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

In October 2008, we reported that Interior’s policies and practices 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. Specifically:    For offshore leases, OEMM—pursuant to the Outer Continental Shelf  Lands Act—lays out 5-year strategic plans for the areas it plans to lease  and establishes a schedule for offering leases. 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 adequately  oversee these activities: (1) completing environmental inspections; (2)  verifying oil and gas production; (3) hiring, training, and retaining staff; (4)  using categorical exclusions to streamline environmental analyses  required for certain oil and gas activities; (5) performing environmental  monitoring in accordance with land use plans; (6) conducting  environmental analyses; and (7) responding to onshore lease protests. Verifying oil and gas production. For onshore leases, BLM only completed a  portion of its production verification inspections because its workload had  substantially grown in response to increases in onshore drilling. Additionally, in March 2010, we found that  Interior had not consistently updated its oil and gas measurement  regulations. Although Interior policy  directed its agencies to prepare handbooks providing guidance on how to  implement NEPA, we found that MMS lacked such a handbook. 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 currently 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 inflexible royalty rate structure has  put pressure on Interior and Congress to periodically change royalty  rates. For example, we reported the results of a private study in 2007 showing  that the revenue share the U.S. government collects on oil and gas  produced in the Gulf of Mexico ranked 93rd lowest of the 104 revenue  collection regimes around the world covered by the study. To address weaknesses in Interior’s  royalty program, we suggested that Congress may wish to consider  directing the Secretary of the Interior to    convene an independent panel to perform a comprehensive review of the  federal oil and gas fiscal system and    direct MMS and other relevant agencies within Interior to establish  procedures for periodically collecting data and information and  conducting analyses to determine how the federal government take and  the attractiveness for oil and gas investors in each federal oil and gas  region compare to those of other resource owners and report this  information to Congress. To address what we believe are key weaknesses  in Interior’s royalty program while acknowledging potential differences  between federal, state, and private leases, we recommended that the  Secretary of the Interior develop a strategy to evaluate options to  encourage faster development of oil and gas leases on federal lands,  including determining whether methods to differentiate between leases  according to the likelihood of finding economic quantities of oil or gas and  whether some of the other methods states use could effectively be  employed, either across all federal leases or in a targeted fashion. 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 ability to maintain the accuracy of production and royalty data  has been hampered because companies can make adjustments to their  previously entered data without prior MMS approval. This  created an unnecessary risk that MMS was not collecting accurate  royalties in a timely manner. Since September 2008, MMS has made improvements in its IT systems for  identifying missing royalty reports, but it is too early to assess their  effectiveness. Moreover, in our March 2010 report, we found that Interior’s longstanding  efforts to implement two key IT systems for facilitating verification of  produced volumes of oil and gas from federal leases were behind schedule  and years from widespread adoption.
Why GAO Did This Study

The catastrophic oil spill in the Gulf of Mexico has drawn attention to the exploration and production of oil and gas from leases on federal lands and waters. The Department of the Interior oversees oil and gas activities on federal lands and waters. Onshore, the Bureau of Land Management (BLM) has oversight responsibilities. Offshore, 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 oversaw offshore oil and gas activities, while MMS's Minerals Revenue Management collected revenues from oil and gas produced. For the purposes of our testimony today, we present our findings in accordance with Interior's organizational structure prior to establishing BOEMRE. Over the past 5 years, GAO has issued numerous recommendations to the Secretary of the Interior to improve the agency's management of oil and gas resources--most recently in two reports issued in March 2010. Overall, GAO's work in this area can be useful in evaluating potential strategies for reorganizing and improving oil and gas management at Interior. Specifically, GAO's work can assist the Secretary and Congress as they are considering restructuring Interior's oversight of oil and gas development and production, revenue collection, and information technology (IT) systems.

What GAO Found

GAO's recent evaluations of federal oil and gas management have identified key areas where Interior could provide more effective oversight. In October 2008, GAO reported that Interior policies and practices for leasing offshore and onshore oil and gas differed in key ways. Considering the ways that areas are selected for leasing, GAO found that MMS sets out a 5-year strategic plan identifying both a leasing schedule and the offshore areas it will lease. In contrast, BLM relies on industry and others to nominate onshore areas for leasing, then selects lands to lease from these nominations and from areas it has identified. 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 in key areas. For example, in a June 2005 report, GAO found that Interior was unable to complete its environmental inspections because of increased onshore drilling activity. GAO also found in a September 2008 review that Interior was not consistently completing inspections to verify oil and gas volumes produced from federal leases. GAO found in a March 2010 report that MMS faces challenges conducting required environmental reviews in Alaska. In particular, MMS has no handbook providing guidance on how to conduct these reviews, although Interior policy directs it to prepare one. Interior may be missing opportunities to fundamentally shift the terms of federal oil and gas leases and increase revenues. In a September 2008 report, GAO reported that, 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 revenues. Interior began studying ways to improve revenue collection and leasing practices earlier this year. Interior's oil and gas IT systems lack key functionalities. A September 2008 GAO review 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. More recently, a March 2010 report found that Interior's long-standing efforts to implement two key technologies for verifying oil and gas production are behind schedule and years from widespread adoption.