[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
             NATURAL GAS ROYALTIES: THE FACTS, THE REMEDIES

=======================================================================

                                HEARING

                               before the

                  SUBCOMMITTEE ON ENERGY AND RESOURCES

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 1, 2006

                               __________

                           Serial No. 109-251

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of 
PATRICK T. McHENRY, North Carolina       Columbia
CHARLES W. DENT, Pennsylvania                    ------
VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont 
JEAN SCHMIDT, Ohio                       (Independent)
------ ------

                      David Marin, Staff Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

                  Subcommittee on Energy and Resources

                 DARRELL E. ISSA, California, Chairman
LYNN A. WESTMORELAND, Georgia        DIANE E. WATSON, California
ILEANA ROS-LEHTINEN, Florida         BRIAN HIGGINS, New York
JOHN M. McHUGH, New York             TOM LANTOS, California
PATRICK T. McHENRY, North Carolina   DENNIS J. KUCINICH, Ohio
KENNY MARCHANT, Texas

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                   Lawrence J. Brady, Staff Director
                 Dave Solan, Professional Staff Member
                          Lori Gavaghan, Clerk
          Richard Butcher, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 1, 2006....................................     1
Statement of:
    Cruickshank, Walter, Ph.D., Deputy Director, Minerals 
      Management Service, Department of the Interior.............    13
Letters, statements, etc., submitted for the record by:
    Cruickshank, Walter, Ph.D., Deputy Director, Minerals 
      Management Service, Department of the Interior, prepared 
      statement of...............................................    24
    Issa, Hon. Darrell E., a Representative in Congress from the 
      State of California, prepared statement of.................     3


             NATURAL GAS ROYALTIES: THE FACTS, THE REMEDIES

                              ----------                              


                        WEDNESDAY, MARCH 1, 2006

                  House of Representatives,
              Subcommittee on Energy and Resources,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:07 p.m., in 
room 2154, Rayburn House Office Building, Hon. Darrell E. Issa 
(chairman of the subcommittee) presiding.
    Present: Representatives Issa, Watson, and Higgins.
    Staff present: Larry Brady, staff director; Lori Gavaghan, 
legislative clerk; Thomas Alexander, counsel; Dave Solan, Ph.D. 
and Ray Robbins, professional staff members; Alexandra Teitz, 
minority counsel; Richard Butcher, minority professional staff 
member; and Cecelia Morton, minority office manager.
    Mr. Issa. Good afternoon. A quorum being present, I call 
this hearing to order.
    This subcommittee is conducting a fact-finding hearing to 
investigate the implementation of the Federal Natural Gas 
Royalty Payment Program.
    Recent news reports suggest that the Government may be 
unable to collect anywhere from $7 billion to $28 billion in 
natural gas royalties from leases of Federal lands and waters.
    This is particularly troublesome at a time when natural gas 
companies are continuing to post record earnings.
    There are several areas of concern, the first is whether 
some gas companies have failed to fulfill their contractual 
obligations to make royalty payments to the Department of the 
Interior.
    There is confusion surrounding figures the industry has 
supplied to the Interior Department, the accounting methods of 
the Interior Department, and the degree of oversight provided 
by Minerals Management Service [MMS].
    On this basis alone, the U.S. Government may have been 
underpaid $700 million worth of royalties in 2005.
    Second, there is concern that the United States could be 
excluded from billions of royalties resulting from the Deep 
Water Royalty Relief Act. The act was enacted to provide an 
incentive to companies to explore and extract oil and natural 
gas from the U.S. waters. This came at a time when oil and 
natural gas prices were low, and the interest in deep water 
drilling was lacking.
    The act gives the Secretary of the Interior the authority 
to enter into leases with oil and gas companies with defined 
volume suspensions and price thresholds so that companies can 
recover their capital investments before paying royalties on 
the gross revenues.
    Again, this was at a time in which prices were low.
    During 1998 and 1999, however, these critical price 
thresholds were not included as terms of the leases, thereby 
allowing companies to recoup their capital investments long 
before the expiration of volume suspensions.
    As these wells are now beginning to reap billions in gross 
revenues because of record gas prices, the effect of the price 
threshold-free language is coming to fruition.
    As a result, the United States may be unable to claim part 
of the billions in gross revenues for the years 1998 and 1999.
    The Department of Interior and the MMS have been very 
cooperative in responding to all of our requests for 
information. They assure me--and I emphasize this--they assure 
me that they can factually explain the situation and that there 
is no $700 million shortfall.
    However, the $700 million is not the only issue. The focus 
here today is also on the more critical issue: the 1998 and 
1999 leases and the billions that the U.S. Government may be 
precluded from collecting. That is why we are here today and 
have only one witness to establish the fact in this public 
forum.
    The subcommittee will be diligent in our oversight 
responsibilities, depending upon the information we find here 
today. We may followup with hearings that are focused on more 
specific issues that need further analysis. We may focus on 
legislation to correct errors that we discover here today or in 
future hearings.
    It is our responsibility to ensure that royalties are 
collected according to the law and the intent of Congress. I 
look forward to the hearing, Dr. Cruickshank's testimony today.
    I ask unanimous consent that the briefing memo prepared by 
the subcommittee staff be inserted into the record as well as 
all relevant materials.
    I would now yield to the ranking gentlewoman from 
California for her opening statement, Ms. Watson.
    [The prepared statement of Hon. Darrell E. Issa follows:]

