For oil and  gas, production royalties are paid either in value or in kind. Billions of Dollars of Royalty Revenue Will be Foregone Because of Problems Associated with Royalty Relief

As Assistant Secretary Allred of Interior recently testified before the  Congress, the absence of price thresholds in leases issued in 1998 and 1999  has already cost the government almost $1 billion and MMS has estimated  a range of potential future foregone revenue for these leases of between  $6.4 billion and $9.8 billion. However, because there is considerable uncertainty  about future oil and natural gas prices and production levels, actual  foregone royalties could end up being higher or lower than MMS’s  estimates. MMS is currently negotiating with oil and gas companies to apply price  thresholds to future production from the 1998 and 1999 leases. However, the  results of the negotiation have been mixed so far—as of late February  2007, only 6 of 45 companies have agreed to terms, and a current legal  challenge to Interior’s authority to set price thresholds on any DWRRA  leases may further deter or complicate a negotiated settlement. In addition to forgone royalty revenues from leases issued in 1998 and  1999, royalty revenues on leases issued under DWRRA in 1996, 1997, and  2000 are also threatened pending the outcome of a legal challenge  regarding price thresholds. This  information includes the administrative costs of the RIK program and the  revenue impacts of all sales. We found that MMS lacked this information  largely because it had not developed information systems to rapidly and  efficiently collect this information. Specifically, to further the  development of management controls for MMS’s RIK program, we  recommended that the Secretary of the Interior instruct the appropriate  managers within MMS to identify and acquire key information needed to  monitor and evaluate performance prior to expanding the RIK program. We acknowledge the agency’s efforts and, within the context of the  program’s scope at the time of our report, consider our recommendations  implemented by the agency. Noting this issue, we are undertaking work for the Congress. Specifically,  we have several ongoing reviews assessing, among other things, MMS’s  ability to quantify and compare administrative costs and revenues of the  RIK and royalties in value programs; the effectiveness of the systems used  to collect, account for, and disburse royalties; and the accuracy of royalty  revenue collection, including evaluating whether the value of RIK  payments equal or exceed the value of royalties that would have been  received in value for oil and gas as required by statute. MMS Does Not Collect the Data Necessary to Assess Whether Geothermal Royalties Remain Constant as Required by Law

In a 2006 report on geothermal royalties, we found that MMS had  erroneous and missing historical geothermal electricity revenue data and  did not collect sufficient data from royalty payors to accurately asses  whether MMS was collecting the amount of royalties required by statute. Specifically, about 40 percent of the royalty revenue data for royalty  payors was either missing or erroneous in the projects we reviewed. In  addition, MMS did not have sufficient historical gross revenue data for  geothermal electricity sales. MMS is charged with collecting and distributing royalties collected from  the development of geothermal resources used to generate electricity. The  Energy Policy Act of 2005 included provisions that significantly changed  how geothermal royalties are calculated but also instructed the Secretary  of the Interior to seek to maintain the same level of royalties over the next  ten years that would have been collected prior to the Act’s passage. In order to compare royalties collected under  the provisions of the Act with what would have been collected under the  old system would require historical data on gross revenues from  geothermal electricity sales as well as accurate royalty data on those sales. In our report we recommended that the Secretary of the Interior  direct MMS to correct these deficiencies and the agency agreed with our  findings and recommendations. We will continue to monitor the agency’s  efforts to address these shortcomings. Our work on this issue is continuing on multiple  levels, including comparing the value of royalties taken in kind to the value  of royalties taken as cash, reviewing the diligence of resource  development, and evaluating the accuracy of the agency’s cost, revenue,  and production data.
Why GAO Did This Study

The Department of the Interior's Minerals Management Service (MMS) is charged with collecting and administering royalties paid by companies developing fossil and renewable energy resources on federal lands and within federal waters. To promote development of oil and natural gas, fossil resources vital to meeting the nation's energy needs, the federal government at times has provided "royalty relief" waiving or reducing the royalties that companies must pay. In these cases, relief is typically applicable only if prices remain below certain threshold levels. Oil and gas royalties can be taken at MMS's discretion either "in value" as cash or "in kind" as a share of the product itself. Additionally, MMS also collects royalties on the development of geothermal energy resources--a renewable source of heat and electricity--on federal lands. This statement provides (1) an update of our work regarding the fiscal impacts of royalty relief for leases issued under the Deep Water Royalty Relief Act of 1995; (2) a description of our recent work on the administration of the royalties in kind program, as well as ongoing work on related issues; and (3) information on the challenges to collecting geothermal royalties identified in our recent work. To address these issues we relied on recent GAO reports on oil, gas, and geothermal royalty collection systems. We are also reviewing key MMS estimates and data.

What GAO Found

The absence of price thresholds in oil and gas leases issued by MMS in 1998 and 1999 has already cost the government about $1 billion and the agency has recently estimated that future foregone royalties would be $6.4 billion to $9.8 billion over the lives of the leases. Precise estimates of the actual foregone royalties, however, are not possible at this time because future projections are sensitive to price and production levels, both of which are subject to change. MMS is currently negotiating with oil and gas companies to apply price thresholds to future production from these leases, with mixed results--only 6 of the 45 companies involved have agreed to terms. Moreover, a pending legal challenge to Interior's authority to include price thresholds on any leases issued under the Deep Water Royalty Relief Act could, if successful, cost the government billions more in refunded and foregone revenue. In our most recent review of the royalty in kind (RIK) program, conducted in 2004, we found that MMS was unable to determine whether the revenues received from its sales of oil taken in kind were equivalent to receiving royalties in value, largely because it had not developed systems to rapidly and efficiently collect this information. We made recommendations that the agency has implemented that have improved the administration of the program as it existed at the time of our report. However, the continued expansion of the program raises a new question about the adequacy of the agency's overall management practices and internal controls to meet the increasing demands placed on the RIK program. Accordingly, we are undertaking follow-on reviews assessing, among other things, the agency's ability to quantify and compare administrative costs and revenues of the RIK and royalties in value programs and the extent to which the revenues collected under the RIK program are equal to or greater than what would have been received had they been taken in value. In a 2006 report on geothermal royalties, we found that missing and erroneous historical data, as well as insufficient data on electricity sales, meant that MMS is unable to accurately determine whether it was collecting royalties as directed by statute. The Energy Policy Act of 2005 included provisions that significantly changed how geothermal royalties are calculated but also directed Interior to maintain the same level of royalties over the next ten years that would have been collected prior to the Act's passage. We found that making this determination requires historical data on sales of electricity produced from geothermal resources as well as accurate royalty data. However, MMS did not have sufficient historical gross revenue data with which to establish a baseline for past royalties paid as a percentage of electricity revenues. Further, about 40 percent of MMS's royalty data was either missing or erroneous for the projects we reviewed. We recommended that MMS correct these deficiencies and the agency agreed. We are continuing to monitor the agency's efforts.