Oil and Gas Leasing
Federal Oil and Gas Resource Management and Revenue Collection in Need of Comprehensive Reassessment
Gao ID: GAO-09-506T March 17, 2009
In fiscal 2008, the Department of the Interior (Interior) collected over $22 billion in royalties and other fees related to oil and gas. Interior's Bureau of Land Management (BLM) and Minerals Management Service (MMS) manage federal onshore and offshore oil and gas leases, respectively. Acquiring a federal lease gives the lessee the rights to explore for and develop the oil and gas resources under the lease, including drilling wells and building pipelines that may lead to oil and gas production. This statement focuses on findings from a number of recent GAO reports on federal oil and gas management. GAO has made numerous recommendations to Interior, which the agency generally agreed with and is taking steps to address. However, two important issues remain unresolved. Specifically, GAO made one recommendation and one matter for Congressional consideration that together call for a comprehensive re-evaluation of how Interior manages federal oil and gas resources. To-date, Interior has not undertaken such a comprehensive review and until this is done, the public cannot have reasonable assurance that federal oil and gas resources are being appropriately managed for the public good.
In recent years, GAO has conducted numerous evaluations of federal oil and gas management and found many material weaknesses. Interior does less to encourage development of federal oil and gas leases than some state and private landowners. Eight states GAO reviewed undertook more efforts to encourage development on their oil and gas leases, using increasing rental rates as well as shorter lease terms and escalating royalty rates. Some states also do more than Interior to structure leases to reflect the likelihood of oil and gas production, which may encourage faster development. Private landowners also use various leasing methods to encourage faster development, including lease terms as short as 6 months. The annual federal oil and gas leases issued and the pace of development have generally increased in recent years. Several factors influence industry's decisions to acquire and develop federal oil and gas leases, including oil and gas prices; the availability and cost of equipment; the geology of the land underlying the lease; and regulatory issues, such as limitations on when drilling can occur. Development activity in a sample of leases issued from 1987 through 1996 varied considerably. Development occurred on about 26 percent of offshore and 6 percent of onshore leases issued, but production was less frequent, with about 12 percent of offshore leases and 5 percent of onshore leases ultimately achieving production. Shorter leases were generally developed more quickly than longer leases, but not as frequently during the term of the lease. MMS and BLM employ different practices for deciding which federal properties to lease and when, and could do more to encourage faster development of certain federal oil and gas leases that are relatively more likely to have significant oil and gas resources. BLM has encountered persistent problems in hiring and retaining sufficient and adequately trained staff to keep up with workload as a result of rapid increases in oil and gas operations on federal lands. The federal government receives one of the lowest shares of revenue for oil and gas resources compared with other countries and Interior has not systematically re-examined how the federal government is compensated for extraction of oil and gas for over 25 years.
GAO-09-506T, Oil and Gas Leasing: Federal Oil and Gas Resource Management and Revenue Collection in Need of Comprehensive Reassessment
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Testimony:
Before the Subcommittee on Energy and Mineral Resources, Committee on
Natural Resources, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Tuesday, March 17, 2009:
Oil And Gas Leasing:
Federal Oil and Gas Resource Management and Revenue Collection in Need
of Comprehensive Reassessment:
Statement of Frank Rusco, Director:
Natural Resources and Environment:
GAO-09-506T:
GAO Highlights:
Highlights of GAO-09-506T, a testimony before The Subcommittee of
Energy and Mineral Resources; Committee on Natural Resources; House of
Representatives.
Why GAO Did This Study:
In fiscal 2008, the Department of the Interior (Interior) collected
over $22 billion in royalties and other fees related to oil and gas.
Interior‘s Bureau of Land Management (BLM) and Minerals Management
Service (MMS) manage federal onshore and offshore oil and gas leases,
respectively. Acquiring a federal lease gives the lessee the rights to
explore for and develop the oil and gas resources under the lease,
including drilling wells and building pipelines that may lead to oil
and gas production.