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    Ms. Watson. Thank you so much, Mr. Chairman. And I am sorry 
I am just now arriving--conflicts. But I want to commend you 
for scheduling this hearing today on the subject matter, and in 
the 5 years since the Bush administration has taken office, 
neither the Government Reform Committee nor the Resources 
Committee has held a single oversight hearing on the management 
of the Federal Royalty Program or on the validity of the 
regulations governing collection of natural gas royalties.
    So I want to thank the Deputy Director of MMS for attending 
the first hearing of what should be several meetings to discuss 
the issue.
    Indeed with the gas and oil industry recording the largest 
revenues in history, Congress must take a hard look at the 
reasons for royalty relief. The fact of the matter is the 
policy of royalty relief that the Congress passed was an unwise 
policy. But the oil companies convinced this Congress to do so, 
and they have convinced the administration to allow it to 
continue.
    President Bush was quoted in the April 9, 2005 New York 
Times, ``I will tell you with $55 oil, we don't need incentives 
to oil and gas companies to explore. There are plenty of 
incentives.''
    The Bush administration recently acknowledged that the 
further expansion of their oil royalty relief program was not 
necessary. Unfortunately, President Bush did not go to such an 
extent that he insisted that royalty relief be taken out of the 
energy bill he just signed.
    The American taxpayer is the victim in this situation. I 
understand that there is an accounting controversy surrounding 
the math that the New York Times used to calculate a $70 
million--excuse me--$700 million, in other words, $7 billion 
pool of uncollected royalties from the oil and gas companies.
    So let us get down to transparency and utilize the proper 
numbers. Why is there an unwillingness to allow a fair and 
accurate exchange of numbers between government and private 
industry? Has the manipulation of Enron taught us anything?
    Moreover, the bottom line is those companies believed, as 
the administration has said, that at a minimum, they were not 
going to get relief from the payment of the rent to the 
taxpayers if oil was over $35 a barrel.
    As we all know, the world price of oil today is hovering 
around $60 a barrel, and recently it has been on a high and as 
high as $70. Now, how can we allow companies to exploit public 
assets and then charge us extraordinary amounts to use the 
products derived from those assets?
    The American public is having a difficult time heating 
their homes and putting gas in their cars. The country is at an 
all-time deficit. Projections from the New York Times place 
uncollected royalties at $65 billion in the next 5 years, 
utilizing the plan proposed by the Department of Labor.
    Leases without any royalty mechanism are driving the 
largest revenue losses. Americans deserve an answer to the 
currently inexplicable leases issued in 1998 and 1999 that do 
not contain price thresholds at all.
    Good public policy demands that Congress conduct real 
oversight and protect the taxpayers' interests.
    Recently, Representative Markey introduced legislation to 
prevent any future royalty holidays for the oil companies. The 
legislation is designed to seek and direct the Minerals 
Management Service to renegotiate these leases so that it does 
include the provision of a minimum of a trigger, hopefully 
promoting a better royalty policy than that.
    The bill dictates that companies who do not want to 
cooperate with renegotiation should be barred from future bids 
on the Outer Continental Shelf.
    I am interested to hear from the Department of the Interior 
if this is a step in the right direction. To their credit, some 
of the major oil companies are struggling that, in fact, they 
do owe the royalties and that there is a trigger mechanism.
    Unfortunately, Kerr-McGee and apparently some other 
companies have decided that they are going to challenge the 
whole law.
    They believe they are not obligated to pay any of these 
royalties; also that there is no trigger in this law.
    So, Mr. Chairman, I again want to commend you for your 
leadership in bringing this issue to our subcommittee.
    I look forward to the testimony today and subsequent 
hearings, and I am as dedicated as you are in providing strong 
leadership and advocacy on behalf of the American public and in 
particular our drivers in California who have an extra 
appendage and that is their automobiles.
    So, again, thank you, and I yield back.
    Mr. Issa. I thank the gentlelady. I would note for the 
record that as far as our staff can determine, the first letter 
that was received and part of the impetus for this hearing here 
today came from a letter from the minority side, and it is the 
first that we believe we received in those 5 years you spoke 
about--on January 23, 2006, calling on both Chairman Pombo and 
Chairman Davis to look into these issues. I wanted to make sure 
that credit was given where credit was due. I am delighted to 
be doing this. To be honest, I looked at those New York Times 
articles and I looked at this request from the minority in 
determining that this was an issue that should be quickly 
scheduled, and we moved what was not on the agenda ahead so 
that it could, in fact, be done right now. I hope that this 
will be the first of many.
    I would like to now yield 5 minutes to the gentleman from 
New York, who also is very engaged in this issue and even has 
his own legislation.
    Mr. Higgins. I will waive an opening statement.
    Mr. Issa. The gentleman waives an opening statement. So 
with that, we can get to the meat of this.
    Dr. Cruickshank, I am going to be brief and then give you 
all the time that you need. But I would like to mention that 
your Ph.D. couldn't be more appropriate, in that your education 
in geological sciences from Cornell and from Penn State and 
your mineral--Doctorate in Mineral Economics. Boy, we are 
talking minerals and money here today--couldn't be more on 
task. I note that you have been on the job since April 8, 2002, 
when you were designated Deputy Director of Minerals Management 
Service. I appreciate the administration providing you. I 
appreciate your being here today.
    Before I swear you in, I would ask unanimous consent that 
your entire testimony be placed in the record in addition to 
any materials that you may supply, including your PowerPoint 
presentation. Without objection, so ordered.
    It is the rule of this committee that all Members--or 
certainly all people testifying and any who may be on your 
staff that may give you advice, guidance, or may ultimately 
answer a question also be sworn in.
    So I would ask that you and anyone fitting that description 
please rise and take the oath. Note there is only one.
    [Witness sworn.]
    Mr. Issa. Let the record show an answer in the affirmative.
    Thank you very much, and, as we talked about earlier--
please have a seat. I understand that your testimony will be 
supported by PowerPoint, we will then take questions and 
answers, and without objection, take what time you need to do 
both.

