[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                           ROYALTIES AT RISK

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

                           OVERSIGHT HEARING

                               before the

                     COMMITTEE ON NATURAL RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                       Wednesday, March 28, 2007

                               __________

                            Serial No. 110-9

                               __________

       Printed for the use of the Committee on Natural Resources



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                     COMMITTEE ON NATURAL RESOURCES

               NICK J. RAHALL II, West Virginia, Chairman
              DON YOUNG, Alaska, Ranking Republican Member

Dale E. Kildee, Michigan             Jim Saxton, New Jersey
Eni F.H. Faleomavaega, American      Elton Gallegly, California
    Samoa                            John J. Duncan, Jr., Tennessee
Neil Abercrombie, Hawaii             Wayne T. Gilchrest, Maryland
Solomon P. Ortiz, Texas              Ken Calvert, California
Frank Pallone, Jr., New Jersey       Chris Cannon, Utah
Donna M. Christensen, Virgin         Thomas G. Tancredo, Colorado
    Islands                          Jeff Flake, Arizona
Grace F. Napolitano, California      Stevan Pearce, New Mexico
Rush D. Holt, New Jersey             Henry E. Brown, Jr., South 
Raul M. Grijalva, Arizona                Carolina
Madeleine Z. Bordallo, Guam          Luis G. Fortuno, Puerto Rico
Jim Costa, California                Cathy McMorris Rodgers, Washington
Dan Boren, Oklahoma                  Bobby Jindal, Louisiana
John P. Sarbanes, Maryland           Louie Gohmert, Texas
George Miller, California            Tom Cole, Oklahoma
Edward J. Markey, Massachusetts      Rob Bishop, Utah
Peter A. DeFazio, Oregon             Bill Shuster, Pennsylvania
Maurice D. Hinchey, New York         Dean Heller, Nevada
Patrick J. Kennedy, Rhode Island     Bill Sali, Idaho
Ron Kind, Wisconsin                  Doug Lamborn, Colorado
Lois Capps, California               Vacancy
Jay Inslee, Washington
Mark Udall, Colorado
Joe Baca, California
Hilda L. Solis, California
Stephanie Herseth, South Dakota
Heath Shuler, North Carolina

                     James H. Zoia, Chief of Staff
                   Jeffrey P. Petrich, Chief Counsel
                 Lloyd Jones, Republican Staff Director
                 Lisa Pittman, Republican Chief Counsel
                                 ------                                








                               CONTENTS

                              ----------                              
                                                                   Page

Hearing held on Wednesday, March 28, 2007........................     1

Statement of Members:
    Pearce, Hon. Stevan, a Representative in Congress from the 
      State of New Mexico........................................     2
    Rahall, Hon. Nick J., II, a Representative in Congress from 
      the State of West Virginia.................................     1

Statement of Witnesses:
    Alexander, Ryan, President, Taxpayers for Common Sense.......    49
        Prepared statement of....................................    50
    Allred, Hon. C. Stephen, Assistant Secretary, Land and 
      Minerals Management, U.S. Department of the Interior.......    12
        Prepared statement of....................................    15
    Bucy, Pamela, Frank M. Bainbridge Professor of Law, 
      University of Alabama School of Law........................    71
        Prepared statement of....................................    73
    Gaffigan, Mark, Acting Director, Natural Resources and 
      Environment, Government Accountability Office..............     4
        Prepared statement of....................................     5
        Response to questions submitted for the record...........    11
    Gambrell, Kevin L., Indian Land Working Group................    37
        Prepared statement of....................................    39
        Response to questions submitted for the record...........    43
    Geesey, Michael, Director, Wyoming Department of Audit.......    69
        Prepared statement of....................................    70
    Lester, A. David, Executive Director, Council of Energy 
      Resource Tribes............................................    63
        Prepared statement of....................................    65
    Maxwell, Bobby L., Former Auditor, Minerals Management 
      Service....................................................    33
        Prepared statement of....................................    34
    Roller, Dennis, Audit Manager, North Dakota State Auditor's 
      Office, Royalty Audit Section..............................    58
        Prepared statement of....................................    60
Additional materials supplied:
    Pica, Erich G., Director of Domestic Programs, Friends of the 
      Earth, Statement submitted for the record..................    89


                          OVERSIGHT HEARING ON



                         ``ROYALTIES AT RISK''

                              ----------                              


                       Wednesday, March 28, 2007

                     U.S. House of Representatives

                     Committee on Natural Resources

                            Washington, D.C.

                              ----------                              

    The Committee met, pursuant to call, at 11:00 a.m. in Room 
1324, Longworth House Office Building, Hon. Nick J. Rahall, II 
[Chairman of the Committee] presiding.
    Present: Representatives Rahall, Christensen, Grijalva, 
Bordallo, Costa, Kind, Inslee, Baca, Flake, Pearce, Brown, 
McMorris Rodgers and Lamborn.

STATEMENT OF THE HONORABLE NICK J. RAHALL, II, A REPRESENTATIVE 
          IN CONGRESS FROM THE STATE OF WEST VIRGINIA

    The Chairman. The Committee on Natural Resources will come 
to order and is convening today to conduct a hearing on 
Royalties at Risk.
    In recent years, many of us have witnessed a sorry pattern 
across the spectrum of Federal agencies. At every henhouse a 
fox is stationed. The well-connected few are rewarded at the 
expense of the common folk, and all the while the people's 
branch has been looking the other way.
    The Minerals Management Service exemplifies this troubling 
pattern. Throughout the last several years, the MMS seems to 
have drifted further and further into the grasp of the oil and 
gas industry. No doubt this occurred in part because of the 
agency's dual and conflicting roles.
    On the one hand the MMS is charged with developing energy 
resources on our public lands. On the other hand, it is 
supposed to collect at a fair value payment owed to people for 
the development of the resources they own. But something has 
gone wrong. Development has been thriving. Oil and gas drilling 
has dramatically increased. It is obvious by the sheer number 
of rigs that are sprouting up all over the West and drilling 
platforms in the Gulf of Mexico.
    The energy development function at the MMS has been running 
at full throttle, but when it comes to collecting the payment 
due to the people, the agency has stalled. At best its 
performance might be described as slipshod, but some argue it 
is something more sinister.
    Further complicating the collection capability of the MMS 
is the Royalty-in-Kind program, a program over which I have 
consistently in my years in Congress raised concerns. The RIK 
program was designed to allow energy companies to pay the 
government in product rather than in cash, but it has become an 
elusive mess.
    For the MMS, tracking money was hard enough, but following 
the flow of oil has proven to be a slippery business indeed. By 
some accounts the Royalty-in-Kind program has served as a giant 
loophole, allowing wealthy companies to forego fair payment to 
the public.
    To make matters worse, in 2000 the agency further watered 
down its audit function through a process known as compliance 
review. Under this regime, fewer and fewer audits are being 
conducted even as more and more energy is being produced.
    Some seasoned auditors tried to raise red flags, but they 
were ignored or they were pushed aside. As a result, the people 
back home who are struggling to pay the mortgage, buy the 
groceries and pay their annual tax bill have been getting 
tougher treatment from Uncle Sam than do wealthy multinational 
oil conglomerates.
    The MMS by necessity works closely with representatives of 
the oil and gas industry, but in far too many cases that 
closeness has taken on the distasteful appearance of coziness. 
It is becoming clear that the agency has acted to the benefit 
of the industry and to the detriment of the public.
    The recurring questions are: To what extent did it do so 
deliberately? How can it be fixed? What can be done to prevent 
it from happening again?
    This committee has long neglected its duty to explore these 
questions. That ends now. From the moment I took over this 
chairmanship, I said that we would exercise vigorously and 
fully our constitutional responsibilities of oversight. That is 
what we begin today.
    I thank the witnesses for taking the time to be with us, 
and I look forward to hearing their testimony. Before I do, I 
will recognize the acting Ranking Member, the gentleman from 
New Mexico, Mr. Pearce.

 STATEMENT OF STEVAN PEARCE, A REPRESENTATIVE IN CONGRESS FROM 
                    THE STATE OF NEW MEXICO

    Mr. Pearce. Thank you, Mr. Chairman. I am excited to join 
you at today's hearing, Royalties at Risk. Like yesterday's 
hearing, I must say that the title gives me pause because of 
the perception that it creates.
    We learned yesterday that of the 262 million acres of BLM 
land, less than five percent of that land is being used for oil 
and gas production. The other 95 percent of BLM lands has no 
oil, no gas production, even though treasured resources are 
there.
    Similarly, only 15 percent of the National Wildlife Refuge 
System has oil and gas activities. Furthermore, not a drop--
zero percent--of our parklands permit oil and gas activities. 
We learned last Congress that less than three percent of our 
Outer Continental Shelf is being leased for oil and gas 
production.
    The Outer Continental Shelf and our Federal lands aren't 
generating any royalties, any of the royalties that it could 
be, because most of it is off limits. Those are the royalties 
at risk. If we continue to follow the San Francisco energy 
policy, those are the royalties at risk we should be 
discussing.
    This hearing is a classic example of penny wise and pound 
foolish. There are billions of dollars of Federal royalties 
left on the table because more and more of our Federal lands 
where much of the energy is remains off limits.
    For example, a recent Congressional Research Service study 
regarding the Arctic National Wildlife Refuge, ANWR, estimated 
the prospective royalty revenue at $36 billion. In addition, 
corporate income tax revenue from ANWR was estimated at $75 
billion.
    I don't mean to suggest that we must not demand that the 
American taxpayer is fairly compensated for existing oil and 
gas production, but it is a great shame that the truth of our 
tremendous energy resource and the associated royalties are 
being hidden from the American public.
    I know that today's testimony will include a discussion of 
the MMS Royalty-in-Kind program. I have been a supporter of 
collecting royalties in kind because it is simpler to take a 
straight percentage of a meter reading rather than to work in a 
system of dueling auditors over oil's production value. Any 
time you have money involved, you will attract lawyers and 
auditors like regulations to bureaucrats.
    Every grade school child understands the concept of one for 
me and one for you. Royalty-in-Kind is much simpler than all of 
this production value dueling and fighting. Simply put, the 
more plumbing you have, the more ways there are to clog up the 
drain.
    I worked in the oil and gas industry, and the truth is the 
matter of trying to value oil is not a simple task. It is a 
commodity whose price is different every day, depending on 
where you are. The price for our West Texas crude in eastern 
New Mexico was always valued at less because it had a lesser 
quality and a higher cost at the refinery.
    When prices were low, oil servicemen like me hurt, and when 
prices were high you knew that you could make your house 
payment. That price changes daily and by location. To this end, 
I look forward to hearing from Assistant Secretary Allred 
regarding MMS' Royalty-in-Kind program and the progress you 
have made so that we may put an end to dueling auditors.
    Again, I look forward to the testimony and discussions. 
Welcome to all of you, and thank you again, Mr. Chairman.
    The Chairman. Do any other Members have opening statements?
    [No response.]
    The Chairman. OK. If not, we will proceed with the panel. 
Panel I is The Honorable C. Stephen Allred, Assistant 
Secretary, Department of Interior, and Mr. Mark Gaffigan, 
Acting Director, National Resource and Environment, Government 
Accountability Office.
    Gentlemen, we thank you for being with us today. We have 
your written testimony. It will be made part of the record as 
if actually read, and you may proceed as you wish.

STATEMENT OF MARK GAFFIGAN, ACTING DIRECTOR, NATIONAL RESOURCE 
       AND ENVIRONMENT, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Gaffigan. Mr. Chairman, Mr. Pearce, Members of the 
Committee, good morning. I am pleased to be here to discuss the 
Minerals Management Service's management of Federal royalty 
revenues collected from energy resources produced from Federal 
lands and waters.
    Federal lands and waters provide a significant amount of 
revenue and energy to the American people. Most notably, about 
$10 billion in annual oil and gas royalty revenue is generated 
from Federal production that supplies about one-third of all 
the oil and one-quarter of all the natural gas produced in the 
United States. In addition, Federal lands and waters also 
provide increasingly important renewable resources such as 
geothermal energy.
    M.M.S. has strived to meet the challenging responsibility 
of managing these resources, but our oversight work has 
highlighted some problems that require attention. In my 
testimony today, I would like to touch upon three areas of our 
royalties work that point to the need for ongoing attention: 
Royalty relief, royalties-in-kind and geothermal energy 
royalties.
    First, royalty relief. The waiver or reduction of royalties 
in order to encourage the development of oil and natural gas 
has been fraught with problems. Specifically, a series of 
mistakes and legal challenges in implementing relief under the 
1995 Deep Water Royalty Relief Act will likely add billions in 
unanticipated cost for taxpayers.
    As has been widely reported, price thresholds, provisions 
designed to limit royalty relief in the event of the high 
prices we are experiencing today, were left off of over 1,000 
leases issued in 1998 and 1999. Today, the lack of these 
thresholds has already cost about $1 billion in foregone 
royalty revenue.
    In addition, current estimates by MMS indicate a range of 
future foregone royalties of between $6.4 and $9.8 billion. 
Adding to this problem, a current lawsuit is questioning 
whether MMS even has the authority to establish price 
thresholds for any of the leases issued under the 1995 Act, 
thus bringing into question over 2,000 more leases issued in 
1996, 1997 and 2000. If the case is lost, this could add 
billions more in foregone revenue.
    However, not every Federal lease provides royalty free oil 
and gas to producers. In fact, on most leases royalties are 
actually paid by producers and collected by the Federal 
government. Unfortunately, determining proper royalty cash 
payments has a history of costly, administratively difficult 
problems resulting from disputes and litigation over the value 
of oil and gas.
    As an alternative to collecting royalties and cash, MMS can 
choose to accept a portion of the actual oil and gas produced 
to sell itself, known as taking royalties-in-kind or RIK. We 
reviewed the RIK program in 2003 and 2004 and found shortfalls 
in data and information systems that limited the ability to 
determine how well RIK was doing.
    We made recommendations to improve RIK, and MMS was very 
responsive in implementing them. However, the RIK program has 
grown significantly, with MMS receiving one-third of its 
revenue from RIK in Fiscal Year 2005. This raises questions 
about the ability to effectively manage RIK at these much 
higher levels. At the request of Congress, we are about to 
begin an updated look at RIK, ensuring that this important 
program has continued oversight.
    Finally, while MMS has faced significant challenges in 
managing oil and gas royalties, other energy resources also 
demand attention. For example, our 2006 review of geothermal 
royalties found that about 40 percent of MMS royalty data for 
the geothermal projects we looked at was either missing or 
erroneous. As with oil and gas, the lack of good data and 
information limits the ability of MMS to fulfill its royalty 
management responsibilities.
    M.M.S. is charged with an important responsibility in 
balancing the goals of developing Federal energy resources 
while ensuring a fair return for the American people. 
Unfortunately, royalty management problems have created a sea 
of uncertainty about future development and a crisis of 
confidence for the American taxpayer that overshadows both 
goals.
    As we continue our work, GAO looks forward to assisting the 
Congress and MMS to ensure that royalty management continues to 
have oversight attention.
    This concludes my opening remarks. I have submitted a 
written statement for the record, and I welcome any questions 
you might have. Thank you.
    [The prepared statement of Mr. Gaffigan follows:]

   Statement of Mark Gaffigan, Acting Director, Natural Resources & 
           Environment, U.S. Government Accountability Office