This statement focuses on findings from a number of recent GAO reports
on federal oil and gas management. GAO has made numerous
recommendations to Interior, which the agency generally agreed with and
is taking steps to address. However, two important issues remain
unresolved. Specifically, GAO made one recommendation and one matter
for Congressional consideration that together call for a comprehensive
re-evaluation of how Interior manages federal oil and gas resources.
Interior has not undertaken such a comprehensive review and until this
is done, the public cannot have reasonable assurance that federal oil
and gas resources are being appropriately managed for the public good.
What GAO Found:
In recent years, GAO has conducted numerous evaluations of federal oil
and gas management and found many material weaknesses. Key among the
findings in these reports are:
* Interior does less to encourage development of federal oil and gas
leases than some state and private landowners. For example, the eight
states GAO reviewed used more tools to encourage development on their
oil and gas leases, using increasing rental rates as well as shorter
lease terms and escalating royalty rates. Some states also do more than
Interior to structure leases to reflect the likelihood of oil and gas
production, which may encourage faster development.
* The annual number of federal oil and gas leases issued and the pace
of development have generally increased in recent years. Several
factors influence industry‘s decisions to acquire and develop federal
oil and gas leases, including oil and gas prices; the availability and
cost of equipment; the geology of the land underlying the lease; and
regulatory issues, such as limitations on when drilling can occur.
* Development and production activity in a sample of leases issued from
1987 through 1996 varied considerably. Development occurred on about 26
percent of offshore and 6 percent of onshore leases issued, but
production was less frequent, with about 12 percent of offshore leases
and 5 percent of onshore leases ultimately achieving production.
Shorter leases were generally developed more quickly than longer
leases, but not as frequently.
* MMS and BLM employ different practices for deciding which federal
properties to lease and when, and could do more to encourage faster
development of certain federal oil and gas leases that are relatively
more likely to have significant oil and gas resources.
* BLM has encountered persistent problems in hiring and retaining
sufficient and adequately trained staff to keep up with workload as a
result of rapid increases in oil and gas operations on federal lands.
* The federal government receives one of the lowest shares of revenue
for oil and gas resources compared with other countries and Interior
has not systematically re-examined how the federal government is
compensated for extraction of oil and gas for over 25 years.
In recent reports, GAO has made a number of recommendations to improve
the accuracy of oil and gas royalty measurement and collections and to
improve the overall management of federal oil and gas resources.
View [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-506T] or key
components. For more information, contact Frank Rusco at (202) 512-3841
or ruscof@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
We appreciate the opportunity to participate in this hearing to discuss
the Department of the Interior's management of federal oil and gas
leases. In fiscal year 2008, the Department of the Interior (Interior)
collected over $22 billion in royalties for oil and gas produced on
federal lands and waters, purchase bids for new oil and gas leases,
annual rents on existing leases, making revenues from federal oil and
gas one of the largest nontax sources of federal government funds.
Within Interior, the Bureau of Land Management (BLM) manages onshore
federal oil and gas leases and the Minerals Management Service (MMS)
manages offshore leases, while MMS is responsible for collecting
royalties for all leases. In recent years, GAO and others, including
Interior's Inspector General have conducted numerous evaluations of
federal oil and gas management and revenue collection processes and
practices and have found many material weaknesses. These weaknesses
place an unknown but significant proportion of royalties and other oil
and gas revenues at risk and raise questions about whether the federal
government is collecting an appropriate amount of revenue for the
rights to explore for, develop, and produce oil and gas on federal
lands and waters. Specifically, our recent work has found the
following:
* Interior does less to encourage development of federal oil and gas
leases than some state and private landowners. Interior officials cited
one lease provision that may encourage development--escalating rental
rates. For example, the rental rates for 10-year onshore federal leases
increase from $1.50 per acre per year for the first 5 years to $2 per
acre per year for the next 5 years. Compared to Interior, the eight
states we reviewed undertook more efforts to encourage development on
their oil and gas leases, using increasing rental rates as well as
shorter lease terms and escalating royalty rates. Some states also do
more than Interior to structure leases to reflect the likelihood of oil
and gas production, which may encourage faster development.