   STATEMENT OF WALTER CRUICKSHANK, PH.D., DEPUTY DIRECTOR, 
    MINERALS MANAGEMENT SERVICE, DEPARTMENT OF THE INTERIOR

    Mr. Cruickshank. Thank you, Mr. Chairman, and members of 
the committee for this opportunity to appear today to discuss 
the various issues that have been raised concerning oil and gas 
royalties over the last month.
    You have noted the plan. I would like to follow. I have a 
PowerPoint presentation responding to the initial New York 
Times article of January 23rd. And after walking through that, 
I would then like to give some additional remarks on Deep Water 
Royalty Relief--the history and mechanics of that program and 
the issue of price thresholds and where we are today.
    I will start with the PowerPoint. There are 5 issues raised 
in that initial article that I would like to address. The 5 
issues include the first, which is the statement that we could 
have received $700 million more in royalties had we based 
royalties on larger market prices; the issue of different 
prices being reported to MMS and to the SEC. The third issue 
noted that natural gas prices are higher now than in 2001, but 
natural gas royalties are less. I would like to go on to the 
reasons that has occurred. And the fourth issue raised in the 
article was whether our valuation rules are aggressive enough 
in seeking to collect royalties on the right basis, and finally 
discuss the issue of our audit program.
    So I will turn to each of those in turn.
    But first, a little bit of background on royalties. Royalty 
is the public share of the value of minerals produced from 
Federal lands. For oil and gas leases, the royalty rate is 
generally 12\1/2\ percent as a minimum royalty rate in statute, 
but there are authorities to charge higher royalty rates or to 
reduce royalties below that 12\1/2\ percent on occasion.
    The value, for royalty purposes, is based on the value of 
the production at or near the lease. And that is based on 85 
years of practice, of statute, of regulations, of provisions in 
the lease terms themselves and of judicial decisions.
    The basic royalty equation is the value of the royalty 
production times the volume sold times the royalty rate. The 
value of royalty production again is based at the lease, 
though, and often then does not reflect the price at a market 
center that may be some distance from the lease.
    In those cases, where you are selling at some distance far 
from the lease, you are allowed to deduct your costs of 
transporting the production from the lease to the point of 
sale.
    So the value for royalty purposes is the market price, 
minus what you are allowed to deduct for your cost of 
transporting to the point of sale, and for natural gas, you may 
also take deductions for processing that gas to take out 
royalty bearing liquids.
    I would like to start by addressing the issue of the 
potential $700 million shortfall in royalty collections.
    That number arose out of data on our Web site, but the 
numbers were used in a way that it was really not consistent 
with what the data on the Web site contained.
    What the New York Times did was basically use the data on 
the Web site to calculate an average value for natural gas 
produced in fiscal year 2005, compare that to other market 
prices, to come up with the $700 million shortfall.
    But our data on the Web is really not tied to the dates or 
month of production. Rather, it is based on when we receive 
payment. Our royalty management program is one that is charged 
with collecting money and disbursing money, and the data that 
we put on our Web site really tracks the cash-flows, if you 
will--the money, when we receive it and when we pay it out, 
rather than tying it to the year in which it was actually 
produced.
    What typically happens in the oil and gas industry is that 
there are a lot of adjustments after the initial royalty 
payments. Royalties are generally paid 30 days after the month 
of production. But it could be many months, and in some cases 
years before those numbers are actually locked in stone by the 
companies. There can be a variety of reasons for this--related 
to the number of partners on a field, the number of fields 
tying into a pipeline, the number of pipelines tying into 
processing plants. And at each stage, the owner of the pipeline 
or the processing plant needs to allocate the production 
volumes back to the various entities. It often takes quite a 
long time for companies to really finalize what the proper 
volumes were on which royalties are based.
    In addition, when we take compliance actions against 
companies, we are telling them also that they need to correct 
the reports that they submitted previously.
    Under the Royalty Simplification and Fairness Act of 1996, 
companies are allowed by statue 6 years to make adjustments to 
their initial reports on royalties.
    What we find is that the data that we have for any fiscal 
year often includes a lot of reports for prior fiscal years. 
The 2005 data that the New York Times used included by volume 
24 percent of the transactions were from prior years, when 
prices were lower. And as a result, that tended to bias the 
price that was calculated using that data.
    This slide shows the New York Times approach. They took the 
sales volume and sales value on our Web site to calculate the 
$5.62 average value, compared that to the Energy Information 
Administration's wellhead price for the same time period, of 
$6.45, and basically that price difference applied to the 
production volumes, and the royalty rate comes up with the $700 
million difference.
    Now, what we did is we recognize that the sales volumes 
used in that calculation included by volume 24 percent 
transactions from prior years. And so we removed those years 
and recalculated the numbers using the same method as the New 
York Times, but including only those volumes sold--produced and 
sold in 2005, so that we were calculating an average value for 
2005 production rather than an average value that encompassed 
several years.
    When you do that, when you remove those prior year 
adjustments, you end up calculating an average value reported 
to MMS of $6.59 rather than the $5.62 that the New York Times 
reported.
    That average value is above the benchmark the Times used of 
$6.45. There really is no price differential between the market 
price and the values reported to MMS; therefore, there is no 
$700 million shortfall.
    Mr. Issa. Just to interrupt briefly.
    Mr. Cruickshank. Yes.
    Mr. Issa. Would it be amenable to you--and you can continue 
through your PowerPoint, but I think on behalf of both the 
majority and the minority staff if the information you have as 
complete as possible for as many years that shows a pattern of 
accrual versus cash basis, which is what I understand you are 
saying. If you could provide us with the data so that both 
sides of the staff could independently look at the materials 
that would probably be good. I think as much as I accept how 
this problem occurred, ultimately I think either somebody on 
your staff working with the majority and minority staff or the 
raw data, one way or the other, and the former is preferred, 
would allow both of us to get a comfort level--and I take you 
at your word--that this is just the difference between the ease 
of posting cash versus the complexity of providing the accrual 
system in real time to a Web site. But I think since this is 
not primarily what this hearing is about today, but we do have 
to have a comfort level that all moneys owed are being 
collected that we could do a lot of this offline--if that is 
acceptable?
    Mr. Cruickshank. That is fine. We will be happy to make 
that data available.
    And as you noted, because of these adjustments that we get 
every month, posting accrual data would be difficult because we 
would have to be constantly changing it.
    Mr. Issa. I understand. Please continue.
    Mr. Cruickshank. I do want to caveat the numbers I just 
gave. Because of these adjustments, the numbers we used for 
2005 clearly will change over time, as companies adjust their 
