MMS  estimated that from fiscal years 2004 through 2007, the RIK program  generated about $150 million more in net value to the government than  MMS would have collected had it received royalties in cash. MMS May Be Losing Revenue Because It Does Not Accurately and Promptly Identi and Collect on R IK Gas Imbalances

MMS risks losing millions of dollars in revenue because it does not  accurately and promptly identify and collect on RIK gas imbalances. Specifically, MMS (1) estimates it is owed a net of $21 million for gas  imbalances, but it lacks the necessary information to determine the exact  amounts; (2) does not audit RIK gas operators’ production and allocatio n  data, and thus cannot verify that it receives the correct volumes of RIK  gas; (3) lacks adequate policies and procedures to reconcile and resolv imbalances; (4) does not have an information system that can provide  accurate and timely data for reconciling and resolving imbalances; and (5)  has insuffici ent staff and training to administer the program efficiently and  effectively. However, MMS does not know the exact amount it is owed for imbalances  because it lacks at least three types of information. However, this leaves open the possibility that some companies that owe RIK gas  could provide less gas to MMS on days when gas prices are relatively high,  hat  and make up the difference by providing more gas on days when prices are relatively low. To investigate the extent to which MMS has been allocated its royalty  percentage of RIK gas on a daily basis, we analyzed daily volumes of to production and allocation to MMS at a sample of measurement points. MMS Does Not Audit Operators’ Records to Verify RIK Gas Production

MMS also may be forgoing revenue because it does not audit operator d to ensure it has received its entitled royalty percentage. Industry representatives told us that oil and gas companies  regularly audit to ensure that they have received the gas they are entitled  to. As a result, MMS analysts spend a great deal of time  repeatedly calling companies to inquire about missing imbalance  statements. In such cases, because MMS has not sent a demand letter to a   RIK  company for payment, it has not referred a company to Treasury. n System MMS’s Informatio Does Not Provide Accurate and Timely Data

MMS’s information system does not provide accurate and timely data on  RIK gas imbalances, which reduces the agency’s ability to collect on thes imbalances. As a consequence, more  than half of MMS’s gas imbalance work, according to the RIK gas  imbalance manager, is currently done manually. For example, an RIK manager told us that, although mistakes canoccur in gas imbalance calculations, MMS does not have enough staff dedicate someone to review this work. resulting in lost revenues to MMS. Establish procedures, with reasonable deadlines, for resolvin collecting all RIK gas imbalances in a timely manner. MMS stated that it will evaluate  whether it should require operators to submit imbalance statements in a  standardized format. Further, we found that industry monitors imbalances on a  daily basis to ensure they do not continue to believe that MMS should begin to monitor imbalances daily  a changes requiring operators to deliver MMS the royalty percentage on a  daily basis. To address our objective, we reviewed various reports by  the Department of the Interior (Interior) and Interior’s Minerals  Management Service (MMS) on the history and current status of  imbalances associated with the RIK gas program including: (1) a 2002  internal MMS assessment of RIK gas imbalances; (2) a 2002 report by  Interior’s Office of Inspector General, which discussed, in part, MMS’s  vulnerability to underreporting of gas receipts due to RIK gas imbalances;  (3) MMS’s monthly action plan on RIK imbalances and open receivables,  first prepared in August 2007; and (4) MMS’s periodic cumulative  imbalance, cash-out, and keepwhole summary statements. The  difference between the RIK gas owed––MMS’s entitled percentage of gas–– and the percentage of gas it actually receives is referred to as an  “imbalance.” As discussed in the body of this report, MMS attempts to  reconcile gas imbalances monthly. For cases in which the  measurement points had differing royalty percentages, it would not have  been possible to calculate whether MMS was allocated its share of gas.
Why GAO Did This Study

Companies that develop and produce oil and gas from federal lands and waters are required to report their production volumes and other data to the Department of the Interior's (Interior) Minerals Management Service (MMS) and to pay royalties either in value (cash) or in kind (oil or gas). In fiscal year 2008, MMS estimated that it had collected more than $2.4 billion in royalty-in-kind (RIK) gas. It is important that MMS ensure that it receives the RIK gas to which it is entitled. The difference between the RIK gas owed--MMS's entitled percentage of gas--and the percentage it actually receives is referred to as a "gas imbalance." GAO was asked to evaluate the extent to which MMS can provide reasonable assurance that it is accurately identifying and collecting RIK gas imbalances in a timely fashion. GAO analyzed MMS documents and data, documentation of industry standards, and interviewed MMS and industry officials.

What GAO Found

MMSisforgoing revenues for gas royalties owed to the federal government because it does not provide reasonable assurance that it accurately and promptly identifies and collects on RIK gas imbalances. GAO found that MMS is forgoing revenues for the following reasons: (1) MMS estimates that it is owed a net of $21 million for past imbalances but it lacks the information necessary to calculate the full amount of revenues due. MMS does not have sufficient data to determine whether it has received its full percentage of RIK gas. Also, MMS's estimate does not include interest on some unpaid imbalances because MMS has not determined when interest begins to accrue on imbalances, as required by law. Further, MMS monitors imbalances on a monthly, rather than daily basis, which leaves open the possibility that some companies owing RIK gas could provide less gas to MMS when gas prices are relatively high, making up the difference by providing more gas when prices are relatively low, something that could cost MMS additional revenues because it could miss the opportunity to sell gas on the days when prices are high. (2) MMS does not audit gas companies' production and allocation data, therefore it cannot verify that it is receiving its entitled percentage of gas. MMS does not audit, in part, because it believes that its verification procedures are sufficient. However, other governments and gas companies routinely audit their imbalances and uncover inaccuracies that would result in lost revenues if left unchecked. (3) MMS lacks adequate policies and procedures for accurately and promptly identifying and collecting gas imbalances. For instance, the agency does not know how companies allocate gas among all parties having a claim on a share of gas produced; this may affect whether MMS receives its percentage of gas on a daily basis. In addition, MMS does not compel companies to document production and deliveries in a consistent format and meet deadlines. As a result, MMS analysts spend time gathering and reformatting data instead of identifying and collecting on imbalances. MMS also allows companies to negotiate imbalances indefinitely. For example, MMS has been negotiating with a company for more than 2 years regarding a $900,000 imbalance. (4) MMS's information system does not provide accurate and timely data on RIK gas imbalances. For instance, MMS's information system cannot calculate cash settlements for imbalances or compare various types of data that companies submit. Consequently, MMS processes more than half of its gas imbalance data manually. (5) MMS has been operating for many years without sufficient staff to reconcile gas imbalances, and the staff it has is not sufficiently trained. For instance, according to RIK management, MMS does not have sufficient staff to dedicate someone to fully review RIK gas analysts' work on imbalances, even though mistakes in that work often occur. MMS recently hired one new gas imbalance analyst but has not formally assessed staffing needs. In addition, RIK gas imbalance staff lack, among other things, training on industry standards on gas imbalance calculations.