Royalty Revenues
Total Revenues Have Not Increased at the Same Pace as Rising Oil and Natural Gas Prices due to Decreasing Production Sold Gao ID: GAO-06-786R June 21, 2006In fiscal year 2005, federal and Native American lands supplied about 35 percent of the oil and 26 percent of the natural gas produced in the United States. Companies that lease these lands to produce oil and natural gas pay royalties to the Department of the Interior's Minerals Management Service (MMS) based on a percentage (the royalty rate) of the cash value of the oil and natural gas produced and sold. As an alternative to collecting cash royalty payments, MMS has the option to take a percentage of the actual oil and natural gas produced (referred to as "taking royalties in kind") and selling it themselves or using it for other purposes, such as filling the nation's Strategic Petroleum Reserve (SPR). MMS reported collecting $7.4 billion in fiscal year 2001 and $8 billion in fiscal year 2005 in cash royalty payments and in revenue from its own royalty-in-kind sales of oil and natural gas. While these total royalty revenues increased by about 8 percent from 2001 to 2005, oil and natural gas prices rose substantially more--about 90 percent for oil and 30 percent for natural gas. Consequently, Congress asked us why oil and natural gas royalty revenues did not increase at the same pace as the increase in oil and natural gas prices.
Federal and Native American royalty revenues did not increase at the same pace as oil and natural gas prices between 2001 and 2005 principally because the volumes upon which royalties are based declined substantially during this time. In assessing changes in royalty revenues, it is important to understand the three key variables of volume, price, and royalty rate that make up total royalty revenues. When reporting and paying royalties to MMS, companies must collect and report various data, including the volume of oil or natural gas sold, the sales price received less allowable deductions--such as transportation--to get the resource to market, and the royalty rate to be paid as specified in the oil and natural gas lease. Companies can calculate the royalty revenue they owe to the federal government using the three key variables illustrated in the following equation: Royalty revenue = volume sold x sales price less deductions x royalty rate. In conducting our work, it was not possible with the available data to precisely determine how much of the change in total royalty revenues was due to a change in any one variable, as all three variables were changing over time at varying rates. For example, during any given month in which royalties are collected, each of the variables may either rise or fall compared to the previous month. For our analysis, however, we estimated a variable's contribution to the total dollar change in royalty revenues for oil and natural gas by assuming that the other two variables changed at a constant rate. Under this assumption, the total change in that variable from 2001 to 2005 closely approximated the actual change over the period. We also examined the effects of specific factors, such as hurricanes, on total volumes sold and average royalty rates. We obtained oil and natural gas data from MMS's financial system for fiscal years 2001 and 2005 to conduct our independent analysis to more fully explain the change in both natural gas and oil royalty revenues. We also interviewed MMS officials at their Lakewood, Colorado, office to solicit their views on why oil and natural gas royalty revenues did not increase at the same rate as prices between 2001 and 2005. The comparison of royalty revenues between 2001 and 2005 does not include natural gas or oil production that is subject to royalty relief. Legislation and regulations exempt some production from certain leases in the Gulf of Mexico from royalties, and therefore these production volumes do not appear in the royalty revenue statistics. Although the volumes subject to royalty relief were small, they are expected to grow in the future. We have ongoing work and plan a future report on royalty-relief policies and MMS efforts to estimate the impact of royalty relief on future royalty revenues.
GAO-06-786R, Royalty Revenues: Total Revenues Have Not Increased at the Same Pace as Rising Oil and Natural Gas Prices due to Decreasing Production Sold
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June 21, 2006:
Congressional Requesters:
Subject: Royalty Revenues: Total Revenues Have Not Increased at the
Same Pace as Rising Oil and Natural Gas Prices due to Decreasing
Production Sold:
In fiscal year 2005, federal and Native American lands supplied about
35 percent of the oil and 26 percent of the natural gas produced in the
United States. Companies that lease these lands to produce oil and
natural gas pay royalties to the Department of the Interior's Minerals
Management Service (MMS) based on a percentage (the royalty rate) of
the cash value of the oil and natural gas produced and sold. As an
alternative to collecting cash royalty payments, MMS has the option to
take a percentage of the actual oil and natural gas produced (referred
to as "taking royalties in kind") and selling it themselves or using it
for other purposes, such as filling the nation's Strategic Petroleum
Reserve (SPR). MMS reported collecting $7.4 billion in fiscal year 2001
and $8 billion in fiscal year 2005 in cash royalty payments and in
revenue from its own royalty-in-kind sales of oil and natural gas.