2005 reports over the coming couple of years. So the $6.59 
represents a snapshot of the data as we have it today, and that 
may vary somewhat as we get additional information that is more 
representative of the value that we are paid than the $5.62, 
which encompasses an average over several years as opposed to 
just 2005 sales.
    The second issue raised in the New York Times had to do 
with the difference in values reported to MMS and to the 
Securities and Exchange Commission.
    The difference really is the basis of the different 
requirements of the two organizations. But the prices are not 
inconsistent. SEC requires companies to report the average 
gross sales price of all their final sales within the country.
    This represents a composite of their sales from Federal 
leases, State leases, private lands, and it is a mix of sales 
at the lease, at market centers, and in some cases farther 
downstream, closer to the end users.
    In addition, SEC does not allow companies to take any 
deductions for transportation or processing costs from the 
prices reported to SEC.
    For MMS, we also are receiving a variety of prices that get 
averaged together. Some of these sales values are from sales at 
the lease, where transportation is netted out before the value 
is determined.
    In other cases, we are receiving reports of prices from the 
market centers, and the transportation deductions are taken 
elsewhere.
    As a result, what you have is different reports for SEC, 
each company's report reflecting its own particular portfolio 
of sales. For MMS, you have an aggregate of all companies' 
average sales values from Federal leases, but many of them 
reported with transportation deducted, which is not the case 
for SEC.
    So you tend to find some variations in the prices simply 
because of the different rules about what companies are 
supposed to report to the two agencies. The prices are 
generally consistent with each other when you focus on similar 
time periods, but there are variations because of the different 
portfolios that individual companies may hold in terms of where 
their gas comes from and where they sell it.
    The third issue relates to why natural gas royalties are 
not higher in 2005 than they were in 2001, given that natural 
gas prices are so much higher.
    The reasons here are several. I am going to walk through 5 
reasons in particular, but they basically relate to how the 
world has changed from fiscal year 2001 to 2005. There is less 
gas being produced from Federal leases now than 5 years ago. 
That gas is coming from different leases, leases that have 
different royalty rates, different royalty relief terms, and 
coming from parts of the country with different prices.
    So I am going to walk through each of these reasons. But 
what they will total up to is about $1.3 billion in royalty 
value. In other words, if the world did not change between 2001 
and 2005 other than the price of natural gas, we would have 
expected to see about $1.3 billion more in royalties than we 
did see in 2005.
    These changes that I am going to talk about are responsible 
for about that much difference in the royalties that we 
collected.
    The first reason has to do with just a general decrease in 
the amount of natural gas produced from Federal leases over 
time. This chart shows that decline between fiscal year 2001 
and 2005, and the difference is about 1 trillion cubic feet in 
natural gas.
    The largest portion of this just reflects the general 
decline in the amount of gas being produced from Federal leases 
over time, but a significant component as well has to do with 
shut-ins because of hurricanes, staring with Hurricane Ivan in 
2004, whose effects were felt well into 2005, as well as 4 
other named storms during 2005. We had about 340 billion cubic 
feet of natural gas that was shut in due to hurricanes. That, 
combined with the general decline in production from Federal 
leases, amounts to the 1 trillion cubic foot decrease in 
natural gas volumes over time.
    Using the New York Times benchmark of $6.45, the royalty 
value of that gas is equivalent to about $884 million, and is 
the largest single reason for the change in the amount of 
natural gas royalties collected between the 2 years.
    The second issue deals with the fact that not all leases 
are created equal. As I mentioned before, most oil and gas 
leases have a one-eighth royalty rate, or 12\1/2\ percent. 
There is one general exception to that, and that are leases in 
the shallow water Gulf of Mexico have a royalty rate of 16\2/3\ 
percent, a somewhat higher royalty rate, recognizing that has 
been very prolific area for natural gas production for over 50 
years, and was able to bear a higher royalty rate.
    However, because it has been producing for a long time, 
there is just simply not as much natural gas left in the 
shallow waters of the Gulf of Mexico. As you can see from the 
yellow bars on this chart, production from shallow waters of 
the Gulf have been falling. That decline actually started in 
1990 and has been fairly steady over time.
    Part of that decline has been offset by an increase in 
production from deep water Gulf of Mexico leases that have a 
one-eighth royalty rate. So we have had a shift in the share of 
production, an overall decline in production, but then a shift 
in the share of production from leases with a one-sixth royalty 
rate to leases with a lower one-eighth royalty rate.
    As a result, the average royalty rate for offshore 
production has declined over the last 5 years, from 15.6 
percent in 2001 to 15 percent in 2005.
    That change in average royalty rate alone amounts to a 
difference in royalty collections of about $136 million, and 
this is solely from the fact that we are now getting production 
from a different set of leases than we were 5 years ago.
    But the shift in production from shallow water to deep 
water also is tied to the other issue I will be talking about 
today, the Deep Water Royalty Relief Act. I am going to return 
to this topic shortly to talk about the history of this act and 
the price threshold issue, but for purposes of the PowerPoint, 
I just want to focus on the fact that during 2005, there were 
247 billion cubic feet of natural gas produced from Federal 
leases on which no royalties were paid. There are two reasons 
for that, as you have noted. One is that the leases issued in 
1998 and 1999 do not have price thresholds and so that 
production has been royalty free. But then on other leases 
issued in that time period, between 1996 and 2000, companies 
have not paid in spite of price thresholds because they want to 
challenge the legality of those thresholds.
    As I said, I will return to those issues shortly, but 
between those--because of those two reasons, there is about 247 
billion cubic feet of natural gas produced on which no 
royalties were paid. If royalties had been paid on that 
production, it would have been about $200 million more in 
royalty collections.
    The third reason for this change has to do with greater 
production on shore. While production from the Outer 
Continental Shelf has declined in natural gas, it has grown on 
shore, increased by about 17 percent. And this has been 
predominantly in the Rocky Mountain region of the country. 
There are two issues involved here. One is that these on shore 
leases also have a one-eighth royalty rate rather than the 
higher one-sixth royalty rate, but also the Rocky Mountain 
region has generally lower natural gas prices than the Gulf of 
Mexico.
    This is largely due to the fact that as natural gas 
production has grown in the Rockies, the capacity of pipelines 
to take natural gas out of the Rockies to other markets has not 
grown as rapidly. That is changing. New pipeline capacity is 
being added, but right now production has grown more rapidly 
than the pipeline capacity so that gas stays in the Rocky 
Mountain regions and depresses the price of natural gas that is 
sold in that area.
    The average difference over 5 years between those two 
regions is about one dollar per million cubic--per thousand 
cubic feet of gas.
