Federal Oil And Gas Management
Opportunities Exist to Improve Oversight Gao ID: GAO-09-1014T September 16, 2009In fiscal year 2008, the Department of the Interior collected over $22 billion in royalties and other fees related to oil and gas. Within Interior, the Bureau of Land Management (BLM) manages onshore federal oil and gas leases, and the Minerals Management Service's (MMS) Offshore Energy and Minerals Management (OEMM) manages offshore leases. A federal lease gives the lessee rights to explore for and develop the lease's oil and gas resources. MMS is responsible for collecting royalties for oil and gas produced from both onshore and offshore leases. GAO has reviewed federal oil and gas management and revenue collection and found many material weaknesses. This testimony is based primarily on key findings from past GAO reports and some preliminary findings from ongoing work. These findings focus on Interior's: (1) policies for oil and gas leasing, (2) oversight of oil and gas production, (3) royalty regime and policies to boost oil and gas development, (4) oil and gas information technology (IT) systems, and (5) royalty-in-kind program. GAO's past reports provided recommendations that Interior officials report that they are working to implement.
GAO's numerous evaluations of federal oil and gas management have identified five key areas where Interior could provide greater oversight: Interior's policies for leasing offshore and onshore oil and gas differed in key ways. Specifically, MMS sets out a 5-year strategic plan identifying both a leasing schedule and the areas it would lease. In contrast, BLM relies on industry and others to nominate areas for leasing, then selected lands to lease from these nominations, as well as areas it had identified. Additionally, MMS independently assessed the value of the lease and reserves the right to reject low bids, whereas BLM relied exclusively on the results of its bid auctions to determine the lease's market value. Oil and gas activity has generally increased in recent years, and Interior has, at times, been unable to meet its legal and agency mandated oversight obligations for (1) completing required environmental inspections, (2) verifying oil and gas production, (3) using categorical exclusions to streamline environmental analyses required for certain oil and gas activities, and (4) performing environmental monitoring in accordance with land use plans. Interior may be missing opportunities to fundamentally shift the terms of federal oil and gas leases and increase revenues. Compared to other countries, the United States receives one of the lowest shares of revenue for oil and gas. In addition, Interior's royalty rate, which does not change to reflect changing prices and market conditions, has at times, led to pressure on Interior and Congress to periodically change royalty rates in response to market conditions. Interior also has done less than some states and private landowners to encourage lease development and may be missing opportunities to increase production and, subsequently, revenues. Interior's oil and gas IT systems lack key functionalities. GAO's past work found that MMS's ability to maintain the accuracy of oil and gas production and royalty data was hampered by two key limitations in its IT system (1) it did not limit companies' ability to adjust self-reported data after MMS had audited them, and (2) it did not identify missing royalty reports. Preliminary GAO findings have also identified technical problems within BLM's IT systems and their compatibility with MMS's IT systems. Interior's royalty-in-kind program, in which oil and gas producers submit royalties in oil and gas rather than cash, continues to face challenges. GAO found problems with MMS's analysis of program benefits that were reported to Congress, and that MMS failed to use third party data to verify companies' self-reported data. Meanwhile, Interior's Inspector General identified major ethical lapses, including inappropriate relationships between MMS royalty-in-kind program officials and industry representatives.
GAO-09-1014T, Federal Oil And Gas Management: Opportunities Exist to Improve Oversight
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Testimony:
Before the Committee on Natural Resources, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Wednesday, September 16, 2009:
Federal Oil And Gas Management:
Opportunities Exist to Improve Oversight:
Statement of Frank Rusco, Director:
Natural Resources and Environment:
GAO-09-1014T:
GAO Highlights:
Highlights of GAO-09-1014T, a testimony before the Committee on Natural
Resources, House of Representatives.
Why GAO Did This Study:
In fiscal year 2008, the Department of the Interior collected over $22
billion in royalties and other fees related to oil and gas. Within
Interior, the Bureau of Land Management (BLM) manages onshore federal
oil and gas leases, and the Minerals Management Service‘s (MMS)
Offshore Energy and Minerals Management (OEMM) manages offshore leases.
A federal lease gives the lessee rights to explore for and develop the
lease‘s oil and gas resources. MMS is responsible for collecting
royalties for oil and gas produced from both onshore and offshore
leases.
GAO has reviewed federal oil and gas management and revenue collection
and found many material weaknesses. This testimony is based primarily
on key findings from past GAO reports and some preliminary findings
from ongoing work. These findings focus on Interior‘s: (1) policies for
oil and gas leasing, (2) oversight of oil and gas production, (3)
royalty regime and policies to boost oil and gas development, (4) oil
and gas information technology (IT) systems, and (5) royalty-in-kind
program. GAO‘s past reports provided recommendations that Interior
officials report that they are working to implement.
