In addition, all the companies  that share the proceeds from the sale of oil and gas from federal lands and  waters are required each month to report to MMS on the Form MMS-2014  data about the oil and gas they sold. Also, the Royalty Policy Committee (RPC)—a group  empanelled by the Secretary of the Interior and charged with providing  advice on managing federal and Indian leases and revenues––has  identified numerous deficiencies. MMS Has Ongoing Efforts to Improve the Accuracy of Payor- Reported Royalty Data, but It Is Too Early to Assess the Effectiveness of These Efforts

MMS has three major efforts underway to improve the accuracy of payor- reported royalty data used to collect and verify royalties, but it is too early  to evaluate the effectiveness of these efforts. Second, MMS is implementing RPC recommendations  concerning edit checks, valuation regulations for natural gas, and  coordination with BLM. Third, MMS is continuing to develop processes to  increase the accuracy of royalty reporting data by improving edit checks  on oil and gas sales prices and using the CPT to identify errors in the  amount of oil and gas reportedly sold by payors. In Several Instances, Data Used to Collect and Verify Royalties Are Either Missing or Appear to Be Erroneous

While much of the royalty data we examined from fiscal years 2006 and  2007 appears reasonable, we found several instances where key data were  missing or appear to be erroneous. We also found  that from about 2 to 7.4 percent of the time, depending on the group of  leases we examined, either the amount of royalties that payors report due  (royalty value) and/or the total value of the oil and gas that payors report  (sales value) appeared erroneous. We found that about 5.5 percent of the time that operators reported  monthly gas production from leases, payors did not submit the  corresponding monthly royalty report. The missing royalty reports for this  production represent potentially about $117 million in royalties that may  not have been collected. Checks for Reasonableness of Payor- Reported Royalty Data Indicate Errors in Transportation and Processing Allowances

We evaluated all royalty data for fiscal years 2006 and 2007—excluding  royalty-in-kind leases—for obvious errors in key reported royalty  variables, including volumes of oil and gas sold, the value of this oil and  gas, and royalties paid, and found that the error rate for these variables  ranged from 0 percent to about 2.3 percent, with the highest levels of  errors being found in transportation and processing allowances. Multiple Factors Affect Oil and Gas Companies’ Abilities to Accurately Report Royalties Owed to the Federal Government

Oil and gas company representatives reported that several factors can  affect their ability to accurately report royalty data, including complex  land ownership patterns, unit agreements, ambiguity in federal  regulations, short time frames for filing royalty reports, and inaccuracies  in MMS’s internal databases. This resulted in about 1,500 producing gas leases.
Why GAO Did This Study

In fiscal year 2008, the Department of Interior's Minerals Management Service (MMS) collected over $12 billion in royalties from oil and gas production from federal lands and waters. Companies that produce this oil and gas self-report to MMS data on the amount of oil and gas they produced and sold, the value of this production, and the amount of royalties owed. Since 2004, GAO has noted systemic problems with these data and recommended improvements. GAO is providing: (1) a descriptive update on MMS's key efforts to improve the accuracy of oil and gas royalty data; (2) our assessment of the completeness and reasonableness of fiscal years 2006 and 2007 oil and gas royalty data--the latest data available; and (3) factors identified by oil and gas companies that affect their ability to accurately report royalties owed to the federal government.

What GAO Found

MMS has several key efforts underway to improve the accuracy of the payor-reported data used to collect and verify royalties, but it is too soon to evaluate their effectiveness. MMS is in the process of implementing (1) GAO's past recommendations to help identify missing royalty reports and monitor payors' changes to royalty data; (2) recommendations from the Royalty Policy Committee--a group empanelled by the Secretary of the Interior to provide advice on managing federal and Indian leases and revenues--to improve edit checks, monitor the quality of natural gas, revise gas valuation regulations, and improve coordination with BLM; and (3) other efforts on adding specific edits for sales prices and identifying discrepancies in volumes between operators and payors. While much of the royalty data we examined from fiscal years 2006 and 2007 are 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, payors claimed 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 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 of expected ranges. Oil and gas company representatives reported that several factors affect their ability to accurately report royalties, including complex land ownership, administratively combining leases into units, ambiguity in federal regulations that establish gas prices, short time frames for filing royalty reports, and inaccuracies in MMS's internal databases.