    The combined effect of this shift to on-shore leases with 
the lower royalty rate and a lower value, amounts for about $14 
million in royalty collection difference.
    The next chart simply illustrates the change in prices 
between the two regions based on the market center index 
prices.
    The final reason explaining why royalty collections were 
less in 2005 than might have otherwise been expected has to do 
with hurricanes. This is not because of hurricanes being shut 
in. We have talked about that already. But this has to do with 
the fact that some companies had their royalty payment systems 
based in New Orleans. So when Hurricane Katrina hit on August 
29th, those companies were physically unable to make their 
payments on August 30th and September 30th.
    Those payments have since been made, but the money came in 
during fiscal year 2006 and are captured in the 2006 data as 
opposed to the 2005 data. We have gone back and taken a look, 
and the money received in 2006 that normally would have been 
collected in 2005 on natural gas is about $60 million.
    So these 5 reasons together, we estimate account for about 
a $1.3 billion royalty difference. If none of these things had 
occurred, we would have collected about $1.3 billion more in 
royalties because of the price difference in natural gas. But 
the world has changed over the last 5 years and our royalty 
collections reflect that.
    The fourth issue raised in the article has to do with 
whether our valuation regulations have been relaxed over the 
last few years in terms of the way we collect royalties.
    The easiest way to respond to that is to actually take a 
look at each of the individual rulemakings that we have made 
over the last few years. With each of those rulemakings, we are 
required to do an economic analysis that is shared publicly to 
receive comments on, and that analysis is supposed to try and 
estimate what the impact on royalty collections will be from 
the changes in regulations.
    For oil, in 2000 and then again in 2004, we made 
adjustments to our Federal oil valuation regulations, which 
define how royalties are to be paid on oil. Those rules dealt 
with changing the basic valuation, the basic prices that are 
used for determining value.
    The first of those rules was estimate to provide an 
additional $67 million in royalty collections, based on prices 
of that day. The modifications in 2004 were expected to be 
revenue neutral; perhaps raise a little bit of money, but 
generally thought to be a revenue neutral change.
    With respect to natural gas royalties, the focus there has 
been on what companies are allowed to deduct for transportation 
and what they are not allowed to deduct. We spent some time 
trying to clarify what is deductible and what isn't. And again, 
the regulatory analysis for that rule shows that royalty 
collections will increase as result of the rule changes 
relative to what they would have been if we had not made the 
rule change.
    That is true for the Indian Gas Regulation as well, so in 
general all of the rulemaking that we have done over the last 5 
years on--for royalty collections for valuing oil and gas for 
royalty purposes have resulted in either no change in the 
amount of royalties collected or increases in the amount of 
royalties collected and are not consistent with the idea that 
we are somehow relaxing the standards on which we are basing 
royalties.
    The fifth issue raised in the article has to do with our 
audit and compliance program and how our resources may have 
changed over time and how the number of audits we have done has 
changed over time.
    This page in the presentation shows the basic data. Our 
Office of Inspector General has gone over this page, and these 
numbers are consistent with what our Inspector General is also 
reporting on these issues.
    As you can see, the number of audits completed has jumped 
around quite a bit, but there really is no apparent trend. The 
number in 2005 is the highest of the last 5 years, but that, in 
part, reflects the fact that we had a major initiative in 2005 
to try and close out a lot of very old and dated audits, so 
that number is a little higher than we would normally expect to 
see.
    But generally, we have been able to maintain the number of 
audits that we are starting and working on, and since every 
audit takes a different amount of time to complete, the audit 
completion data jump around a lot. But there is no trend there 
in either direction, up or down. We have been able to maintain 
the number of audits we are doing, and I would note that the 
audits on this line are full audits, following the Government 
Accounting standards, the Yellow Book standards for conducting 
audits.
    Our funding has gone up for our audit and compliance 
program by minor amounts, from $32 million to $35 million over 
the last 5 years, which we consider to be a pretty good record 
given the budget times that we are in these days.
    What I will note, though, is that the article was correct 
in noting that we have fewer auditors working now than we did 5 
years ago. The main reason for that is the growth in our 
royalty in-kind program. The royalty in-kind program rather 
than getting our royalties as cash payments from the companies 
we actually take our percent share as production. We take the 
oil or we take the natural gas, and we sell it ourselves at the 
market centers for market prices.
    This results in a much easier compliance process. We still 
have to go out and make sure the companies gave us the right 
volume of oil, but we no longer have to see whether they used 
the right value in calculating royalty--whether they took the 
right deductions.
    The audits are far simpler. There is a lot less to look at.
    In 2005, we took about 80 percent of our royalty oil in the 
Gulf of Mexico in kind, and we are up to about 30 percent of 
our natural gas royalties being taken in kind out of the Gulf 
of Mexico. These are substantial volumes, and they have allowed 
us to shift audit resources away from some of these offshore 
leases. Some of them have been moved to compliance for on shore 
leases, but it is also allowed us to reduce the number of 
auditors overall.
    Again, this does not reflect any less coverage. It reflects 
the fact that royalty in-kind has provided some efficiencies 
that allow us to reallocate our resources.
    Finally, I would note that the article made mention of an 
Inspector General report in 2003 that suggested a lot of 
improvements to our internal controls over the audit program.
    As a result of that report, we completed a 39-item action 
plan for improving the audit program. And when we finished 
that, we brought in an independent CPA firm to review our audit 
program, the same firm that had been critical of our program 
along the same lines of the Inspector General a few years 
before.
    That independent review has given us a clean bill of 
health, an unqualified opinion with no weaknesses, no 
reportable conditions, no management letter--about as good as 
you can get from an auditor.
    So we are comfortable that the issues the IG has raised 
have all been fixed.
    As of last year, we were able to cover through our 
compliance program about 71 percent of the revenues collected 
for the audit year we were targeting, which is a very good 
sample.
    And just to close the PowerPoint, I would like to note that 
the Government Accountability Office has taken a look at this 
PowerPoint. They have been asked to dig into the numbers behind 
it, and we shared our work papers with them, and they are 
preparing a briefing this afternoon. GAO generally agrees with 
our conclusions here. They have not had time to dig into the 
raw data themselves, but they believe our approach in this 
response is reasonable. They believe our conclusions are 
correct. They agree with the reasoning here, though, they have 
not actually opened on the exact numbers within this report.
    With that, I would now like to turn to the issue of Deep 
Water Royalty Relief and briefly talk about the history and 
purpose of that act and the price threshold issues with which 