What GAO Found:
GAO‘s numerous evaluations of federal oil and gas management have
identified five key areas where Interior could provide greater
oversight:
* Interior‘s policies for leasing offshore and onshore oil and gas
differed in key ways. Specifically, MMS sets out a 5-year strategic
plan identifying both a leasing schedule and the areas it would lease.
In contrast, BLM relies on industry and others to nominate areas for
leasing, then selected lands to lease from these nominations, as well
as areas it had identified. Additionally, MMS independently assessed
the value of the lease and reserves the right to reject low bids,
whereas BLM relied exclusively on the results of its bid auctions to
determine the lease‘s market value.
* Oil and gas activity has generally increased in recent years, and
Interior has, at times, been unable to meet its legal and agency
mandated oversight obligations for (1) completing required
environmental inspections, (2) verifying oil and gas production, (3)
using categorical exclusions to streamline environmental analyses
required for certain oil and gas activities, and (4) performing
environmental monitoring in accordance with land use plans.
* Interior may be missing opportunities to fundamentally shift the
terms of federal oil and gas leases and increase revenues. Compared to
other countries, the United States receives one of the lowest shares of
revenue for oil and gas. In addition, Interior‘s royalty rate, which
does not change to reflect changing prices and market conditions, has
at times, led to pressure on Interior and Congress to periodically
change royalty rates in response to market conditions. Interior also
has done less than some states and private landowners to encourage
lease development and may be missing opportunities to increase
production and, subsequently, revenues.
* Interior‘s oil and gas IT systems lack key functionalities. GAO‘s
past work found that MMS‘s ability to maintain the accuracy of oil and
gas production and royalty data was hampered by two key limitations in
its IT system (1) it did not limit companies‘ ability to adjust self-
reported data after MMS had audited them, and (2) it did not identify
missing royalty reports. Preliminary GAO findings have also identified
technical problems within BLM‘s IT systems and their compatibility with
MMS‘s IT systems.
* Interior‘s royalty-in-kind program, in which oil and gas producers
submit royalties in oil and gas rather than cash, continues to face
challenges. GAO found problems with MMS‘s analysis of program benefits
that were reported to Congress, and that MMS failed to use third party
data to verify companies‘ self-reported data. Meanwhile, Interior‘s
Inspector General identified major ethical lapses, including
inappropriate relationships between MMS royalty-in-kind program
officials and industry representatives.
View GAO-09-1014T 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 Committee:
We appreciate the opportunity to participate in this hearing to discuss
the Department of the Interior's management of federal oil and gas
leases and the proposed Consolidated Land, Energy, and Aquatic
Resources Act of 2009. Effective management and oversight of our
nation's oil and gas resources, and the royalties paid on their
production, is increasingly critical as our country faces both serious
fiscal challenges and long-term projected growth in energy demand.
Interior plays an important role in managing federal oil and gas
resources. In fiscal year 2008, Interior reported that private
companies extracted approximately 467 million barrels of oil and 4.7
trillion cubic feet of natural gas from federal lands and waters. This
production provided significant revenue to the federal government.
Specifically, Interior collected more than $22 billion in royalties for
oil and gas produced from federal lands and waters, purchase bids for
new oil and gas leases, and 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's (MMS) Offshore Energy and Minerals
Management (OEMM) manages offshore leases. MMS is responsible for
collecting royalties for both onshore and offshore 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 in this management. 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 from federal
lands and waters.
In this context, my testimony today addresses (1) Interior's policies
and practices for oil and gas leasing, (2) Interior's oversight of oil
and gas production, (3) the existing royalty fiscal regime and
Interior's policies to encourage oil and gas development, (4)
inefficiencies within Interior's oil and gas information technology
(IT) systems, and (5) the ongoing challenges with Interior's Royalty-
in-Kind (RIK) program. Across several of these areas, our past work has
led us to make a number of recommendations to the Secretary of the
Interior. Officials at Interior have reported that they are working to
implement many of these recommendations. This statement is primarily
based on our extensive body of work on Interior's oil and gas leasing
and royalty collection programs, including one report being issued
today,[Footnote 1] as well as some preliminary ongoing work on
Interior's procedures for ensuring oil and gas produced from federal
leases is properly accounted for. This body of work was conducted in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained during these reviews provides a reasonable basis
for our findings and conclusions based on our audit objectives.
Interior's Policies for Offshore and Onshore Oil and Gas Leases Differ
in Key Ways:
In October 2008, we reported that Interior's policies for identifying
and evaluating lease parcels and bids differ in key ways depending on
whether the lease is located offshore--and therefore overseen by OEMM-
-or onshore--and therefore overseen by BLM.[Footnote 2] These
differences follow.