    Mr. Chairman and Members of the Committee:
    We are pleased to be here today to discuss our recent work on the 
administration of revenues collected from the production of fossil and 
renewable energy resources on federal lands and within federal waters. 
Companies that develop these resources do so under leases which 
generally require the payment of royalties on the resources extracted 
and produced. These leases are administered by the Minerals Management 
Service (MMS), an agency within the Department of the Interior 
(Interior). These resources include geothermal, coal, and, most 
notably, oil and natural gas (hereafter oil and gas).
    In particular, fossil energy resources from federal lands and 
waters are a critical component of the nation's energy portfolio, 
supplying more than a third of all the oil and nearly a quarter of all 
the natural gas produced in the United States in Fiscal Year 2005. Oil 
and gas companies received over $77 billion from the sale of oil and 
gas produced from federal lands and waters in Fiscal Year 2006, and 
these companies paid the federal government about $10 billion in 
royalties.
    In order to promote oil and gas production, the federal government 
has at times and in specific cases provided ``royalty relief''--the 
waiver or reduction of royalties that companies would otherwise be 
obligated to pay. When the government grants royalty relief, it 
typically specifies the amounts of oil and gas production that will be 
exempt from royalties and may also specify that royalty relief is 
applicable only if oil and gas prices remain below certain levels, 
known as ``price thresholds.'' For example, the Outer Continental Shelf 
Deep Water Royalty Relief Act of 1995, also known as the Deep Water 
Royalty Relief Act (DWRRA), mandated royalty relief for oil and gas 
leases issued in the deep waters of the Gulf of Mexico from 1996 to 
2000. These deep water regions are particularly costly to explore and 
develop. However, as production from these leases has grown, and as oil 
and gas prices have risen dramatically in recent years, serious 
questions have been raised about the extent to which royalty relief has 
been in the interest of taxpayers. These concerns were brought into 
stark relief when it was learned that MMS issued leases in 1998 and 
1999 that failed to include the price thresholds above which royalty 
relief would no longer be applicable, making large volumes of oil and 
natural gas exempt from royalties and significantly affecting the 
amount of royalty revenues collected by the federal government. Further 
royalty relief is currently available under other legislation and 
programs, raising the prospect that the federal government may be 
forgoing additional royalty revenues. Recently, congressional 
committees, Interior's Inspector General, 1 public interest 
groups, and the press have questioned whether our nation's oil and gas 
royalties are being properly managed and whether the oil and gas 
industry is paying a fair share of revenue to the public resource 
owners, especially in light of high oil and gas prices, record industry 
profits, and the daunting current and long-range fiscal challenges 
facing our nation. GAO has expressed similar concerns, and the U.S. 
Comptroller General has highlighted royalty relief as an area needing 
additional oversight by the 110th Congress. 2
---------------------------------------------------------------------------
    \1\ Minerals Management Service's Compliance Review Process, 
Department of the Interior Office of the Inspector General, Report No. 
C-IN-MMS-0006-2006 (Washington, D.C.: Dec. 2006).
    \2\ GAO, Suggested Areas for Oversight for the 110th Congress, GAO-
07-235R (Washington, D.C.: Nov. 17, 2006).
---------------------------------------------------------------------------
    The MMS is authorized by Congress to collect royalties ``in 
value,'' as a fraction of the revenues companies receive from sale of 
oil and gas produced on federal leases, or ``in kind,'' as a fraction 
of the oil and gas that the MMS then sells to recover the government's 
share of oil and gas revenue. With regard to oil, while MMS has long 
received relatively small amounts of oil in kind for specific purposes, 
such as in a past program that provided royalty oil to small refiners 
at subsidized prices, the bulk of royalties have historically been 
collected in value. In recent years, however, MMS has taken a growing 
proportion of oil royalties in kind. Much of this oil was then 
exchanged for other oil that was put into the nation's Strategic 
Petroleum Reserve, over 700 million barrels of publicly held crude oil 
that is stored to ensure emergency supplies in the event of a 
significant disruption in the normal oil supply. Under the Energy 
Policy Act of 2005, MMS is charged with ensuring that the revenues it 
receives when it sells oil taken in kind are at least as great as the 
revenues it would have received had it taken the royalties in value. 
The recent expansion of the royalties in kind (RIK) program has raised 
the obvious question of whether or not this condition is being met.
    While fossil energy resources are significant, the federal 
government also manages royalties from renewable sources such as 
geothermal energy. Geothermal energy is a unique renewable energy 
resource in that it can provide a consistent and uninterrupted supply 
of heat and electricity. Companies drill wells to bring the geothermal 
fluids and steam to the surface, separate the steam from the fluids as 
their pressure drops, and use the steam to spin the blades of a turbine 
that generates electricity. The electricity is then sold to utilities 
in a manner similar to sales of electricity generated by hydroelectric, 
coal-fired, and gas-fired power plants, and the companies pay royalties 
based on the electricity sold.
    Due, in part, to increasing demand for electricity, interest is 
increasing in developing geothermal energy resources as an alternative 
form of generation. Because many areas that have the potential to 
produce additional geothermal energy are located on federal lands, the 
federal government will continue to be a major participant in the 
future development of geothermal energy. MMS collects the federal 
geothermal royalties and disburses to the state and local governments 
its share of these royalties. In 2005, the most recent year for which 
data are available, MMS collected $12.3 million in geothermal 
royalties, almost all of which was derived from the production of 
electricity.
    You asked us to provide information from our recent work on the 
administration of federal royalty revenues at MMS. My testimony today 
(1) updates our work regarding the fiscal impacts of royalty relief for 
leases issued under the Deep Water Royalty Relief Act of 1995; (2) 
describes our recent work regarding the administration of the royalties 
in kind program, as well as ongoing work on this and related issues we 
have undertaken for congressional requesters; and (3) provides 
information on the challenges to collecting and managing geothermal 
royalties that we identified in recent work.
    To address these issues, we relied on recent GAO reports related to 
MMS's royalty collection systems for oil, gas, and geothermal 
resources. As part of our ongoing work, we also reviewed the 
methodology and assumptions used by MMS to produce their February 2007 
estimate of foregone oil and gas royalties. Our work follows the 
issuance of our report last year explaining why oil and gas royalties 
have not risen at the same pace as rising oil and gas prices. 
3 Our work was conducted in accordance with generally 
accepted government auditing standards.
---------------------------------------------------------------------------
    \3\ GAO, Royalty Revenues: Total Revenues Have Not Increased at the 
Same Pace as Rising Natural Gas Prices due to Decreasing Production 
Sold, GAO-06-786R (Washington, D.C.: June 21, 2006).
---------------------------------------------------------------------------
In summary we found:
      The absence of price thresholds in leases issued in 1998 
and 1999 has already cost the government about $1 billion and MMS's 
most recent estimate indicates a range of future foregone royalties of 
between $6.4 billion and $9.8 billion over the lifetime of the leases. 
However, because there is considerable uncertainty about future oil and 
natural gas prices and production levels, actual foregone royalties 
could end up being higher or lower than MMS's estimates. MMS is 
currently negotiating with oil and gas companies to apply price 
thresholds to future production from the 1998 and 1999 leases. To date, 
the results of these negotiations have been mixed--only 6 of the 45 
companies involved have agreed to terms. Moreover, a pending legal 
challenge to Interior's authority to include price thresholds on any 
leases issued under the DWRRA could, if successful, cost the government 
billions more in refunded and foregone revenue.
      In our most recent audit of the RIK program, conducted in 
2004, we found that MMS had not collected the necessary information to 
determine whether or not the revenues received from its sales of 
royalty oil were equivalent to receiving royalties in value, largely 
because it had not developed information systems to rapidly and 
efficiently collect this information. We made recommendations to the 
Secretary of the Interior that the agency has implemented and that have 
improved the administration of the program as it existed at the time. 
However, the continued expansion of the program raises additional 
questions about the adequacy of the agency's overall management 
practices and internal controls to meet the increasing demands of the 
program. Accordingly, at the request of Congress, we are undertaking a 
follow-on review assessing, among other things, the agency's ability to 
quantify and compare administrative costs and revenues of the RIK and 
royalties in value programs and the extent to which the revenues 
collected under the RIK program are equal to or greater than what would 
have been received had they been taken in value.
      In a 2006 report on geothermal royalties, we found that 
MMS had erroneous and missing historical geothermal royalty data and 
did not collect sufficient data from royalty payors to accurately asses 
whether MMS was collecting the amount of royalties required by statute. 
The Energy Policy Act of 2005 included provisions that significantly 
changed how geothermal royalties are calculated but also instructed the 
Secretary of the Interior to seek to maintain the same aggregate level 
of royalties over the next ten years that would have been collected 
prior to the Act's passage. We found that in order to compare royalties 
collected under the provisions of the Act with what would have been 
collected under the old system would require historical data on gross 
revenues from geothermal electricity sales as well as accurate royalty 
data. However, we found that MMS did not have sufficient historical 
gross revenue data with which to establish a baseline for past 
royalties paid as a percentage of electricity revenues. Further, about 
40 percent of MMS's royalty data was either missing or erroneous for 
the projects we reviewed. In our report we recommended that the 
Secretary of the Interior direct MMS to correct these deficiencies and 
the agency agreed with our findings and recommendations. We are 
continuing to monitor the agency's efforts to address these 
shortcomings.
Background
    Interior oversees and manages the nation's publicly owned natural 
resources, including parks, wildlife habitat, and crude oil and natural 
gas resources on over 500 million acres onshore and in the waters of 
the Outer Continental Shelf (OCS). In this capacity, Interior is 
authorized to lease federal fossil and renewable energy resources and 
to collect the royalties associated with their production. These 
substantial revenues are disbursed to 38 States, 41 Indian Tribes, 
Interior's Office of Trust Funds Management on behalf of some 30,000 
individual Indian royalty owners, and to U.S. Treasury accounts.
    Royalties paid for fossil and renewable resources extracted from 
leased lands represent the principal source of the $12.6 billion in 
revenues managed by MMS' $10.7 billion, more than 85 percent of 
revenues received in Fiscal Year 2006. 4 Of these, oil and 
natural gas leases are the most significant component of royalties, 
composing on average nearly 90 percent of the royalties received over 
the past five years. For oil and gas, production royalties are paid 
either in value or in kind. The OCS Lands Act of 1953, as amended, and 
the Mineral Leasing Act of 1920, as amended, authorize the collection 
of production royalties either in value or in kind for federal lands 
leased for development onshore and on the OCS. Furthermore, according 
to MMS, the terms of virtually all federal oil and gas leases provide 
for royalties to be paid in value or in kind at the discretion of the 
lessor. The Energy Policy Act of 2005 provides additional statutory 
requirements to support the operation and funding of a program for 
managing federal oil and gas royalties in kind.
---------------------------------------------------------------------------
    \4\ The remaining $1.9 billion consist of other revenues received 
from rent payments and bonuses paid by companies for successful bids on 
leases.
---------------------------------------------------------------------------
    Additionally, MMS also collects revenue generated by exploration 
and development of geothermal energy resources commonly used to 
generate electricity. 5 Until recently, the Geothermal Steam 
Act of 1970, as amended, directed MMS to disburse royalties collected 
from geothermal energy development such that 50 percent of geothermal 
royalties be retained by the federal government and the other 50 
percent be disbursed to the states in which the federal leases are 
located. 6 A provision of the Energy Policy Act of 2005 
changed the distribution of the royalties collected from geothermal 
resources. While 50 percent of federal geothermal royalties must still 
be disbursed to the states in which the federal leases are located, an 
additional 25 percent must be disbursed to the counties in which the 
leases are located, leaving only 25 percent to the federal government.
---------------------------------------------------------------------------
    \5\ Geothermal energy is literally the heat of the earth. This heat 
is abnormally high where hot and molten rocks exist at shallow depths 
below the earth's surface. Water, brines, and steam circulating within 
these hot rocks are collectively referred to as geothermal resources.
    \6\ 30 U.S.C. Sec. 191(a). The State of Alaska is an exception to 
this provision, receiving 90 percent.
---------------------------------------------------------------------------
Billions of Dollars of Royalty Revenue Will be Foregone Because of 
        Problems Associated with Royalty Relief
    As Assistant Secretary Allred of Interior recently testified before 
the Congress, the absence of price thresholds in leases issued in 1998 
and 1999 has already cost the government almost $1 billion and MMS has 
estimated a range of potential future foregone revenue for these leases 
of between $6.4 billion and $9.8 billion. MMS calculated these 
estimates under a range of assumptions about oil and natural gas prices 
and future production levels. We reviewed MMS's assumptions and 
methodology for estimating the potential foregone revenue from 1998 and 
1999 leases and found them to be reasonable. However, because there is 
considerable uncertainty about future oil and natural gas prices and 
production levels, actual foregone royalties could end up being higher 
or lower than MMS's estimates.
    MMS is currently negotiating with oil and gas companies to apply 
price thresholds to future production from the 1998 and 1999 leases. If 
successful, this approach would partially undo the omission of price 
thresholds for future production, thereby implementing the royalty 
relief as though price thresholds had been included in the leases. 
However, the results of the negotiation have been mixed so far--as of 
late February 2007, only 6 of 45 companies have agreed to terms, and a 
current legal challenge to Interior's authority to set price thresholds 
on any DWRRA leases may further deter or complicate a negotiated 
settlement.
    In addition to forgone royalty revenues from leases issued in 1998 
and 1999, royalty revenues on leases issued under DWRRA in 1996, 1997, 
and 2000 are also threatened pending the outcome of a legal challenge 
regarding price thresholds. Specifically, Kerr-McGee filed suit against 
the Department of the Interior in early 2006, challenging its authority 
to place price thresholds on any of the leases issued under the DWRRA. 
In effect, this suit seeks to remove price thresholds from the leases 
in question. In June 2006, Kerr-McGee agreed to enter into mediation 
with Interior in an attempt to resolve the issue; however, the 
mediation was unsuccessful and litigation has resumed. As of March 
2007, the leases in question have generated approximately $1 billion in 
royalties. If the government loses this legal challenge, it may be 
required to refund these royalties--perhaps with interest penalties--
and to forego any future royalties on these leases, and perhaps any 
lease issued during 1996, 1997, and 2000. As a result, the government 
could stand to lose billions of additional dollars.
The RIK Program Has Been Unable to Demonstrate Its Effectiveness Due to 
        Data Limitations
    We reviewed the RIK pilot program for this committee in two 
separate reports in 2003 and 2004 and found that MMS did not collect 
the necessary information to effectively monitor and evaluate the 
program. 7 This information includes the administrative 
costs of the RIK program and the revenue impacts of all sales. We found 
that MMS lacked this information largely because it had not developed 
information systems to rapidly and efficiently collect this 
information.
---------------------------------------------------------------------------
    \7\ GAO, Mineral Revenues: A More Systematic Evaluation of the 
Royalty-in-Kind Pilots is Needed, GAO-03-296 (Washington, D.C.: Jan. 9, 
2003) and GAO, Mineral Revenues: Cost and Revenue Information Needed to 
Compare Different Approaches for Collecting Federal Oil and Gas 
Royalties, GAO-04-448 (Washington, D.C.: Apr. 16, 2004).
---------------------------------------------------------------------------
    We made several recommendations in our 2003 and 2004 reports to 
address the shortcomings we identified. Specifically, to further the 
development of management controls for MMS's RIK program, we 
recommended that the Secretary of the Interior instruct the appropriate 
managers within MMS to identify and acquire key information needed to 
monitor and evaluate performance prior to expanding the RIK program. We 
specified that such information should include the revenue impacts of 
all RIK sales, administrative costs of the RIK program, and expected 
savings in auditing revenues. We also recommended that MMS clarify the 
RIK program's strategic objectives to explicitly state that the goals 
of RIK include obtaining fair market value and collecting at least as 
much revenue as MMS would have collected in cash royalty payments. MMS 
agreed with both recommendations and has taken several steps to address 
these shortcomings.
    We acknowledge the agency's efforts and, within the context of the 
program's scope at the time of our report, consider our recommendations 
implemented by the agency. However, the expansion of use of RIK since 
our last review raises an additional concern. The RIK program has 
actively expanded the scope of its operations as MMS has increasingly 
opted to take royalties in kind rather than in cash. As MMS reported in 
its September 2006 Report to Congress, today's RIK operation manages a 
significant portfolio of the nation's oil and gas royalty assets 
collected primarily from federal leases in the Gulf of Mexico. This 
portfolio has expanded more than three-fold from 1999 to present--some 
82 million barrels of oil equivalent were exchanged in kind in Fiscal 
Year 2005--and is expected to continue to grow for the foreseeable 
future. The Energy Policy Act of 2005 permanently established an RIK 
operation with administrative and business costs to be paid from 
royalty revenues generated by RIK sales, effectively transitioning the 
program from pilot status to a steady-state business operation and 
potentially enabling a further expansion of the RIK program. The Act 
restricts the use of RIK to those situations where the benefit is 
determined to equal or exceed the benefit from royalties in value prior 
to the sale. However, the larger scale of the RIK program at present 
makes it unclear that MMS can effectively and accurately make this 
determination going forward.
    Noting this issue, we are undertaking work for the Congress. 
Specifically, we have several ongoing reviews assessing, among other 
things, MMS's ability to quantify and compare administrative costs and 
revenues of the RIK and royalties in value programs; the effectiveness 
of the systems used to collect, account for, and disburse royalties; 
and the accuracy of royalty revenue collection, including evaluating 
whether the value of RIK payments equal or exceed the value of 
royalties that would have been received in value for oil and gas as 
required by statute.
MMS Does Not Collect the Data Necessary to Assess Whether Geothermal 
        Royalties Remain Constant as Required by Law
    In a 2006 report on geothermal royalties, we found that MMS had 
erroneous and missing historical geothermal electricity revenue data 
and did not collect sufficient data from royalty payors to accurately 
asses whether MMS was collecting the amount of royalties required by 
statute. 8 Specifically, about 40 percent of the royalty 
revenue data for royalty payors was either missing or erroneous in the 
projects we reviewed. In addition, MMS did not have sufficient 
historical gross revenue data for geothermal electricity sales.
---------------------------------------------------------------------------
    \8\ GAO, Renewable Energy: Increased Geothermal Development Will 
Depend on Overcoming Many Challenges, GAO-06-629 (Washington, D.C.: May 
24, 2006), 34-38.
---------------------------------------------------------------------------
    MMS is charged with collecting and distributing royalties collected 
from the development of geothermal resources used to generate 
electricity. The Energy Policy Act of 2005 included provisions that 
significantly changed how geothermal royalties are calculated but also 
instructed the Secretary of the Interior to seek to maintain the same 
level of royalties over the next ten years that would have been 
collected prior to the Act's passage. We found that to meet the 
statutory requirements, MMS will need to calculate the percentage of 
gross sales revenues that lessees will pay in future royalties from 
electricity sales and compare this to what lessees would have paid 
prior to the Act. In order to compare royalties collected under the 
provisions of the Act with what would have been collected under the old 
system would require historical data on gross revenues from geothermal 
electricity sales as well as accurate royalty data on those sales.
    As a result of the insufficient gross revenue data and missing or 
erroneous royalty revenue data, MMS is unable to determine if it is 
collecting the amount of royalties on geothermal electricity production 
as required in statute. In our report we recommended that the Secretary 
of the Interior direct MMS to correct these deficiencies and the agency 
agreed with our findings and recommendations. We will continue to 
monitor the agency's efforts to address these shortcomings.
Conclusions
    As seen by all the attention royalties management has received in 
the Congress and the media, Interior's performance in managing this 
effort is a cause for concern. Billions of dollars have been lost 
already and potentially billions more are at risk. In a time of dire 
long-term national fiscal challenges it is urgent that this problem be 
fixed and the confidence of the American public that the sale of its 
national resources is generating a fair return be restored. Our work on 
this issue is continuing on multiple levels, including comparing the 
value of royalties taken in kind to the value of royalties taken as 
cash, reviewing the diligence of resource development, and evaluating 
the accuracy of the agency's cost, revenue, and production data.
    We look forward to this continued work, and to helping this 
committee and the Congress as a whole exercise oversight of this 
important issue. Mr. Chairman, this concludes my prepared statement. I 
would be pleased to respond to any questions that you or other members 
of the Committee may have at this time.
GAO Contact and Staff Acknowledgments
    For further information about this testimony, please contact me, 
Mark Gaffigan, at 202-512-3841 or [email protected]. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this statement. Contributors to this testimony 
include Frank Rusco, Assistant Director; Robert Baney; Ron Belak; 
Philip Farah; Doreen Feldman; Glenn Fischer; Dan Haas; Chase Huntley; 
Dawn Shorey; Barbara Timmerman; Maria Vargas; and Jacqueline Wade.
Related GAO Products
      Oil and Gas Royalties: Royalty Relief Will Likely Cost 
the Government Billions, but the Final Costs Have Yet to Be Determined, 
GAO-07-369T (Washington, D.C.: Jan. 18, 2007).
      Suggested Areas for Oversight for the 110th Congress,  
GAO-07-235R (Washington, D.C.: Nov. 17, 2006).
      Department of Interior: Royalty-in-Kind Oil and Gas 
Preferences, B-307767 (Washington, D.C.: Nov. 13, 2006).
      Royalty Revenues: Total Revenues Have Not Increased at 
the Same Pace as Rising Natural Gas Prices due to Decreasing Production 
Sold, GAO-06-786BR (Washington, D.C.: June 21, 2006).
      Renewable Energy: Increased Geothermal Development Will 
Depend on Overcoming Many Challenges, GAO-06-629 (Washington, D.C.: May 
24, 2006).
      Mineral Revenues: Cost and Revenue Information Needed to 
Compare Different Approaches for Collecting Federal Oil and Gas 
Royalties, GAO-04-448 (Washington, D.C.: Apr. 16, 2004).
      Mineral Revenues: A More Systematic Evaluation of the 
Royalty-in-Kind Pilots is Needed, GAO-03-296 (Washington, D.C.: Jan. 9, 
2003).
                          ROYALTIES COLLECTION
 ongoing problems with interior's efforts to ensure a fair return for 
                      taxpayers require attention
What GAO Found
    The absence of price thresholds in oil and gas leases issued by MMS 
in 1998 and 1999 has already cost the government about $1 billion and 
the agency has recently estimated that future foregone royalties would 
be $6.4 billion to $9.8 billion over the lives of the leases. Precise 
estimates of the actual foregone royalties, however, are not possible 
at this time because future projections are sensitive to price and 
production levels, both of which are subject to change. MMS is 
currently negotiating with oil and gas companies to apply price 
thresholds to future production from these leases, with mixed results--
only 6 of the 45 companies involved have agreed to terms. Moreover, a 
pending legal challenge to Interior's authority to include price 
thresholds on any leases issued under the Deep Water Royalty Relief Act 
could, if successful, cost the government billions more in refunded and 
foregone revenue.
    In our most recent review of the royalty in kind (RIK) program, 
conducted in 2004, we found that MMS was unable to determine whether 
the revenues received from its sales of oil taken in kind were 
equivalent to receiving royalties in value, largely because it had not 
developed systems to rapidly and efficiently collect this information. 
We made recommendations that the agency has implemented that have 
improved the administration of the program as it existed at the time of 
our report. However, the continued expansion of the program raises a 
new question about the adequacy of the agency's overall management 
practices and internal controls to meet the increasing demands placed 
on the RIK program. Accordingly, we are undertaking follow-on reviews 
assessing, among other things, the agency's ability to quantify and 
compare administrative costs and revenues of the RIK and royalties in 
value programs and the extent to which the revenues collected under the 
RIK program are equal to or greater than what would have been received 
had they been taken in value.
    In a 2006 report on geothermal royalties, we found that missing and 
erroneous historical data, as well as insufficient data on electricity 
sales, meant that MMS is unable to accurately determine whether it was 
collecting royalties as directed by statute. The Energy Policy Act of 
2005 included provisions that significantly changed how geothermal 
royalties are calculated but also directed Interior to maintain the 
same level of royalties over the next ten years that would have been 
collected prior to the Act's passage. We found that making this 
determination requires historical data on sales of electricity produced 
from geothermal resources as well as accurate royalty data. However, 
MMS did not have sufficient historical gross revenue data with which to 
establish a baseline for past royalties paid as a percentage of 
electricity revenues. Further, about 40 percent of MMS's royalty data 
was either missing or erroneous for the projects we reviewed. We 
recommended that MMS correct these deficiencies and the agency agreed. 
We are continuing to monitor the agency's efforts.
Why GAO Did This Study
    The Department of the Interior's Minerals Management Service (MMS) 
is charged with collecting and administering royalties paid by 
companies developing fossil and renewable energy resources on federal 
lands and within federal waters. To promote development of oil and 
natural gas, fossil resources vital to meeting the nation's energy 
needs, the federal government at times has provided ``royalty relief'' 
waiving or reducing the royalties that companies must pay. In these 
cases, relief is typically applicable only if prices remain below 
certain threshold levels. Oil and gas royalties can be taken at MMS's 
discretion either ``in value'' as cash or ``in kind'' as a share of the 
product itself. Additionally, MMS also collects royalties on the 
development of geothermal energy resources--a renewable source of heat 
and electricity--on federal lands.
    This statement provides (1) an update of our work regarding the 
fiscal impacts of royalty relief for leases issued under the Deep Water 
Royalty Relief Act of 1995; (2) a description of our recent work on the 
administration of the royalties in kind program, as well as ongoing 
work on related issues; and (3) information on the challenges to 
collecting geothermal royalties identified in our recent work.
    To address these issues we relied on recent GAO reports on oil, 
gas, and geothermal royalty collection systems. We are also reviewing 
key MMS estimates and data.
                                 ______
                                 
    [The response to questions submitted for the record by Mr. Gaffigan 
follows:]

April 27, 2007

The Honorable Nick J. Rahall
Chairman
Committee on Natural Resources
House of Representative

Dear Representative Rahall:

    This letter acknowledges the questions submitted by the Committee 
concerning our testimony on royalties at risk before the House 
Committee on Natural Resources on March 28, 2007. Please see the 
enclosure for our responses.

Sincerely yours,

Mark Gaffigan
Acting Director
Natural Resources and Environment

Enclosure

Qu estion 1: Benefits of Deep Water Royalty Relief Act--What benefits 
did the country receive by encouraging exploration and development of 
oil and gas in deep water through enactment of the Deep Water Royalty 
Relief Act of 1995 during a time of very low commodity prices? In your 
answer, can you quantify corporate and individual income tax revenue as 
well as job impacts?

    GAO Response--A number of Congressional members asked GAO to 
examine the costs of royalty relief--in light of rapidly rising oil and 
gas prices, press reports, and questions by other interested parties as 
to whether the oil and gas industry was paying its fair share of 
royalties. These members did not ask us to examine the benefits. 
However, GAO has indicated in past testimony that benefits are an 
important part of an overall assessment of royalty relief. These 
benefits may include increased bonus bids, greater production, 
increased oil and gas exploration, greater employment in the oil and 
gas industry, and increased tax revenues. An accurate estimate of these 
benefits arising from royalty relief would be difficult to achieve 
because one would need to determine how much of the oil production, 
exploration, and employment that has occurred is the result of, rather 
than simply coincident with, royalty relief. Higher oil prices since 
passage of the act have likely led to increased production, more 
exploration, and greater employment, even in the absence of royalty 
relief.

Qu estion 2: Geothermal Recommendations--You indicated that MMS agreed 
with your recommendation included in your 2006 geothermal study. Are 
you satisfied that they followed up on your recommendation?

    GAO Response--Shortly after release of our report, MMS indicated 
plans to implement our two recommendations. These recommendations 
involved requiring payors to report gross sales revenues and requiring 
MMS to correct erroneous or missing data as necessary. In July 2006, 
MMS published revised geothermal valuation regulations, in accordance 
with the Energy Policy Act, which was necessary prior to establishing 
reporting requirements. MMS reported that it incorporated stakeholder 
comments into the final regulations and that it will publish these 
regulations soon. MMS is also revising the geothermal payor handbook to 
reflect new reporting requirements, including our recommendation to 
report gross sales revenues. With regards to correcting erroneous and 
missing data, MMS reports that it completed one full audit and sent an 
order to the payor to submit royalty underpayments for past years. MMS 
reports that it is conducting compliance reviews on other leases that 
we identified as having monetarily insignificant underpayments. GAO 
will continue to monitor and assess the adequacy of MMS efforts to 
implement these recommendations until MMS completes its work.
                                 ______
                                 
    The Chairman. Secretary Allred?