we are dealing with today.
    The Deep Water Royalty Relief Act was passed in 1995 and 
for purposes of the hearing today, there are 2 sections of that 
act of importance.
    Section 303 of the act authorized the Secretary to issue 
leases with royalty relief. This language basically said that 
the Secretary could issues leases that provided royalty relief 
in the form of a volume or value of royalty-free production. 
Once that volume or value was produced, royalties would be due 
on all additional production after that fact.
    In addition, that section authorized the Secretary to vary 
relief based on market prices, and that is the authority for 
the price thresholds that limit the applicability of royalty 
relief when prices are high.
    Section 304 of that act then went on to direct the 
Secretary to issue leases using that system, that the 
Department was required to issue leases in the Deep Water Gulf 
of Mexico for all years, 1996 through 2000, with royalty 
relief, and the act specified the amount of royalty relief we 
were to apply. It ranged from 17\1/2\ million barrels to 87\1/
2\ million barrels of oil equivalent.
    That section, Section 304, made no reference to price 
thresholds.
    The mechanics of this relief is that the suspension volumes 
granted by the act allow that production to come online royalty 
free, but once that suspension volume is produced, then 
royalties will be paid on all additional production. Where 
there are price thresholds on the leases, that limits the 
applicability of the royalty relief. When market prices are 
above the threshold level, royalties are due on production and 
that production counts toward the royalty relief volume, the 
other royalty relief provisions notwithstanding.
    The purpose of this act, as you noticed, Mr. Chairman, were 
to try and encourage companies to move into an area of the Gulf 
of Mexico that was viewed as very high cost and very high risk, 
but with substantial potential for new sources of energy. And, 
as you noted, this was a time when oil and gas prices were 
fairly low.
    For the Deep Water Gulf of Mexico, the geological concepts 
and the technology had not yet been proven for whether there is 
actually substantial oil and gas there to be found.
    The effects of this act were two-fold: one, the relief made 
leases very much more valuable than they would have been in the 
absence of relief and for leases issued between 1996 and 2000, 
this increase in value we believe resulted in about $2 billion 
in bonus bids, up-front bonus payments for these leases that 
would not have been received in the absence of royalty relief.
    In addition, oil and gas production from Deep Water has 
grown dramatically over time. Since the enactment of the Deep 
Water Royalty Relief Act, deep water oil has grown by about 400 
percent and natural gas has grown about 340 percent over that 
time period.
    Today, deep water Gulf of Mexico accounts for about two-
thirds of the oil and over one-third of the natural gas coming 
from the region.
    So it has been a very successful region of the country in 
terms of trying to promote additional supplies of oil and 
natural gas, and we believe Deep Water Royalty Relief 
contributed to that success.
    When the mandatory provisions of the act expired in 2000, 
then we were left simply with Section 303 of the act that gave 
discretionary authority to issue royalty relief.
    At that time, the Department chose to continue royalty 
relief, but to scale it back. They eliminated royalty relief in 
some water depths and reduced the volumes to 5 to 12 million 
barrels of oil equivalent depending on water depth. In 
addition, all of those leases were issued with price 
thresholds, so at today's market prices every deep water lease 
that is producing--that was issued from 2000 is paying 
royalties.
    Finally, we come to the Energy Policy Act of 2005, which 
again made royalty relief mandatory in the Deep Water Gulf of 
Mexico. We had been making sale by sale decisions on whether to 
have royalty relief, but the Energy Policy Act mandated that we 
continue that relief for the next 5 years in the Gulf of 
Mexico. It adopted the range of royalty relief that we had been 
using--the 5 to 12 million barrels, but it added an additional 
tier for deeper water of 16 million barrels of royalty relief.
    Finally, that act continued the policy of allowing set 
carry to set price thresholds to limit the applicability of 
royalty relief and that authority is explicit in the Energy 
Policy Act.
    Turning to price thresholds, as I mentioned, when this act 
was originally enacted, we had to sit down and decide how to 
implement it, and the Secretary at that time determined that we 
would have price thresholds on all the leases issued between 
1996 and 2000.
    But somehow, as you have noted, for the leases issued in 
1998 and 1999, those price threshold provisions are not in the 
lease.
    I have looked at all of the decision documents related to 
lease sales in that time period, as well as all the lease sale 
documents themselves, and what I have concluded is that there 
was no affirmative decision to take price thresholds out. It 
was clear in 1996 a decision was made to have price thresholds 
as part of the Deep Water Relief clauses in these leases.
    When the Director of MMS and the Assistant Secretary were 
asked to make decisions on the lease sales in 1998 and 1999, 
they were not asked to change that provision. There is nothing 
in those documents asking for the elimination or removal of the 
price threshold clauses. Indeed, those documents suggest Deep 
Water Royalty Relief would continue as it had in 1996 and 1997.
    Now, with the passage of 8 years of time and a large 
turnover in staff, it is impossible to say exactly what 
happened, but as near as I can piece together, over the same 
timeframe, we were putting regulations in final form that 
implemented the Deep Water Royalty Relief Act.
    The language in the lease documents themselves that refer 
to this program were being revised to reflect the new 
regulations, and in making those revisions it appears that the 
price threshold language was inadvertently dropped out for 
those 2 years.
    Clearly, there is a lot of oil and gas production tied up 
with this. Looking back over the last several years, if the 
price thresholds had been in place on those leases, we would 
have been collecting royalties on about 475 billion cubic feet 
of natural gas and over 50 million barrels of oil that has been 
produced royalty free because of the absence of those clauses.
    That is certainly worth several hundred million dollars of 
royalty collections, and if prices remain high, will easily 
move into several billion dollars over the coming years.
    In addition to that, we are facing a legal challenge to 
thresholds, to price thresholds for leases issued in 1996, 
1997, and 2000.
    On these leases, because of the price thresholds, we have 
already collected over $425 million of royalties with about 
$100 million still due. That money that is due is largely from 
companies that are challenging whether we could have put price 
thresholds on in the first place. We clearly believe we have 
the authority to do so because of Section 303 of the Deep Water 
Royalty Relief Act. But clearly, there is a lot of money at 
stake here, not just the $500 million or so looking backward, 
but if price thresholds remain--if prices remain high as they 
are today, then clearly there are billions of dollars in 
royalties that will be collected because of those price 
thresholds in future years.
    Because of the amount of money at stake, we are going to 
vigorously defend our authority to have price thresholds in 
these leases so that at the end of the day, we will be able to 
collect all of those amounts, plus interest.
    But this is clearly a piece of litigation where there is a 
lot of money at stake, and we will vigorously defend our 
position on this.
    That concludes my remarks, and I would be happy to answer 
any questions that you or members of the committee may have.
    [The prepared statement of Mr. Cruickshank follows:]