Identifying lease parcels. OEMM's and BLM's methods for identifying
areas to lease vary significantly. Specifically:
* For offshore leases, OEMM--as prescribed by the Outer Continental
Lands Act--lays out 5-year strategic plans for the areas it plans to
lease and establishes a schedule for offering leases. OEMM offers
leases for competitive bidding, and all eligible companies may submit
written sealed bids, referred to as bonus bids, for the rights to
explore, develop, and produce oil and gas resources on these leases,
including drilling test wells.
* For onshore leases, BLM--which must follow the Federal Onshore Oil
and Gas Leasing Reform Act of 1987--is not required to develop a long-
term leasing plan and instead relies on the industry and the public to
nominate areas for leasing. BLM selects lands to lease from these
nominations, as well as some parcels it has identified on its own. In
some cases, BLM, like MMS, offers leases through a competitive bidding
process, but with bonus bids received in an oral auction rather than in
a sealed written form.
Evaluating bids. OEMM and BLM differ in their regulations and policies
for evaluating whether the bids received for areas offered for lease
are sufficient. Specifically:
* For offshore leases, OEMM compares sealed bids with its own
independent assessment of the value of the potential oil and gas in
each lease. After the bids are received, OEMM--using a team of
geologists, geophysicists, and petroleum engineers assisted by a
software program--conducts a technical assessment of the potential oil
and gas resources associated with the lease and other factors to
develop an estimate of their fair market value. This estimate becomes
the minimally acceptable bid and is used to evaluate the bids received.
The bidder that submits the highest bonus bid that meets or exceeds
MMS's estimate of the fair market value of a lease is awarded the
lease. These rights last for a set period of time, referred to as the
primary term of the lease, which may be 5, 8, or 10 years, depending on
the water depth. If no bids equal or exceed the minimally acceptable
bid, the lease is not awarded but is offered at a subsequent sale.
According to OEMM, since 1995, the practice of rejecting bids that fall
below the minimally acceptable bid and re-offering these leases at a
later sale has resulted in an overall increase in bonus receipts of
$373 million between 1997 and 2006.
* For onshore leases, BLM relies exclusively on competitors,
participating in an oral auction, to determine the lease's market
value. Furthermore, BLM, unlike OEMM, does not currently employ a
multidisciplinary team with the appropriate range of skills or
appropriate software to develop estimates of the oil and gas reserves
for each lease parcel, and thus, establish a market and resource-based
minimum acceptable bid. Instead, BLM has established a uniform national
minimum acceptable bid of at least $2 per acre and has taken the
position that as long as at least one bid meets this $2 per acre
threshold, the lease will be awarded to the highest bidder.
Importantly, onshore leases that do not receive any bids in the initial
offer are available noncompetitively the day after the lease sale and
remain available for leasing for a period of 2 years after the
competitive lease sale. Any of these available leases may be acquired
on a first-come, first-served basis subject to payment of an
administrative fee. Prior to 1992, BLM offered primary terms of 5 years
for competitively sold leases and 10 years for leases issued
noncompetitively. Since 1992, BLM has been required by law to only
offer leases with 10-year primary terms whether leases are sold
competitively or issued noncompetitively.
Interior's Oversight of Federal Oil and Gas Production Has Not Kept
Pace with Increased Activity:
Oil and gas activity has generally increased over the past 20 years,
and our reviews have found that Interior has--at times--been unable to
meet its oversight obligations for (1) completing environmental
inspections, (2) verifying oil and gas production, (3) performing
environmental monitoring in accordance with land use plans, and (4)
using categorical exclusions to streamline environmental analyses
required for certain oil and gas activities. Specifically:
* Completing environmental inspections. In June 2005, we reported that,
with the increase in oil and gas activity, BLM had not consistently
been able to complete its required environmental inspections--the
primary mechanism to ensure that companies are complying with various
environmental laws and lease stipulations. At the time of our review,
BLM officials explained that because staff were spending increasing
amounts of time processing drilling permits, they had less time to
conduct environmental inspections.[Footnote 3]
* Verifying oil and gas production. In September 2008, we reported that
neither BLM nor OEMM was meeting its statutory obligations or agency
targets for inspecting certain leases and metering equipment used to
measure oil and gas production, raising uncertainty about the accuracy
of oil and gas measurement. For onshore leases, BLM had completed only
a portion of its production verification inspections--with some BLM
offices completing all of their required inspections and others
completing portions as small as one quarter of their required
inspections--because its workload has substantially grown in response
to increases in onshore drilling. For offshore leases, OEMM had
completed about half of its required production inspections in 2007
because of ongoing cleanup work related to Hurricanes Katrina and Rita.
[Footnote 4] Additionally, in our ongoing work, we have found that
Interior has not consistently updated its oil and gas measurement
regulations. Specifically, OEMM has routinely reviewed and updated its
measurement regulations, whereas BLM has not. Accordingly, OEMM has
updated its measurement regulations six times since 1998, whereas BLM
has not updated its measurement regulations since 1989.