         STATEMENT OF THE HONORABLE C. STEPHEN ALLRED, 
        ASSISTANT SECRETARY, DEPARTMENT OF THE INTERIOR

    Mr. Allred. Thank you, Mr. Chairman, Mr. Pearce, Members of 
the Committee. I appreciate the opportunity to meet with you 
today to discuss these issues that are facing the Department of 
Interior and the Minerals Management Service.
    This is my first opportunity to come before the House 
before I was confirmed six months ago. I thought it was 
important for us to give you an insight into my background and 
perhaps will explain some of the actions that I am taking and 
planning to take.
    By way of background, I grew up on a potato farm and ranch 
in Idaho. This is my first Federal experience. I have over 20 
years of experience in state government. Most recently I 
assisted then Governor Kempthorne in the creation of Idaho's 
Department of Environmental Quality and became its first 
director.
    In addition, I have spent 20 years in the private sector, 
and in fact that is the largest continuous portion of my 
career, where I was involved in engineering and construction. 
The organization that I ran as a chief executive of that 
organization did over $600 million a year in business.
    At the outset of my testimony I want to state my belief 
that government employees have an obligation to protect the 
public interest of the United States, and they need to be 
perceived as doing so. If the public believes that we somehow 
have failed in this obligation, whether in fact or perception, 
that damage is to the detriment of all of us.
    As you know, Secretary Kempthorne places great importance 
on the Department, its agencies and its employees acting in a 
highly ethical manner both in fact and perception.
    What I want to do in the next couple of minutes is tell you 
what the Secretary and I are doing to deal with the issues that 
are the subject of this hearing. After the Senate confirmed me 
as assistant secretary some six months ago, Secretary 
Kempthorne asked me to review and manage the issues involving 
the absence of price thresholds in the deep water leases issued 
in 1998 and 1999 in the Gulf of Mexico and the other royalty 
management issues.
    Regarding royalty management, the Department has reviewed 
the Inspector General's report of December 2006 concerning the 
collection of oil and gas revenues. The Department is actively 
implementing the recommendations and findings of the IG's 
review.
    In addition, I have traveled to the Minerals Management 
Service's Denver Operations Center where these activities take 
place and have reviewed their royalty collection process. 
Earlier this month in fact I personally observed a royalty-in-
kind sale.
    We have formed a high level panel to look at these 
processes and procedures. That panel is chaired by two 
extremely capable individuals, former Senators Bob Kerrey and 
Jack Garn. Other members include individuals experienced in 
Federal revenue collection and those of the state and tribal 
governments.
    As with any large organization with complex operations, 
there are going to be many opportunities to improve those 
operations. We look forward to receiving the Committee's 
recommendations and to further improving our activities.
    I find a lot of confusion. In fact, I had a lot when I 
first got involved in the question of royalties. I would like 
to take just a short period of time to review how royalties are 
determined.
    The first chart that I would like to put up is the Royalty-
in-Value program. What I would like to do is to direct your 
attention to the left-hand part of that chart. The Minerals 
Management Service supervises the meters on every source of oil 
and gas and receives reports with regard to the production of 
those commodities. They also receive reports from the left-hand 
side of that chart from those who buy the oil and so we have 
two sources of independent confirmation as to the amount of oil 
that is produced.
    In between we have two actions which cause most of the 
argument having to do with the royalty-in-value type of 
royalty. The first is transportation by the producer to the 
buyer. The second is the processing of that oil since much of 
the oil contains both oil and water.
    Under the system that Congress has determined that we 
should use, the producers are allowed to deduct that 
transportation and that processing from the value of the oil 
that they produce and upon which they have to pay royalties. It 
is pretty clear what they produce.
    It is generally unclear as to what the costs and whether 
they are at arm's length relationships for the transportation 
and the processing of those oils. That is where much of the 
dispute comes about and the reason that we have to audit and 
review their compliance.
    The second type of royalty that I would like to discuss is 
the royalty-in-kind. Again, I would direct your attention to 
the left side of that chart because again we have the same 
meters which are supervised by the Minerals Management Service 
and which are reported in actually a couple of different forms 
to the Minerals Management Service to determine the amount of 
product, oil or gas, that is produced from that source.
    In addition, since we now take our share of that oil or gas 
and we transport it and process it and sell that on a 
competitive basis, we know what has been produced. We know what 
it costs. We do not have the arguments that we have with the 
producers as to what those deductions should be so the 
advantage to us in the royalty-in-kind over royalty-in-value is 
that it removes most of the arguments that we have to resolve 
with the producers with regard to those.
    Incidentally, in 2005 the RIK version of royalties 
generated $32 million more to the Federal treasury than it 
would if we had taken the same amount of royalties in the 
traditional Royalty-in-Value program. Because of the reduced 
need for the detailed audits, we also believe that we avoided 
almost $4 million in costs that we would have otherwise 
incurred if we had managed that under the Royalty-in-Value 
program.
    Now also, as you are probably aware, we will begin in July 
delivering most of the royalty-in-kind oil to the Strategic 
Petroleum Reserve to fill its existing capacity. We will 
maintain a small amount of sales to the Small Refiner program 
and a small amount in the market so that in 2009 when the 
repository is filled we will still have the capability to take 
that and deal with that oil.
    I want to emphasize. We have the choice of whether we take 
it in royalty-in-value or royalty-in-kind, and we make that 
decision based upon an analysis of what is in the best interest 
of the government.
    I am convinced after my reviews that MMS is collecting the 
royalties that are set forth by the legislation that Congress 
has enacted. Again, as with any large and complex operation, 
there are opportunities to do better and to improve our 
operation. I and the Minerals Management Service intend to do 
that.
    Just some quick statistics I thought you might be 
interested in with regard to royalty management. In 2006, we 
collected $12.8 billion. That involved some 380,000 production 
sources per month, and we collected royalty from approximately 
264,000 royalty-bearing points each month. That is from about 
29,000 different leases. We have 530 employees involved in 
that, of which 118 are compliance staff, 135 are auditors, 120 
are contract personnel, and 108 are state and tribal audit 
partners.
    Another interesting statistic is in the 2000-2005 period we 
completed 1,572 audits resulting in the collection of an 
additional $98 million, 495 compliance reviews collecting an 
additional $94 million in revenue.
    An interesting statistic I think that is important that our 
audits returned an average of $2.06 per audit dollar spent. 
Compliance reviews returned an average of $3.27 per dollar 
spent in those compliance reviews. MMS enforcement actions in 
the period 2002-2006 have resulted in the collection of over 
$52 million in penalties.
    Regarding the price thresholds in 1998 and 1999, we have 
reviewed the Inspector General's report of January 2007 and 
have I believe gained a fairly complete understanding of the 
information that is available there.
    I have also traveled to the New Orleans Regional Office 
where the oil and gas operations are regulated. I have asked 
the Minerals Management Service to form a group, including 
members of the Inspector General's staff, to conduct a lessons 
learned review of the information that he has and to apply 
those to our leases.
    The Chairman. Mr. Assistant Secretary, can you wrap up here 
in the next 30 seconds?
    Mr. Allred. I sure can. I want to make the point that since 
2001 all of the leases that we have issued have included the 
price thresholds.
    I would be most happy to answer any questions that you 
have.
    [The prepared statement of Mr. Allred follows:]

Statement of C. Stephen Allred, Assistant Secretary, Land and Minerals 
          Management, United States Department of the Interior

    Mr. Chairman, thank you for the opportunity to appear here today to 
discuss with you the Department of the Interior's role in managing 
energy production on the Outer Continental Shelf and revenue from all 
Federal and Indian mineral leases. I know this Committee has been 
instrumental in shaping our domestic energy program, particularly with 
regard to encouraging environmentally sound development of our domestic 
oil and gas resources on the Outer Continental Shelf.
    The Department and its agencies, including the Minerals Management 
Service (MMS), serve the public through careful stewardship of our 
nation's natural resources. The Department also plays an important role 
in domestic energy development. One third of all energy produced in the 
United States comes from resources managed by the Interior Department.
    As energy demand continues to increase, these resources are all the 
more important to our national security and to our economy. The Energy 
Information Administration estimates that, despite increased 
efficiencies and conservation, over the next 20 years energy 
consumption is expected to grow more than 25 percent. Even with more 
renewable energy production expected, oil and natural gas will continue 
to account for a majority of energy use through 2030. Interior's 
domestic energy programs, particularly offshore oil and gas production, 
will remain vital to our national energy portfolio for some time to 
come, as evidenced in Figure A attached at the end of my statement.
    Since assuming the duties of Assistant Secretary of Land and 
Minerals Management six months ago, I have developed a deeper 
appreciation for the complexities involved in managing federal energy 
production. I also am committed to ensuring that we provide an accurate 
and transparent accounting of the revenue this production generates for 
the American people.
    At the direction of Secretary Kempthorne, two important topics have 
been my major focus over the past six months--the deep water leases 
issued without price thresholds for royalty relief in 1998 and 1999, 
and the management of royalty revenues.
    I would like to begin by providing some background on MMS's role in 
Federal energy production and revenue collection. I then will discuss 
in greater detail the two primary issues I am focusing on with MMS.
Background
    The MMS has two significant missions related to energy: managing 
access to offshore federal energy resources and managing revenues 
generated by federal and Indian mineral leases, on and offshore. Both 
of these functions are important to the nation's economic health and 
are key to meeting the nation's energy needs.
    The Federal Outer Continental Shelf (OCS) covers 1.76 billion acres 
and is a major source of crude oil and natural gas for the domestic 
market. In fact, according to the Energy Information Administration, if 
the Federal OCS were treated as a separate country, it would rank among 
the top five nations in the world in terms of the amount of crude oil 
and second in natural gas it supplies for annual U.S. consumption. 
1
---------------------------------------------------------------------------
    \1\ EIA U.S. Imports by Country of Origin, 12-21-2006.
---------------------------------------------------------------------------
    Since 1982, MMS has overseen OCS production of 11 billion barrels 
of oil and more than 116 trillion cubic feet of natural gas.
    Since 1982, OCS leasing has increased by 200 percent and oil 
production has increased by 185 percent. According to MMS's 
calculations, within the next 5 years, offshore production will likely 
account for more than 40 percent of oil and 20 percent of U.S. natural 
gas production, primarily due to deep water discoveries in the Gulf of 
Mexico.
    Attached Figure B shows the Energy Information Administration's 
2007 forecast for total domestic oil and gas production and illustrates 
what the significance of the OCS contribution is to the Nation's energy 
security.
    To support increased production offshore, MMS's Proposed 5-Year OCS 
Oil and Gas Leasing Program for 2007-2012 proposes a total of 21 lease 
sales.
    We are closer to achieving the goals of this proposed program since 
January, when the President modified a Presidential withdrawal in order 
to allow leasing in two areas previously closed--the North Aleutian 
Basin in Alaska and an area in the central Gulf of Mexico. The 
President modified the leasing status of these two areas in response to 
Congressional action and the request of Alaska State leaders. In 
addition, this Administration has increased the royalty rate from 12.5 
percent to 16.7 percent for any new deep water leases offered in the 
Gulf of Mexico.
    In implementing the mandates of the Gulf of Mexico Energy Security 
Act, MMS will offer deep-water acreage in the ``181 South'' area and in 
a portion of the Sale 181 area remaining in the Eastern Gulf of Mexico.
    Our analysis indicates that implementing the new program would 
result in a mean estimate of an additional 10 billion barrels of oil, 
45 trillion cubic feet of gas, and $170 billion in net benefits for the 
nation over a 40-year time span.
    In addition to providing and managing access to the OCS, MMS 
administers and enforces the financial terms for all Federal mineral 
leases, both onshore and offshore and on Indian lands.
    These activities have generated an average of more than $9 billion 
in revenue per year over the past five years, representing one of the 
largest sources of non-tax revenue to the Federal Government. (In FY 
2006, $12.6 billion was collected, and 60 percent of that was from 
offshore activities).
    Since 1982, the MMS has distributed approximately $164.9 billion to 
Federal, State, and Indian accounts and special funds, including 
approximately:
      $101.1 billion to the General Fund of the U.S. Treasury;
      $20.4 billion to 38 states;
      $5.2 billion to the Department's Office of Trust Funds 
Management on behalf of 41 Indian tribes and 30,000 individual Indian 
mineral owners; and
      $38.2 billion to the Land and Water Conservation Fund, 
the National Historic Preservation Fund, and the Reclamation Fund.
    MMS carries out these responsibilities under statutory mandates and 
ongoing oversight by Congress, the Government Accountability Office 
(GAO) and the Department's Office of Inspector General.
    I am happy to point out that for the past five years, as part of 
its annual CFO audit, MMS consistently has received clean audit 
opinions from the Office of the Inspector General's contracted 
independent auditing firm.
1998-1999 OCS Leases without Price Thresholds for Royalty Relief
    This January, the Department's Office of Inspector General 
announced its findings on the 1998 -1999 deep water leases issued 
without price thresholds. The MMS requested this independent review 
last year. We appreciate the Inspector General's work and would note 
that the Department and the MMS have undertaken some procedural and 
organizational changes regarding lease sale packages and instruments in 
order to strengthen our leasing procedures.
    The Department of the Interior shares Congress's frustration that 
during the previous Administration price thresholds were not included 
in the 1998--1999 deep water leases. This Administration has included 
price thresholds in all deep water leases it has issued with royalty 
relief. The American people own these resources and are entitled to 
receive a fair return.
    The Deep Water Royalty Relief Act of 1995 required deep water 
leases issued from 1996 - 2000 to include a royalty incentive to allow 
companies to produce a set volume of oil and gas before they began 
paying royalties. Since enactment, the deep waters of the Gulf of 
Mexico have become one of the Nation's most important sources of oil 
and natural gas. Price thresholds limit royalty relief when oil and gas 
prices are high. Price thresholds were included in leases before 1998 
and after 1999. They were not included in the 1998--1999 leases.
    This matter has been a focus of mine since I assumed this position 
last fall. In an attempt to address the missing price thresholds, we 
are continuing to discuss this issue with companies in order to obtain 
agreements to apply price thresholds to the deep water leases issued in 
1998 - 1999. To date our efforts have focused on obtaining the much 
larger royalty amounts to be realized from future production, estimated 
to be about $9 billion.
    To date we have reached agreements with six companies. This is a 
significant but we need more companies to sign agreements.
    I have adopted three basic principles to guide my actions in 
seeking to resolve this matter. First, our focus will be to negotiate 
price thresholds in leases prospectively; second, we will not give 
economic advantage to one company over another; and finally, we will 
strive to amend these agreements in a way that will minimize litigation 
risk.
    To achieve these principles, the Administration and the Congress 
must work together. We cannot do this alone.
    We know that the House has already addressed this issue 
legislatively. We appreciate Congress's efforts to encourage companies 
to agree to pay additional royalties. However, we must be mindful of 
potential unintended consequences. H.R. 6 could conceivably result in 
litigation. If legislation addressed future lease sales, and if a judge 
were to enjoin future lease issuance for a period of time, the 
resulting impacts would be significant. Litigation could take years to 
resolve. The MMS has attempted to project what the potential loss of 
production, revenue and royalties if lease sales were delayed for a 
three-year period could look like.
    Attached Figure C shows for example, for a 3-year delay, production 
over 10 years would be reduced 1.6 billion barrels of oil equivalent 
(boe).
    Attached Figure D shows for example, the expected cumulative 
revenue decline over a 10 year period of $13 billion for a 3-year 
delay.
    We all can agree this would not be in the Nation's best interest. 
The OCS is a significant supplier of oil and gas. We cannot afford 
major delays in offshore energy production due to unintended 
consequences.
    We look forward to working with Congress on resolving this issue of 
national interest.
Management of Royalty Revenue
    My second focus is the management of royalty revenue collected from 
Federal and Indian mineral leases. In FY 2006, about 2,600 companies 
reported and paid royalties totaling $12.6 billion from approximately 
27,800 producing Federal and Indian leases.
    MMS's mineral revenue processes and procedures are complex and 
involve implementing myriad statutory authorities and regulations, as 
well as a complex set of case law from over 50 years of administrative 
and judicial decisions on Federal royalty matters.
    The process begins when companies calculate their payments for 
royalties owed the Federal government. Royalties are calculated based 
upon four components: the volume of oil and gas produced from the 
lease, which is verified by BLM or MMS officials during regular on-site 
inspections; the royalty rate, which is specified in the lease 
document; the value of the oil and gas as determined by regulations; 
and any deductions for the costs of transporting and/or processing the 
oil and gas production, which are also determined by regulations. 
Companies are required to report this information and submit their 
royalty payments to MMS on a monthly basis.
    MMS receives reports and payments from payors and accepts them into 
the accounting system, similar to filings with the Internal Revenue 
Service. Fundamental accounting processes identify revenue sources, and 
funds are distributed to recipients as prescribed by law. Interest is 
assessed on late and/or under payments.
    MMS's audit and compliance program assesses whether royalty 
payments are correct. The types of questions that arise during 
compliance activities include whether the company reported and paid its 
royalty on the right volume, royalty rate, and value and whether the 
company correctly calculated allowable transportation and processing 
costs. Findings of underpayments are followed by collection of the 
payment plus interest. Enforcement proceedings range from alternative 
dispute resolution to orders to pay and penalty actions.
    The current compliance strategy uses a combination of targeted and 
random audits, compliance reviews, and royalty-in-kind property 
reconciliations. The strategy calls for completion of the compliance 
cycle within three years of the royalty due date. In Fiscal Year 2006, 
this strategy resulted in compliance reviews on $5.8 billion in Federal 
and Indian mineral lease revenues, 72.5 percent of total mineral 
revenues paid for calendar year 2003.
    In recent years, MMS has completed an increased number of audits, 
doubling the number of audits in the most recent four-year period over 
the previous four years. From 1998--2001, MMS, State, and Tribal 
auditors completed 784 audits compared to the 1,572 audits completed 
from 2002-2005. This increase is partially the result of the effort in 
2005 on the part of MMS to close a significant number of old audits as 
a result of a recommendation from an external peer review of our audit 
activities. Collections based on audit work fluctuate from year to 
year. The apparent reductions in collections resulting from compliance 
efforts from 2001 through 2004 stand in contrast with very large 
collections in the 1998-2001 period. This anomaly is due to resolution 
of numerous lawsuits on undervaluation of crude oil and natural gas 
during the 1998-2001 period. The result of the resolution of these 
issues was large payments of additional royalties. Because these issues 
were resolved, no additional large payments were owed in 2002-2005.
    The MMS compliance and enforcement program has generated an annual 
average of more than $125 million for each of the last 24 years. In 
other words, MMS has collected a total of more than $3 billion dollars 
in additional mineral revenues since program inception in 1982.
    From FY 2003 through FY 2005, for every dollar spent on compliance 
reviews, MMS has collected $3.27. For every dollar spent on audits, MMS 
has collected $2.06.
    MMS aggressively pursues interest owed on late payments as required 
by law. In Fiscal Year 2006, MMS issued over 3,800 late payment 
interest bills and collected a net amount of $7 million.
    MMS has authority to use civil penalties in situations where 
routine compliance efforts have been unsuccessful. During the last 5 
years MMS has collected over $23 million in civil penalties resulting 
from MRM enforcement actions. So far in FY 2007 MMS has issued over $2 
million in civil penalty notices that are now in the administrative 
process. When combined with other MMS enforcement actions during the 
same time frame, MMS collected a total of $52.4 million.
    Last year, while performing reconciliation of volume imbalances, 
the MMS promptly identified that the Kerr McGee Oil and Gas Corporation 
had under-delivered royalty gas volumes to MMS's Royalty-In-Kind (RIK) 
program--at a time of very high gas prices. MMS pursued the issue and 
collected $8.1 million--based on these high price periods--to resolve 
the issue.
    In December, MMS announced that a bill for over $32 million had 
been issued to BP America Production Company for additional royalties 
and interest due identified through audit work of BP's coalbed methane 
production that occurred in the state of New Mexico.
    These day-to-day efforts are just part of MMS's normal course of 
business. These efforts are not only effective at ensuring compliance, 
but also beneficial in bringing the appropriate revenues to the states, 
Indians, and the American public.
    I would like to emphasize, however, that although this work is 
important, our focus is not on numbers of audits or amounts obtained in 
collections. The real goal is to increase upfront compliance. We 
measure success in having higher levels of upfront compliance so that 
companies are making correct payments the first time. Audits act as a 
deterrent, but we hope that audits will reveal fewer problems as 
companies increase voluntary compliance.
    MMS has taken steps to improve compliance rates in order to achieve 
this goal. They include the following:
      Clearer regulations--MMS has made significant progress in 
developing and implementing clearer regulations, eliminating much 
uncertainty and ambiguity that previously resulted in major findings.
      RIK--MMS is receiving an increasing percentage of 
revenues through its RIK program and has eliminated many valuation 
issues for the RIK volumes. During FY 2005, for example, MMS received 
about one-third of its revenues through RIK.
      More effective compliance strategies--Compliance reviews 
have allowed MMS to cover more properties than were possible using 
audits alone, thereby increasing the deterrent effect. This increased 
presence encourages companies to be more vigilant about proper 
reporting and payment.
    We appreciate the recent report of the Office of Inspector General 
concerning the audit and compliance program. The results are similar in 
substance to audits I have reviewed in State government or in the 
private sector. My experience is that in any organization with such 
large and complex operations, I would expect any performance audit to 
find opportunities for improvement. MMS has embraced the findings, and 
has an action plan to address them.
    We note the Inspector General's major conclusion that compliance 
reviews are a useful tool in our program, and we look forward to 
implementing recommendations to further improve our application of 
compliance reviews. We submit for the Committee's attention our 
``Action Plan to Strengthen Minerals Management Service's Compliance 
Program Operations'' which documents improvement actions taken and 
planned in this area.
    MMS does not work alone in its efforts to ensure the proper 
collection of royalties; MMS collaborates with the States and tribes on 
our compliance and audit activities. In addition, every three years, 
the federal audit function of MMS is peer-reviewed by an outside 
independent certified public accounting firm. Most recently, in 2005, 
the MMS audit program was found to meet all applicable government 
auditing standards. I am also happy to point out that for the past five 
years, as part of its annual Chief Financial Officer audit, MMS 
consistently has received clean audit opinions from the Office of the 
Inspector General's contracted independent auditing firm.
    Having said that, it also is true MMS continues to look for ways to 
improve its programs, practices and performance. We welcome input from 
this Committee, the full Congress, the Office of the Inspector General, 
GAO and the public.
    In response to the recent interest regarding the accuracy and 
effectiveness of the MMS's royalty management program, Secretary 
Kempthorne and I determined that an independent panel should be 
convened to review the procedures and processes surrounding MMS's 
management of mineral revenue. We are committed to ensuring our 
processes are effective and transparent, and we welcome advice and 
counsel.
    The new panel will operate as a Subcommittee under the auspices of 
the Royalty Policy Committee, an independent advisory board appointed 
by the Interior Secretary to advise on royalty management issues and 
other mineral-related policies.
    The Subcommittee on Royalty Management has been asked to review 
prospectively:
      The extent to which existing procedures and processes for 
reporting and accounting for federal and Indian mineral revenues are 
sufficient to ensure that the MMS receives the correct amount.
      The audit, compliance and enforcement procedures and 
processes of the MMS to determine if they are adequate to ensure that 
mineral companies are complying with existing statutes, lease terms, 
and regulations as they pertain to payment of royalties.
      The operations of the Royalty-in-Kind program to ensure 
that adequate policies, procedures and controls are in place to ensure 
that decisions to take federal oil and gas royalties in kind result in 
net benefits to the American people.
    Appointments to the Subcommittee were made on March 21, 2007. We 
are pleased that former Senators Bob Kerrey and Jake Garn have agreed 
to serve as co-chairs of this oversight. Secretary Kempthorne served 
with them in the Senate and knows firsthand of their highest integrity. 
The other members of the committee bring a wealth of knowledge to this 
process. They include representatives from state and tribal 
governments, industry, academia and revenue collection for the 
government. We are grateful for their service and look forward to their 
recommendations.
    The Subcommittee will conduct its review over a six-month period 
and then provide its final findings and recommendations to the full 
Royalty Policy Committee and the Secretary of the Interior. We will be 
happy to share the recommendations with you when they are available.
State and Tribal Royalty Audits
    As part of its compliance assurance activities, the MMS administers 
delegated and cooperative audit agreements with eleven States and seven 
Indian Tribes. The States and Tribes are working partners and an 
integral aspect of the overall onshore compliance efforts. Tribes 
perform audits on tribal mineral royalties within their reservation and 
the States perform audits on Federal leases within their boundaries. 
The MMS conducts compliance reviews and audits to provide compliance 
coverage over properties not covered by the States and Tribes.
    The Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA) 
tasks the Department of the Interior with ``utilizing the capabilities 
of the states and Indian tribes in developing and maintaining an 
efficient and effective Federal royalty management system.'' Title II 
of this same statute enabled the Secretary of the Interior to enter 
into cooperative agreements with states and Indian tribes to carry out 
inspections and audits on Federal and Indian mineral leases within 
their respective state or reservation. Under Title II, Section 202, we 
have the Tribal Cooperative Audit Program; and under Section 205, the 
State Delegated Audit Program).
    Since the first agreement was signed with the State of Wyoming in 
1981, MMS has held regular meetings with state and tribal 
representatives to discuss issues of mutual importance. The 
relationship among MMS and states and tribes has highlighted 
partnerships as well as contractual obligations.
    Funding for States and Tribes participating in the Section 202 and 
Section 205 programs was around $9.1 million in FY 2006 and remains 
level for FY 2007. The MMS continues to explore how to best allocate 
available budget resources for the 202/205 Program. We have analyzed 
cost, workload, and risk data to apply ``best business case'' criteria 
to the funding of this program. The mineral revenues at risk and number 
of producing leases are used to establish funding allocations among 
States and Tribes. Other factors, such as program effectiveness and 
anticipated increases and decreases in revenue activity, are also 
considered.
    To manage compliance coverage of the onshore Federal lease universe 
within available funds, MMS developed a ``business case'' that uses the 
number of producing leases and total royalty revenues received by 
states to allocate resources beginning in FY 2006. The attached table 
reflects the number of leases and revenues received by states and the 
MMS funding allocation for FY 2004 through 2007. You will notice that 
the total amount of funds devoted to the audit function of states has 
not decreased. However, it is apparent from this analysis that some 
states were significantly over-funded or under-funded in comparison to 
others. MMS designed the business case to correct such inequities while 
maintaining overall program funding.
    The MMS had several briefings on this methodology with the 
Congressional delegations representing impacted states, the Department 
of the Interior's Office of the Inspector General and the Government 
Accountability Office. During these briefings, the majority of 
participants seemed satisfied that our methodology was fair and 
reasonable.
    At an August 2006 meeting in Alaska, MMS announced to its state and 
tribal compliance partners that we will be working on improving the 
effectiveness of our joint meetings and that MMS will fund one national 
meeting annually at a central location, as well as regional and topical 
meetings as needed. The national meeting will address issues common to 
all states and tribes. Regional and topical meetings will focus on 
issues specific to a given region of the country. These meetings will 
provide additional benefits to all parties and enhance communication 
among MMS and the delegations. States and tribes have also requested 
training on specific issues which are difficult to address in a 
national meeting, but will be an integral part of our regional 
sessions. For example, once the final rule implementing the geothermal 
provisions of the Energy Policy Act of 2005 is published, MMS will hold 
a topical meeting with those states that have Federal geothermal 
production to provide training on the rule and to coordinate our 
compliance efforts. Discussing this topic at a national meeting is not 
productive when very few states and no tribes are affected.
    The MMS will continue its practice of coordinating with state and 
tribal delegations in preparing the agenda. For many years, 
representatives from the Office of the Inspector General have regularly 
attended the STRAC meetings, and they will continue to be invited.
Conclusion
    In the six months since I was confirmed to this position, I have 
been working closely with the MMS to understand the complex processes 
associated with accounting for the revenues generated from oil and gas 
development on Federal lands, including the Outer Continental Shelf. In 
an effort to gain a greater understanding of this work, I have traveled 
to MMS's Denver office where I reviewed the procedures and controls 
used to ensure that minerals revenues are properly reported and 
accounted for and most recently I attended a sale of Royalty-in Kind 
oil and gas. I also have visited offices and reviewed operations in the 
Gulf of Mexico Regional Office.
    This work is very important and must be undertaken carefully. 
Equally important, and very important to Secretary Kempthorne and me, 
is that we conduct business with the highest standards of ethics 
possible. Making sure we can live up to that standard has been a high 
priority of mine. I have stressed, and will continue to stress, our 
obligation to conduct ourselves in accordance with the highest ethical 
standards and to be accountable for our actions. Moreover, our conduct 
must be ethical both in fact as well as in perception.
    To summarize my remarks today, I want to reiterate I will continue 
to focus on several key areas of oversight to the Minerals Management 
Service.
    We will issue our 5-year proposed OCS leasing program on time. This 
is an important plan that addresses national energy security and 
facilitates the development of critical energy resources now and in the 
future.
    I will continue to seek prospective royalty agreements with the 
companies that entered into leases issued in 1998 and 1999 that lack 
price thresholds in order to capture the majority of the revenues the 
government would have received.
    I am pleased at the results of our efforts thus far, but recognize 
that there is much more work to be done. I look forward to continuing 
to work with you, the Members of Congress, to address this important 
issue.
    In addition, I will continue to work with MMS to review and improve 
our royalty management programs. I have every confidence that MMS will 
successfully implement appropriate Inspector General's recommendations 
and that the review by the soon-to-be finalized royalty policy 
subcommittee will provide a fresh perspective on royalty management 
issues and challenges.
    I welcome your input on all of these initiatives, and I look 
forward to working with you.
    Mr. Chairman, this concludes my remarks. I would be happy to answer 
any questions you have.
    [NOTE: Attachments to Mr. Allred's statement have been retained in 
the Committee's official files.]
                                 ______
                                 
