For oil in Wyoming, MMS has taken royalties in kind since October  1998. Savings in Auditing RIK Occur, but Overall Impact on Royalty Administration Costs Cannot Be Completely Quantified

While there are substantial administrative savings in auditing royalty  collections that are attributable to the RIK pilots, there are no quantified  savings in the overall administration of royalty collections. While  MMS has redirected auditing resources it saved to auditing more cash  payments, it is not yet able to determine the benefit of this increased audit  effort on overall royalty collection. Finally, when MMS does select a company  to audit, there are fewer companies to select because of the recent mergers  of the large oil and gas companies. A review of the auditing and compliance costs for oil and gas  leases in the Gulf of Mexico and Wyoming—two locations in which MMS  received both cash and in-kind royalty payments during fiscal year 2003— showed that the costs to audit cash sales per lease were substantially  higher than the costs to audit in-kind royalties in both areas. Instead MMS relies primarily upon the  Department of the Interior’s Solicitor’s Office, which does not track  specific types of litigation costs for MMS. The Revenue Impact of RIK Sales Is Mixed

Our analysis of sales in three RIK pilots indicates a mixed performance  when comparing RIK sales revenue to what might have been collected  under cash royalty payments. Specifically, (1) RIK sales in Wyoming  increased revenues by about 2.6 percent, for an estimated gain of $967,000  on sales of about $37 million; (2) a 6-month oil sale in the Gulf of Mexico  decreased revenues by 5.5 percent, for an estimated loss of $7.2 million on  sales of about $131 million; and (3) natural gas sales in the Gulf of Mexico  produced more revenues than would have been collected from cash royalty  payments—an increase of about 2 percent, for an estimated gain of $4  million on revenues of $210 million. These sales represented about 11  percent of the gas and 57 percent of the oil that MMS took in kind from  inception of the pilots through November 2003. Data Limitations Prevent a More Comprehensive Analysis of RIK Sales

In analyzing RIK sales, we identified specific limitations in MMS’s financial  data that inhibited our analysis and precluded us from conducting a  comprehensive computer-based assessment of all RIK sales. Fourth, a  lengthy management review process limits the usefulness of analyses that  are conducted. Conclusions

RIK can be an important tool for managing the collection of royalty  revenues from federal oil and gas leases. Also, completely quantifying the administrative  efficiency of these RIK sales continues to be a challenge. We interviewed MMS personnel on the costs  of appeals, and we interviewed attorneys in the Department of the  Interior’s Solicitor’s Office to obtain information on the impact of RIK sales  on litigation.
Why GAO Did This Study

In fiscal year 2003, the federal government collected $5.6 billion in royalties from oil and gas production on federal lands. Although most oil and gas companies pay royalties in cash, the Department of the Interior's Minerals Management Service (MMS) has the option to take a percentage of the oil and gas produced and sell this product-- known as "taking royalties in kind (RIK)." MMS has taken royalties in kind continuously since 1998 with the goal of achieving administrative savings while maintaining revenue. GAO attempted to (1) quantify the administrative savings that may be attributable to the RIK sales and (2) compare the sales revenues from RIK sales to what would have been collected in cash royalty payments.

What GAO Found

Although data on administrative savings are limited, there are substantial audit savings attributable to RIK sales, but there are no quantified savings in the overall administration of royalty collections. MMS has anticipated savings in auditing and litigation expenses. While MMS data showed that auditing costs for RIK sales were less than auditing costs for cash sales on a per lease basis, MMS redirected the resources it saved to auditing additional leases. At this time, MMS cannot quantify the benefit from additional auditing. The costs of litigation, which the Solicitor's Office in the Department of the Interior performs for MMS, are not tracked. However, officials with the Solicitor's Office were unable to attribute any savings in litigation to the increased use of RIK and said that future litigation costs are difficult to predict. Finally, MMS must weigh these benefits against additional costs required to conduct RIK sales. Despite limitations in MMS's analyses and revenue data that prevented a more comprehensive assessment of all RIK sales, our estimate of the revenue impacts from RIK sales in three areas indicates a mixed performance. Specifically, RIK oil sales in Wyoming increased revenues by 2.6 percent, for a gain of $967,000 on sales of $37 million. RIK oil sales in the Gulf of Mexico decreased revenues by $7.2 million, for a loss of 5.5 percent on sales of $131 million. RIK gas sales in the Gulf increased revenues by $4 million, for a gain of 2 percent on revenues of $210 million. However, these sales only represent 11 percent of the gas and 57 percent of the oil that MMS took in kind from inception of the pilots through November 2003. MMS does not analyze all sales because there is no requirement to do so, staff considers existing information on sales sufficient, few staff are assigned to analyzing sales, and MMS management has a lengthy review process for finalizing sales analyses.