While these total royalty revenues increased by about 8 percent from
2001 to 2005, oil and natural gas prices rose substantially more--about
90 percent for oil and 30 percent for natural gas. Consequently, you
asked us why oil and natural gas royalty revenues did not increase at
the same pace as the increase in oil and natural gas prices.
In summary, federal and Native American royalty revenues did not
increase at the same pace as oil and natural gas prices between 2001
and 2005 principally because the volumes upon which royalties are based
declined substantially during this time. In assessing changes in
royalty revenues, it is important to understand the three key variables
of volume, price, and royalty rate that make up total royalty revenues.
When reporting and paying royalties to MMS, companies must collect and
report various data, including the volume of oil or natural gas sold,
the sales price received less allowable deductions--such as
transportation--to get the resource to market, and the royalty rate to
be paid as specified in the oil and natural gas lease. Companies can
calculate the royalty revenue they owe to the federal government using
the three key variables illustrated in the following equation:
Royalty revenue = volume sold x sales price less deductions x royalty
rate[Footnote 1]
As summarized in table 1 and table 2, the volume of natural gas and oil
that was sold decreased significantly between 2001 and 2005, largely
offsetting the impact of increased sales prices on total royalty
revenues.
Table 1: Natural Gas Royalty Statistics for Federal and Native American
Lands:
Fiscal Year: 2001;
Total Volume sold (thousands of cubic feet): 6,912,002,366;
Average Sales price received (per thousand cubic feet): $5.05;
Average royalty rate (less deductions): 0.145124;
Total royalty revenues: $5,062,170,355.
Fiscal Year: 2005;
Total Volume sold (thousands of cubic feet): 5,864,705,117;
Average Sales price received (per thousand cubic feet): $6.59;
Average royalty rate (less deductions): 0.137267;
Total royalty revenues: $5,304,520,628.
Source: MMS.
[A] Average sale price rounded to nearest cent.
[End of table]
Table 2: Oil Royalty Statistics for Federal and Native American Lands:
Fiscal year: 2001;
Total volume sold (barrels): 699,346,399;
Average sales price received (per barrel)[A]: $25.27;
Average royalty rate (less deductions): 0.134703;
Total royalty revenues: $2,380,264,986.
Fiscal year: 2005;
Total volume sold (barrels): 434,142,391;
Average sales price received (per barrel)[A]: $47.96;
Average royalty rate (less deductions): 0.128498;
Total royalty revenues: $2,675,676,653.
Source: MMS.
[A] Average sales price rounded to nearest cent.
[End of table]
In conducting our work, it was not possible with the available data to
precisely determine how much of the change in total royalty revenues
was due to a change in any one variable, as all three variables were
changing over time at varying rates. For example, during any given
month in which royalties are collected, each of the variables may
either rise or fall compared to the previous month. For our analysis,
however, we estimated a variable's contribution to the total dollar
change in royalty revenues for oil and natural gas by assuming that the
other two variables changed at a constant rate. Under this assumption,
the total change in that variable from 2001 to 2005 closely
approximated the actual change over the period. We also examined the
effects of specific factors, such as hurricanes, on total volumes sold
and average royalty rates. We obtained oil and natural gas data from
MMS's financial system for fiscal years 2001 and 2005 to conduct our
independent analysis to more fully explain the change in both natural
gas and oil royalty revenues. We also interviewed MMS officials at
their Lakewood, Colorado, office to solicit their views on why oil and
natural gas royalty revenues did not increase at the same rate as
prices between 2001 and 2005. The comparison of royalty revenues
between 2001 and 2005 does not include natural gas or oil production
that is subject to royalty relief. Legislation and regulations exempt
some production from certain leases in the Gulf of Mexico from
royalties, and therefore these production volumes do not appear in the
royalty revenue statistics.[Footnote 2] Although the volumes subject to
royalty relief were small, they are expected to grow in the future. We
have ongoing work and plan a future report on royalty-relief policies
and MMS efforts to estimate the impact of royalty relief on future
royalty revenues. We coordinated and worked with the Department of the
Interior's Office of Inspector General on this review. A detailed
description of our methodology appears in enclosure I. We conducted our
review from February through April 2006 in accordance with generally
accepted government auditing standards.