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    Mr. Issa. Thank you. That was very informative. As Henry 
Kissinger once said to the press when he appeared on the eve of 
the President's resignation as the only person trusted to meet 
the press, he looked at them and said, ``I hope you have 
questions for my answers today.''
    I will tell you have provided many answers to my questions 
before I ask them. Certainly, the first and foremost was why 
were these thresholds not included in 1998. But I do have a 
followup on that I am concerned about.
    There is a trail, there is an electronic trail--there are 
tapes on who drafted, when it was redrafted, in a Word document 
or equivalent--there is a way to piece back together when it 
disappeared from a draft that ultimately was presented. Has 
there been an investigation either by your own agency, the 
Department of Justice, or any other agency to try to ascertain, 
if you will, who, what, where, when this actually occurred?
    Mr. Cruickshank. Not to that level of detail at this point, 
Mr. Chairman. We have gathered the final documents that were 
used for decisionmaking and for the contracts themselves and 
looked at those. We have not at this point gone back and tried 
to locate any preliminary drafts.
    Mr. Issa. At least for this Member, I would think that if 
not your agency, then the Department of Justice would have a 
reason to say this is too many dollars and too important a 
provision not to find out whether, in fact, somebody did it for 
a beneficiary purpose that would be outside the law and would 
leave you with that for today.
    But certainly, I don't think this committee is going to 
leave it in our oversight capacity.
    I would ask also that you would submit for the 
subcommittee's review copies of the leases entered into in 1998 
and 1999, as well as examples of leases for 1996, 1997 and 2000 
so that we would have, if you will, anecdotal examples of the 
very leases. I know they are public record, but I would 
appreciate it if you would provide them.
    Mr. Cruickshank. We will do so.
    Mr. Issa. You mentioned the leases post the 19 or the 2005 
mandating, but you didn't mention whether or not at today's 
prices they would or wouldn't be paying royalties, assuming 
they were producing so quickly. Do you have an opinion on that?
    Mr. Cruickshank. For the leases issued from 2000 on in the 
Deep Water Gulf of Mexico, if they are producing, they would 
all be paying royalties today.
    Mr. Issa. Well, you mentioned that. But the latest act 
where we remandated, if you will, the elimination--I got the 
first part of it. I guess it is our energy bill that you now 
have new requirements. You mentioned that you have made the 
additional reductions subject to price levels, but you didn't 
mention the price levels versus today's price levels.
    Mr. Cruickshank. I don't off the top of my head know what 
the price thresholds are where you're using in all of the 
leases, but all of them are well below today's market prices.
    Mr. Issa. So it would be fair to say that if they produce, 
when they produce, at today's prices, they would be fully 
royaltied and the provision of our act would not be place at 
these price levels?
    Mr. Cruickshank. That is correct.
    Mr. Issa. Great. These leases and one of the reasons I ask 
for copies, they are boilerplate, aren't they?
    Mr. Cruickshank. Yes. There--the way that--there is a 
standard form for the lease, and what the decisionmakers are 
asked to do is to really fill in the blanks as to what 
geographic areas, what minimum bids, rental rates, royalty 
rates--what terms--stipulations we put on operations to protect 
the environment. So the basic lease form itself is boilerplate, 
with some fill in the blank language, and then there are 
addendums to it, attachments to it that spell out some of these 
additional details on a sale by sale basis.
    Mr. Issa. And these always initiate from your side? In 
other words, you are the landlord. You deliver the lease?
    Mr. Cruickshank. That is correct.
    Mr. Issa. And I am assuming that in the contract way that I 
am familiar with, you send them electronically to the 
applicant. They make changes, send it back to you, and there is 
a series of underlines or some other way that each side is 
looking at the changes made in those documents?
    Mr. Cruickshank. There is no negotiation. These are leases. 
They take them or leave them.
    Mr. Issa. Excellent. So that is all the more reason that I 
also would appreciate, to the extent that you can reconstruct, 
the boilerplate that you were giving out in each of those years 
in its raw format; in other words, with no names or addresses 
filled in. And if it changed mid-year or at some point, you can 
determine a before and after, because I guess it is possible 
that it was one way in January and another way in February. I 
am not sure, but I would appreciate knowing that.
    Mr. Cruickshank. OK. We will be able to track through all 
the changes in those documents for you.
    Mr. Issa. Excellent. And this is a difficult question 
because I realize you came on board in 2002, but to the best of 
your knowledge, is there any written guidance from anyone in 
the Department to omit those price thresholds in 1998 and 1999? 
I believe you said no.
    Mr. Cruickshank. There is not. And actually, I took my 
current job in 2002, but I have been with MMS since 1988.
    I did work on the regulations implementing the Deep Water 
Royalty Relief Act, and I am not aware of any guidance and 
could not find any directing us to remove those provisions.
    Mr. Issa. And likewise, you would know of no written or 
oral instructions that may have come from the White House, the 
Secretary's office, or any other government agency at that 
time?
    Mr. Cruickshank. There has been nothing in writing, and I 
am not aware of anything orally.
    Mr. Issa. You previously testified that you felt that this 
omission was, if you will, a word processing error during the 
revision.
    Mr. Cruickshank. I believe that what happened is--yes, the 
addendums to the lease were being changed to reflect the fact 
the regulations had changed and in so doing, the price 
threshold language came out for those 2 years. I have not been 
able to ascertain who may have actually pushed the button or 
why they thought that language could come out. My understanding 
is people believed at the time the price threshold still 
applied, but the revisions clearly do not have that effect.
    Mr. Issa. Now, I know that every lease is a little 
different, but would it be correct to say that during the 
periods before and after the 1998 and 1999 omission that leases 
were substantially similar in their value, exploratory value to 
their price, meaning that there wasn't a discount or a price 
increase that came with these leases that didn't have this 
fairly significant threshold included in them?
    Mr. Cruickshank. Are you asking about whether there is a 
change from 1997 to 1998 because of the change in that 
provision?
    Mr. Issa. Well, usually what--in most contracts the 
question is was there a quid pro quo? Was there, in fact, some 
recognition of a value difference for this or was this given 
away for free by its omission?
    Mr. Cruickshank. Well, there was certainly recognition of 
royalty relief that was factored into how we determined whether 
to accept bids or not and are reflected in the increased 
bonuses we received.
    There was no additional premium placed on these leases in 
1998 and 1999 due to the lack of the price threshold 
provisions, in part because I don't think we realized at the 