    The Chairman. Thank you both for your testimony this 
morning.
    Let me begin with you, Assistant Secretary Allred. I 
appreciate the facts and the figures that you have given in 
your testimony this morning, but, as I referred in my opening 
statement, it is a fact that since the year 2000 there has been 
a dramatic decline in the auditing function in favor of 
compliance reviews.
    The IG reported last December that MMS is now using 
traditional audits on less than 10 percent of leases. The IG 
also noted that compliance reviews did not provide the same 
level of assurance as an audit. As I said earlier, in my view 
there is a dysfunctional situation here ripe for the type of 
abuses that are repeatedly reported.
    So it does appear that we are getting ripped off, plain and 
simple. You have said here today that you propose additional 
audits to fix it. I believe that is what you said, and that is 
my question. Are you going to increase the number of audits 
that you undertake?
    Mr. Allred. Mr. Chairman, one of the advantages we have 
with the compliance reviews, and incidentally this is not 
different than what the IRS does as well, is it allows us to 
look at a much broader spectrum of those who are responsible 
for providing the royalties.
    With the compliance review program, we were able to review 
about 72 percent. If we were to----
    The Chairman. My question is will you increase the number 
of audits? Yes or no.
    Mr. Allred. What we are doing with regard to the audit 
program is based upon the recommendations of the Inspector 
General is we are changing our compliance review program to 
make our audits more risk-based. That may result in more 
audits, depending upon what comes out of the compliance review.
    We are going to have to use both if we are going to have to 
cover the majority of the royalties that we----
    The Chairman. I am not agreeing that both need to be used, 
but you are saying only that you may increase the number of 
audits?
    Mr. Allred. Mr. Chairman, we haven't finished the risk-
based management criteria yet that we are working with the IG 
on.
    The problem here is we have limited resources, as does 
everyone else. Given the resources we have, we need to try to 
cover the largest population of royalty payers that we possibly 
can.
    If we do just audits we will cover a much smaller portion 
of that population, so given both resources what we hope to do, 
and again I would refer you to the returns per dollar spent. We 
need to use both. My belief if we need to use both in the 
appropriate relationships.
    The Chairman. Let me ask Mr. Gaffigan. In your testimony 
you basically state that the MMS is unable to determine whether 
the royalties it receives in kind are equivalent to receiving 
those royalties by cash payments. Is that accurate?
    Mr. Gaffigan. Yes. When we looked at the program in 2003-
2004, and again it was a much smaller program, they were having 
some difficulty with finding the right information to make that 
judgment.
    We made recommendations to improve the information. We feel 
that they were responsive to those recommendations. The 
question is whether today at this larger scale they are 
implementing those recommendations and making those 
determinations as we go forward. That is what we are going to 
look at in our work for you as we go forward.
    The Chairman. So we are basically at a point where it has 
expanded so rapidly that we need to decide whether it should be 
eliminated?
    Mr. Gaffigan. Well, it is at a good size. I mean, it is 
one-third of the royalties they took in Fiscal Year 2005. I 
don't know. Obviously whether you eliminate or not is a policy 
decision that you guys will make, but it provides an 
opportunity for them to understand the market.
    When we looked at this, we looked at RIK going back to 1999 
when it was first talked about. We said at the time there were 
certain conditions which you needed to look to where RIK may 
make some sense, and those were sort of the ability to have 
access to pipelines, processing for gas, large volumes and 
market expertise.
    If you can combine those factors it may make sense to go 
with an RIK. I think what we will try to do in looking at the 
RIK program, as well as the RIV program because you can't look 
at one without the other, is to address those questions.
    The Chairman. Thank you.
    The gentleman from New Mexico?
    Mr. Pearce. I thank the Chairman.
    Mr. Allred, on the compliance review process, now the IRS 
uses compliance reviews and the SEC uses compliance reviews, 
and yet we are given the impression today that compliance 
reviews are a complete abomination, that they are something 
that has only been seen by the robber barons that are currently 
running the White House.
    If you took the full amount of production, and you have 
that number available to you, don't you? You may not have it 
today. We know that the amount of percent that the government 
is supposed to take is about 12.5 percent generally on 
royalties, but it is creeping up in some places because, 
frankly, the economics are better.
    When you do the calculation, the total number of barrels 
produced times the royalty rate, you get a number over here at 
the right-hand side of the page that is some number. Now, I 
think Johnnie Burton testified that we are getting almost 98 
percent or 99 percent. Can you verify that number?
    In other words, I am trying to remember the hearing from a 
couple weeks ago. How much percent of the royalties are we 
actually collecting if you just do a straight mathematical 
calculation?
    Mr. Allred. Mr. Pearce, I don't have those numbers with me, 
but as we look through the compliance program what we look to 
see, and the reason that that number is difficult is, you will 
remember, you have allowed in the process for the companies to 
deduct, just like in the income tax----
    Mr. Pearce. We are getting way too complex, sir. I 
appreciate that.
    You have made a statement that you are convinced that your 
agency is collecting what it should set out to collect. If you 
could get that total number of barrels times the percentage 
rates on the different blocks because some are different rates, 
show me the calculation and then show me you said you collect 
$12.8 billion, show me what it should be because I don't think 
we are risking much using the compliance review process. Will 
you get me that?
    Mr. Allred. Yes, I will, Mr. Pearce.
    Mr. Pearce. OK. All right. Thanks.
    In our last hearing about the Clinton leases the IG 
concluded that this whole business was a mistake by the Clinton 
Administration, and they based that on several factors, but 
when we went through that factor the IG himself said that there 
is no evidence that omission was deliberate, but then on page 7 
of his own report says that the Gulf of Mexico supervisor in 
charge of leases was called by D.C. headquarters and directed 
to remove the price triggers.
    That to me seems deliberate. Does it appear that it was a 
deliberate act to you?
    Mr. Allred. Mr. Pearce, yes, it does.
    Mr. Pearce. In the IG report he concluded that the omission 
was a mistake because there was a policy to include price 
thresholds. However, are we looked through thousands of emails 
from that whole period of time we didn't find one instruction 
to direct people to take. There wasn't one piece of evidence 
directing that the price thresholds would be included.
    He declared then when we made that point, he said well, it 
was more of an innuendo policy. What do you think about 
innuendo policies? This is our IG. This is the ranger, the 
Texas Ranger. What about innuendo policies?
    Mr. Allred. Well, Mr. Pearce, I can tell you that in the 
Department of Interior now we do not have innuendo policies.
    Mr. Pearce. All right.
    Mr. Allred. We will specify what they are.
    Mr. Pearce. The IG also admitted after we began to draw his 
attention to letters that we held up in front of him and said 
you say there is no smoking gun, but you happened to leave the 
smoking guns out. Here are the letters from the Clinton 
Administration employees that were excluded from his big 
report, and they all said that the exclusion of price 
thresholds was intentional.
    We are trying to unravel a pretty messy deal here. I don't 
know. What do you think about the government? Your agency has 
offered incentives, has even gone beyond, to try to get the 
companies to kind of voluntarily come into compliance.
    I worry about that. I think you all are fair-minded. I 
don't always agree, but I worry about this one step. Would you 
talk about that policy where you are encouraging people to 
change the parameters which they had previously in place?
    Mr. Allred. I would be glad to, Mr. Pearce. You know, we 
believe these are contracts between the Federal government and 
these companies, and as with any contract you have to have the 
agreement of both parties to change it.
    We are encouraging the companies to come in voluntarily, 
and six have done so. They represent a little over 20 percent 
of what we believe will be future production. We are continuing 
to talk to others to add the price threshold to their leases. 
We do not believe we can force them, but there are a number of 
them that believe they need to do so as well.
    Those discussions continue. I think though that we will not 
make further progress in that until Congress decides what role 
it wants to play because I think currently there is a bit of 
confusion about what will happen, and the companies are not 
willing to come in until that is decided.
    Mr. Pearce. Thank you.
    Mr. Chairman, I have other questions, but I see my time has 
expired. If we get a second round, I would appreciate it.
    The Chairman. OK. The Chair is going to recognize Members 
by the order in which they came in the hearing this morning. 
Ms. Bordallo would be next, the gentlelady from Guam.
    Ms. Bordallo. Thank you, Mr. Chairman, but I have no 
questions.
    The Chairman. OK. The gentleman from Arizona, Mr. Grijalva. 
Do you have questions?
    Mr. Grijalva. No, sir.
    The Chairman. Yes. The Chair will recognize the gentleman 
from Colorado.
    Mr. Lamborn. Thank you, Mr. Chairman. I have no questions, 
but I would be happy to yield my time to the Ranking Member in 
case he had any last follow-up questions.
    Mr. Pearce. I thank the gentleman.
    Mr. Allred, in your testimony you give us some views on 
H.R. 6. One of the things that legal scholars have talked about 
is that it appears that H.R. 6 is a takings, a constitutional 
abridgement; that is, that is offends the Constitution of the 
United States in taking things without due process or whatever 
is required.
    What do your legal advisors tell you the strength of the 
Fifth Amendment or the breach of contract claims are on H.R. 6? 
In other words, what are you expecting if that passes for your 
challenge to be to implement it?
    Mr. Allred. Mr. Pearce, the advice as I understand it is 
that we believe that that would be challenged in court, and our 
fear is that that challenge would result in a prohibition or an 
injunction against going forth with lease sales.
    I have some graphs if anyone wants to get more detail, but 
our concern is that a three-year delay in leasing could well 
mean about 1.6 billion barrels of oil would not go into the 
U.S. economy and that about $13 billion over 10 years would not 
come into the Federal Treasury.
    Mr. Pearce. OK. On our next panel we have a witness. Tell 
me a little bit about the government employees who obtain 
information in the course and scope of their duties and then 
their ability to file a claim under the False Claims Act.
    What about an MMS auditor that received information from a 
company in the course of an audit? Should they be able to go 
under the False Claims Act and file? Can you explain your 
agency's position on that?
    Mr. Allred. I would be glad to, Mr. Pearce. We believe that 
those auditors should not be able to use information that is 
available to them through their official course of duties.
    There are two different mechanisms if they have concern 
that they can raise either with management or with the 
Inspector General. As we have asked the Inspector General to 
review these issues, and I think you will see a report from him 
within the next few weeks. I anticipate that that report will 
indicate that those individuals did not afford themselves 
either one of those routes to bring their concerns forward.
    So I am concerned that auditors within the Department of 
Interior should not be able to use information derived from 
their responsibilities as public employees for their own 
personal gain.
    Mr. Pearce. In other words, they have access to data that 
as a private citizen they could not have access to and so the 
government requires people to open up their books to show the 
most sensitive pieces of their company, and then the person who 
used the government key to unlock that door that would normally 
be closed then uses data to go out and file a claim in which 
they personally stand to make a large sum of money.
    Now you are just saying that you would disagree with that 
particular intent. Would you say it crosses an ethical line?
    Mr. Allred. Yes, sir, I believe it does.
    Mr. Pearce. OK. Talk a little bit about the Tribal 
Cooperative Audit Program, specific examples compared to what 
we see in New Mexico or California or North Dakota, if you 
would. We have just about a minute left, so if you would make 
it tight.
    Mr. Allred. Yes, I will. As you are aware, we contract with 
states and tribal auditors to assist us in auditing. What we 
have done recently, and it has caused some consternation, is we 
have looked at the workload specifically with regard to those 
states or tribes, and as a result of that we have reallocated 
some of the funds. We have reduced the funds.
    Mr. Pearce. Let me interrupt for just a second. I mean, 
some of the states are complaining they are not getting enough 
money, but their amount per lease is tremendously higher than 
New Mexico at $155 per lease.
    You provide a chart of that, and I appreciate that, in your 
testimony. New Mexico gets $155 per lease. North Dakota, for 
instance, is up in the $700 range, California above $2,500 per 
well in this audit process, and yet they are complaining.
    We will get into this a little bit later. I see my time has 
expired. I do appreciate the gentleman.
    The Chairman. The gentleman from California, Mr. Costa.
    Mr. Costa. Yes. Thank you very much, Mr. Chairman. As a 
continuation of the hearing we held last month, I thank you for 
continuing this effort. I think it is very important. This 
relates to the Committee and the subcommittees' efforts in this 
110th Congress.
    Mr. Allred, you spoke I guess in your testimony to the 
Senate Policy Committee on Energy, if I understand it 
correctly, that there was nothing drastically wrong, and I know 
you have only been kind of on the job for six months here, but 
with the Minerals Management Service's bureau, and yet it is my 
understanding that you also have taken steps toward impaneling 
a commission to study the Minerals Management Service.
    I am trying to understand more clearly the two statements 
if there is nothing drastically wrong. I mean, we have put 
together panels when we asked former Secretary Baker and former 
Congressman Hamilton to make recommendations on the Iraq Study 
Commission. We have had a similar panel put together when we 
were looking with Shalala and Dole on issues involving 
veterans' health care just recently.
    If there is nothing drastically wrong, what is the need for 
the panel?
    Mr. Allred. Mr. Costa, I think there is always a need for 
outside review, and sometimes we get so involved in our day-to-
day activities that it is very beneficial to have those outside 
reviews.
    That is why I have supported the Inspector General doing 
the performance audits. I have had those throughout my career. 
I think they are very valuable to identify areas where we can 
continue to improve.
    One of my concerns when I asked that panel to be formed by 
the Secretary was to make sure that we not only deal with the 
issues and how can we improve, but that we also make sure as we 
go forth with that that we deal with the perception and the 
perception that it might not be as well, so in addition to the 
Inspector General I wanted another group to come in to give us 
their impression.
    Mr. Costa. I appreciate that. So you have appointed the 
panel, as I understand it. Do you have timelines in terms of 
when you would like them to report back to the Secretary?
    We hope that you will be able to share that with the 
Committee.
    Mr. Allred. Mr. Costa, we would be most happy to. It will 
be reported to what is called the Royalty Policy Committee, 
which is a FACA committee. It will be public in that thing, and 
we would be most happy to brief you.
    Mr. Costa. Do you have timelines for them?
    Mr. Allred. I have asked them to do it in a six month time 
period.
    Mr. Costa. Good. We will follow up with that.
    You made a comment at the end of your first line of 
questioning to the gentleman from New Mexico, Mr. Pearce, when 
you were talking about I believe the six out of the 45 that had 
worked with you, but you said that there was some uncertainty I 
think--these are my words, not your words--as to the 
determination as to what would be determined here by the 
Congress.
    Could you explain further? I wasn't clear as to where you 
were going with that.
    Mr. Allred. I would be very happy to. In my continuing 
discussions with the companies who have 1998 and 1999 leases 
they are uncertain as to what Congress might do, and because of 
that they are very reluctant to enter into any further 
agreements with us until they know what that----
    The Chairman. In terms of what, changing the pattern in 
terms of the royalty? What uncertainty specifically? Can you 
put your finger on that?
    Mr. Allred. I think the questions they have as to whether 
or not there would be additional costs that might be incurred 
as a result of what Congress would do.
    Mr. Costa. All right. Let me, Mr. Gaffigan, because my time 
is almost expired.
    On the issue of compliance review versus audits, in terms 
of standard procedure for investigation and accounting 
practices is there a random sampling or a level in which you 
think you can best get to the determination as to what in fact 
is being done appropriately and what is not being done, and do 
you think in this case we have reached whatever that 
appropriate randomness is with regard to Minerals Management 
Service?
    Mr. Gaffigan. I would commend to you the IG's report 
recently in December that looked at this issue. We have been 
focusing lately on the fiscal impact, but in general when you 
are doing an audit one of the things, the criteria, you try to 
look at is materiality; in other words, where are the big 
dollars, no matter whether it is an audit of royalties or any 
other issue.
    You have to constantly be looking at that. You cannot sort 
of go with one program and then change as things change. As 
they move from RIK to RIV or using more RIK, there are also 
issues to think about. What kind of audit steps do we need to 
change? What kind of things do we need to look at in RIK?
    That doesn't mean, you know, that the audit function goes 
away just because you have RIK. It is a range of issues. There 
is no one number that is out there. They should constantly be 
looking at it, and one of the criteria they should be applying 
is sort of the materiality of what they are looking at.
    Mr. Costa. OK. My time has expired, but I would like to 
pursue that line of questioning. I may have to submit those 
questions to you.
    I yield back to the Chairman.
    The Chairman. The Chair will note the absence of any Member 
on the Minority side at this time, but will ask unanimous 
consent that all Members be allowed to submit questions for the 
record, and we would ask the witnesses to follow up on those 
written questions at a later time.
    The gentleman from Wisconsin, Mr. Kind, is recognized.
    Mr. Kind. Thank you, Mr. Chairman, and thank you for 
holding this very important hearing.
    As a former Ranking Member on the subcommittee, a lot of us 
on the Committee have been disturbed in recent years in regards 
to some of the reports coming out of MMS and Department of 
Interior in regards to royalty collections.
    I think this hearing is very pertinent and very relevant to 
the type of work that we need to do in this committee in the 
coming year, and I appreciate the witnesses' testimony. We are 
going to have a couple of panels coming before us.
    Mr. Allred, let us start with you. Obviously you have heard 
reports in the media. We have heard reports too in regards to 
possible retaliation of some auditors in relation to royalty 
relief and how it is being conducted
    If you take a look at those auditors in question, and we 
are going to have a couple of them testifying in a little bit. 
If you look at their resume and their background and 
experience, and they do seem to be eminently qualified, and yet 
when they were trying to highlight issues and problems at MMS 
it certainly smacks of retaliation, which is very disturbing.
    There may be a very perfect, logical explanation of what 
took place. Maybe if you can illuminate us a little bit in 
regards to the cases specifically that would be helpful to the 
Committee.
    Mr. Allred. I would be glad to. First of all, a couple of 
issues. The first is that there was a process by which those 
concerns could have been brought forward. They were not.
    As I indicated earlier, we have asked the Inspector General 
to investigate, and I am informed that his report is just about 
done. That will be available to both you and to us.
    Second, the question of retaliation. He has also I believe 
looked at that, so that information will be available as well. 
What some are calling retaliation is the issue of whether or 
not we should continue those auditors to let them audit those 
accounts for which they would personally benefit from.
    The Government Accounting rules prohibit that. They require 
an independence and so those auditors were removed from that 
audit function. It was not retaliation. It was done to make 
sure that we comply with ethics, ethical questions and with the 
Government Accounting Standards.
    Mr. Kind. We will have an opportunity to question them in a 
little bit in regards to what took place in the individual 
instances and that, but, getting back to what Mr. Costa was 
raising, you have testified here today that your Department has 
been successful in renegotiating six of the deep water leases 
out of a potential 45 contracts that exist.
    Are there any legal challenges right now prohibiting 
further negotiations with these companies? What is the 
stalemate with the remaining companies at this point? You 
indicated there is uncertainty in regards to future 
congressional action, but is there any other obstacles that MMS 
is facing right now?
    Mr. Allred. There really are none, and we continue those 
sorts of discussions, but there is a reluctance on their part 
to agree until they know what the whole playing field is.
    As Mr. Gaffigan testified, there is a challenge to the 
basis of the law that you passed as to whether or not we can 
apply thresholds, and certainly that is a real question. We 
believe we are on sound ground in defending your law, but that 
is a challenge.
    Mr. Kind. So that may be freezing the good faith efforts to 
try to reach an agreement outside of legislative action I 
assume.
    Mr. Gaffigan, let me turn to you. We are just trying to 
understand the culture at MMS. I have had a chance to briefly 
review the report that you submitted before the Committee.
    In your opinion, what is really the heart of the problem 
here? Is it just insufficient personnel or resources in data 
collection there, or is there a greater culture at MMS making 
it more difficult to collect proper royalty in these 
circumstances?
    It certainly seems in your report that you are concerned 
about data collection processes and the lack of information in 
order to make good determinations, but in your opinion that is 
the real obstacle?
    Mr. Gaffigan. I think the challenge comes down to two 
things: People and the information. MMS is an environment where 
the kind of people they would hire to do the sorts of things 
can also get jobs in industry, and when prices are high in the 
industry and things are going well it is harder and harder to 
draw the kind of expertise that you need to bring in to do 
things like royalties-in-kind.
    The other piece of the puzzle is information. Consistently 
as we have looked at it as auditors, we have consistently been 
sort of frustrated by the lack of the ability to get good, 
timely information.
    You know, just in preparing for this hearing we were trying 
to get a sense of well, how much has gone into RIK lately? You 
know, right now the best current information is based on Fiscal 
Year 2005. Here we are in the middle of Fiscal Year 2007. We 
have seen this theme over and over as we try to look for good 
information.
    Mr. Kind. I see. Thank you. Thank you both for your 
testimony.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Massachusetts, Mr. Markey.
    Mr. Markey. I thank the Chair very much. I am trying to be 
the winner of the Nick Rahall sound alike contest today. I 
think I am doing a pretty good job.
    The Chairman. You have a long way to go.
    Mr. Markey. This pollen is unbelievable today.
    Has the Administration, Mr. Allred, reversed its position 
and now agrees that the language in H.R. 6 would not constitute 
a takings and would not violate the Equal Protection Clause?
    Mr. Allred. Sir, I am not an attorney and I am not aware of 
any change in our position, nor do I have enough expertise to 
really comment on whether it would or would not.
    Mr. Markey. Well, the testimony from the Administration is 
that it would constitute a takings and would violate the Equal 
Protection Clause, so you are saying that hasn't changed.
    In your testimony you cite the prospect of litigation as 
the result of the Administration's opposition to the provisions 
of H.R. 6. Our committee, Mr. Rahall, I and Mr. Miller and 
others, we got some of the nation's most respected 
constitutional scholars to actually help us write the language 
which is in H.R. 6.
    As you know, anyone can bring a lawsuit, but constitutional 
scholars indicate that this language is in fact going to be 
upheld so it doesn't really stop obviously an oil company from 
suing. We assume some will, although it will be on weak 
constitutional arguments.
    Why do you continue to make that case, Mr. Allred, given 
constitutional experts' views that the language in H.R. 6 is 
strong and would be upheld if challenged?
    Mr. Allred. Congressman, my concern is perhaps a more 
strategic one from a standpoint of what might happen to the 
leasing program and what might happen with regard to the amount 
of oil or the revenues to the United States if there were a 
challenge and if a company were to be able to get an injunction 
against the leasing program.
    Our analysis has indicated that if we had a three year 
hiatus as a result of an injunction that it would cost the 
United States about 1.6 billion barrels of oil and about $13 
billion over 10 years to the U.S. Treasury. That is my 
practical concern.
    Mr. Markey. I understand your view on it, but I think that 
you should understand that that could be the case for any law 
that this committee passes.
    Any law that the National Resources Committee passes that 
is then signed into law could be brought to court. It is not a 
reason I think for you to say we shouldn't be passing any laws 
because oil companies, gas companies, coal companies might take 
that law to court.
    I don't think you should put yourself in the place of the 
oil industry filing a frivolous lawsuit against an obviously 
constitutional law which we have already passed through the 
House. I think you are siding with the wrong party in this 
case. I think you should be siding with this Congress and with 
the American people seeking to reclaim lost revenues rather 
than with the oil and gas industry.
    Now, you stated in your testimony that the Administration 
will focus on negotiation price thresholds on the leases 
prospectively. When the companies holding these leases have 
already received the windfall profit estimated at between $1 
and $2 billion from past production, don't you think it makes 
sense, Mr. Allred, to simultaneously attempt to recover this 
massive lost revenue as well?
    Mr. Allred. Congressman, I believe we should have price 
thresholds that recover both past and future royalties.
    Mr. Markey. What is the Administration doing to recover the 
already lost royalty payments?
    Mr. Allred. One of the things, as I indicated, is that I 
have tried to look at where I can get the biggest recovery 
first, and that has been on the future. I have been a little 
bit handicapped in my discussions.
    Mr. Markey. Why is it a mutually exclusive strategy to go 
after future and not past revenues simultaneously? Why? Are you 
hamstrung at your agency that you don't have enough personnel? 
Should we pass an emergency appropriations to get you some more 
lawyers?
    It would be a very small investment for us to have to make 
to get you another half a dozen lawyers over there to claim $2 
billion. I think we would be willing to do it for you. Would 
you make that request to us?
    Mr. Allred. Congressman, my biggest problem has been when I 
have talked to them and they have said why should we do it 
because H.R. 6 does not require it prior to October 1.
    Mr. Markey. So at that point would you do so?
    Mr. Allred. I am sorry. At what point?
    Mr. Markey. I know it doesn't require it. Why don't you do 
it prior to that deadline? I mean, do you need a statutory 
mandate to do it?
    Mr. Allred. I am sorry, but I don't understand. You are 
saying should we do it irregardless of H.R. 6?
    Mr. Markey. Let me just move on to the next question, Mr. 
Allred.
    As part of the renegotiated terms that Interior reached 
with six of the 45 companies holding these faulty leases, the 
agreement states that it will terminate if Kerr-McGee prevails 
in its lawsuit.
    What kind of deal is that to agree on a renegotiated 
contract that still lets the oil companies have the full 
freedom to sue for more taxpayer money later on?
    Mr. Allred. Congressman, I think that is a reality of the 
legal system. They are challenging your law and whether or not 
it included the ability for the Department of Interior to place 
price thresholds.
    If the courts find that your law did not include that then 
we could not prevail in any case to force price thresholds.
    Mr. Markey. Did you attempt to get those six companies to 
waive their rights to file a Kerr-McGee style lawsuit as part 
of the renegotiation?
    Mr. Allred. Congressman, I believe none of those six 
companies are part of that Kerr-McGee lawsuit.
    Mr. Markey. No. As part of your negotiation with them, did 
you ask them to waive their rights to file a Kerr-McGee style 
lawsuit?
    Mr. Allred. Congressman, no, I did not.
    Mr. Markey. You did not. Looking back now, do you think 
perhaps that should have been something that you had looked at?
    Mr. Allred. Congressman, I don't believe they have ever 
threatened to or have been part of that. I have discussed the 
Kerr-McGee issue with Anadarko, and I have sought to try to 
resolve that. I have been unable to do so.
    Mr. Markey. Mr. Chairman, thank you. I yield back the 
balance of my time.
    The Chairman. The gentleman from Arizona, Mr. Flake?
    Mr. Flake. Thank you, Mr. Chairman.
    Mr. Allred, Senator Bingaman in the Senate has said that he 
doesn't plan to move H.R. 6 because of constitutional 
questions.
    Do you want to comment on that? Does he share the same 
concerns that you have or that have been expressed by the oil 
companies?
    Mr. Allred. Congressman, I have not had a specific 
discussion with Senator Bingaman about H.R. 6 so I really can't 
comment on what his beliefs are.
    My concerns have to do with the practical impact of a 
potential litigation that might deprive us of about 1.6 billion 
barrels of oil and about $13 billion of income to the Federal 
Treasury.
    What I have sought to do is I have negotiated with these 
companies to minimize their opportunity to challenge in court 
what we are doing. I believe they should be paying royalties 
and the Department of Interior believes they should be paying 
royalties, but as I have gone forth, and I have learned this 
through vast experience and a lot of gray hair, is I don't want 
to do it in a way that might give anybody an opportunity to 
challenge in court.
    What my advice to the Senate and my advice to the House is 
to however we resolve this issue let us try to do it, and we 
are most willing to work with all of you. Let us try to do it 
in a way that does not open the U.S. Government to a challenge 
of what we do.
    Mr. Flake. Do you have any specific recommendations on how 
to proceed in that regard?
    Mr. Allred. Congressman, the Senate asked me that question, 
and my response was that I believe there is a way, without 
direct use of subsidies, to encourage more companies to sign by 
providing the tool to the Department of Interior that would 
allow us to extend the deep water leases for three years in 
return for their agreement to include price thresholds. I 
believe that would bring a number of other companies.
    Mr. Flake. Thank you. No further questions.
    The Chairman. The gentleman from California, Mr. Costa?
    Mr. Costa. Thank you.
    I appreciate your patience, Mr Allred. Obviously this is 
something that concerns the Committee. You have appointed--not 
you but within the Department there was an appointment as it 
relates to the Interior's Royalty Policy Committee.
    As we all know, whether we like it or not in government 
perceptions are often times challenging. Specifically 
referencing Mr. Deal, who has been appointed as I guess the 
vice chair of the Subcommittee on Royalty Management, his 
previous employment of course with the American Petroleum 
Institute is one which some would argue might create potential 
conflicts.
    It is important I think for all of us that the Royalty 
Management Subcommittee and the panel be viewed as independent 
and that the perception be seen that way. Would you care to 
comment?
    Mr. Allred. Congressman Costa, I would like the opportunity 
to do so.
    The Royalty Review Subcommittee is a subcommittee of the 
Royalty Policy Committee, which is a FACA committee, and as 
such it has to have a Royalty Policy Committee member on it. 
Mr. Deal was the Royalty Policy Committee's choice to be on our 
subcommittee that we have asked for.
    I have little concern, given the other people that are on 
that, that anybody will bias their report. If you look at 
Senator Garn or Senator Kerrey or you look at the other people 
who have been appointed, they do not have backgrounds primarily 
with business and so I think that what we will get is a very 
open and a very independent report, and that is what we sought.
    Mr. Costa. All right. Thank you.
    Mr. Gaffigan, back to the issue of the audits versus the 
compliance reviews. You spoke about a number of factors that 
had to be included when Minerals Management Services made those 
choices.
    It is my understanding that the Government Accountability 
Office is to complete and release an updated report on the 
Royalty-in-Kind program. Is that correct?
    Mr. Gaffigan. We are just beginning that work.
    Mr. Costa. OK. So would it be premature then for you to 
comment or elaborate on some of the findings that are taking 
place?
    Mr. Gaffigan. Yes, because we don't have any findings, but 
I would say the things we will look at are some of the things 
we have looked at from the beginning of this program. It goes 
back to 1999 when we talked about what sort of things need to 
be out there? What conditions need to be out there to look at 
RIK?
    We identified four remaining factors. We talked about 
access to pipelines, we talked about access to the processing 
of natural gas, we talked about having large volumes so the 
government is in a position of a strong sales position and also 
market expertise. Those are the sorts of things we will look 
at.
    Following up on that, in our 2003 and 2004 work we asked 
two basic questions. How do you sort of measure how you would 
have done against royalties-in-value, and how also have you 
done in sort of your administrative costs? Do you track 
litigation costs, and have you any savings there?
    When we looked at that in the pilot stage there were some 
problems in terms of the kind of information that was available 
to make those judgments. We made recommendations, and we are 
going to pursue and see how they are doing on a much larger 
scale.
    Mr. Costa. Well, we will want you to keep us updated.
    Mr. Gaffigan. Absolutely.
    Mr. Costa. I will yield the balance of my time back, Mr. 
Chairman.
    The Chairman. Thank you.
    Gentlemen, thank you for being with us today. We appreciate 
it.
    Mr. Allred. Thank you very much.
    The Chairman. Thank you, Mr. Assistant Secretary.
    Our next panel is composed of Mr. Bobby Maxwell, Former 
Auditor, Minerals Management Service, Mr. Kevin L. Gambrell, 
Indian Land Working Group, and Ms. Ryan Alexander, President, 
Taxpayers for Common Sense.
    The Committee welcomes our panel members, and we will 
proceed as we normally do. We do have your written testimonies, 
and they will be made part of the record as if actually read. 
You may proceed in your individual testimonies as you desire.
    Mr. Maxwell?