Falling Natural Gas Production Volumes Have Largely Offset Rising
Natural Gas Prices:
As summarized in table 1, decreases in the volume of natural gas
produced and sold between 2001 and 2005 have largely offset the impact
of increased sales prices on total royalty revenues. Natural gas
production volumes from federal and Native American lands decreased
because of natural declines in older wells. In addition, hurricanes in
2005 contributed to a decline in natural gas production volumes by
forcing companies to temporarily suspend natural gas production from
wells in the Gulf of Mexico. Finally, the volume of gas upon which
royalties are based in a given year is decreased by the amount of gas
that is exempt from paying royalties under federal royalty-relief
provisions. Natural gas volumes subject to royalty relief did grow
between 2001 and 2005. In 2001, MMS reported about 5 billion cubic feet
of natural gas were exempt from royalties under royalty-relief
provisions. In 2005, MMS reported that these volumes increased to over
246 billion cubic feet of natural gas, with a total estimated royalty
value of about $226 million. Volumes of natural gas subject to royalty
relief are expected to grow in the future. We have ongoing work to
examine royalty-relief policies and efforts to estimate the impact of
royalty relief on future royalty revenues.
In addition to reduced production volumes, the average royalty rates on
natural gas production from federal and Native American lands decreased
from 2001 to 2005, contributing to the drop in royalty revenues.
Royalty rates can vary depending on where the natural gas is produced.
In general, average royalty rates for natural gas have decreased as
production has declined in areas with higher royalty rates (such as
shallow waters in the Gulf of Mexico where the royalty rate is 16.67
percent) and increased in areas with lower royalty rates (such as deep
waters in the Gulf of Mexico where the royalty rate is 12.5 percent).
Because the comparison of royalty revenues between years does not
include production that is subject to royalty relief, the average
royalty rate is not affected by production that is subject to royalty
relief.
From fiscal years 2001 to 2005, total natural gas royalty revenues from
federal and Native American lands increased by about $242 million (see
table 1). We estimate that the rise in natural gas prices between 2001
and 2005 would have increased royalty revenues by $1,392 million.
Natural gas prices have risen since 2001 because demand for natural gas
has expanded faster than supply. The domestic gas industry has been
producing at near capacity, and the nation's ability to increase
imports has reached its limits. Tight supplies have also made the
market susceptible to extreme price spikes when either demand or supply
changes unexpectedly, such as when hurricanes hit the Gulf Coast in
late 2005. However, we estimate that a decline in the total natural gas
volume sold resulted in a decrease of about $860 million in potential
royalty revenues. In addition, a decline in the average royalty rate
decreased potential royalty revenues by an additional $292 million. The
relationship between the changes in natural gas royalty revenues due to
an increase in the price of natural gas, decrease in volumes sold, and
decrease in average royalty rate is illustrated in figure 1.
Figure 1: Estimated Effects of Volume, Price, and Royalty Rate on
Federal and Native American Natural Gas Royalty Revenues, Fiscal Years
2001 to 2005:
[See PDF for Image]
Source: GAO analysis of MMS data.
Note: Changes attributed to individual variables account for 99 percent
instead of 100 percent of the actual change in total royalty revenues
due to limitations in the methodology. See enclosure I for more
details.
[End of Figure]
A significant portion of the $860 million decrease in potential royalty
revenues associated with declining sales volumes appears to be the
result of a decrease in natural gas production caused by the normal
depletion of natural gas wells in shallow waters (i.e., waters less
than 400 meters deep) of the Gulf of Mexico. MMS's Gulf of Mexico
Offshore Region reported a precipitous decline in natural gas
production in shallow waters of the Gulf starting in 1997. This decline
continued from 2001 to 2005. MMS reported that natural gas production
from shallow waters dropped from about 4.2 trillion cubic feet in 2001
to about 2.4 trillion cubic feet in 2005, while production from deep
waters (i.e., waters over 400 meters deep) remained relatively
stable.[Footnote 3] However, since companies are reporting the
discovery of oil and natural gas fields in increasingly deeper water,
MMS anticipates that production from deep water will increase in the
future.