* Performing environmental monitoring. In June 2005, we reported that
four of the eight BLM field offices we visited had not developed any
resource monitoring plans to help track management decisions and
determine if desired outcomes had been achieved, including those
related to mitigating the environmental impacts of oil and gas
development. We concluded that without these plans, land managers may
be unable to determine the effectiveness of various mitigation measures
attached to drilling permits and decide whether these measures need to
be modified, strengthened, or eliminated. Officials offered several
reasons for not having these plans, including that staff that could
have been used to develop such plans had been busy with processing an
increased number of drilling permits, as well as budget constraints.
[Footnote 5]
* Using categorical exclusions. Our report issued today on BLM's use of
categorical exclusions[Footnote 6]--authorized under section 390 of the
Energy Policy Act of 2005 to streamline the environmental analysis
required under the National Environmental Policy Act (NEPA) when
approving certain oil and gas activities--identifies some benefits but
raises numerous questions about how and when BLM should use these
categorical exclusions. First, our analysis found that BLM used section
390 categorical exclusions to approve over one-quarter of its
applications for drilling permits from fiscal years 2006 to 2008. While
these categorical exclusions generally increased the efficiency of
operations, some BLM field offices, such as those with recent
environmental analyses already completed, were able to benefit more
than others. Second, we found that BLM's use of section 390 categorical
exclusions was frequently out of compliance with both the law and
agency guidance and that a lack of clear guidance and oversight by BLM
were contributing factors. We found several types of violations of the
law, such as BLM offices approving more than one oil or gas well under
a single decision document and drilling a new well after statutory time
frames had lapsed. We also found examples, in 85 percent of field
offices reviewed, where officials did not comply with agency guidance,
most often by failing to adequately justify the use of a categorical
exclusion. While many of these violations and noncompliance were
technical in nature, others were more significant and may have thwarted
NEPA's twin aims of ensuring that BLM and the public are fully informed
of environmental consequences of BLM's actions. Third, we found that a
lack of clarity in both section 390 of the act and BLM's guidance has
raised serious concerns. Specifically:
(1) Fundamental questions about what section 390 categorical exclusions
are and how they should be used have led to concerns that BLM may be
using these categorical exclusions in too many--or too few--instances;
for example, there is disagreement as to whether BLM must screen
section 390 categorical exclusions for circumstances that would
preclude their use or whether their use is mandatory;
(2) Concerns about key concepts underlying the law's description of
these categorical exclusions have arisen--specifically, whether section
390 categorical exclusions allow BLM to exceed development levels, such
as number of wells to be drilled, analyzed in supporting NEPA documents
without conducting further analysis; and;
(3) Vague or nonexistent definitions of key criteria in the law and BLM
guidance have led to varied interpretations among field offices and
concerns about misuse and a lack of transparency. In light of our
findings from this report, we recommended that BLM take steps to
improve the implementation of section 390 of the act by clarifying
agency guidance, standardizing decision documentation, and ensuring
compliance through more oversight.[Footnote 7] We also suggested that
Congress may wish to consider amending the Energy Policy Act of 2005 to
clarify and resolve some of the key issues identified in our report.
Interior May be Missing Opportunities to Fundamentally Shift the Terms
of Federal Oil and Gas Leases to Increase Revenues:
In our past work, we have identified several areas where Interior may
be missing opportunities to increase revenue by fundamentally shifting
the terms of federal oil and gas leases. As we reported in September
2008, (1) federal oil and gas leasing terms result in the U.S.
government receiving one of the smallest shares of oil and gas revenue
when compared to other countries and (2) Interior's royalty rate, which
does not change to reflect changing prices and market conditions, led
to pressure on Interior and Congress to periodically change royalty
rates.[Footnote 8] We also reported that Interior was doing far less
than some states to encourage development of leases.[Footnote 9]
Specifically:
* The U.S. government receives one of the lowest shares of revenue for
oil and gas resources compared with other countries and resource
owners. For example, we reported the results of a private study in 2007
showing that the revenue share the U.S. government collects on oil and
gas produced in the Gulf of Mexico ranked 93rd lowest of the 104
revenue collection regimes around the world covered by the study.
Further, the study showed that some countries had increased their
shares of revenues as oil and gas prices rose and, as a result, could
collect between an estimated $118 billion and $400 billion, depending
on future oil and gas prices. However, despite significant changes in
the oil and gas industry over the past several decades, we found that
Interior had not systematically re-examined how the U.S. government is
compensated for extraction of oil and gas for over 25 years.