          STATEMENT OF BOBBY MAXWELL, FORMER AUDITOR, 
                  MINERALS MANAGEMENT SERVICE

    Mr. Maxwell. Mr. Chairman and subcommittee Members, thank 
you for the privilege and opportunity to be here today.
    I have 26 years' experience auditing oil and gas companies.
    The Chairman. Mr. Maxwell, let me ask you to bring the 
microphone a little closer to you, please.
    Mr. Maxwell. OK. Is that better?
    The Chairman. Yes, sir. Thank you.
    Mr. Maxwell. OK. Thank you.
    Mr. Chairman and subcommittee Members, thank you for the 
opportunity and privilege to be here today.
    I have 26 years' experience auditing oil and gas companies. 
Twenty-two of those years were at Minerals Management Service. 
I am an expert in auditing sales contracts, revenue and 
production systems.
    I have also received many of the highest awards at MMS for 
the work I have done. One of those awards included the 
Meritorious Service Award. I understand auditing and how to 
protect the assets of the American taxpayer.
    M.M.S. has changed over the years. Less auditing is being 
performed. Less underpaid royalties are being collected. The 
qualifications of audit staff have decreased. Certain royalty 
areas are not being audited at all.
    Valid orders for royalty payments are sometimes not issued. 
I personally was not allowed to issue a valid order to Kerr-
McGee Corporation for $10 million. I was not allowed to audit 
royalty-in-kind contracts. I was not allowed to order companies 
to pay interest on late payments.
    On the Kerr-McGee issue, I personally filed a false claims 
lawsuit on behalf of the Federal government. The Department of 
Justice did not intervene in the lawsuit because it has become 
a political issue.
    On January 23, 2007, a courageous jury in the district 
court of Colorado found Kerr-McGee Worldwide Corporation guilty 
of underpaying the Federal government $7.6 million in royalties 
and also that Kerr-McGee had withheld vital information from 
the Federal government. With an impartial judge and jury, 
deliberations only lasted for several hours. The American 
public has spoken, but now Kerr-McGee is trying for a technical 
win to not pay the American taxpayer.
    Unfortunately, even today MMS states that Kerr-McGee owes 
no additional royalties. MMS never attended the trial. MMS 
never reviewed the 60,000 trial documents I received under 
discovery. MMS never received the thousands of pages of 
depositions or reviewed them. MMS never reviewed the trial 
transcripts. MMS really just doesn't know. MMS is the 
proverbial ostrich that has its head in the sand, sees nothing, 
knows nothing, but states no royalties are due.
    Kerr-McGee personnel's testimony at trial clearly showed 
they had knowledge that the additional royalty was due MMS. 
However, their final defense was that MMS never demanded the 
payment.
    M.M.S. must be required to maintain a highly professional 
and aggressive audit program to collect all the royalties that 
are due the government. MMS has many qualified auditors, very 
highly qualified, many with MBAs, CPAs and industry experience. 
However, many of them are more in clerical or technical 
positions where they are not using that experience right now.
    I think you have reviewed my written testimony, so I thank 
you for the opportunity to be here and your time and attention, 
and I will answer any questions you may have.
    [The prepared statement of Mr. Maxwell follows:]

            Statement of Bobby L. Maxwell, Former Auditor, 
                      Minerals Management Service