Specifically, while Interior uses varying lengths for offshore leases,
with deeper waters receiving longer lease terms, this provision is not
explicitly related to the expected productivity of the lease. On the
other hand, five of the states that we reviewed--Alaska, Louisiana,
Montana, New Mexico, and Texas--vary lease lengths or royalty rates to
reflect the likelihood that the lease will produce. We also found that
private landowners have used various leasing methods to encourage
faster development, including lease terms as short as 6 months.
* The annual number of federal oil and gas leases issued and the pace
of development have generally increased in recent years. Over the past
20 years, the total number of oil and gas leases Interior issued has
varied each year but generally increased in recent years, as has the
amount of development activity, and industry officials told us that a
range of factors influence their decisions to acquire and develop
leases. The number of offshore leases issued annually from 1987 through
2006 had two large peaks--in 1988 and 1997--and has generally been
increasing since 1999. Onshore leases peaked in 1988 and then declined
until about 1992, remaining at these lower levels until about 2003 when
they increased, coinciding with rising oil and historically higher
natural gas prices. Drilling and production activity on federal leases
was higher from 1997 through 2006 than from 1987 through 1996, but the
increase was more dramatic for onshore leases. Industry officials told
us that several factors influence their decisions to acquire and
develop federal oil and gas leases, including oil and gas prices; the
availability and cost of equipment; the geology of the land underlying
the lease; and regulatory issues, such as limitations on when drilling
can occur.
* Development and production activity in a sample of leases issued from
1987 through 1996 varied considerably. We reviewed data on about 55,000
offshore and onshore federal leases issued from 1987 through 1996--
those that have exceeded their primary 10-year lease terms. We then
tracked development activity on that sample of leases through 2007 to
determine what, if any, development activity occurred, and at what
point in time. We identified three key findings regarding development.
First, development occurred at some point during the period 1987-2007
on about 26 percent of offshore and 6 percent of onshore leases in the
sample. Production was less frequent, with about 12 percent of offshore
leases and 5 percent of onshore leases ultimately achieving production.
Second, shorter leases were generally developed more quickly than
longer leases, but not as frequently during the term of the lease.
Finally, for those leases that eventually produced oil or gas, a
substantial amount of the initial drilling activity--about 25 percent
onshore--took place after the scheduled expiration of the lease,
following a lease extension.
* MMS and BLM employ different practices for deciding which federal
properties to lease and when, determining the initial length of the
lease, and determining the price at which the leases are sold. In
addition, some states and private resource owners use more tools than
the federal government, including incentives for early development or
penalties for later development, to encourage rapid development,
particularly of leases that are deemed to be likely to contain
significant oil and gas resources. In this regard, we found that
Interior could do more to encourage faster development of certain
federal oil and gas leases that are relatively more likely to have
significant oil and gas resources.[Footnote 1]
* BLM has encountered persistent problems in hiring and retaining
sufficient and adequately trained staff to keep up with an increasing
workload as a result of rapid increases in oil and gas operations on
federal lands. For example, between 1999 and 2004, when applications
for permits to drill more than tripled, BLM was unable to keep up with
the commensurate increase in its workload, in part, as result of an
ineffective workforce planning process, the lack of key data on
workload activities, and a lack of resources. As a result of this
staffing shortfall, BLM was unable to meet its requirements to mitigate
environmental impacts of oil and gas development.[Footnote 2] More
recently, we reported that BLM's inability to attract and retain
sufficient trained staff have kept the agency from meeting requirements
to inspect drilling and production of oil and gas on federal lands.