* Since 1980, in part due to Interior's inflexible royalty rate
structure, Congress and Interior have been pressured--with varying
success--to periodically adjust royalty rates to respond to current
market conditions. For example, in 1980, a time when oil prices were
high compared to today's prices, in inflation-adjusted terms, Congress
passed a windfall profit tax, which it later repealed in 1988 after oil
prices had fallen significantly from their 1980 level. Later, in
November 1995--during a period with relatively low oil and gas prices-
-the federal government enacted the Outer Continental Shelf Deep Water
Royalty Relief Act (DWRRA) which provided for "royalty relief," the
suspension of royalties on certain volumes of initial production, for
certain leases in the Gulf of Mexico in depths greater than 200 meters
during the 5 years after passage of the act--1996 through 2000. For
leases issued during these 5 years, litigation established that MMS
lacked the authority under the act to impose thresholds.[Footnote 10]
As a result, companies are now receiving royalty relief even though
prices are much higher than at the time the DWRRA was enacted. In June
2008, we estimated that future foregone royalties from all the DWRRA
leases issued from 1996 through 2000 could range widely--from a low of
about $21 billion to a high of $53 billion. Finally, in 2007, the
Secretary of the Interior twice increased the royalty rate for future
Gulf of Mexico leases. In January, the rate for deep water leases was
raised to 16.66 percent. Later, in October, the rate for all future
leases in the Gulf, including those issued in 2008, was raised to 18.75
percent. Interior estimated these actions would increase federal oil
and gas revenues by $8.8 billion over the next 30 years. The January
2007 increase applied only to deep water Gulf of Mexico leases; the
October 2007 increase applied to all water depths in the Gulf of
Mexico.
We concluded that these royalty rate increases appeared to be a
response by Interior to the high prices of oil and gas that have led to
record industry profits and raised questions about whether the existing
federal oil and gas fiscal system gives the public an appropriate share
of revenues from oil and gas produced on federal lands and waters.
Further, the royalty rate increases did not address industry profits
from existing leases. Existing leases, with lower royalty rates, would
likely remain highly profitable as long as they produced oil and gas or
until oil and gas prices fell significantly. In addition, in choosing
to increase royalty rates, Interior did not evaluate the entire oil and
gas fiscal system to determine whether or not these increases were
sufficient to balance investment attractiveness and appropriate returns
to the federal government for oil and gas resources. On the other hand,
according to Interior, it did consider factors such as industry costs
for outer continental shelf exploration and development, tax rates,
rental rates, and expected bonus bids. Further, because the increased
royalty rates are not flexible with respect to oil and gas prices,
Interior and Congress could again be under pressure from industry or
the public to further change the royalty rates if and when oil and gas
prices either fall or rise. Finally, these past royalty changes only
affected Gulf of Mexico leases and did not address onshore leases.
* Interior's OEMM and BLM varied in the extent to which they encouraged
development of federal leases, and both agencies did less than some
states and private landowners to encourage lease development. As a
result, we concluded that Interior may be missing opportunities to
increase domestic oil and gas production and revenues. Specifically, in
the Gulf of Mexico, OEMM varied the lease length in accordance with the
depth of water over which the lease is situated. For example, leases
issued in shallow water depths typically have lease terms of 5 years,
whereas leases in the deepest areas of the Gulf of Mexico have 10 year
primary terms; shallower water tends to be nearer to shore and to be
adjacent to already developed areas with pipeline infrastructure in
place, while deeper water tends to be further out, have less available
infrastructure to link up with, and generally present greater
challenges associated with the depth of the wells themselves. In
contrast, BLM issues leases with 10 year primary terms, regardless of
whether the lease happens to lie adjacent to a fully developed field
with the necessary pipeline infrastructure to carry the product to
market, or whether it is in a remote location with no surrounding
infrastructure. Furthermore, BLM also uses 10 year primary terms in the
National Petroleum Reserve-Alaska, where it is significantly more
difficult to develop oil fields because of factors including the harsh
environment. We also examined selected states and private landowners
that lease land for oil and gas development and found that some did
more than Interior to encourage lease development. For example, to
provide a greater financial incentive to develop leased land, the state
of Texas allowed lessees to pay a 20 percent royalty rate for the life
of the lease if production occurred in the first 2 years of the lease,
as compared to 25 percent if production occurred after the fourth year.
In addition, we found that some states and private landowners also did
more to structure leases to reflect the likelihood of finding oil and
gas. For example, New Mexico issued shorter leases and could require
lessees to pay higher royalties for properties in or near known
producing areas and allowed longer leases and lower royalty rates in
areas believed to be more speculative. Officials from one private
landowners' association told us that they too were using shorter lease
terms, ranging from as little as 6 months to 3 years, to ensure that
lessees were diligent in developing any potential oil and gas resources
on their land. Louisiana and Texas also issued 3-year onshore leases.
While the existence of lease terms that appear to encourage faster
development of some oil and gas leases suggest a potential for the
federal government to also do more in this regard, it is important to
note that it can take several years to complete the required
environmental analyses needed for lessees to receive approval to begin
drilling on federal lands.
