	Interior’s Oversight Does Not Provide Adequate Assurance That the Government Is Being Fully Compensated for Oil and Gas Production on Federal Lands and Waters

Interior lacks adequate assurance that it is receiving the full royalties it is  owed because (1) neither BLM nor OMM is fully inspecting leases and  meters as required by law and agency policies, and (2) MMS lacks  adequate management systems and sufficient internal controls for  verifying that royalty payment data are accurate and complete. However, BLM officials from all 5 field offices  told us that when they have conducted production inspections they have  identified a number of violations. For example, OMM  officials responsible for meter inspections in the Gulf of Mexico told us  that they completed about half of the required 2,700 inspections, but that  they met OMM’s goal for witnessing oil and gas meter calibrations. In addition, MMS lacks a process to routinely and systematically reconcile  all production data included by payors on their royalty reports or by  operators on their production reports with production data available from  third-party sources. Furthermore, MMS’s financial management system lacks internal controls  over the integrity and accuracy of production and royalty-in-value data  entered by companies. MMS’s Compliance Efforts Do Not Consistently Use Third-Party Data to Check Self-Reported Royalty-in-Value Payment Data

MMS’s increasing use of compliance reviews, which are more limited in  scope than audits, has led to an inconsistent use of third-party data to  verify that self-reported royalty data are correct, thereby placing accurate  royalty collections at risk. According to MMS,  compliance reviews can be conducted much more quickly and require  fewer resources than audits, largely because they represent a quicker,  more limited reasonableness check of the accuracy and completeness of a  company’s self-reported data, and do not include a systematic examination  of underlying source documentation. To help meet this goal, MMS continues to rely  heavily on compliance reviews, yet it is unable to state the extent to which  this performance goal is accomplished through audits as opposed to  compliance reviews. The MMS Royalty-in- Kind Program Is at Risk of Inaccurate Collection of Natural Gas Royalties because of Inconsistent Oversight

Because MMS’s royalty-in-kind program does not extend the same  production verification processes used by its oil program to its gas  program, it does not have adequate assurance that it is collecting the gas  royalties it is owed. The methods that MMS uses to identify these imbalances differ for oil and  gas. For oil, MMS obtains pipeline meter data from OMM’s liquid verification  system, which records oil volumes flowing through numerous metering  points in the Gulf of Mexico region. Data from the gas verification system could be useful in validating  production volumes and reducing discrepancies. Significant Questions and Uncertainties Exist Regarding the Reported Financial Benefits of the Royalty-in-Kind Program

The methods and underlying assumptions MMS uses to compare the  revenues it collects in kind with what it would have collected in cash do  not account for all costs and do not sufficiently deal with uncertainties,  raising doubts about the claimed financial benefits of the royalty-in-kind  program. Interest

Revenues from the sale of royalty-in-kind oil are due 10 days earlier than  cash payments, and revenues from the sale of in-kind gas are due 5 days  earlier. Our work on this issue is continuing  along several avenues, including comparing the royalties taken in kind  with the value of royalties taken in cash, assessing the rate of oil and gas  development on federal lands, comparing the amount of money the U.S.  government receives with what foreign countries receive for allowing  companies to develop and produce oil and gas, and examining further the  accuracy of MMS’s production and royalty data. We plan to make  recommendations to address the weaknesses we identified in our final  reports on these issues.
Why GAO Did This Study

Companies that develop and produce federal oil and gas resources do so under leases administered by the Department of the Interior (Interior). Interior's Bureau of Land Management (BLM) and Offshore Minerals Management (OMM) are responsible for overseeing oil and gas operations on federal leases. Companies are required to self- report their production volumes and other data to Interior's Minerals Management Service (MMS) and to pay royalties either "in value" (payments made in cash), or "in kind" (payments made in oil or gas). GAO's testimony will focus on whether (1) Interior has adequate assurance that it is receiving full compensation for oil and gas produced from federal lands and waters, (2) MMS's compliance efforts provide a check on industry's self-reported data, (3) MMS has reasonable assurance that it is collecting the right amounts of royalty-in-kind oil and gas, and (4) the benefits of the royalty-in-kind program that MMS has reported are reliable. This testimony is based on ongoing work. When this work is complete, we expect to make recommendations to address these and other findings. To address these issues GAO analyzed MMS data, reviewed MMS, and other agency policies and procedures, and interviewed officials at Interior. In commenting on a draft of this testimony, Interior provided GAO technical comments which were incorporated where appropriate.

What GAO Found

Interior lacks adequate assurance that it is receiving full compensation for oil and gas produced from federal lands and waters because Interior's Bureau of Land Management (BLM) and Offshore Minerals Management (OMM) are not fully conducting production inspections as required by law and agency policies and because MMS's financial management systems are inadequate and lack key internal controls. Officials at BLM told us that only 8 of the 23 field offices in five key states we sampled completed their required production inspections in fiscal year 2007. Similarly, officials at OMM told us that they completed about half of the required production inspections in calendar year 2007 in the Gulf of Mexico. In addition, MMS's financial management system lacks an automated process for routinely and systematically reconciling production data with royalty payments. MMS's compliance efforts do not consistently examine third-party source documents to verify whether self-reported industry royalty-in-value payment data are complete and accurate, putting full collection of royalties at risk. In 2001, to help meet its annual performance goals, MMS moved from conducting audits, which compare self-reported data against source documents, toward compliance reviews, which provide a more limited check of a company's self-reported data and do not include systematic comparison to source documentation. MMS could not tell us what percentage of its annual performance goal was achieved through audits as opposed to compliance reviews. Because the production verification processes MMS uses for royalty-in-kind gas are not as rigorous as those applied to royalty-in-kind oil, MMS cannot be certain it is collecting the gas royalties it is due. MMS compares companies' self-reported oil production data with pipeline meter data from OMM's oil verification system, which records oil volumes flowing through metering points. While analogous data are available from OMM's gas verification system, MMS has not chosen to use these third-party data to verify the company-reported production numbers. The financial benefits of the royalty-in-kind program are uncertain due to questions and uncertainties surrounding the underlying assumptions and methods MMS used to compare the revenues it collected in kind with what it would have collected in cash. Specifically, questions and uncertainties exist regarding MMS's methods to calculate the net revenues from in-kind oil and gas sales, interest payments, and administrative cost savings.