	Interior’s Policies for Offshore and Onshore Oil and Gas Leases Differ in Key Ways

In October 2008, we reported that Interior’s policies for identifying and  evaluating lease parcels and bids differ in key ways depending on whether  the lease is located offshore—and therefore overseen by OEMM—or  onshore—and therefore overseen by BLM. For onshore leases, BLM—which must follow the Federal Onshore Oil and  Gas Leasing Reform Act of 1987—is not required to develop a long-term  leasing plan and instead relies on the industry and the public to nominate  areas for leasing. BLM selects lands to lease from these nominations, as  well as some parcels it has identified on its own. Specifically:    For offshore leases, OEMM compares sealed bids with its own  independent assessment of the value of the potential oil and gas in each  lease. For onshore leases, BLM relies exclusively on competitors, participating in  an oral auction, to determine the lease’s market value. Interior’s Oversight of Federal Oil and Gas Production Has Not Kept Pace with Increased Activity

Oil and gas activity has generally increased over the past 20 years, and our  reviews have found that Interior has—at times—been unable to meet its  oversight obligations for (1) completing environmental inspections,  (2) verifying oil and gas production, (3) performing environmental  monitoring in accordance with land use plans, and (4) using categorical  exclusions to streamline environmental analyses required for certain oil  and gas activities. Verifying oil and gas production. Interior May be Missing Opportunities to Fundamentally Shift the Terms of Federal Oil and Gas Leases to Increase Revenues

In our past work, we have identified several areas where Interior may be  missing opportunities to increase revenue by fundamentally shifting the  terms of federal oil and gas leases. As we reported in September 2008,  (1) federal oil and gas leasing terms result in the U.S. government  receiving one of the smallest shares of oil and gas revenue when compared  to other countries and (2) Interior’s royalty rate, which does not change to  reflect changing prices and market conditions, led to pressure on Interior  and Congress to periodically change royalty rates. Specifically:    The U.S. government receives one of the lowest shares of revenue for oil  and gas resources compared with other countries and resource owners. We also examined selected states and private landowners  that lease land for oil and gas development and found that some did more  than Interior to encourage lease development. In addition, we  found that some states and private landowners also did more to structure  leases to reflect the likelihood of finding oil and gas. Interior’s Oil and Gas IT Systems Lack Key Functionalities

Our past work and preliminary findings have identified shortcomings in  Interior’s IT systems for managing oil and gas royalty and production  information. In September 2008, we reported that Interior’s oil and gas IT  systems did not include several key functionalities, including (1) limiting a  company’s ability to make adjustments to self-reported data after an audit  had occurred and (2) identifying missing royalty reports. MMS’s royalty IT system is also unable to automatically detect instances  when a royalty payor fails to submit the required royalty report in a timely  manner. Interior’s RIK Program Continues to Face Challenges

Interior’s management and oversight of its RIK program has raised  concerns as to whether Interior is receiving the correct royalty volumes of  oil and gas. Both we and Interior’s Inspector General have issued reports  detailing deficiencies in both program management and management  ethics, including (1) problems with reporting the benefits of the RIK  program to Congress, (2) Interior’s failure to use available third-party data  to confirm gas production volumes, (3) inappropriate relationships  between RIK staff and industry representatives, and (4) insufficient  controls for monitoring natural gas imbalances, among others.
Why GAO Did This Study

In fiscal year 2008, the Department of the Interior collected over $22 billion in royalties and other fees related to oil and gas. Within Interior, the Bureau of Land Management (BLM) manages onshore federal oil and gas leases, and the Minerals Management Service's (MMS) Offshore Energy and Minerals Management (OEMM) manages offshore leases. A federal lease gives the lessee rights to explore for and develop the lease's oil and gas resources. MMS is responsible for collecting royalties for oil and gas produced from both onshore and offshore leases. GAO has reviewed federal oil and gas management and revenue collection and found many material weaknesses. This testimony is based primarily on key findings from past GAO reports and some preliminary findings from ongoing work. These findings focus on Interior's: (1) policies for oil and gas leasing, (2) oversight of oil and gas production, (3) royalty regime and policies to boost oil and gas development, (4) oil and gas information technology (IT) systems, and (5) royalty-in-kind program. GAO's past reports provided recommendations that Interior officials report that they are working to implement.

What GAO Found

GAO's numerous evaluations of federal oil and gas management have identified five key areas where Interior could provide greater oversight: Interior's policies for leasing offshore and onshore oil and gas differed in key ways. Specifically, MMS sets out a 5-year strategic plan identifying both a leasing schedule and the areas it would lease. In contrast, BLM relies on industry and others to nominate areas for leasing, then selected lands to lease from these nominations, as well as areas it had identified. Additionally, MMS independently assessed the value of the lease and reserves the right to reject low bids, whereas BLM relied exclusively on the results of its bid auctions to determine the lease's market value. Oil and gas activity has generally increased in recent years, and Interior has, at times, been unable to meet its legal and agency mandated oversight obligations for (1) completing required environmental inspections, (2) verifying oil and gas production, (3) using categorical exclusions to streamline environmental analyses required for certain oil and gas activities, and (4) performing environmental monitoring in accordance with land use plans. Interior may be missing opportunities to fundamentally shift the terms of federal oil and gas leases and increase revenues. Compared to other countries, the United States receives one of the lowest shares of revenue for oil and gas. In addition, Interior's royalty rate, which does not change to reflect changing prices and market conditions, has at times, led to pressure on Interior and Congress to periodically change royalty rates in response to market conditions. Interior also has done less than some states and private landowners to encourage lease development and may be missing opportunities to increase production and, subsequently, revenues. Interior's oil and gas IT systems lack key functionalities. GAO's past work found that MMS's ability to maintain the accuracy of oil and gas production and royalty data was hampered by two key limitations in its IT system (1) it did not limit companies' ability to adjust self-reported data after MMS had audited them, and (2) it did not identify missing royalty reports. Preliminary GAO findings have also identified technical problems within BLM's IT systems and their compatibility with MMS's IT systems. Interior's royalty-in-kind program, in which oil and gas producers submit royalties in oil and gas rather than cash, continues to face challenges. GAO found problems with MMS's analysis of program benefits that were reported to Congress, and that MMS failed to use third party data to verify companies' self-reported data. Meanwhile, Interior's Inspector General identified major ethical lapses, including inappropriate relationships between MMS royalty-in-kind program officials and industry representatives.