time the price thresholds didn't apply; and certainly just 
looking at the track record, the amount of leases issued in 
those 2 years actually declined from the previous 2 years.
    Mr. Issa. They didn't know----
    Mr. Cruickshank. So it is----
    Mr. Issa. OK. And this question I am particularly 
interested in, and I think it is probably the most important 
one I will ask today. Do you believe that the lack of price 
thresholds during 1998 and 1999--this follows up on what you 
have said is in conflict with the overall intent of the act? 
Isn't it true that Section 303 and 304 of the act should be 
read together and not to the exclusion of one another? In other 
words, and I found this by reading 04 and then going seeing how 
it read on 03. In other words, doesn't Section 304 merely 
define Section 303 by providing the specific volume suspensions 
outlined in the bidding section in 303?
    Mr. Cruickshank. That is how we read the act, and for that 
reason, we believe that the authority in 303 to have price 
thresholds remains intact under that construct.
    Mr. Issa. The assessment at this point is or isn't that 
you--as to 1998 and 1999--this perhaps $7 billion or more that 
over the life of the lease is you will not get because of this 
absence of writing, do you believe that you have a right or any 
opportunity or any chance under existing law to collect those 
lost revenues?
    Mr. Cruickshank. I am not a lawyer, but my understanding is 
that these leases represent contracts entered into by two 
parties and cannot be unilaterally changed by one party or the 
other.
    Mr. Issa. Well, I think I will ask the opposite, though, 
isn't it true that the parties, many of the same parties are 
disputing what is in the language of the other 3 years--well, 
basically saying a deal is a deal unless we didn't get the 
better part of it, in which case a deal isn't a deal and we 
want to set aside the contract?
    Mr. Cruickshank. Well, we are being challenged on the price 
threshold provisions for those other 3 years, and presumably on 
the grounds that they feel that the contract is inconsistent 
with the law, in which case I suppose the law would override.
    Mr. Issa. Well, isn't it true that the absence of those 
thresholds may be in conflict with both the intent of Congress 
and the stated policy of your department?
    Mr. Cruickshank. Well, Congress certainly made price 
thresholds discretionary, and at the time these leases were 
being put in effect, oil and gas prices were much lower, and I 
am not sure if people really gave a lot of thought to when 
thresholds might kick in. That clearly was--had been the policy 
of the Department to include price threshold provisions and 
certainly those do exist in every other year.
    Mr. Issa. OK. Now, we are going to have to make one quick 
vote and come back. And fortunately, it is only one vote. Ms. 
Watson, do you want to come back and ask a series of questions?
    Ms. Watson. I just have one, because you have covered many 
of the questions I was going to ask.
    Mr. Issa. I am trying to get to as many of your questions 
as I can. With that, I would yield to the gentlewoman from 
California.
    Ms. Watson. Thank you. I am perplexed because the oil 
industry is enjoying the highest profits in history. And I 
really feel it was outrageous that the oil industry benefited 
after Katrina, and their quarterly reports showed benefits in 
the billions of dollars.
    My questions go to the audits. In your testimony, you 
indicated that compliance funding has increased slightly in the 
nominal dollars since fiscal year 2001. Yet, the New York Times 
reported today that spending on compliance and asset management 
has fallen since 2001 from $51.3 million to a proposed $43.1 
million in fiscal year 2007.
    Could you explain the difference in those numbers--and the 
thought came to me when you said you had been there since the 
1980's and now you are the Chief, I guess Director. You have to 
really watch what you wish for. You might get it.
    But anyway, if you can explain that and then if you can 
followup and let us know us know why MMS auditors and the 
tribal auditors have been cut, the number of auditors has been 
cut. So you can tie those together. Those are my questions, 
because I think the Chair is raising all the issues that I 
wanted to raise in addition.
    Mr. Issa. We are a team.
    Mr. Cruickshank. OK. On the first issue of the dollar 
amounts, the New York Times was reporting a budget line item 
that captures not only what is done in the terms of audit and 
compliance, but also has the budget for our Office of 
Enforcement, which is the office that goes out and bills and 
collects the money, as well as some IT system dollars in it.
    The numbers that were in this PowerPoint reflect the 
dollars actually spent on audit and compliance activities, and 
the Office of Inspector General has confirmed those numbers.
    I would suspect that the number of auditors--the number of 
audits for Indian leases has not changed. The number of State 
auditors has not changed dramatically. It is within 2 or 3 or 
where it was and really reflects an on board number rather than 
an FTE number.
    Where there has been a decline in the number of auditors is 
on the Federal audit staff, and that reflects the growth in the 
royalty in-kind program in the Gulf of Mexico, because we don't 
have as many audits to do offshore now because of the RIK 
Program, we have been able to decrease the number of auditors 
looking at offshore leases.
    Ms. Watson. I would think that because we have all these 
different ways of calculating, and as you said, the Times 
calculated one way and you calculated another way and so on, I 
would think that you would need more auditors to be able to set 
the standard. The Markey bill I think has some provisions in 
that would be useful and helpful, but I do think you need a 
team so MMS can catch these differences beforehand.
    I don't feel that the answer is satisfying, because I do 
think that a lot rests on your shoulders and because you have 
been sued and I understand that the awards have been quite 
large. We might want to do a better job of making the figures 
kind of coincide with what the reality is and so that was my 
response, Mr. Chairman. I will be going to the floor, and I 
don't see that I need to return, so you can finish asking your 
questions at this time.
    Mr. Issa. Excellent.
    Ms. Watson. Thank you so much, Mr. Chairman. I yield back.
    Mr. Issa. Thank you very much, and because several Members 
have expressed an interest to supply questions in writing, I 
would ask would you respond to those in writing. What I will 
do, because I think we have made a fairly good jab at the 
record here today, although I think that we are going to ask 
you to come back, undoubtedly, sometime in the future. I would 
ask that the record, by unanimous consent, be kept open for 2 
weeks, subject to extension based on Members who do ask you 
additional questions and your response.
    I would like to thank you for being here and for dedicating 
your time. I am going to save you the greatest burden of all, 
which is hanging out here while we wander off to vote and then 
come back. Whenever possible, it is nice to do it in one felled 
swoop.
    So with the reservation that undoubtedly, we are not done, 
but we are certainly for today and the foreseeable future, this 
hearing is adjourned. Thank you.
    [Whereupon, at 3:11 p.m., the subcommittee was adjourned.]

                                 
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