This puts federal revenues at risk because when inspections are made,
violations have been found, including errors in the volumes of oil and
gas reported by operators to MMS.[Footnote 3]
* The federal government receives one of the lowest shares of revenue
for oil and gas resources compared with other countries. For this and
other reasons, the United States is an attractive country for
investment in oil and gas development. Specifically, in 2007, the
revenue share that the federal government collects on oil and gas
produced in the Gulf of Mexico ranked 93rd lowest of 104 revenue
collection regimes around the world that were studied. However, despite
significant changes in the oil and gas industry over the past several
decades, Interior has not systematically re-examined how the federal
government is compensated for extraction of oil and gas for over 25
years. In contrast, some other countries have recently increased their
shares of revenues as oil and gas prices rose and, as a result, will
collect between an estimated $118 billion and $400 billion, depending
on future oil and gas prices.[Footnote 4]
* In 1995, a time when oil and natural gas prices were significantly
lower than they are today, Congress passed the Outer Continental Shelf
Deep Water Royalty Relief Act (DWRRA), which authorized MMS to provide
"royalty relief" on oil and gas produced in the deep waters of the Gulf
of Mexico from certain leases issued from 1996 through 2000. This
"royalty relief" waived or reduced the amount of royalties that
companies would otherwise be obligated to pay on the initial volumes of
production from leases, which are referred to as "royalty suspension
volumes." We recently reported that litigation over this royalty relief
for deep water leases sold between 1996 and 2000 could cost the public
in the range of $21 billion to $53 billion in forgone revenue over the
next 25 years, depending on how much oil and gas is eventually produced
on these leases and the prices at which the oil and gas is sold.
[Footnote 5]
* Interior's verification of federal oil and gas production is
insufficient. Specifically, we found that Interior is not meeting
statutory or agency targets for inspections of certain onshore and
offshore leases and metering equipment for measuring oil and gas
production, raising questions about the accuracy of company-reported
oil and gas production figures. In addition, we found that MMS's
management of cash royalty collection lacks key controls, such as the
ability to effectively monitor and validate oil and gas company
adjustments to self-reported royalty data including those made after
audits have been completed, which could have implications for the
amount of revenue collected. Further, we found that MMS's royalty
compliance efforts rely too heavily on self-reported data and that the
more consistent use of available third-party data as a check on self-
reported data could provide greater assurance that royalties are
accurately assessed and paid.[Footnote 6] We have an ongoing engagement
further examining production verification issues expected to be
completed later this year.
* More could be done to verify production levels for Interior's royalty-
in-kind (RIK) program, in which companies provide the federal
government with oil or gas in lieu of cash royalty payments.
Specifically, we found that under the RIK program, MMS's oversight of
natural gas volumes is less robust than its oversight of oil volumes--
a finding that raises questions about the accuracy of company-reported
volumes of natural gas from which MMS must determine whether it is
receiving its appropriate share of production. In addition, we found
that MMS's annual reports to Congress do not fully describe the
performance of the RIK program and, in some instances, may overstate
the benefits of the program.[Footnote 7] We also have an ongoing
engagement examining the RIK program expected to be released later this
year.
In response to recommendations made by GAO and others, Interior has put
into place a wide-ranging plan to significantly modify its current
practices. We acknowledge Interior's efforts to change and improve many
of its current practices as an important first step to address material
weaknesses in the existing system. However, we are concerned that
Interior may lack the resources and skills to simultaneously address
significant changes in its practices while effectively meeting its
routine responsibilities. If steps are not taken to effectively manage
these challenges, the agency may face a decline in staff morale,
continued employee turnover at its senior levels, and ongoing
challenges hiring qualified new staff, further putting federal revenues
at risk.
More importantly, we believe that Interior needs to fundamentally
reexamine the way in which federal oil and gas resources are managed.
Specifically, we recommended that Interior develop a strategy to
encourage faster development of oil and gas leases on federal lands for
those leases deemed to be more likely to produce oil and gas.[Footnote
8] In developing this strategy, Interior could benefit from evaluating
alternative leasing practices used by some states and private land
owners, as well as other countries, to determine what changes to
federal leasing practices and the law is needed to speed up development
of some specific leases that are likely to be highly productive. While
Interior generally agreed with our recommendation and is looking at
some of these issues in a study, we do not believe Interior's study is
sufficiently comprehensive to meet the needs we identified. As a
result, we believe this puts at risk the agency's mission to
effectively manage federal oil and gas resources in the public
interest.