While older natural gas wells onshore also experienced declining
production, these declines were overshadowed by an increase in natural
gas production from new onshore wells. Onshore total natural gas
volumes sold actually increased by about 17 percent from 2001 to 2005,
according to MMS statistics. Had this onshore increase not occurred,
the $860 million decrease in potential royalty revenues associated with
declining sales volumes would have been greater. We have previously
reported the increase in oil and natural gas activities on federal
onshore lands managed by the Bureau of Land Management.[Footnote 4]
Permits issued to drill wells on these lands more than tripled from
fiscal years 1999 to 2004, with much of the increase occurring in the
Rocky Mountain states of Montana, Wyoming, Colorado, Utah, and New
Mexico.
Hurricanes in the Gulf of Mexico also contributed to the decline in
natural gas sales volume from 2001 to 2005 by forcing companies to
temporarily suspend production. MMS reported that, during August and
September 2005, total cumulative shut-in natural gas production was
196,481 million cubic feet, or about 5 percent of the annual natural
gas production in the Gulf of Mexico. We estimate that this production
could have resulted in royalty revenues of about $208 million, although
it is unclear what portion of this production was subject to royalties.
In addition to the declining natural gas sales volumes, a declining
average royalty rate also reduced total royalty revenues. From 2001 to
2005, the average royalty rate dropped from about 14.5 percent to about
13.7 percent, resulting in a decrease of about $292 million in
potential royalty revenues. This decrease appears to have resulted
largely from the decline in natural gas production in shallow waters of
the Gulf of Mexico. Shallow water leases have royalty rates of 16.67
percent, while deeper water leases carry royalty rates of 12.5 percent.
The increase in onshore production, where leases also carry a 12.5
percent royalty rate, has also contributed to the decline in the
average royalty rate.
Declining Oil Sales Have Largely Offset Rising Oil Prices:
As summarized in table 2, decreases in the volumes of oil produced and
sold between 2001 and 2005 have largely offset the impact of increased
sales prices on total royalty revenues. The oil volumes sold from
federal and Native American lands declined principally because MMS took
substantial volumes in kind and used these volumes to fill the SPR,
instead of receiving cash royalty payments or selling the oil and
collecting revenue from royalty-in-kind sales. As with natural gas,
hurricanes in 2005 also contributed to a decline in oil production
volumes by forcing companies to temporarily suspend production from
wells in the Gulf of Mexico. Also, the volume of oil upon which
royalties are based in a given year is decreased by the amount of oil
that is exempt from paying royalties under federal royalty-relief
provisions. Although the comparison of royalty revenues between 2001
and 2005 does not include oil production that is subject to royalty
relief, the volumes subject to royalty relief did grow between 2001 and
2005. In 2001, MMS reported about 2.6 million barrels of oil were
exempt from royalties under royalty-relief provisions. In 2005, MMS
reported that these volumes increased to about 29 million barrels of
oil, with a total estimated royalty value of about $175 million. The
oil volumes subject to royalty relief are expected to grow further, and
we have work currently under way to examine royalty-relief policies and
estimates of the impact on future royalty revenues. In addition to the
declining oil sales volumes, a declining average royalty rate for oil
also contributed to reduced total royalty revenues.
From fiscal years 2001 to 2005, total oil royalty revenues from federal
and Native American lands increased by about $295 million (see table
2). We estimate that the rise in crude oil prices between 2001 and 2005
increased potential royalty revenues by $1,693 million. Crude oil
prices rose during this period primarily because the growth in world
oil demand has not been accompanied by a similar growth in crude oil
supplies. Demand has increased, particularly in the United States,
China, and India, while production has been voluntarily restricted by
members of the Organization of Petroleum Exporting Countries or
otherwise disrupted by events in Nigeria, Iraq, and Venezuela. In
addition, hurricanes in the Gulf Coast in late 2005 disrupted the flow
of oil into the United States and damaged oil facilities, leading to
increased prices at that time. However, a decline in the total oil
volume sold during this same period resulted in a decrease of about
$1,278 million in potential royalty revenues. In addition, a drop in
the average royalty rate caused another $129 million decrease in
potential royalty revenues. The relationship between the changes in oil
royalty revenues due to an increase in the price of crude oil, decrease
in volumes sold, and decrease in average royalty rate is illustrated in
figure 2.