To address what we believed were key weaknesses in this program, while
acknowledging potential differences between federal, state, and private
leases, we recommended that the Secretary of the Interior develop a
strategy to evaluate options to encourage faster development of oil and
gas leases on federal lands, including determining whether methods to
differentiate between leases according to the likelihood of finding
economic quantities of oil or gas and whether some of the other methods
states use could effectively be employed, either across all federal
leases or in a targeted fashion. In so doing, we recommended that
Interior identify any statutory or other obstacles to using such
methods and report the findings to Congress.[Footnote 11]
We also noted that Congress may wish to consider directing the
Secretary of the Interior to:
* convene an independent panel to perform a comprehensive review of the
federal oil and gas fiscal system,[Footnote 12] and:
* direct MMS and other relevant agencies within Interior to establish
procedures for periodically collecting data and information and
conducting analyses to determine how the federal government take and
the attractiveness for oil and gas investors in each federal oil and
gas region compare to those of other resource owners and report this
information to Congress.[Footnote 13]
Interior's Oil and Gas IT Systems Lack Key Functionalities:
Our past work and preliminary findings have identified shortcomings in
Interior's IT systems for managing oil and gas royalty and production
information. In September 2008, we reported that Interior's oil and gas
IT systems did not include several key functionalities, including (1)
limiting a company's ability to make adjustments to self-reported data
after an audit had occurred and (2) identifying missing royalty
reports.[Footnote 14] Since September 2008, MMS has made improvements
in identifying missing royalty reports, but it is too early to assess
their effectiveness, and we remain concerned with the following issues:
* MMS's ability to maintain the accuracy of production and royalty data
has been hampered because companies can make adjustments to their
previously entered data without prior MMS approval. Companies may
legally make changes to both royalty and production data in MMS's
royalty IT system for up to 6 years after the initial reporting month,
and these changes may necessitate changes in the royalty payment.
However, MMS's royalty IT system currently allows companies to make
adjustments to their data beyond the allowed 6-year time frame. As a
result of the companies' ability to make these retroactive changes,
within or outside of the 6-year time frame, the production data and
required royalty payments can change over time--even after MMS
completes an audit--complicating efforts by agency officials to
reconcile production data and ensure that the proper royalties were
paid.
* MMS's royalty IT system is also unable to automatically detect
instances when a royalty payor fails to submit the required royalty
report in a timely manner. As a result, cases in which a company stops
filing royalty reports and stops paying royalties may not be detected
until more than 2 years after the initial reporting date, when MMS's
royalty IT system completes a reconciliation of volumes reported on the
production reports with the volumes on their associated royalty
reports. Therefore, it remains possible under MMS's current strategy
that the royalty IT system may not identify instances in which a payor
stops reporting until several years after the report is due. This
creates an unnecessary risk that MMS may not be collecting accurate
royalties in a timely manner.
Additionally, in July 2009, we reported that MMS's IT system lacked
sufficient controls to ensure that royalty payment data were accurate.
[Footnote 15] While many of the royalty data we examined from fiscal
years 2006 and 2007 were reasonable, we found significant instances
where data were missing or appeared erroneous. For example, we examined
gas leases in the Gulf of Mexico and found that, about 5.5 percent of
the time, lease operators reported production, but royalty payors did
not submit the corresponding royalty reports, potentially resulting in
$117 million in uncollected royalties. We also found that a small
percentage of royalty payors reported negative royalty values, which
cannot happen, potentially costing $41 million in uncollected
royalties. In addition, royalty payors claimed gas processing
allowances 2.3 percent of the time for unprocessed gas, potentially
resulting in $2 million in uncollected royalties. Furthermore, we found
significant instances where royalty payor-provided data on royalties
paid and the volume and or the value of the oil and gas produced
appeared erroneous because they were outside the expected ranges.
Moreover, in preliminary findings on Interior's procedures for ensuring
oil and gas produced from federal leases is properly accounted, we
found that:
* The IT systems employed by both BLM and MMS fail to communicate
effectively with one another resulting in cumbersome data transfers and
data errors. For example, in order to complete the weekly transfer of
oil and gas production data between MMS and BLM, MMS staff must copy
all production data onto a disk, which then must be sent to BLM's
building where it is subsequently uploaded into BLM's IT system.
Furthermore, according to BLM staff, the production uploads are
currently not working as intended. Frequently, an operator may make
adjustments to production records, which results in the creation of a
new record. When these new records are uploaded into BLM's IT system,
they should replace--or overlay--the prior record. However, due to
technical problems, new reports are not correctly overlaying the
previously uploaded production reports; instead they are creating
duplicate or triplicate production reports for the same operator and
month. According to BLM's IT system coordinator, this will likely
complicate BLM's production accountability work.
* BLM's efforts to use gas production data acquired remotely from gas
wells through its Remote Data Acquisition for Well Production program
to facilitate production inspections have shown few results after 5
years of funding and at least $1.5 million spent. Currently, BLM is
only receiving production data from approximately 50 wells via this
program, and it has yet to use the data to complete a production
inspection, making it difficult to assess its utility.