In addition, we believe that a comprehensive reassessment of how much
revenue the federal government collects from oil and gas produced on
federal lands and waters, and in what manner, is long overdue, and we
recommended to Interior that it undertake such a reassessment in our
draft report, Oil and Gas Royalties: The Federal System for Collecting
Oil and Gas Revenues Needs Comprehensive Reassessment.[Footnote 9]
However, in commenting on this recommendation, Interior stated that
such a reassessment would be premature in light of a study the agency
had under way that was looking at some aspects of these issues. Because
we believe Interior's ongoing study is too limited in scope and scale,
in the final report we proposed that Congress consider directing the
Secretary of the Interior to convene an independent panel to perform a
comprehensive review of the federal system for collecting oil and gas
revenue. In the event that the Secretary of the Interior convenes a
panel, the panel and Interior should utilize available information
about the share of oil and gas revenues that other resource owners,
including states and other countries, collect and the ways in which
they structure these collections to create more stable investment
environments in their oil and gas industries. Until this comprehensive
reassessment is undertaken and completed, the federal government will
not have reasonable assurance that it is collecting an appropriate
share of revenue from oil and gas produced on federal lands and waters.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to respond to any questions that you or other Members of the
Subcommittee might have.
GAO Contact and Staff Acknowledgement:
For further information on this statement, please contact Frank Rusco
at (202) 512-3841 or ruscof@gao.gov. Contact points for our
Congressional Relations and Public Affairs offices may be found on the
last page of this statement. Other staff that made key contributions to
this testimony include Shea Bader, Glenn C. Fischer, Jon Ludwigson,
Alison O'Neill, Barbara Timmerman, and Maria Vargas.
[End of section]
Footnotes:
[1] GAO, Oil and Gas Leasing: Interior Could Do More to Encourage
Diligent Development, [hyperlink,
http://www.gao.gov/products/GAO-09-74] (Washington, D.C.: Oct. 3,
2008).
[2] GAO, Oil and Gas Development: Increased Permitting Activity Has
Lessened BLM's Ability to Meet Its Environmental Protection
Responsibilities, [hyperlink, http://www.gao.gov/products/GAO-05-418]
(Washington, D.C.: June 17, 2005).
[3] GAO, Mineral Revenues: Data Management Problems and Reliance on
Self-Reported Data for Compliance Efforts Put MMS Royalty Collections
at Risk, [hyperlink, http://www.gao.gov/products/GAO-08-893R]
(Washington, D.C.: Sept. 12, 2008).
[4] GAO, Oil and Gas Royalties: The Federal System for Collecting Oil
and Gas Revenues Needs Comprehensive Reassessment, [hyperlink,
http://www.gao.gov/products/GAO-08-691] (Washington, D.C.: Sept. 3,
2008).
[5] GAO, Oil and Gas Royalties: Litigation over Royalty Relief Could
Cost the Federal Government Billions of Dollars, [hyperlink,
http://www.gao.gov/products/GAO-08-792R] (Washington, D.C.: June 5,
2008). The Department of Interior has since lost the case on appeal.
Kerr-McGee Oil & Gas Corp. v. Dept. of Interior, 554 F. 3d 1082 (5th
Cir. 2009).
[6] GAO, Mineral Revenues: Data Management Problems and Reliance on
Self-Reported Data for Compliance Efforts Put MMS Royalty Collections
at Risk, [hyperlink, http://www.gao.gov/products/GAO-08-893R]
(Washington, D.C.: Sept. 12, 2008).
[7] GAO, Oil and Gas Royalties: MMS's Oversight of Its Royalty-in-Kind
Program Can Be Improved through Additional Use of Production
Verification Data and Enhanced Reporting of Financial Benefits and
Costs, [hyperlink, http://www.gao.gov/products/GAO-08-942R]
(Washington, D.C.: Sept. 26, 2008).
[8] GAO, Oil and Gas Leasing: Interior Could Do More to Encourage
Diligent Development, [hyperlink,
http://www.gao.gov/products/GAO-09-74] (Washington, D.C.: Oct. 3,
2008).
[9] GAO, Oil and Gas Royalties: The Federal System for Collecting Oil
and Gas Revenues Needs Comprehensive Reassessment, [hyperlink,
http://www.gao.gov/products/GAO-08-691] (Washington, D.C.: September 3,
2008).
[End of section]
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