Figure 2: Estimated Effects of Volume, Price, and Royalty Rate on
Federal and Native American Oil Royalty Revenues, Fiscal Years 2001 to
2005:
[See PDF for Image]
Source: GAO analysis of MMS data.
Note: Changes attributed to individual variables account for 97 percent
instead of 100 percent of the actual change in total royalty revenues
due to limitations in the methodology. See enclosure I for more
details.
[End of Figure]
Most of the $1,278 million decrease in potential royalty revenues
associated with declining sales volumes appears to be the result of
transfers of royalty oil to the SPR. The Congress created the SPR to
provide emergency oil in the event of a disruption in petroleum
supplies. Managed by the Department of Energy (DOE), the SPR is a
series of underground salt caverns along the coastline of the Gulf of
Mexico that can store up to 700 million barrels of oil. MMS assists DOE
in transferring oil into the SPR. Under royalty in kind, instead of
receiving cash royalty payments, MMS takes the federal government's
royalty share in oil. MMS can then sell the oil and collect revenue
from the royalty-in-kind sales or use it for other purposes. In fact,
MMS was directed to transfer the oil to the SPR. Since the oil was
transferred and not sold, no cash royalty revenues were collected from
a sale. MMS began assisting DOE with the transfer of royalty oil to the
SPR in April 2002, after having stopped filling the SPR in December
2000. In 2005, MMS reported that it had assisted in transferring about
213 million barrels of oil to the SPR. This amount represents about 80
percent of the decrease in total oil volume sold from 2001 to 2005.
Hurricanes in the Gulf of Mexico also contributed to the decline in oil
sales volumes from 2001 to 2005 by forcing companies to shut-in wells.
MMS reported that during August and September 2005, total cumulative
shut-in oil production was 40,828,134 barrels, or about 15 percent of
the decline in total oil volumes sold from 2001 to 2005. We estimate
that this shut-in production could have produced royalty revenues of at
least $270 million, although it is unclear what portion of this
production was royalty-bearing and at what price the oil would have
been sold. In addition, oil volumes sold from onshore federal and
Native American lands decreased by 8 million barrels, or about 3
percent of the decrease in total oil volumes sold from 2001 to 2005.
In addition to the declining oil sales volumes, a declining average
royalty rate also helped offset the increase in total royalty revenues
due to increasing crude oil prices. From 2001 to 2005, the average
royalty rate dropped from about 13.5 percent to about 12.8 percent,
resulting in a decrease of about $129 million in potential oil royalty
revenues. As with natural gas, this decrease appears to have resulted
from an increase in the proportion of oil produced from deep waters in
the Gulf of Mexico, where royalty rates are lower.
Agency Comments:
We provided a draft of this report to the Department of the Interior
for review and comment. The Minerals Management Service provided
written comments, which are presented in enclosure II. MMS agreed with
our observations and emphasized our conclusion that federal oil and gas
royalty collections from 2001 through 2005 have not kept pace with
rising oil and natural gas prices because of a decrease in the volumes
of oil and natural gas sold during this period. MMS also provided
comments to improve the report's technical accuracy, which we
incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report, we plan no further distribution until 30 days from the
date of this letter. At that time we will send copies of this report to
appropriate congressional committees, the Secretary of the Interior,
the Director of MMS, the Director of the Office of Management and
Budget, and other interested parties. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or wellsj@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this letter include Ron Belak, Glenn C. Fischer, Mark Gaffigan, and
Frank Rusco.
