	Potential Challenges with Reorganization of Oil and Gas Functions

Interior’s ongoing reorganization of bureaus with oil and gas functions will  require time and resources, and undertaking such an endeavor while  continuing to meet ongoing responsibilities may pose new challenges. Historically, BLM managed onshore federal oil and gas activities, while  MMS managed offshore activities and collected royalties for all leases. In  May 2010, the Secretary of the Interior announced plans to reorganize  MMS into three separate bureaus. Interior recently began implementing this  restructuring effort, transferring offshore oversight responsibilities to the  newly created BOEMRE and revenue collection to ONRR. Interior plans to  continue restructuring BOEMRE to establish two additional separate  bureaus—the Bureau of Ocean and Energy Management, which will focus  on leasing and environmental reviews, and the Bureau of Safety and  Environmental Enforcement, which will focus on permitting and  inspection functions. While this reorganization may eventually lead to more effective operations,  we have reported that organizational transformations are not simple  endeavors and require the concentrated efforts of both leaders and  employees to realize intended synergies and accomplish new  organizational goals. Given that, as of  December 2010, Interior had not implemented many recommendations we  made to address numerous weaknesses and challenges, we are concerned  about Interior’s ability to undertake this reorganization while (1) providing  reasonable assurance that billions of dollars of revenues owed to the  public are being properly assessed and collected and (2) maintaining focus  on its oil and gas oversight responsibilities. Challenges of Balancing Oil and Gas Development with Environmental Stewardship

We have reported that Interior has experienced several challenges in  meeting its obligations to make federal oil and gas resources available for  leasing and development while simultaneously meeting its responsibilities  for managing public lands for other uses, including wildlife habitat,  recreation, and wilderness. In January 2010, we reported that while BLM  requires oil and gas operators to reclaim the land they disturb and post a  bond to help ensure they do so, not all operators perform such  reclamation. For fiscal years 1988 through 2009, BLM spent  about $3.8 million to reclaim 295 orphaned wells, and BLM has identified  another 144 wells yet to be reclaimed. Human Capital Challenges

We have reported that BLM and MMS have encountered persistent  problems in hiring, training, and retaining sufficient staff to meet Interior’s  oversight and management responsibilities for oil and gas operations on  federal lands and waters. For example, in March 2010, we reported that  BLM and MMS experienced high turnover rates in key oil and gas  inspection and engineering positions responsible for production  verification activities. As a result, Interior faces challenges meeting its  responsibilities to oversee oil and gas development on federal leases,  potentially placing both the environment and royalties at risk. Moreover, the human capital issues we identified with BLM’s management  of onshore oil and gas continue, and these issues have not yet been  addressed in Interior’s reorganization plans. Concerns over Revenue Collection

Federal oil and gas resources generate billions of dollars annually in  revenues that are shared among federal, state, and tribal governments;  however, we found Interior may not be properly assessing and collecting  these revenues. In September 2008, we reported that Interior collected  lower levels of revenues for oil and gas production in the deep water of  the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners  whose revenue collection systems were evaluated in a comprehensive  industry study—these resource owners included other countries as well as  some states. We also reported in March 2010 that Interior was not taking the steps  needed to ensure that oil and gas produced from federal lands was  accurately measured. For example, we found that neither BLM nor MMS  had consistently met their agency goals for oil and gas production  verification inspections. Development of Existing Leases

In October 2008, we reported that Interior could do more do encourage the  development of existing oil and gas leases. Federal leases contain one provision–– increasing rental rates over time for offshore 5-year leases and onshore  leases—to encourage development. In addition to using increasing rental  rates, some states undertake additional efforts to encourage lessees to  develop oil and gas leases more quickly, including shorter lease terms and  graduated royalty rates—royalty rates that rise over the life of the lease.
Why GAO Did This Study

The Department of the Interior oversees oil and gas activities on leased federal lands and waters. Revenue generated from federal oil and gas production is one of the largest nontax sources of federal government funds, accounting for about $9 billion in fiscal year 2009. For onshore leases, Interior's Bureau of Land Management (BLM) has oversight responsibilities. For offshore leases, the newly created Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE), has oversight responsibilities. Prior to BOEMRE, the Minerals Management Service's (MMS) Offshore Energy and Minerals Management Office oversaw offshore oil and gas activities, while MMS's Minerals Revenue Management Office collected revenues from all oil and gas produced on federal leases. Over the past several years, GAO has issued numerous recommendations to the Secretary of the Interior to improve the agency's management of oil and gas resources. In 2011, GAO identified Interior's management of oil and gas resources as a high risk issue. GAO's work in this area identified challenges in five areas: (1) reorganization, (2) balancing responsibilities, (3) human capital, (4) revenue collection, and (5) development of existing leases.

What GAO Found

Reorganization: Interior's reorganization of activities previously overseen by MMS will require time and resources and may pose new challenges. Interior began a reorganization in May 2010 that will divide MMS into three separate bureaus--one focusing on revenue collection, another on leasing and environmental reviews, and yet another on permitting and inspections. While this reorganization may eventually lead to more effective operations, GAO has reported that organizational transformations are not simple endeavors. GAO is concerned with Interior's ability to undertake this reorganization while meeting its revenue collection and oil and gas oversight responsibilities. Balancing Responsibilities: GAO has reported that Interior has experienced several challenges with meeting its responsibilities for providing for the development of oil and gas resources while managing public lands for other uses, including wildlife habitat. In January 2010, GAO reported that, while BLM requires oil and gas operators to reclaim the land they disturb and post a bond to help ensure they do so, not all operators perform reclamation. For fiscal years 1988 through 2009, BLM spent about $3.8 million to reclaim 295 so-called "orphaned" wells--because reclamation had not been done, and other resources, including the bond, were insufficient to pay for it. Human Capital: GAO has reported that BLM and MMS have encountered persistent problems in hiring, training, and retaining sufficient staff to meet their oversight and management responsibilities for oil and gas operations. For example, in March 2010, GAO reported that BLM and MMS experienced high turnover rates in key oil and gas inspection and engineering positions responsible for production verification activities. As a result, Interior faces challenges meeting its responsibilities to oversee oil and gas development on federal leases, potentially placing both the environment and royalties at risk. Revenue Collection: While federal oil and gas resources generate billions of dollars in annual revenues, past GAO work has found that Interior may not be properly assessing and collecting these revenues. In September 2008, GAO reported that Interior collected lower levels of revenues for oil and gas production in the deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners whose revenue collection systems were evaluated in a comprehensive industry study. Nonetheless, Interior has not completed a comprehensive assessment of its revenue collection policies and processes in over 25 years. Additionally, in March 2010, GAO reported that Interior was not consistently completing inspections to verify volumes of oil and gas produced from federal leases. Development of Existing Leases: In October 2008, GAO reported that Interior could do more to encourage the development of existing oil and gas leases. Federal leases contain one provision--increasing rental rates over time for offshore 5-year leases and onshore leases--to encourage development. In addition to escalating rental rates, states undertake additional efforts to encourage lessees to develop oil and gas leases more quickly, including shorter lease terms and graduated royalty rates.