pilots in the
future.
6. MMS supplied us with the estimated loss of about $3 million on the
aggregation contracts. We calculated that transportation was worth
about $13 million on the basis of transportation costs and volumes
supplied by MMS. MMS reported that the total value of royalty payments
on the aggregated gas was about $363 million.
[End of section]
7. Our assessment that MMS has difficulty obtaining royalty information
from its financial system is based largely on MMS personnel, who have
used these data to estimate the revenue impacts of RIK sales and told
us that they could not use these data without first performing time-
consuming checks for accuracy and reasonableness. At our request, these
personnel supplied us with royalty data from nine Wyoming oil
properties that we estimate accounted for about 50 percent of the oil
sold during the Wyoming pilots. Although we did not find widespread
systemic problems with this small data set, we confirmed that a small
amount of missing, incomplete, and inaccurate data, in addition to
numerous modifications of data entries by payors (adjustments),
precluded using these data for calculating revenue impacts without
first inspecting these data for accuracy and reasonableness. We
confirmed that the manual inspection of these data was time-consuming.
In addition, MMS personnel told us that RIK gas data are not entered
into the system at the lease level, and we believe this will complicate
comparing RIK revenues with cash royalty payments.
[End of section]
Appendix II: Objectives, Scope, and Methodology:
In this report, we discuss (1) the extent to which the Minerals
Management Service has taken federal royalties in kind since 1995 and
the reasons for doing so and (2) the status of MMS‘s efforts to
implement management controls for its RIK program.
To determine the extent to which and the purposes for which MMS has
taken RIK since 1995, we reviewed legislative directives concerning RIK
in the Mineral Leasing Act of 1920, the Outer Continental Shelf Lands
Act of 1953, and the Appropriations Acts for the Interior and Related
Agencies for fiscal years 1995 though 2002. We also reviewed
presidential directives for using federal royalty oil to fill the SPR.
We reviewed prior reports and other documentation on the Small Refiners
Program, the SPR, and the RIK pilots in Wyoming and the Gulf of Mexico.
We then asked MMS personnel to supply data on the amount and values of
federal royalty oil and gas taken in kind and of total oil and gas
royalties from January 1995 through July 2002. Although MMS personnel
within the RIK Program could supply data on RIK revenues and volumes
taken in kind during this time period, they could not supply data on
total royalty revenues and the total amount of oil and gas produced on
federal lands that were more current than September 2001. We did not
review the accuracy of these figures.
To review the status of MMS‘s efforts to implement management control
over its RIK Program, we reviewed the Federal Managers‘ Financial
Integrity Act of 1982, the standards for management control that we
issued entitled Standards for Internal Control in the Federal
Government (GAO/AIMD-00-21.3.1, November 1999), and the implementation
guidance issued by the Office of Management and Budget in OMB Circular
A-123. We also reviewed our tool for assessing an agency‘s management
controls entitled Internal Control Management and Evaluation Tool (GAO-
01-1008G, August 2001) and our guide for assessing an agency‘s
strategic plan entitled Agencies‘ Strategic Plans Under GPRA: Key
Questions to Facilitate Congressional Review (GAO/GGD-10.1.16, May
1997). Standards for Internal Control in the Federal Government
establishes the criteria that agencies must meet in developing and
maintaining management control, which is not one event but a series of
actions and activities that occur throughout an agency‘s operations on
an ongoing basis. Our review focused on MMS‘s efforts to address risks
that could affect the RIK Program and on some management control
activities that we identified as being critical to MMS‘s implementation
and management of the program. These management control activities are
(1) developing strategic objectives, (2) linking performance measures
to these objectives, (3) obtaining the necessary data for making
management decisions and for monitoring and evaluating the RIK Program,
and (4) developing written procedures and documenting compliance with
these procedures. We assessed MMS‘s efforts to establish these
management control activities by reviewing relevant documentation and
interviewing MMS personnel.