Signed by:
Jim Wells:
Director, Natural Resources and Environment:
Enclosures:
List of Addressees:
The Honorable Jeff Bingaman:
Ranking Minority Member:
Committee on Energy and Natural Resources:
United States Senate:
The Honorable Norm Coleman:
Chairman, Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Carl Levin:
Ranking Minority Member:
Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Daniel K. Akaka:
United States Senate:
The Honorable Maria Cantwell:
United States Senate:
The Honorable Thomas R. Carper:
United States Senate:
The Honorable Mark Dayton:
United States Senate:
The Honorable Byron L. Dorgan:
United States Senate:
The Honorable Richard J. Durbin:
United States Senate:
The Honorable Russell D. Feingold:
United States Senate:
The Honorable Dianne Feinstein:
United States Senate:
The Honorable Tim Johnson:
United States Senate:
The Honorable John F. Kerry:
United States Senate:
The Honorable Frank R. Lautenberg:
United States Senate:
The Honorable Robert Menendez:
United States Senate:
The Honorable Barbara A. Mikulski:
United States Senate:
The Honorable Patty Murray:
United States Senate:
The Honorable Barack Obama:
United States Senate:
The Honorable Jack Reed:
United States Senate:
The Honorable Ken Salazar:
United States Senate:
The Honorable Charles E. Schumer:
United States Senate:
The Honorable Ron Wyden:
United States Senate:
The Honorable Darrel E. Issa:
Chairman:
Subcommittee on Energy and Resources:
Committee on Government Reform:
House of Representatives:
The Honorable Carolyn B. Maloney:
House of Representatives:
[End of Section]
Enclosure I:
Scope and Methodology:
To determine why oil and natural gas royalty revenues have not kept
pace with rising oil and natural gas prices from fiscal years 2001 to
2005, we first interviewed Minerals Management Service (MMS) officials
in Lakewood, Colorado. MMS presented their briefing entitled
"Management of the Nation's Natural Gas Royalty Revenues: The
Department of the Interior's Response to the NY Times, February 2006."
MMS issued this document in response to an article published in The New
York Times on January 23, 2006, that questioned why natural gas royalty
revenues in 2005 did not increase at the same rate as prices increased.
We reviewed extensive documentation supporting the information in MMS's
presentation and agreed with the reasons MMS cited as to why natural
gas royalty revenues have not kept pace with rising natural gas prices.
We also generally agreed with MMS's portrayal of the impact these
reasons had on royalty revenues. We also discussed with MMS officials
the reasons that oil revenues had not kept pace with rising prices from
2001 to 2005.
Because summary royalty data published on MMS's Web site do not solely
represent transactions that occurred during the reported fiscal year,
but include transactions from previous years as well, we obtained oil
and natural gas data from MMS's financial system for fiscal years 2001
and 2005.[Footnote 5] We obtained data that were posted to the
appropriate fiscal year, including the sum of sales values, sum of
sales volumes, and sum of royalty values less allowances for each payor
aggregated by product type (oil or natural gas) for transactions that
consisted largely of cash royalty payments, royalty in kind,
compensatory royalties, transportation allowances, natural gas
processing allowances, and profitable profit-sharing arrangements. We
tested these aggregate data for reasonableness because we were aware of
possible data errors. We corrected a 1.19 trillion cubic-foot error in
the volume of natural gas sold during fiscal year 2001. However, we did
not test or validate the estimated 6 million transactions of which the
2001 and 2005 data are comprised. We have tested individual oil and
natural gas transactions from MMS's financial database in the past and
have found that, when transactions were aggregated to lesser levels,
between 1.9 and 6.0 percent of the data was erroneous or
missing.[Footnote 6] We found that about 8.5 percent of the aggregated
data for 2001 and 2005 that we analyzed for this report is anomalous.
Anomalous data include data that are outside of a reasonable range for
royalty rates, outside of a reasonable range for expected prices,
contain negative or missing values for sales volumes or royalties when
cash royalties are due, and consist of a positive value when allowances
are reported. We then estimated the financial impact that these
anomalous data had on royalties reported and sales volumes reported.
Because only a small number of these anomalies exceeded 0.01 percent of
the total annual royalty revenues or volumes sold, our analysis
suggests that these anomalous data did not significantly impact royalty
statistics reported in table 1 and table 2. We concluded that these
data are sufficiently reliable for the broad nature of our analysis.