    Mr. Chairman and subcommittee members, thank you for the privilege 
and opportunity to be here today. This is an opportunity for me to 
participate in a hearing that will hopefully make the Mineral 
Management Service (MMS) a better servant of the U.S. taxpayer. MMS is 
responsible for collecting royalty payments for the U.S. Government and 
brings in revenue only second to the Internal Revenue Service.
    I served the American taxpayer with over thirty years of service, 
including three years in the U.S. Army. I believe one of the greatest 
joys in life was the opportunity to work for the government as a 
citizen of this great country. My only regret is that my career was cut 
short due to exposing the Federal government's current cozy 
relationship with the oil and gas industry and its unwillingness to 
consistently enforce laws and regulations requiring the industry to pay 
royalties due on Federal oil and gas leases.
    I audited the oil & gas industry for over 25 years. I became an 
expert in reviewing industry contracts, revenue accounting and 
production systems. I understand professional auditing, industry 
contracts and how to determine what monies are owed the Federal 
government under oil and gas leases.
    I have a Bachelor of Business Administration degree in accounting 
from Chaminade University of Honolulu, a Master's in Business 
Administration from Texas A & M University, and I am a certified public 
accountant in the states of Oklahoma and Hawaii. I received many awards 
from MMS for being highly effective as a manager and for audit results. 
In June 2003, I received the Department of the Interior Meritorious 
Service Award from the Secretary of Interior, Gail A. Norton.
    Around the year 2000, MMS began to change. The auditing function 
began to be de-emphasized and the enforcement of the lease terms and 
regulations seemed to become less important. To replace professional 
audits, top management advocated a new system. This system was called a 
``compliance review'' and often resulted in professional auditors being 
replaced with other staff. The new staff often did not have an 
educational background containing college level accounting or auditing 
courses. All senior managers were ``directed'' that they would support 
the new process as part of their jobs. It was clearly stated that no 
dissent would be tolerated. I do believe that there is an appropriate 
need and use for compliance reviews, but they should never be used as a 
replacement for professional audits.
    With the new compliance system we were told not to bother the oil 
companies. We were told not to be requesting documents as we formerly 
had with audits. Audit staff was reduced. Many auditors stopped 
traveling to companies for audits, stopped interviewing oil company 
staff, stopped visiting marketing departments and field personnel. 
Audits were marginalized, and accounting and auditing degrees were no 
longer required. For four years, MMS received a qualified audit report 
reflecting substandard audit work. In 1992 audits covered 90% of all 
royalty payments, currently audits and compliance reviews are only 
covering 72% of royalty payments. Remember that the compliance review 
is not an audit and does not provide the same level of assurance that 
royalties were correctly paid. Further, royalty underpayment 
collections have decreased by over $100 million per year.
    By the year 2002, we were no longer allowed to audit certain areas. 
For example, we were not allowed to review or audit many Royalty-in-
Kind contracts. In an attempt to review the contracts and 
transportation agreements, I was ordered not to get any information 
from the Royalty-in-Kind division of MMS, or review their contracts for 
sales of the oil and gas. In an attempt to overcome this major scope 
limitation on our audits, a meeting was schedule with the Office of the 
Inspector General and Royalty-in-Kind personnel in Lakewood, Colorado. 
Audit staff traveled from Oklahoma City, Oklahoma, for the meeting. 
Neither the Office of Inspector General nor the Royalty-in-Kind 
personnel showed up for the meeting. I was told not to pursue the issue 
any further.
    This was reminiscent of being directed to not pursue an issue many 
years earlier. In the early 1990's, I was directed not pursue the issue 
of oil companies exchanging crude oil by contracts using artificially 
low exchange values. This resulted in MMS receiving royalties based on 
a value far below the fair market value of the crude oil. A former 
employee of ARCO Oil & Gas Corporation filed a False Claims Act lawsuit 
against the oil companies based on this issue and collected over $400 
million for MMS. This was over $400 million that MMS would never have 
collected on its own initiative.
    In 2003, I was chastised for attempting to bill a corporation for 
interest due on millions of dollars it paid as a result of an audit. 
However, the audit staff convinced the company to voluntarily remit the 
interest payment without a bill from MMS. I was told that a system was 
in place for billing interest and the audit staff should never issue 
bills for interest relating to royalty underpayments we collected. 
However, everyone in MMS knew that the system wasn't working and the 
government was behind many years in the billings and apparently 
millions of dollars in interest would never be collected. The fact that 
many millions of dollars in interest would be years late being 
collected--if ever collected at all--was of no concern to senior 
management. The Jicarilla Apache Nation complained directly to the 
Director of MMS and I was allowed to bill all companies for interest 
due the Jicarilla Apache Tribe.
    Every year we were pressured to do less auditing and state that 
royalties were accurately reported and paid by the oil companies using 
the compliance review process. In some cases the compliance reviews 
were adequate and useful in determining if royalties were correctly 
reported and paid. In other situations, it was only used as a method of 
smoke and mirrors to state that royalties were in compliance. I was 
told that finding and collecting royalty underpayments wasn't 
important, but meeting our Government Performance Results Act standards 
was what mattered, our operating budget depended upon it. Further, we 
were directed that MMS would not issue any subpoenas to oil and gas 
companies for records.
    Pressure continued to mount in 2002 & 2003 to not pursue royalty 
underpayments to the U.S. government by the oil and gas industry. The 
most well known case is the Kerr-McGee Corporation (Kerr-McGee) royalty 
underpayments. I developed an order requiring Kerr-McGee to pay MMS an 
additional $10 million. I was pressured not to issue the order even 
though it was fully supported by the lease terms and regulations. The 
pressure came down from the Director of MMS not to pursue these 
underpayments against Kerr-McGee. I was never told that the order was 
not supported by the MMS regulations or justified--just not to issue 
the order. No criteria was ever provided to me stating why the 
additional royalty should not be collected from Kerr-McGee.
    As you know, I filed a False Claims Act lawsuit against Kerr-McGee 
on behalf on the U.S. government to collect the royalty underpayments 
by Kerr-McGee. Within days of the lawsuit becoming public, I was 
notified that I was being terminated from employment with MMS. MMS was 
determined not to require Kerr-McGee to pay the royalty underpayments. 
The Department of Justice did not intervene in the lawsuit, but allowed 
me to take the lawsuit forward on behalf of the American public. This 
has become a political issue within the Department of Justice.
    I personally continued the lawsuit against Kerr-McGee Worldwide 
Corporation on my own time and at my own expense. It has been a long 
and difficult road, with absolutely no assistance from the Federal 
government. On January 23, 2007, a jury in the United States District 
Court for the District of Colorado found Kerr-McGee guilty of 
underpaying the Federal government $7,555,886.28, and that Kerr-McGee 
had failed to disclose to the United States Government all relevant 
information to determine the value of royalties due. Kerr-McGee's guilt 
of underpaying royalties and withholding vital information from MMS was 
quickly determined when the evidence was presented before an impartial 
judge and jury.
    It is important to note that these twelve courageous citizens had 
no hesitation in finding Kerr-McGee guilty. The overall deliberations 
were less than four hours, and all indications are that the jurors 
determined Kerr-McGee was liable in less than two hours into their 
deliberations. Kerr-McGee's trial evidence did not seriously question 
the royalty underpayments I had calculated, did not dispute the fact 
that it had not engaged in reasonable and prudent marketing of this 
Federal oil, and did not dispute that the buyer, Texon Corporation, 
L.P. (Texon), had provided other significant consideration, including 
the assumption of essentially, all of Kerr-McGee's transportation 
responsibilities. No, Kerr-McGee's primary defense was that MMS had 
decided not to issue an order to pay.
    Kerr-McGee clearly lost in district court, but now is trying for a 
technical win as a way of not paying its royalties due the American 
taxpayer.
    Not withstanding the fact that the American public has spoken on 
this issue, even today MMS still states that Kerr-McGee owes no 
additional royalty. However, MMS never attended the trial; MMS never 
reviewed the almost 60,000 documents I received under the trial 
discovery process; MMS never read the thousands of pages of 
depositions; MMS never listened to the trial testimony or reviewed the 
trial transcripts. In essence, MMS is the proverbial ostrich with its 
head in the sand. It sees nothing and hears nothing, but is sure no 
additional royalty is due. With this type of behavior, it is scary to 
know that MMS is responsible for protecting the American public's 
assets and collecting royalties due.
    Kerr-McGee's testimony at trial clearly stated that its personnel 
knew additional royalty was due, but elected not to pay the U.S. 
Government. Kerr-McGee's accounting and marketing personnel stated that 
they knew Kerr-McGee received additional value for the oil in the form 
of services provided by Texon. Further, they testified that they knew 
royalty was due on this additional value. However, no attempt was ever 
made to pay MMS the full royalty value. The manager of revenue 
accounting at Kerr-McGee, Mr. Terry Kyle, even directed an employee to 
not provide answers to MMS for questions about additional incentives or 
consideration that Kerr-McGee received in exchange for its sale of the 
Federal oil to Texon.
    Kerr McGee's attorney, Mr. Gorenson, provided an affidavit with 
respect to one of Kerr-McGee's district court motions indicating that 
he had full knowledge of the Texon contract terms many years ago. As a 
Kerr-McGee attorney he made no attempt to have Kerr-McGee pay the 
proper value of royalties. Rather, he worked to increase Kerr-McGee's 
profitability at the expense of the American taxpayer.
    I personally believe that the knowledge of the contracts and 
royalty underpayments by Mr. Gorenson and Mr. Kyle are sufficient to 
show that they knowingly and willfully filed false Federal royalty 
reports and underpaid the royalties due the American taxpayers. 
Further, the Director of MMS by stopping a valid order for royalty 
underpayments makes one wonder if collusion between MMS and Kerr-McGee 
took place. It is a matter that I personally believe should be closely 
evaluated. In this instance, a career senior manager, myself, was 
instructed not to issue a valid order for payment of the additional 
royalty. Kerr-McGee knew the royalty was underpaid and the Director of 
MMS personally stopped the order from being issued.
    Kerr-McGee has taken a stand that it owes no royalty on the deep-
water leases that were issued without threshold values for royalty 
payments. These leases were issued by MMS in error by not including a 
threshold value for determining royalties due the Federal government. 
Some companies have renegotiated similar leases in an attempt to 
correct the error and bring an element of fairness to the American 
taxpayer. However, Kerr-McGee is aggressively pursuing the issue 
indicating that it will not pay any royalties to the American taxpayers 
on its deep-water leases with the missing threshold dollar value. 
However, Kerr-McGee will receive billions of dollars in revenue from 
the sales of oil and gas from these assets that belong to the American 
public.
    I sincerely hope that this Congress will hold Kerr-McGee 
responsible for paying all royalties that it owes. I believe, and a 
jury of 12 American citizens agreed, that Kerr-McGee filed false 
royalty reports with MMS and did not pay its full royalty obligation. 
Further, I believe that behind closed doors in Washington D.C. the 
decision was made that Kerr-McGee would be let off the hook and not 
required to pay the royalties it owed. It was totally inappropriate for 
the Director of MMS, as a political appointee, to intervene and revoke 
my authority to issue a legal order to Kerr-McGee to pay the additional 
$10 million. Also, I hope Congress will review MMS' compliance program 
and encourage them to have a highly professional workforce and a truly 
professional audit program independent of political pressure.
    This concludes my formal testimony. Thank you for the opportunity 
to appear here before this Subcommittee. I will be happy to answer any 
question you may have.
                                 ______
                                 
    The Chairman. Thank you, Mr. Maxwell.
    Mr. Gambrell?

                STATEMENT OF KEVIN L. GAMBRELL, 
                   INDIAN LAND WORKING GROUP

    Mr. Gambrell. Mr. Chairman and subcommittee Members, thank 
you for the opportunity to be here today. I see this as an 
opening to correct the course, encourage changes within MMS to 
act as a fiduciary and honor the treaty obligations with the 
tribes and individual Indians.
    I have 16 years' experience in mineral industry work. My 
background is a Master of Science, Mineral Economics. I work as 
a practitioner for Alternative Dispute Resolution with the 
Morris Udall Foundation. I am connected with the Rocky Mountain 
Mineral Law Foundation. I have 280 hours of accounting auditing 
of law, and I have worked as a Navajo Nation mining financial 
analyst, as well as working for industry.
    I came to the Federal government back in 1996, November 18, 
to run an office that managed Indian trust assets, oil and gas, 
on Navajo allotted lands. The reason the office was created was 
because the Federal government had breached the trust with 
Indian landowners, and many were not getting paid and were 
losing their homes, cars, livestock.
    When I took over the office I was delegated the authorities 
of a BIA regional director, an MMS audit chief and a BLM field 
manager, so in my office I saw basically everything from the 
beginning of a lease, auctioning the leases, getting leases 
developed, to counseling leases and collected bonds. I have 
seen the whole process from end to end.
    When I took over this organization, I ran into many areas 
of departmental resistance within the bureaus. Many of the 
bureaus were not willing to give up their authority, and I had 
to fight tooth and nail to get any authority within my office. 
I had to contact the deputy solicitor of Interior, as well as 
the deputy commissioner of Indian Affairs, to get action within 
the departmental agencies at the bureau level in the field.
    At the end of the life of the pilot program, and it was a 
pilot project under Reinventing Government, Vice President Al 
Gore's pilot project, we were considered a success in 2002. 
During that time up until 2002, I had reported to a court and 
discussed what was happening within the Federal Indian Minerals 
Office (FIMO), explaining how we were in compliance with the 
consent decree that had orders to look at zero production, do 
audits, look at transportation, look at other issues, hire 
auditors, hire inspections, do everything from volumetrics to 
valuation.
    In 2002 it was a success. We became departmentalized, and 
Gale Norton decided to extend this project to other locations 
in Indian Country. Also we had been nominated for the Hammer 
Award and other awards.
    The things that have changed since I took the office and 
after 2002 when I stopped reporting to the court to me are a 
travesty. I saw a system called the compliance review system 
that did nothing in terms of really getting at the issues of 
valuation. I had an audit team that worked for seven years, and 
in five years of that seven years we always collected on back 
audit issues. Always. The compliance review process resulted in 
very little collection.
    I also had situations where the system was shut down in 
2001 in November, the MMS royalty system. Soon after, when that 
system came on line it was a new system that was created by 
Accenture, and it was to increase the compliance review process 
and make it a more contemporaneous, real-time audit process 
similar to an audit process. It is not quite. It is more of a 
compliance review.
    When that system came on it failed miserably. I think over 
50 percent of the royalty did not pay out in November 2001. In 
December 2001, Cobell litigation. Judge Lamberth issued an 
order to shut down the system, and that in a sense saved MMS 
from being exposed for the problems that were occurring within 
that system in November 2001.
    The system did not come back on until 2002, April 2002. 
When that system came back on, many people had already lost 
their homes, cars, houses in Indian Country, but in addition to 
that the system still did not pay out correctly. MMS changed 
the error-checking system on volumetrics in order to let the 
data flow through the system and pay out.
    That is just one example of the many problems within MMS 
and the compliance review system after I had stopped reporting 
to the court.
    I thank you for hearing my testimony. If you have any 
questions, I would be glad to answer.
    [The prepared statement of Mr. Gambrell follows:]