We reviewed MMS‘s efforts to mitigate the risks associated with
differences in the properties that produce federal oil and gas,
fluctuating oil and gas prices, disruptions in production, and credit
worthiness. In assessing strategic objectives and linked performance
measures, we reviewed these objectives and measures for their results-
orientation, clarity, specificity, ability to be expressed
quantitatively or in a measurable form, and consistency with
congressional directives. In reviewing the availability of key data for
management decisions and monitoring and evaluating the RIK Program, we
assessed the extent to which MMS had determined the revenue impacts of
all RIK sales, the administrative cost of operating the RIK Program
relative to collecting cash royalties, and the expected savings from
avoiding litigation and appeals and simplifying auditing. We also
examined whether MMS had compared revenue impacts from each RIK sale
with expected revenues from traditional cash royalty payments or other
benchmarks and assessed whether MMS had collected monthly RIK revenues
and sales volumes for monitoring purposes. In reviewing MMS‘s efforts
to develop written procedures, we determined if written procedures
existed as of January 1, 2002, for conducting sales activities,
collecting revenues, and reporting on these revenues. We determined
major sales activities to be the selection of properties from which to
sell RIK, the announcement of the sale, the calculation of a minimum
acceptable bid, the evaluation of bids, and the determination of the
winning bidders. For each sale completed as of October 2002, we also
reviewed whether MMS documented these major activities. However, we did
not assess the adequacy of written procedures to collect and report on
revenues, nor did we assess MMS‘s compliance with these procedures.
Because at the time of our review, MMS had not implemented an automated
system to support the RIK Program, we reviewed its current manual
system and its efforts to acquire automated systems.
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jim Wells (202) 512-3841
Mark Gaffigan (202) 512-3168:
Acknowledgments:
In addition to those named above, Letha Angelo, Ronald Belak, Robert
Crystal, Cynthia Norris, Frank Rusco, Dawn Shorey, Jamelyn Smith, and
Maria Vargas made key contributions to this report.
FOOTNOTES
[1] Management control is synonymous with internal control, which is
the term used in the Federal Managers‘ Financial Integrity Act of 1982.
The standards that GAO were required to establish under the act appear
within the report entitled Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).
[2] For the purpose of this report, 1 cubic foot of gas has a heating
value of 1,000 British thermal units. When MMS reported federal royalty
gas as having a heating value greater than 1,000 British thermal units
per cubic foot, we adjusted the volume to compensate for this
difference.
[3] MMS personnel within the RIK Program supplied data on revenues
collected from the sale of oil taken in kind from January 1995 through
July 2002. However, MMS personnel were unable to supply data on total
federal oil royalty revenues (from both RIK sales and cash royalty
payments) or the total amount of oil produced on federal lands that
were more current than September 2001. They attributed their inability
to obtain these data, in part, on a court-ordered shutdown of the
system that lasted from December 2001 through March 2002.
[4] In these sales, MMS and the state of Wyoming sold oil from
specified properties for 6-month periods. The buyer would receive the
federal and state royalty share of oil from those properties for a
period of 6 months following the sale. Wyoming participated in all but
the first sale.
[5] MMS personnel within the RIK Program supplied data on revenues
collected from the sale of gas taken in kind from January 1995 through
July 2002. However, MMS personnel were unable to supply data on total
federal gas royalty revenues (from both RIK sales and cash royalty
payments) or the total amount of gas produced on federal lands that
were more current than September 2001. They attributed their inability
to obtain these data, in part, on a court-ordered shutdown of the
system that lasted from December 2001 through March 2002.
[6] In these auctions, MMS sells gas from selected properties for
specified periods of time. The buyer receives the federal royalty
share of gas for a period of 5, 7, or 12 months following the sale.
MMS initially sold this gas for 1-month periods but discontinued this
process because it was administratively more efficient to conduct
sales for greater periods of time.
[7] See Federal Oil Valuation: Efforts to Revise Regulations and an
Analysis of Royalties in Kind, GAO/RCED-98-242 (Washington, D.C.: Aug.
19, 1998).
[8] The Department of the Interior‘s Inspector General recently
reported a problem in collecting all revenues due from the sale of
royalty gas. MMS had not resolved in a reasonable time frame the
commonly occurring discrepancies between amounts paid and owed due to
uncertainties in the gas volumes delivered (referred to as ’gas
imbalances“). See Department of the Interior, Office of Inspector
General, Evaluation of Vulnerabilities to Underreporting: Royalty-in-
Value versus Royalty-in-Kind, Report No. 2002-I-0044 (Washington, D.C.:
August 2002).
[9] The Mineral Leasing Act uses the term ’market price“ not ’fair
market value,“ and the requirement to obtain market price does not
cover competitive sales, which, by their very nature, provide some
protection to the federal government.
[10] When sales involve the federal offshore leases whose royalties
must
be shared with adjacent states, MMS officials said that they record the
transactions for each lease separately. This facilitates the
disbursement of royalty revenue to the adjacent states.
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