	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. Interior has begun implementing its restructuring effort, transferring  offshore oversight responsibilities to the newly created BOEMRE and  revenue collection to ONRR. 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. Finally, in September 2009, we reported that BLM’s use of categorical  exclusions under Section 390 of the Energy Policy Act of 2005—which  authorized BLM, for certain oil and gas activities, to approve projects  without preparing new environmental analyses that would normally be  required in accordance with the National Environmental Policy Act—was  frequently out of compliance with the law and BLM’s internal guidance. As a result, we recommended that BLM take steps to improve the  implementation of Section 390 categorical exclusions through clarification  of its guidance, standardizing decision documents, and increasing  oversight. Since 2009, BLM has taken steps to address our  recommendations, but it has not yet completed implementing all of our  recommendations. 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. GAO recommended Interior  conduct a comprehensive review of the federal oil and gas system using an  independent panel. Development of Existing Leases

In October 2008, we reported that Interior could do more do encourage the  development of existing oil and gas leases and proposed a  recommendation. 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. Recently, Interior has stated its intent to pursue legislation establishing a  per acre fee on non-producing leases to encourage development of federal  leases. Our past work has found a wide range of material weaknesses  in Interior’s oversight of federal oil and gas resources.
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. Since the April 2010 explosion on board the Deepwater Horizon, Interior has been in the midst of restructuring the bureaus that oversee oil and gas development. Specifically, Interior's Bureau of Land Management (BLM) oversees onshore federal oil and gas activities; the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE)--created in May 2010--oversees offshore oil and gas activities; and the newly established Office of Natural Resources Revenue (ONRR) is responsible for collecting royalties on oil and gas produced from both onshore and offshore federal leases. Prior to BOEMRE, the Minerals Management Service's (MMS) Offshore Energy and Minerals Management Office oversaw offshore oil and gas activities and revenue collection. 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, which Interior expects to be completed in October 2011, will require time and resources and may pose new challenges. 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. For example, in September 2009, GAO reported that BLM's use of categorical exclusions under Section 390 of the Energy Policy Act of 2005 was frequently out of compliance with the law and BLM's internal guidance. As a result, GAO recommended that BLM take steps to improve the implementation of Section 390. BLM has taken steps to address these recommendations, but it has not yet implemented all of them. 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. As GAO recommended, Interior is undertaking a comprehensive assessment of its revenue collection policies and processes--the first in over 25 years. Interior expects to complete this study later this year. 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. Recently, Interior has stated its intent to pursue legislation establishing a per acre fee on non-producing leases to encourage development of federal leases.