To address weaknesses we identified in our September 2008 report,
[Footnote 16] we recommended that the Secretary of the Interior, among
other things:
* finalize the adjustment line monitoring specifications for modifying
its royalty IT system and fully implement the IT system so that MMS can
monitor adjustments made outside the 6-year time frame, and ensure that
any adjustments made to production and royalty data after compliance
work has been completed are reviewed by appropriate staff, and:
* develop processes and procedures by which MMS can automatically
identify when an expected royalty report has not been filed in a timely
manner and contact the company to ensure it is complying with both
applicable laws and agency policies.
In addition, to address weaknesses identified in our July 2009 report,
[Footnote 17] we made a number of recommendations to MMS intended to
improve the quality of royalty data by improving its IT systems' edit
checks, among other things.
Interior's RIK Program Continues to Face Challenges:
Interior's management and oversight of its RIK program has raised
concerns as to whether Interior is receiving the correct royalty
volumes of oil and gas. Both we and Interior's Inspector General have
issued reports detailing deficiencies in both program management and
management ethics, including (1) problems with reporting the benefits
of the RIK program to Congress, (2) Interior's failure to use available
third-party data to confirm gas production volumes, (3) inappropriate
relationships between RIK staff and industry representatives, and (4)
insufficient controls for monitoring natural gas imbalances, among
others. Specifically:
* In September, 2008, we reported that MMS's annual reports to Congress
did not fully describe the performance of the RIK program and, in some
instances, may have overstated the benefits of the program. For
example, MMS's calculation that from fiscal years 2004 to 2006, MMS
sold royalty oil and gas for $74 million more than it would have
received in cash was based on assumptions, not actual sales data, about
the prices at which royalty payors would have sold their oil or gas had
they sold it on the open market. MMS did not report to Congress that
even small changes in these assumptions could result in very different
estimates. Also, MMS's calculation that the RIK program cost about $8
million less to administer than the royalty-in-value program over the
same period did not include certain costs, such as IT costs shared with
the royalty-in-value program that would likely have changed the results
of MMS's administrative cost analysis. In addition, MMS's annual
reports to Congress lacked important information on the financial
results of individual oil sales that Congress could use to more broadly
assess the performance of the RIK program.[Footnote 18]
* In 2008, we also reported that MMS's oversight of its natural gas
production volumes was less robust than its oversight of oil production
volumes. As a result, MMS did not have the same level of assurance that
it is collecting the gas royalties it is owed. For instance, for oil,
MMS compared companies' self-reported oil production data with third-
party pipeline meter data from OEMM's liquid verification system, which
records oil volumes flowing through pipeline metering points. Using
these third-party pipeline statements to verify production volumes
reported by companies would have provided a check against companies'
self-reported statement of royalty payments owed to the federal
government. While analogous data were available from OEMM's gas
verification system, MMS did not use these third-party data to verify
the company-reported production numbers.[Footnote 19] As of February
2009, MMS had begun to use the gas verification system.
* Interior's Inspector General also issued a report in September 2008
which found that the program had suffered from ethical shortcomings. In
particular, the Inspector General found that a program manager had been
paid for consulting by an oil and gas company in violation of agency
rules and that up to one-third of all RIK staff had inappropriately
socialized and received gifts from oil and gas companies.[Footnote 20]
Most recently, in August 2009, we found that MMS risks losing millions
of dollars in revenue from the RIK natural gas program due to
inadequate oversight.[Footnote 21] Specifically:
* MMS lacks the necessary information to quantify revenues resulting
from imbalances--instances when MMS receives a percentage of total
production other than its entitled royalty percentage. MMS does not
know the exact amount it is owed as a result of natural gas imbalances
because it lacks at least three types of information. First, it does
not verify all gas production data to ensure it receives its entitled
percentage of RIK gas. Second, MMS lacks information on how to price
gas imbalances and when interest will begin accruing on imbalances for
leases that have terminated from the program or those leases where
production has ceased. Finally, MMS could be forgoing revenue because
it lacks information on daily gas imbalances.
* MMS also may be forgoing revenue because it does not audit operator
data to ensure it has received its entitled royalty percentage.
Although MMS has procedures for reconciling imbalances and uses OEMM's
gas verification system data where available, we found that it has not
assessed the risk of forgoing audits at those measurement points where
it does not have complete data with which to verify that it has been
allocated its entitled percentage of gas. Although the RIK guidance
letter to operators states MMS's right to audit operator information
related to RIK gas produced and delivered, MMS has not done so because
it has considered its verification of operator-generated data to be
sufficient. MMS has also claimed that it has saved money as a result of
not auditing and that this is a benefit of the RIK program. However,
other royalty owners and members of the oil and gas industry regularly
audit operator-reported data to ensure that they have received the gas
they are entitled to.