      Statement of Kevin L. Gambrell for Indian Land Working Group

    Mr. Chairman and subcommittee members, thank you for the 
opportunity to be here today. I see this as an opening to correct the 
course, encouraging change within Mineral Management Service (MMS) to 
act as a fiduciary and honor the treaty obligations with tribes and 
individual Indians.
    I served and continue to serve Indian nations and the American 
taxpayer for sixteen years. I look back at my experience and recognize 
that it is one of the greatest joys of my life to see tribal people get 
what they are entitled to. However, I also recognize that MMS and other 
bureaus have forgotten their responsibility and now place industries 
desires and wants above their trust responsibility to maximize the 
benefit of oil and gas development to tribes and the American public.
    I have a Bachelor's degree in International Trade and Relations and 
a Master's in Mineral Economics from the Colorado School of Mines. 
Further, I am a practitioner for Alternative Dispute Resolution with 
the Morris Udall Foundation and I am a whistleblower.
    I started my career in oil and gas management with Navajo Nation as 
their Mining Financial Analyst and later went to work for the U.S. 
Government as the Director of the Federal Indian Minerals Office 
(FIMO).
    The creation of FIMO was a result of Navajo individual Indian 
mineral owners, known as the Shi Shikeyah (roughly translates to, 
``This is My Land'') Allottee Association, filing a lawsuit against the 
Department of the Interior in 1983 claiming that the federal government 
mismanaged their resources. After years of litigation, the U.S. 
District Court ordered Interior to establish FIMO.
    FIMO was established in the early 1990s, however the employees 
mirrored the bureaus, in that they had few common goals, struggled over 
turf issues, handed off responsibility to other staff based on their 
bureau functions, and performed little to no asset management. The 
office failed to become the seamless, efficient and effective office 
the Department committed to, thus the Shi Shikeyah Allottee Association 
requested the court intervene.
    In 1994, the Department established a National Performance Review 
Laboratory under Vice President Al Gore's reinventing government 
initiative. The laboratory is known as the FIMO Pilot project. Part of 
the initiative was to establish a FIMO Director that would navigate the 
staff from Bureau of Indian Affairs (BIA), Bureau of Land Management 
(BLM) and MMS and the mission. This would require delegated authorities 
to operate as a trustee for individual Indians in the Four Corners 
Area. The goal was to perform proper lease management, and accurately 
collect, disburse, and verify all royalties and volumes due from the 
severance of minerals. In addition, FIMO would be placed near the 
beneficiaries of these royalties so as to work with the beneficiaries 
directly.
    In November of 1996, I was hired as the FIMO Pilot Director. Over 
the next six months, I changed the reporting relationship of the FIMO 
staff from the three bureaus to me, reported to a DC level Interior 
committee and acquired delegations of authority to act in the capacity 
of a BIA Area Office, a BLM District Office, and a MMS Compliance 
Division with regard to mineral issues.
    Although FIMO was better equipped to act as the primary source for 
fulfilling the trust responsibility, the agencies maintained control, 
continued old practices and engaged in battles with me anytime I 
questioned their trust management practices. To counter this defiance, 
during the Pilot phase I found safety in reporting to the District 
Court, the allottee association, and the committee. I overcame most of 
the organizational resistance and turned around a negligent approach to 
managing mineral assets on Indian lands to providing services that met 
or exceeded the requirements of a Federal District Court consent 
decree. In one example, we annually collected 7 times the underreported 
royalty than MMS did for 20 years prior to my management. FIMO had the 
highest underpayment collection to audit cost in comparison to other 
MMS audit groups.
    After a thorough evaluation of FIMO, it was considered a success 
and made permanent in October 2001. The Secretary of the Interior gave 
the green light to the committee to implement the FIMO concept 
throughout Indian country and I and my staff were nominated for two 
National Hammer Awards and numerous Spot Awards for excellent 
performance.
    Once the pilot phase ended, the court reporting requirements 
stopped, and I reported to and took direction from line managers, I 
lost the shield and became challenged with managing the trust assets 
under the direction of management that made contrary decisions to 
maximizing the benefit to the Indian allottees.
    Over time, I exhausted all efforts in attempting to protect the 
beneficiaries' interest against my superior's unethical decisions and 
decided to communicate with the Special Master of Cobell litigation who 
had the responsibility to ensure that information vital to the 
interests of individual Indians be safeguarded. I have experienced the 
following:
2000 Indian Gas Rule
    In 2000, MMS changed the Gas Rules on Indian lands allowing 
companies to use index prices versus doing the full accounting in 
accordance with the lease requirements. As the Director of FIMO, I 
opted out of the pricing method because I did not believe I had the 
right to change lease terms without the consent of the Indian 
landowners and the method appeared to negatively impact royalties. When 
I voiced my concerns and decision, I was chastised by management and 
told that my decision was wrong and burdensome to industry.
    When MMS implemented the regulation, the tribes and MMS made the 
decision for individual Indians, except Navajo allottees, to follow the 
new rule. At the start, the Navajo allottees were ahead of the index 
pricing by 25 to 45 cents per mcf every month. I reported this to 
management and they ignored the evidence that the New Rule potentially 
resulted in losses to the tribes and individual Indians. Soon after, DC 
management told me that I was not to attend the quarterly meetings with 
tribes and states.
    They did nothing to inform other Indian groups that index pricing 
was producing negative results in the San Juan Basin and tribes had no 
way to benchmark the method without having gross value information. 
Although MMS had conflicting data, MMS failed to act and protect the 
interest of tribes and individual Indians. MMS management behavior 
violated the requirement to maximize revenues to the beneficiaries as 
stated in the regulations and law.
    Undervaluation of trust assets, a violation of 64 C.F.R. 
Sec. 43506, as the Minerals Management Service explicitly acknowledged 
with regard to valuation of gas production from Indian leases, it is 
responsible, ``[t]o ensure that Indian mineral lessors receive the 
maximum revenues from mineral resources on their lands consistent with 
the Secretary of the Interior's (Secretary) trust responsibility and 
lease terms.''; see also Federal Oil & Gas Royalty Management Act--
1982--Title I, Section 101, Duties of the Secretary ``The Secretary 
shall establish a comprehensive inspection, collection and fiscal and 
production accounting and, auditing system to provide the capability to 
accurately determine oil and gas royalties, interest, fines, penalties, 
fees, deposits, and other payments owed and to collect and account for 
such amounts in a timely manner; and 30 U.S.C. Sec. 1711 Comprehensive 
Accounting and Auditing.
2001 New Computer Compliance System and the Shut-down
    In November of 2001, MMS shut down the old computer compliance 
system and turned on the new system created by the Bermuda based 
Accenture, previously Arthur Anderson. MMS did not parallel test the 
new system against the old system and the new system systematically 
failed halting royalty payments to more than half of the federal and 
Indian leases. In December, the problems were masked or decoyed by the 
court ordered shut-down resulting from Interior's failure to protect 
Indian data from internet hackers. Tribes and Indian individual stopped 
receiving royalties for almost five months and MMS management was able 
to save themselves from a congressional and public flogging.
    The system came back on line at the end of April, 2002 and MMS 
still could not determine where to allocate monies placed in escrow. In 
desperation, MMS reduced their error controls and allowed erroneous 
data to pass through the system in order to get payments out. Only part 
the payment made it to the correct accounts. During the process, I made 
a request for the raw data to do my own reconciliation and management 
told me that their internet contractor had the data, but could not 
provide it because it was proprietary.
    The claim by Interior that they were not able to pay tribes because 
they were off the internet was false. About five years before, Interior 
paid tribes using a manual system. During the entire shut-down, MMS and 
other bureaus blamed the Cobell litigation for the problem. 
Consequently, many Indian people lost their homes, automobiles and 
livestock.
    In reality, this was a multi-million system not suitable for 
compliance, as required by Inspector General Act of 1978, as amended, 
(5 U.S.C. App. 3), which establishes as goals:
    1.  Promoting economy, efficiency, and effectiveness within the 
agency.
    2.  Preventing and detecting fraud, waste, and abuse in agency 
programs and operations.
    3.  Keeping the agency head and the Congress fully and currently 
informed of problems in agency programs and operations and of the 
necessity for and progress of corrective actions.
    To this day, there are still monies sitting in escrow and the new 
system does not live-up to the compliance system that Accenture told 
MMS they would create. Accenture's contract was to end once the system 
was on-line, but their million dollar contract continues. Many tribes 
and state outright reject using the system for any serious analysis and 
resort back to the prudent and thorough audit approach. Lastly, how 
many times has the MMS Director and staff mislead congress on how well 
the compliance system works?
2000 to 2002 Closing Legacy Audits
    In 2000, MMS made a decision to close all back-logged audits. To 
fully and diligently complete the audits, MMS would have to reverse 
their compliance review course and hire and train additional auditors 
with oil and gas accounting backgrounds. MMS decided not to change 
their course and made the deliberate decision to fast track all past 
audits with inappropriate and illegal valuation methods such as the 
``bump method'' and other questionable practices. I blew the whistle on 
the actions management was directing me to do that I knew based on past 
audits would result in 1/8 the collections of underpaid royalties.
    On January 31, 2003, my audit staff and I had a manager meeting in 
Denver regarding audit goals. We talked with MMS Managers about 
accounting requirements and we were directed to:
      bypass the negotiated settlement approval process,
      ignore third party verification,
      classify rudimentary reviews as ``Yellow Book Audits,''
      not document discussions with industry,
      use a compliance system that did not work, and
      perform duties and meet goals without adequate resources.
    I raised concerns continually and provided evidence that their 
method would loose millions of dollars. MMS management ignored my 
arguments and used the fast-track approach throughout Indian country.
    While the ``Bump method'' was casually used in the past through a 
settlement negotiation process with Indian nations, it had never been 
lawful before 2000 as an alternative method without the required 
negotiated settlement process. The negotiated settlement process, as 
defined in Royalty Management Program, Audit Manual 2.0, 2.1.5, 
requires that if the company is unable to perform requirements under 
the Order to Perform, they may use the negotiated/settlement process 
with the approval of the Director of MMS and Assistant Secretary of 
Indian Affairs. MMS management willfully violated these rules and 
continued to implement their ``fast track'' procedures to meet their 
unreasonable goals.
    As a result of my unwillingness to comply with such outrageous 
demands I feel that my superiors placed me in a situation with only 
three alternatives: (1) blatantly breach the trust of the 
beneficiaries, (2) act against management in insubordinate manner, or 
(3) leave. I chose to leave.
    It is difficult to assess how many millions of dollars were lost 
because of this decision. Under any fiduciary system, this deception 
and corrupt practices would be considered malfeasance and negligence 
and somebody would go to jail. Even after I reported this problem to 
the Office of Special Council and the Office of the Inspector General, 
they did nothing to investigate or correct this problem.
2002 Trespass Issue
    In 2002, I encountered a trespass issue where a company was 
operating a cancelled lease. The company produced for almost a year 
without reporting to MMS. The company received checks for production 
and cashed them monthly at a liquor store in Louisiana. We discovered 
the trespass when one of my inspectors visited the well site and found 
that it was producing and selling through the transporter. We contacted 
the transporter, told them that the producing company was trespassing 
and that we wanted all sales information. I contacted the trespassing 
company and told them we would collect 100% of the gross proceeds. They 
were upset, contacted their attorney and debated about how unfairly 
they were being treated. I told them that I would not tolerate this 
violation and would consider filling criminal charges against them.
    The trespassing company contacted MMS management. Then an MMS 
Manager contacted me and told me that I could no longer talk with the 
company and scrutinized my evidence and my approach to the trespass. I 
asked management did they understand that they work for the American 
taxpayer. In order to circumvent ``Friends of the Company'' MMS 
management, I passed the responsibility to my auditor and forced the 
company to comply.
    This case revealed how easily a company could circumvent the 
reporting system and produce and collect revenue without anyone's 
knowledge. This further emphasized the need for third party 
verification and field inspections. It also revealed that management 
considered industry complaints credible to the extent that they were 
willing to violate the beneficiary's interest, court orders and attack 
an MMS subordinate's position.
2003 Zero Production
    After I left federal service, MMS and the Solicitor in Albuquerque, 
NM reversed my decision to collect additional value from companies 
violating lease terms of shutting in production without approval, known 
as ``Zero Production.'' The Solicitor wrongfully believed that 
liability did not transfer with change in lease ownership. The 
Solicitor decision is false based on private land oil and gas cases and 
general property law.
    Before I left, I had already collected more than a million dollars 
and had about million dollars in cases still pending. Even though I was 
able to collect on past violations, the Solicitor ignored the results 
of my collections and arguments and reversed my decisions. I believe 
that MMS and the Solicitors lost more than a million dollars to Indian 
landowners. Their actions again violated court orders and MMS and the 
solicitors never looked anywhere else in Indian country to investigate 
``zero production.''
Compliance Audit Tracking System
    During 2000, MMS management discussed what systems they would 
continue with and remove. The Compliance Audit Tracking System (CATS) 
was marked to be removed and when I discussed what the system did--
track all orders, issue letters and follow-up of compliance work over 
time--management stated that they had no idea that the system contained 
this data. This lead me to conclude that the MMS management was not 
consulting with auditors and were willing discard anything they did not 
understand or they intentionally wanted to remove historical 
information. Discarding this system was in fact a removal of the tool 
that helped the auditors track ``records of decision.'' In talking with 
auditors today, I have been told that MMS has a new system, but it does 
not cover tribes and states and I am concerned that past audit 
``records of decision'' have not been included.
Conclusion
    The problems of mismanagement of the public and Indian trust go far 
beyond the MMS royalty issues. I experienced the broad failures in 
protecting trust asset from BLM's expedited drilling and development 
approvals to BIA's right-of-way undervaluation. In today's environment, 
the actions of government executives represent an extension of 
industry, in which the federal managers fail to understand who they 
work for. Most federal executives have a company job waiting for them 
once the administration changes. The revolving door to industry has 
created a management team that is loyal to industry and the honest and 
diligent government worker is oppressed and pushed out of the way, thus 
violating and discounting the public trust. This is a travesty.
Recommendations
     1.  There is evidence that some oil and gas companies have not 
reported and paid royalties, therefore indicating that the system is 
still somewhat of an honor system. There must be third party 
verification through transporter and plant information.
     2.  Although MMS makes claims that regulation changes will benefit 
the American public, tribes and industry, it often benefits industry 
more. Once the regulation is implemented, there is often it is 
difficult to evaluate if the regulation changes actually benefit the 
tribes and the American public and MMS usually neglects this 
evaluation. Needless to say, industry tracks benefit to the penny for 
any regulation change. MMS needs to reevaluate the regulation changes 
and if they do no work, report this to the public and change course. 
The method of evaluating the regulations effectiveness must be 
emphasized and clear in public registrar at the outset of any proposed 
regulation change.
     3.  MMS's regulation changes that modify lease terms are a 
violation of contractual arrangements between lessees and lessors. MMS 
uses regulations to modify lease terms and inadvertently damages the 
interest of the landowner. MMS does not ask the landowner if they would 
sign a new agreement to clarify or improve lease terms, they simply 
make changes forcing the Indian landowners to comply. This violates 
contractual and property law. MMS and other agencies must consult and 
obtain approval to change lease terms.
     4.  MMS needs to be accountable to the states, tribes, and federal 
government. As it is now, MMS reports and is accountable only to 
federal politically appointed executives. The federal government has a 
50% stake in state leases and a 0% stake in Indian leases. As such, MMS 
should be guided, assessed, and managed by all government stake 
holders. A board of governors representing the states, tribes and 
federal government would do more to force MMS to be responsive to their 
concerns than the current UNILATERAL approach that is often politically 
manipulated with the industry stakeholders having the largest 
influence.
     5.  Although, MMS has limited resources, expediting settlements, 
compliance and collection at the loss of accountability makes them a 
``simple paper processor'' with little to no concern for maximizing the 
benefit to the American public and enforcing lease compliance. MMS 
needs to change their objective from reporting false compliance 
information to maximizing revenue to the tribes and the public.
     6.  Everything MMS does must be made transparent and trackable. 
Any meetings with industry must be recorded and documented. Every 
action should be recorded in a system that can be queried by any state, 
tribal and MMS employee working on compliance. The IG should be able 
review these documented discussions and events at any time.
     7.  IG audits must go beyond the Yellow Book standards or 
Government Auditing Standards (GAS) in reviewing oil and gas audit 
work. Although, the GAS covers important issues such as transparency, 
accountability and peer reviews, it does not review the intricacies of 
valuation and volumetrics. For example, an IG auditor will look at the 
scope of work, internal controls such as signatures by managers, proper 
indexing and spreadsheets that add up in the total column, but they 
rarely review methodology of valuation and compliance with regard to 
court orders and other legal instruments. The IG must support positions 
that are well versed in mineral and energy accounting, as well energy 
law.
     8.  MMS must use the full extent of the lease terms to force 
compliance. MMS currently uses a penalty process to enforce royalty 
collection that is rarely collected and gets few if any results. Under 
royalty violation, I have used the cancellation clause to enforce the 
lease terms and companies have immediately taken action to comply.
     9.  With regard to whistle blowers, the staff within the Office of 
Special Counsel must be diligent and knowledgeable. They must follow-up 
on issues and hold management accountable. Retaliation laws need to be 
stronger, the investigative process needs to be thorough, and 
management needs to be accountable and punished when violating the 
public trust and employee rights.
    10.  MMS needs to restore the audit function. Determining 
underpayment is not an engineering calculation and requires an 
experienced oil and gas auditor that can look a vast array of data that 
is not only quantitative, but qualitative. The compliance review that 
MMS claims is an audit, is not and should be reported as only a review. 
MMS uses the misinformation and other false data to hype the compliance 
work that MMS claims they do annually. Many tribes and states have 
purposely removed themselves from relying on only compliance reviews as 
a realistic approach to lease compliance. These mineral assets belong 
to the public and Indians and once exploited, are gone forever. Every 
penny owed to the public and tribes should be acquired with the most 
diligent and reasonable approach.
    11.  MMS must follow not only the laws and regulations, but also 
the court orders.
    This concludes my formal testimony. Thank you for the opportunity 
to appear here before this Subcommittee. I will be happy to answer any 
question you may have.
                                 ______
                                 

 Responses to Questions submitted for the record by Mr. Kevin Gambrell

 Would you explain the ``Bump method'' to the committee?
    The ``Bump Method'' is a fast track approach for the dual 
accounting requirement (Refer to MMS Audit Manual, Chapter 17, Section 
17.5). This method usually results in fewer dollars collected for 
Indian allottees. In the following I will provide a written summary of 
the method and show the calculations at the end.
DUAL ACCOUNTING DEFINITION
    Dual accounting is sometimes referred to as accounting for 
comparison and it is found in many, if not most Indian leases, both 
allotted and tribal. The purpose is to protect the royalty interest 
owner by comparing two values and using the higher of the two for 
royalty purposes. More specifically, a company acquiring a lease on 
Indian lands must pay gas royalty on a value which is the higher of the 
value of gas before processing less applicable allowances,(well head 
value), to processed less applicable allowances (the combined value of 
drip condensate, residue gas, and other gas plant products, less 
applicable allowances like transportation and processing). To determine 
the reasonableness of the company's reported value, the auditor must 
determine the gross revenue the company received for the gas and if it 
was based on the comparison for processed and unprocessed gas. This 
requires an audit of the company's records and systems, in which we 
look for purchasing contracts, allowance notifications, deductions, 
spreadsheets showing the comparison, and systematic problem due to 
internal controls and systems. Often, we go to third parties, such as 
gas plants and transportation companies to determine if deductions were 
reasonable. This requires an auditor with very specialized skill who 
understands the ``ins and outs'' of gas transactions.
``BUMP METHOD'' DEFINITION
    An alternative approach to the dual accounting comparison is a 
method known as the ``Bump Method'' and also referred to as the 
alternative methodology and the fast track approach. The method was 
questionably approved under the Amendments to the Gas Valuation 
Regulations for Indian Leases, effective January 1, 2000. The reason I 
say questionably is that rule changes lease terms without the consent 
of the Indian lease holder. The concept behind the ``Bump Method'' is 
that the company will adjust the value of gas with regard to quality 
before processing to determine a value after processing, thereby 
bypassing the dual accounting comparison. More specifically, a company 
will take the quality of the gas and if it is greater than 1000 British 
Thermal Unit (BTU) the company will adjust the unprocessed value based 
on table of increments found in 30 CFR Sec. 206.173. For example, 
company A has unprocessed gas quality of 1506 BTU. The company will 
refer to the table and find the adjustment under ``non-ownership in gas 
plant'' is in BTU range of 1501 to 1550, requiring an increment of 
.1600. If the company received $1.00 per thousand cubic feet of gas, 
the company would multiply $1.00 times the increment of .1600 plus 1. 
This means the company will pay royalty on $1.16. Theoretically, this 
approach captures the value of the additional products in the gas 
stream that increases the BTU quality. The caveat is that the auditor 
assumes the price is correctly reported and bulletin prices in the area 
are not manipulated. We know from the 1999 Qui Tam on crude oil, 
Benjamin Johnson versus Unocal, that companies collude and manipulate 
price indices. The companies essentially received value above the index 
price, but never paid royalty or taxes on the higher actual value they 
received. In addition, any audits pending for periods before 2000 had a 
much greater risk of falsified prices because of the market changes, 
deregulations, and vague and questionable practices of transportation, 
measurement and reporting.
    The equation:
        Adjusted Value = ($1.00 X .1600) + 1
        And
        Adjusted Value = $1.16
    The logic behind this method is that value for unprocessed gas 
adjusted with the increment will capture additional value in processed 
gas, therefore giving royalty the higher value. The caveat is that the 
company's reported price and/or the index price may or may not be 
reasonable, and requires verification.
    This method was used in the past through a settlement negotiation 
process with Indian Tribes, but was not sanctioned as alternative 
method outside of the required negotiated settlement process. The 
negotiated settlement process, as defined in Royalty Management 
Program, Audit Manual 2.0 states in general that if the company is 
unable to perform requirements under the Order to Perform, they may use 
the negotiated/settlement process. The Manual than refers to the 
process which requires a settlement team, and once in final form, the 
practice has always been on Indian allotted land, to acquire approval 
of the Director of MMS, Deputy Commissioner of Indian Affairs, and the 
company.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 


    This method was approved as the ``alternative methodology'' on 
January 1, 2000 (Attachment 3) and 25 CFR 206.173. If used prior to 
Janaury 1, 2000 it required the ``settlement negotiation'' process 
because it was not legally available. Further supporting this position, 
it states in the Audit Manual Chapter 2, 2.2.5 ``...Always use 
applicable regulations for the period under audit...'' To understand 
why this is a fast-track approach, you must understand the ``Dual 
Accounting'' method approved prior to January 1, 2000. I will present 
it on the following page:
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

Processed Gas Method (Actual)
    I will not go through the calculations because it varies depending 
on the gas purchasing, transportation and processing contracts. I have 
several settlement statements between the purchaser and seller that 
show cost associated with processing and transportation and the values 
of methane and liquid by-products. Often we find companies taking 
improper deductions, such as marketing cost, or gathering cost. Without 
attempting to obtain the data, we cannot determine what deductions were 
taken.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 


    This method is generally referred to as the wellhead approach or 
the BTU method.
 In what ways has this impacted Indian Country?
The ``Bump Method'' has wide and negative impact on Indian Country. I 
        have bench-marked the method against actual dual accounting and 
        have found (8) eight times the amount of underpaid royalty.
 Why did MMS exclude the Navajo Allottees?
    I was delegated as the BIA Regional Director with authority over 
the Navajo Allotted leases and I opted out of the 2000 Gas Rule for two 
reasons: (1) the new method violated lease terms, and (2) the new 
method resulted in less recovery of underpaid royalties than the lease 
defined method of royalty valuation. I worked with my audit staff to 
determine this and tracked the value against the 2000 Gas Rule prices 
on a monthly basis. The Navajo Allottees realized a 25 to 45 cents per 
thousand cubic feet gain over MMS determined prices every month. The 25 
to 45 cent gains adds up to hundreds of thousand dollars in realized 
royalty for Navajo allottees. This was before audit and audit would 
recover additional monies.
    The ``Bump Method'' was applied to all other allottees or 
Individual Indians across Indian Country, except the Navajo that I 
excluded. MMS did not evaluate the benefits to this method.
    Mr. Gambrell. You testified that while you were acting as Director 
of the pilot project of the Federal Indian Minerals Office you 
collected 7 times the underreported royalty than the MMS had for the 20 
years before you took the position. Yet once this program became 
permanent you were stymied from aggressively going after underpaid 
royalties due.
 Was this due to inertia and turf battles among the agencies at DOI? Do 
        you see any way to change the attitude or throw some light onto 
        it?
    The past under performance of MMS was due to negligence and 
incompetence. Industry knows that MMS's upper management will fold 
almost anytime they are threatened with litigation. MMS has and has had 
an incestuous relationship with industry. Most managers over MMS walk 
through the revolving door to industry and back again. These executive 
are inherently serving their own self-interest above and beyond Indian 
and Public trust. The only way to change this attitude is to:
    1.  Limit the ability for Senior Executive Service managers to work 
for Industry in the area that they had influence over.
    2.  Limit the ability for politically appointed officials to 
recruit Executives from industry.
    3.  Use the existing ethic laws on the ``Appearance of Conflict of 
Interest'' more aggressively.
    4.  Change MMS's oversight and reporting requirement from a Federal 
Executive to a Board of Directors composed of Federal Executives, State 
Audit Managers, and Indian Audit Managers. The State and Indian Nations 
have a higher vested interest in assuring that their royalty interests 
are collected 100%.
Mr. Gambrell. You refer in your testimony to MMS problems with the 
        computer system purchased by a Bermuda company which allowed 
        erroneous data to pass through the system and eventually cause 
        the shut down of the system.
 Is it true that this shut down was falsely blamed on the Cobell 
        litigation?
 Were Indian lease holders directly hurt by the shut down?
 How was the system fixed to ensure the correct data was in the system?
    Throughout Indian Country, MMS, BIA and OST management blamed the 
shut down on the Cobell litigation, rarely referring to the hacker 
penetrable conditions of their network, which enabled any hacker on the 
street to access Indian data and manipulate it. During the same time, 
the MMS system was upgraded and it failed to account for collections 
and disbursements of Indian Royalties. We noticed the problems with the 
MMS system one month before the shut-down ordered by Judge Lambreth of 
the Cobell litigation. In addition, the Department of the Interior was 
able to pay Indian lease holder by shipping digital tapes from Denver, 
Colorado to Anadarko, Oklahoma. After the shut-down, the agencies would 
not exercise this method, for it would expose MMS system failures not 
related to Cobell.
    Indian lease holders were hurt by the shut-down. Many lost 
automobiles, homes, live-stock and their credit was severely damaged.
    The system was never fixed, but instead MMS changed the filtering 
of data to be less stringent, thus allowing garbage data and reporting 
to pass through the system without any scrutiny.
 Mr. Gambrell. When you went to the Special Trustee for Indian Trust 
        Funds with your concerns about the manner in which the trust 
        responsibility was being carried out, what kind of a response 
        did you receive?
    When I speak of talking with the Special Trustee, I am referring to 
the Indian Minerals Steering Committee which includes Executives from 
BIA, BLM, MMS, Solicitors Office and OST (all have primary trust 
responsibility). When I would refer to issues, often the Executives 
would battle over turf issues, do as little as required by law, and 
interpret law to reduce their agency legal risk even if it meant 
damaging the benefit to the Indian individuals or tribes.
    I also met with the Special Master under the Cobell Litigation, who 
had responsibility to oversee the retention of records and information. 
He was deeply concerned and found that what I had reported as egregious 
acts were in fact true. He reviewed the issue concerning audit records 
held in MMS Dallas office and found them to be missing, incomplete, and 
misfiled. He looked into the right-of-way issues and found the 
appraisal records were missing and destroyed. During his investigations 
he was obstructed by the Department Interior Executives and Secretary 
Interior's hired legal counsel.
 Mr. Gambrell. You testified about a 2002 trespass issue which you 
        found a company stealing the resource of an Indian lease and 
        tried to bring the culprit to justice only to be stymied by 
        MMS. Do you know if the Indian allottee was ever paid for his 
        stolen trust asset?
    The allottees were paid because I delegated the resolution and 
tracking of this issue to my auditors. I was prevented from meeting 
with the company and so I delegated my audit staff to act on my behalf 
in dealing with the company.
 Mr. Gambrell. Would you please speak to what is considered the 
        revolving door scenario at the Department which leads to 
        employees more loyal to industry then to those for whom they 
        are trustee? How prevalent a problem is this and can it be 
        stopped?
    I will provide names of those walking through the revolving door. 
MMS Director Cynthia Quarterman, MMS Director Jonny Burton, Deputy 
Secretary of Interior Griles, Secretary of Interior Gale Norton, and so 
on...
    The Executive Branch should:
    1.  Limit the ability for Senior Executive Service managers to work 
for Industry in the area that they had influence over.
    2.  Limit the ability for politically appointed officials to 
recruit Executives from industry.
    3.  Use the existing ethic laws on the ``Appearance of Conflict of 
Interest'' more aggressively.
    4.  Change the oversight and reporting requirements of MMS from a 
Federal Executive to a Board of Directors composed of Federal 
Executives, State Audit Managers, and Indian Audit Managers. The State 
and Indian Nations have a higher vested interest in assuring that their 
royalty interests are collected 100% and will not be as likely to be 
politically manipulated by an Executives political party affiliation.
Questions for Kevin Gambrell from Minority
1.  You written statements is replete with accusations of unethical and 
        illegal behavior by MMS, the Department of the Interior, and 
        oil and gas companies. Are you and auditor or an attorney?
    I was delegated with the trust authority to audit, inspect and 
enforce, and lease Indian allotted leases. I supervised and managed 
auditors, inspectors and lease administrators. I issued subpoenas, 
orders of non-compliance, orders to pay, negotiated settlements, and 
made all trust decisions with regard to oil and gas leasing on Indian 
allotted leases. My title equivalent was a Bureau of Indian Affairs 
Regional Director, Minerals Management Service Chief Compliance 
Officer, and a Bureau of Land Management Field Office Manager. My 
audit, inspection and enforcement and leasing authorities were 
delegated to me by the MMS Director, BLM Director, and BIA Deputy 
Commissioner. I had the authority to enforce all laws and regulations 
that pertained to the Code of Federal Regulations 25, 30 and 43 with 
regard to mineral development on Indian Allotted lands.
    The question as to auditor and attorney is irrelevant with regard 
to upper management positions within the MMS, BLM and BIA. The Director 
of MMS, Johnnie Burton has a Bachelors degree in Education, while I 
have a Master of Science in Mineral Economics and have taken more than 
280 hours of GAAP, FASB, and valuation/auditing training. In addition, 
I was required to take auditing continuation credits annually, where as 
the current Director does not take auditing continuation courses.
 Did the auditors in your office or solicitors with the Department 
        agree with you?
    The auditors in my office fully agreed with me and the solicitors, 
although often they lacked any significant experience, usually agreed 
with me. The solicitors' agreement depended on the issue. I only 
considered the Solicitor's advice as a legal opinion that I would 
consider in making my decision, but would not always go with.
 Did the Inspector General of Interior or Office of Special Counsel 
        agree with you when you brought it to their attention?
    The two organizations are not staffed with professionals to address 
valuation, trust and other technical issues. The IG often reviews only 
the surface issues that pertain to ``Yellow Book'' standards, but do 
not consider actual methods of determining value and bench marking. The 
OSC did not comment on my issues and did not follow-up with questions 
or concerns.
2.  You say MMS willingly ``violated'' court orders in the 2002 
        trespass case and the 2003 Zero Production case (page 5 and 6). 
        Which Court's Order were violated, and what did the Court do 
        about it?
    Shii Shi Keyah Association v. Hodel, No. Civ-84-1622M D.N.M. 
l984)Hon. E.L. Mechem). A class action on behalf of all Navajo 
allottees with oil and gas leases on their lands alleging that the 
Secretary of Interior was not in compliance with the Federal Oil and 
Gas Royalty Management Act of 1982. A consent decree was entered in 
March of 1989 requiring numerous changes on the part of the Secretary 
to bring the Secretary into compliance with FOGRMA. This was after 
several key summary judgment rulings in Plaintiff's favor on 
interpretations of key provision of FOGRMA. An award was also entered 
for the Plaintiff under the Equal Access to Justice Act which was, at 
that time, one of the largest such awards yet to be entered. The court 
retained superintendent jurisdiction over implementation of the consent 
decree for five years.
    The Department of Interior reporting requirement ended in 2001. 
Consequently, the court is not aware of these violations, but will be 
notified through additional lawsuits.
    I also met with the Special Master under the Cobell Litigation, who 
had responsibility to oversee the retention of records and information. 
He was deeply concerned with violations of records retention and found 
that what I had reported as egregious acts were in fact true. He 
reviewed the issue concerning audit records held in MMS Dallas office 
and found them to be missing, incomplete, and misfiled. He looked into 
the right-of-way issues and found the appraisal records were missing 
and destroyed. During his investigations he was obstructed by the 
Department Interior Executives and Secretary Interior's hired legal 
counsel.
                                 ______
                                 
