These payments include royalties, rents, and  other payments—items generally specified within the lease terms. In addition to the  collection of these payments by Interior, the federal government assesses  taxes on the profits companies earn on the sale of oil and gas produced  from federal leases. In our May 2007 report, we found that, based on results of a number of  studies, the government receives one of the lowest government takes in  the world. Interior Has Taken Some Steps to Help Ensure a Fair Return but Does Not Have Procedures for Periodically Conducting Assessments of the Fiscal System

Interior has taken some steps to help ensure a fair return on federal oil  and gas resources since our 2007 report, including: (1) changing offshore  lease terms, while considering but not making changes to onshore lease  terms; (2) contracting for studies of various aspects of the fiscal system;  and (3) examining potential regulatory changes that could simplify royalty  payments and collections. In response to our 2008 findings, Interior  contracted for a study—the 2011 Comparative Assessment of the Federal  Oil and Gas Fiscal System study—that compared the federal oil and gas  fiscal systems of selected federal oil and gas regions to that of other  resource owners. According to Interior officials, the study conducted in response to our  2008 findings—the 2011 Comparative Assessment of the Federal Oil and  Gas Fiscal System—provided some useful information about the fiscal  system such as how fiscal terms in the United States compared with other  resource owners, but it has not directly led to any changes to the fiscal  system or lease terms for new federal oil and gas leases. Interior is examining potential regulatory changes that could simplify  royalty payments and collections. As we found in our past work,  complex valuation regulations can result in inaccurate royalty payments  made by industry, and this could increase ONRR’s costs to ensure  accurate royalty payments because of the need for potentially detailed  and time-consuming audits of records. Interior did not meet this time frame due to  several factors including the complexity of oil and gas valuation,  according to Interior officials. According to ONRR officials, the proposed regulations were undergoing  internal review as of September 2013 and are expected to be published in  the Federal Register in 2014. Interior Does Not Have Documented Procedures for Conducting Periodic Assessments of the Fiscal System or for Supporting Potential Changes to New Lease Terms

Interior does not have documented procedures in place for determining  (1) when to conduct periodic assessments of the overall fiscal system or  (2) whether and how to make changes to lease terms for new offshore  leases. Although Interior recently contracted for such an assessment, it  was the first in well over 25 years. Without documented procedures,  Interior cannot ensure that it will consistently conduct such assessments  in the future, and without periodically conducting such assessments,  Interior cannot know whether there is a proper balance between the  attractiveness of federal leases for investment and appropriate returns for  federal oil and gas resources, limiting Interior’s ability to ensure a fair  return on federal oil and gas resources. Without documented procedures for  determining whether and how to make changes to new offshore lease  terms, Interior is at risk of making inconsistent determinations about lease  terms. Officials told us Interior does not have documented procedures or criteria  for determining whether and how to make changes to offshore lease  terms. Conclusions

Interior has taken several steps intended to help ensure that the public  receives a fair return on oil and gas produced from federal leases. Although leasing programs for both onshore and offshore areas are  subject to many of the same market conditions, and Interior has  increased offshore royalty rates, officials overseeing onshore leasing are  currently unable to make timely adjustments to onshore royalty rates  because, in general, BLM’s regulations fix the rate at 12.5 percent,  potentially limiting Interior’s ability to ensure that the public is receiving a  fair return and potentially resulting in foregone revenue. Without such documented procedures, Interior’s rationale  is not transparent, and it is at risk of making inconsistent determinations  about lease terms. Recommendations for Executive Action

To better ensure that the government receives a fair return on its oil and  gas resources, we recommend that the Secretary of the Interior take the  following three actions:
Take steps, within existing authority, to revise BLM’s regulations to  provide for flexibility to the bureau to make changes to onshore royalty  rates, similar to that which is already available for offshore leases, to  enhance Interior’s ability to make timely adjustments to the terms for  federal onshore leases.
Why GAO Did This Study

In fiscal year 2012, companies received over $66 billion from the sale of oil and gas produced from federal lands and waters, and they paid $10 billion to the federal government for developing these resources according to the Department of the Interior. The federal government seeks a fair return on its share of revenue from leasing and production activities on federal lands and waters through the federal oil and gas fiscal system. Under the fiscal system, companies pay royalties, rents, and other payments--payments generally specified in lease terms-- and taxes on profits from the sale of oil and gas produced from federal leases. In May 2007, GAO found, based on several studies, that the government received one of the lowest percentages of value of oil and gas produced in the world. In September 2008, GAO found that Interior had not evaluated the federal oil and gas fiscal system for over 25 years and recommended that a periodic assessment was needed.
GAO was asked to review Interior's collection of oil and gas revenues. This report examines steps Interior has taken to ensure the public receives a fair return on oil and gas resources since 2007. GAO reviewed applicable law and regulations; examined prior GAO studies, Interior policies and documents; and interviewed officials.

What GAO Found

Interior has taken some steps intended to help ensure a fair return on federal oil and gas resources but does not have documented procedures for periodically conducting assessments of the fiscal system. Specifically, Interior has taken the following steps:
Changed offshore lease terms and considered but has not changed onshore lease terms . Interior changed certain offshore lease terms-- including raising royalty rates twice in response to changing market conditions. For onshore resources, which are subject to many of the same market conditions, Interior has considered but not made changes to royalty rates. Interior officials are currently unable to make timely adjustments to onshore royalty rates. Current regulations generally provide for a fixed onshore royalty rate that limits Interior's flexibility to make timely adjustments.
Contracted for studies of various aspects of the fiscal system . Interior contracted for three studies examining its fiscal system including a study done in 2011, in response to GAO's September 2008 report that compared the U.S. government's oil and gas fiscal system to other resource owners. Interior officials said the reports provided some useful information such as how fiscal terms in the United States compared to other resource owners.
Interior is examining potential regulatory changes that could simplify royalty payments . Interior is examining potential regulatory changes that could simplify royalty payments. GAO found in the past that complex valuation regulations can result in inaccurate royalty payments made by industry, and this could increase costs to ensure accurate royalty payments because of the need for potentially detailed and timeconsuming audits of records. In May 2011, Interior published the Advance Notice Of Proposed Rulemaking for a proposed rule currently undergoing internal review. According to officials, the proposed rule is expected to be published in 2014, and officials explained that it took several years due to factors including the complexity of oil and gas valuation.
Interior does not have documented procedures in place for determining when to conduct periodic assessments of the fiscal system. Although Interior recently contracted for such an assessment, it was the first in well over 25 years. Without documented procedures, Interior will not have reasonable assurance that it will consistently conduct such assessments in the future and, without periodically conducting such assessments, Interior cannot know whether there is a proper balance between the attractiveness of federal leases for investment and appropriate returns for federal oil and gas resources, limiting Interior's ability to ensure a fair return. Further, Interior does not have documented procedures for determining whether and how to make changes to new offshore lease terms. Without documented procedures for determining whether and how to make changes to new offshore lease terms, Interior's rationale is not transparent and may result in inconsistent decisions. Such inconsistencies would undermine Interior's credibility and ability to better ensure a fair return on federal oil and gas resources.

What GAO Recommends

GAO recommendations include that Interior establish documented procedures for (1) periodically assessing the fiscal system and (2) determining whether and how to change new offshore lease terms. Interior concurred with GAO's recommendations.