To address weaknesses we identified in our September 2008 and August
2009 reports,[Footnote 22] we recommended that the Director of MMS,
among other things:
* improve calculations of the benefits and costs of the RIK program and
the information presented to Congress by (1) calculating and presenting
a range of the possible performances of the RIK sales in accordance
with Office of Management and Budget guidelines; (2) reevaluating the
process by which it calculates the early payment savings; (3)
disclosing the costs to acquire, develop, operate, and maintain RIK-
specific IT systems; and (4) disaggregating the oil sales data to show
the variation in the performances of individual sales.
* improve MMS's oversight of the RIK gas program and help ensure that
the nation receives its fair share of RIK gas by (1) establishing
policies and procedures to ensure outstanding imbalances are valued
appropriately and that the correct amount of interest is charged; (2)
monitoring daily gas imbalances and determining whether legislative
changes are needed to require operators to deliver the royalty
percentage on a daily basis; (3) auditing the operators and imbalance
data; (4) promulgating RIK program regulations; and (5) establishing
procedures, with reasonable deadlines, for resolving and collecting all
RIK gas imbalances in a timely manner.
In conclusion, over the past several years, we and others have examined
oil and gas leasing at the Department of the Interior many times and
determined such leasing to be in need of fundamental reform across a
wide range of Interior's functions. As Congress considers what
fundamental changes are needed in how Interior structures its oversight
of oil and gas leasing, we believe that our and others' past work
provides a road map for successful reform of the agency's oversight
functions. If steps are not taken to effectively manage these
challenges, we remain concerned about the agency's ability to manage
the nation's oil and gas and provide reasonable assurance that the U.S.
government is collecting an appropriate amount of revenue for the
extraction and use of these scarce resources.
Mr. Chairman, this completes my prepared statement. I would be happy to
respond to any questions that you or other Members of the Committee may
have at this time.
GAO Contact and Staff Acknowledgments:
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 Ron Belak, Ben Bolitzer, Melinda Cordero, Nancy
Crothers, Heather Dowey, Glenn C. Fischer, Cindy Gilbert, Richard
Johnson, Mike Krafve, Jon Ludwigson, Jeff Malcolm, Alison O'Neill,
Justin Reed, Holly Sasso, Dawn Shorey, Karla Springer, Barbara
Timmerman, Maria Vargas, Tama Weinberg, and Mary Welch.
[End of section]
Footnotes:
[1] GAO, Energy Policy Act of 2005: Greater Clarity Needed to Address
Concerns with Categorical Exclusions for Oil and Gas Development under
Section 390 of the Act, [hyperlink, [hyperlink,
http://www.gao.gov/products/GAO-09-872] (Washington, D.C.: Sept. 16,
2009).
[2] 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).
[3] 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).
[4] 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).
[5] [hyperlink, http://www.gao.gov/vGAO-05-418].
[6] [hyperlink, http://www.gao.gov/products/GAO-09-872].
[7] [hyperlink, http://www.gao.gov/products/GAO-09-872].
[8] 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).
[9] [hyperlink, http://www.gao.gov/products/GAO-09-74.
[10] The Department of Justice filed a Petition for Writ of Certiorari
with the Supreme Court on July 13, 2009 challenging the Fifth Circuit
ruling in Kerr-McGee Oil & Gas Corp. v. U.S. Department of the
Interior, 554 F.3d 1082 (5th Cir. 2009).
[11] [hyperlink, http://www.gao.gov/products/GAO-08-691].
[12] [hyperlink, http://www.gao.gov/products/GAO-08-691].
[13] [hyperlink, http://www.gao.gov/products/GAO-09-74].
[14] [hyperlink, http://www.gao.gov/products/GAO-08-893R].
[15] GAO, Mineral Revenues: MMS Could Do More to Improve the Accuracy
of Key Data Used to Collect and Verify Oil and Gas Royalties,
[hyperlink, http://www.gao.gov/products/GAO-09-549] (Washington, D.C.:
July 15, 2009).
[16] [hyperlink, http://www.gao.gov/products/GAO-08-893R].
[17] [hyperlink, http://www.gao.gov/products/GAO-09-549].
[18] 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).
[19] [hyperlink, http://www.gao.gov/products/GAO-08-942R].
[20] Department of the Interior, Inspector General Investigative
Report, August 7, 2008.
[21] Royalty-in-Kind Program: MMS Does Not Provide Reasonable Assurance
It Receives Its Share of Gas, Resulting in Millions in Forgone Revenue,
[hyperlink, http://www.gao.gov/products/GAO-09-744] (Washington, D.C.:
Aug. 14, 2009).
[23] [hyperlink, http://www.gao.gov/products/GAO-08-942R] and
[hyperlink, http://www.gao.gov/products/GAO-09-744].
[End of section]
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