We decided to pursue an approach that was different from MMS's approach
in quantifying the individual impact of changes in prices, volumes, and
royalty rates on total royalty revenues and to assess why total royalty
revenues had not kept pace with rising prices. MMS estimated the impact
of these variables by determining what royalties would have been if
individual variables had not declined or if specific events, like
hurricanes, had not occurred. While mathematically sound, this
methodology has some limitations--for instance, it does not consider
that all the variables are changing over time. In addition, the sum of
estimated individual changes using this methodology significantly
exceeds the actual change in total royalty revenues, and this could be
misinterpreted. In contrast, we estimated the effects of each
individual variable on total royalty revenues by multiplying the change
in that variable from 2001 to 2005 by the average values of the other
variables during that period. This methodology assumes that all the
variables were changing at a constant rate from 2001 to 2005. We
examined the raw data and found that this assumption was generally
reasonable for natural gas volumes sold, average natural gas prices,
and net natural gas royalty rates, except for the average natural gas
price in fiscal year 2002. It also appears to be reasonable for net oil
royalty rates and average oil prices, except for fiscal year 2002. The
one main exception is that the drop in oil volumes sold was not
changing at a constant rate--oil volumes sold dropped substantially
between 2002 and 2003 when the federal government started to transfer
significant quantities of oil to the SPR. Under our methodology,
nonetheless, the sum of the estimated individual impacts on total
royalty revenues was close to the actual total change in royalty
revenues.
[End of Section]
Enclosure II:
Comments from the Department of the Interior:
United States Department of the Interior:
Minerals Management Service:
Washington, DC 20240:
Jun 02 2006:
Mr. Jim Wells
Director, Natural Resources and Environment:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Wells:
Thank you for the opportunity to comment on the draft report entitled
"Royalty Revenues: Total Revenues Have Not Increased at the Same Pace
as Rising Oil and Natural Gas Prices due to Decreasing Production
Sold," (GAO-06-786R). The Minerals Management Service (MMS) appreciates
the continuing dialogue and assistance from GAO to ensure the quality
and continuous improvement of our revenue management program.
The services the MMS provides have a major economic benefit to
taxpayers, states, and the American Indian community. Therefore, we are
dedicated to ensuring all revenues from Federal and Indian mineral
leases are accurately collected and disbursed to the appropriate
recipients in a timely manner.
We appreciate the thoroughness of the draft report and, while we took a
different approach to this issue, are in concurrence with your
conclusion: an overall decrease in volume between 2001 and 2005 offset
the impact of rising prices on total royalty revenues.
If you have any questions regarding this response, please contact Mr.
James Witkop, MMS's Audit Liaison Officer, at (202) 208-3236.
Sincerely,
Signed by:
R. M. "Johnnie" Burton Director:
Enclosure:
[End of Section]
(360676):
FOOTNOTES
[1] Companies report to MMS on Form MMS-2014 the volume sold (sales
volume), the amount of revenue received from this sale (sales value),
and the royalty revenue due to MMS (royalty value less allowances). The
average sales price is calculated by dividing sales value by sales
volume. The average royalty rate net of allowances is calculated by
dividing royalty value less allowances by sales value.
[2] Certain leases issued in 1998 and 1999 did not contain price
thresholds, resulting in additional royalty-free volumes which do not
appear in the royalty revenue statistics.
[3] Not all volumes produced are subject to royalties. The Outer
Continental Shelf Deep Water Royalty Relief Act of 1995 exempts certain
volumes from royalties. Hence, total volumes sold reported in tables 1
and 2 reflect volumes on which royalties wee paid, and as a result are
less than total volumes actually produced for a given year.
[4] GAO, Oil and Gas Development: Increased Permitting Activity Has
Lessened BLM's Ability to Meet Its Environmental Protection
Responsibilities, GAO-05-418 (Washington, D.C.: June 17, 2005).
[5] Transactions from previous fiscal years are called adjustments, and
they are a standard industry practice caused by, among other things,
rebalancing of volumes sold and corrections to unit allocations. Fiscal
years 2001 and 2005 contain adjustments only for their respective years
that are current as of January 6, 2006, and exclude reported sales of
nitrogen.
[6] GAO, Mineral Revenues: Cost and Revenue Information Needed to
Compare Different Approaches for Collecting Federal Oil and Gas
Royalties, GAO-04-448 (Washington, D.C.: Apr. 16, 2004), app. I.
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