    The Chairman. Thank you.
    Ms. Alexander?

            STATEMENT OF RYAN ALEXANDER, PRESIDENT, 
                   TAXPAYERS FOR COMMON SENSE

    Ms. Alexander. Good morning, Chairman Rahall, Ranking 
Member Flake and Representative Costa. Thank you for the 
opportunity to testify today.
    Taxpayers for Common Sense is a national, nonpartisan 
budget watchdog organization. We believe in transparency, 
competitive and clean contracting and accurate and independent 
auditing. In short, we believe that taxpayers have a right to 
demand excellence in accountability from our government.
    For more than a decade, TCS has worked actively to ensure 
that taxpayers receive a fair return on the resources extracted 
from Federal lands and waters. In recent years, numerous 
management failures at the Minerals Management Service have 
cost taxpayers billions of dollars in waste and lost revenue.
    TCS urges the Committee to reform the revenue collection 
process, to improve contracting practices and to increase 
accounting accuracy at MMS. We also urge the Committee to hold 
the oil and gas industry accountable for accurate reporting of 
minerals extracted from Federal lands and to eliminate royalty 
relief programs. We look forward to working with the Committee 
to effect these changes.
    My focus today will be on three areas of primary concern to 
Taxpayers for Common Sense: The risks presented by the reliance 
on compliance review and industry self-reporting, the risk to 
taxpayers the Royalty-in-Kind program presents and the failure 
of MMS to remedy known problems.
    It is the responsibility of MMS to ensure fair calculation, 
collection and distribution of royalties on behalf of the 
American taxpayer. In decades past, the MMS Auditing and 
Compliance Division collected over $100 million annually 
through the audit process. In recent years, this amount has 
declined to less than half that number.
    In the last decade, MMS began transitioning from a 
traditional audit process to a new automated royalty 
verification process known as compliance review. This system 
relies substantially on self-reported data from the oil and gas 
industry.
    A recent report from the Inspector General concluded that 
the compliance review process may not detect underreporting and 
underpayment of royalties, particularly because anomalies 
detected in the compliance review process rarely trigger a 
traditional audit. The combination of self-reporting and 
superficial data reviews provides companies with an incentive 
to underreport and underpay royalties owed.
    The Royalty-in-Kind program usually puts the Federal 
government in the position of marketing oil and gas directly. 
We have concerns about putting the government in this position. 
Industry has proved itself very capable of bringing oil and gas 
to the marketplace. Putting the government in that role is 
potentially costly and inefficient.
    Reports from the Inspector General raise questions about 
the ability of MMS to track royalties collected, to track the 
volume of production on Federal lands, and earlier this morning 
we heard Mr. Gaffigan raise questions about MMS' ability to 
determine whether or not the sales from royalty-in-kind 
payments equal or exceed cash royalty payments as required by 
statute.
    Given these concerns, we have little confidence that MMS is 
equipped to get the best deal for taxpayers through direct 
sales. At the very least, the royalty-in-kind system should be 
thoroughly evaluated, and if found not to benefit the taxpayer 
we believe the program should be scrapped.
    As the Committee well knows, the error of omitting price 
threshold language from leases executed in 1998 and 1999 has 
already cost the taxpayer over $1 billion. Recent reports 
suggest that Director Johnnie Burton was aware of this error in 
2004, and it was brought to wide public attention by the New 
York Times expose last year, and yet MMS has only recently 
begun to remedy this problem.
    We are pleased to see that they have started to remedy this 
problem, but every single delay costs the taxpayers more money. 
Moreover, the current leadership at MMS has shown little 
appetite for pursuing underpayments discovered by their own 
staff. Worse, employees who have attempted to remedy 
underpayment collection have been dismissed.
    It is clear that several actions at MMS must occur to 
remedy the current situation. Compliance review based on self-
reported data cannot be relied upon to ensure adequate 
collection of royalty revenue. Steps must be taken to ensure 
independent audits occur and royalty underpayments cease. The 
system has to be reformed so it is more transparent and can 
easily account for royalty payments.
    For example, when Assistant Secretary Allred was testifying 
earlier he couldn't give the numbers that you wanted. Those 
numbers should be very easily accessible. Furthermore, the 
system should be publicly accessible via the internet.
    It is the Federal government's responsibility to protect 
the taxpayers' resources and ensure that they are adequately 
compensated for their sales. It is clear that the agency 
responsible for the taxpayer protection is in need of an 
accountability overhaul.
    We are pleased to see such rigorous oversight by Congress. 
The absence of the checks and balances inherent in the 
oversight process invariably leads to problems, particularly in 
agencies that by the nature of their missions have close ties 
to the industries they regulate.
    We are pleased the Committee has begun to address these 
issues, and we look forward to working with you to see the 
Minerals Management Service reformed.
    [The prepared statement of Ms. Alexander follows:]

                Statement of Ryan Alexander, President, 
                       Taxpayers for Common Sense

    Good morning Chairman Rahall and members of the committee. Thank 
you for the opportunity to testify today. My name is Ryan Alexander and 
I am the President of Taxpayers for Common Sense (TCS), a national, 
non-partisan budget watchdog organization. The mission of Taxpayers for 
Common Sense is to fight wasteful government spending and subsidies to 
achieve an efficient and responsible government that lives within its 
means. We believe in competitive and clean contracting--from the Iraq 
war, to Katrina, to DOD procurement, to MMS contracts. We believe in 
transparency: taxpayers should be able to easily see how their tax 
dollars are spent, whether in the $460 billion defense budget or $300 
million MMS budget. We believe in accurate and independent auditing. In 
short, we believe that taxpayers have a right to demand excellence and 
accountability from our government.
    For more than a decade, TCS has actively worked to ensure that 
taxpayers receive a fair return on minerals and resources extracted 
from federal lands and waters. The mismanagement at the Mineral 
Management Service (MMS) offends all our core values and in the absence 
of corrective action will continue to waste tax dollars. TCS is 
committed to reforming our revenue collection process, ensuring fair 
contracting, and increasing accounting accuracy at MMS. TCS is also 
committed to holding the oil and gas industry accountable for fair and 
accurate reporting of minerals extracted from federal lands and 
supporting efforts to eliminate royalty relief provisions. We will 
continue to actively pursue each of these goals and look forward to 
working with the committee on other efforts to achieve these ends.
    In addition to the mismanagement and enforcement problems at MMS, 
we believe there are structural problems with the current royalty 
system that subsidize the oil and gas industry at the expense of the 
taxpayer.
    As you know, oil and gas companies that drill on federal and Indian 
lands or off-shore pay royalties for the oil, gas and some other 
minerals they remove. Generally, this payment is a percentage of the 
total value of the oil or gas extracted. It is the responsibility of 
MMS to ensure fair collection, calculation and distribution of 
royalties on behalf of the American taxpayer. The collection of 
royalties is a significant source of revenue for the federal 
government: In Fiscal Year 2006, the Minerals Management Service 
reported more than $10 billion in royalty revenue.
Royalty Relief
    With the oil and gas industry continuing to experience record 
profits, there is little need for taxpayers to continue to subsidize 
it.
    Given the current fiscal climate, we commend the House for 
recognizing the need to reel in royalty relief provisions. Earlier this 
Congress, the House passed legislation requiring the repeal of royalty 
relief provisions included in the Energy Policy Act of 2005. We also 
applaud the MMS for proposing the repeal of sections 344 and 345 of the 
Energy Policy Act in their FY08 budget request. Taxpayers for Common 
Sense opposed the inclusion of these provisions in the Energy Policy 
Act and looks forward to working with Congress and MMS to see these 
sections repealed.
Royalty-In-Kind Program
    Another area which Taxpayers for Common Sense fears is ripe for 
abuse is the Royalty-In-Kind program. From our standpoint, ``in kind'' 
contributions across government programs almost always end up being a 
bad deal for taxpayers. We saw a red flag when MMS began pursing an 
expansion of their in-kind program in the mid-1990s. The Royalty-In-
Kind program allows oil and gas companies to pay their royalty dues in 
the form of oil or gas instead of cash. This forces the federal 
government to market the oil and gas themselves. The burden of 
marketing and selling oil and gas complicates government bureaucracy 
and leads to a lack of transparency.
    It may be true that the Royalty-In-Kind program makes it easier for 
MMS and the industry to calculate the royalties that are due because 
they need only determine a percentage of the amount of oil produced and 
do not need to be concerned with the sale price. But the benefit for 
the government ends there. In effect, the process adds layers of 
complication and inefficiency by requiring the federal government to 
resell oil and gas. Involving the government in the sale of oil can 
easily lead to abuse. Given the current track record of MMS, we have 
little faith that this system can operate efficiently and for the 
benefit of taxpayers.
Auditing and Compliance
    To ensure the adequate collection of royalties, MMS has an auditing 
and compliance division whose goal is to oversee leases and complete 
audits. In decades past, this division collected over $100 million 
annually through the audit process. However, in recent years this 
amount has significantly declined to less than half of that number. In 
fact, a more than twenty percent decrease in the number of audits was 
reported in the last five years. Not only has the collection of 
revenues dropped dramatically in recent years, MMS has clearly shown 
less commitment to this division, as demonstrated by shrinking budgets 
and significant cutbacks in staffing.
    In the last decade, MMS began transitioning from a traditional 
audit process to a new, automated royalty verification process, known 
as compliance review. This shift has not been cost-effective and is an 
important contributing factor in the drop in revenues collected by MMS. 
Further, relying on self-reported data from the oil and gas industry is 
not an accurate way to monitor royalty collection.
    Proponents of compliance review correctly point out that the 
process allows MMS to check data pertaining to more transactions than 
the traditional audit process; however, the superficial review does not 
allow for an in-depth analysis or encourage improved accounting 
procedures. As the Department of Interior Inspector General Earl 
Devaney testified before the committee in February, the compliance 
review process does not provide the same level of detail or accuracy a 
traditional audit provides.
    The IG audit report released in December 2006 detailed many 
weaknesses in this program. The report highlighted MMS's inability to 
access accurate and complete information on the program and the 
inability to use it for daily management and reporting purposes. 
Further, the current system does not provide states, tribes and 
Congress with accurate information on the Compliance and Asset 
Management Program.
    The report went on to conclude that MMS could not establish the 
true cost and benefit of compliance reviews and audits. When 
considering the impact on federal taxpayers, one of the most egregious 
findings of the IG report was that anomalies rarely lead to a full 
audit. The report concluded that ``MMS may not detect underpaid 
royalties.''
    Additionally, the fact that the data relied on for this process is 
self-reported by the companies should be of grave concern. The 
combination of self-reporting and superficial data reviews provides 
companies with an incentive to under-report and under-pay royalties 
owed.
    As demonstrated in the case brought forth by our fellow witness, 
Mr. Bobby Maxwell, as well as other auditors at the agency, a negligent 
MMS appears to be serving the interests of the oil and gas industry 
over those of the taxpayer. In a glaring example of mismanagement 
within the agency, these auditors were prohibited by the MMS from 
collecting gross underpayments of royalties they had uncovered in their 
investigations.
Contracting and 1998 and 1999 Leases
    Perhaps the best-known example of mismanagement at the MMS is the 
errors made in the leasing contracts of 1998 and 1999. In 1995, 
Congress passed the Outer Continental Shelf Deep Water Royalty Relief 
Act which awarded the oil and gas industry a waiver of royalty payments 
for leases issued from 1996-2000. These leases were all intended to 
include price thresholds that would trigger the collection of royalties 
when the price of oil reached above $36/barrel.
    A little more than a year ago it came to light that a gross error 
had occurred in more than 1,000 leases issued in 1998 and 1999. 
Contracts had omitted the price threshold language, unlike those for 
leases issued in 1996, 1997 and 2000. When this error was uncovered in 
a New York Times expose, a series of congressionally driven 
investigations determined it was merely a clerical error. This clerical 
error has already cost taxpayers at least $1 billion in lost revenue.
    Adding insult to injury, Johnnie Burton, Director of MMS, was made 
aware of the error as early as 2004, despite congressional testimony 
she had given late last year to the contrary. The information was 
uncovered by the Interior Inspector General and documented in a series 
of emails sent to Ms. Burton.
    While the original omission of the price threshold language was 
obviously a very serious error, MMS's failure to devise and implement a 
fair remedy in the nearly three years the agency has been aware of the 
problem is emblematic of the lack of accountability and culture of 
mismanagement at MMS.
    On the subject of price thresholds, we would like to call one 
additional matter to the Committee's request. MMS finalized the 
``Shallow Water, Deep Natural Gas'' rule in 2004. The rule is designed 
to spur development of natural gas far below ground in shallow waters. 
Unlike the 1998 and 1999 leases, this rule does include a price 
threshold. Unfortunately, MMS set the price threshold at the sky high 
level of $9.34 per thousand cubic feet of natural gas. The threshold is 
indexed to inflation and rose to $9.91 for 2006. MMS data show that 
this threshold is so high that companies would have avoided royalties 
even in 2005 and 2006, in a time of record high prices following the 
Gulf Coast hurricanes. A threshold this high is no better than no 
threshold at all.
    We would also note that the threshold increased dramatically as the 
shallow water deep gas rule moved forward--from $5.00 in the proposed 
rule to $9.34 in the final version. The result will be billions in 
foregone revenues for the federal taxpayer. We encourage the Committee 
to look into this matter in greater depth.
Culture of Mismanagement at the MMS
    Federal taxpayers continue to bear the burden of these multi-
billion dollar errors. The problem will only be compounded in the 
coming years. Director Burton has shown little initiative to remedy the 
problems within the agency. In addition to failing to correct the 
missing lease language when it was first brought to her attention, 
several employees who have attempted to remedy the under-collection of 
royalties have been dismissed on her watch.
    The Department of Interior estimates in the next five years that 
energy companies will likely extract $65 billion in oil and gas from 
federal lands and pay little or no royalties for it. This will cost 
taxpayers $7-$9 billion in lost revenue. The problem will only escalate 
as more oil comes online. By 2011, the Department of Interior estimates 
that royalty-free oil will quadruple and natural gas will see a 50% 
increase. Taxpayers cannot afford to have a grossly mismanaged agency 
overseeing this important source of revenue.
Remedies and Solutions
    It is clear that several actions at the MMS must occur to remedy 
the current situation. Senior employees must be held accountable for 
their actions and committed to the mission of the agency, not the 
pocketbooks of Big Oil. Too many examples of close connections with the 
oil industry have surfaced to ignore this problem. We encourage the 
committee to continue rigorous oversight to ensure MMS is operating in 
the interest of federal taxpayers.
    Furthermore, compliance review cannot be relied upon to ensure 
adequate collection of royalty revenues. Steps must be taken to ensure 
independent audits occur and royalty underpayments cease. The current 
system heavily relies on self-reporting, which can only lead to abuse. 
The system has to be reformed so that it is more transparent and can 
easily account for royalty payments. Furthermore this system needs to 
be publicly accessible via the Internet.
    Past errors must also be corrected. Contracts that omitted the 
price threshold language must be renegotiated. We applaud Congress for 
beginning to take steps in this direction. It is clear in testimony 
provided by several of the oil companies involved with leases that the 
industry was aware of the error and was also fully aware of Congress's 
intent to keep the price thresholds in the contracts. Contracts are 
renegotiated all the time, and this situation must be addressed or 
taxpayers stand to lose billions more. Gross negligence on the part of 
government employees is an unacceptable reason to allow the oil and gas 
companies to exploit congressional intent and avoid the dues that are 
rightfully owed to taxpayers. These oversight hearings will help reveal 
to the general public any companies that refuse to pay. As we have 
already mentioned, it is outrageous to imagine giveaways to oil and gas 
companies while they are experiencing such enormous profits.
    It is the federal government's responsibility to protect taxpayers' 
resources and ensure they are adequately compensated for their sale. It 
is clear the agency responsible for this taxpayer protection is in need 
of an accountability overhaul.
    MMS's Royalty-In-Kind system has fundamental flaws that make it 
hard for taxpayers to be sure they are getting their money's worth from 
their resources. Under the best conditions, this type of system would 
be prone to abuse, particularly at an agency as flawed as MMS. At the 
very least the Royalty-In-Kind system should be thoroughly evaluated, 
and, if not found to benefit the taxpayer, scrapped.
    The oil and gas industry runs on a boom and bust cycle. While 
seductive, the offer of royalty relief to stimulate production can skew 
the marketplace and have long-term unintended consequences of 
diminished returns for taxpayers. We urge Congress to be very judicious 
before pursuing royalty relief in the future.
    Again, we are pleased to see such rigorous oversight by this 
Congress. The absence of energetic oversight or the checks and balances 
inherent in the oversight process invariably leads to problems, 
particularly in agencies that by the very nature of their missions have 
close ties with the industries they regulate. We are pleased the 
committee has begun to address this issue and look forward to working 
more to see this embattled agency reformed.
                                 ______
                                 
    The Chairman. The Chair thanks the panel for your 
testimony.
    Let me begin my questions with Mr. Maxwell if I might. I do 
thank you for traveling as far as you have to stand up and be 
counted. The root of your testimony, it seems to me, is that 
since the year 2000 a dramatic different philosophy has taken 
root at MMS, and it appears that that philosophy is do not 
bother the oil companies. I believe you put it that way in your 
testimony.
    It just boggles the mind. It is incredible. It is 
incredible that such a philosophy would take hold when it comes 
to the American people's lands. It is something the American 
people must know, and they are deserving of a true record.
    Government auditors are told not to bother those whom they 
are lawfully entrusted to audit. If this system was in place at 
the IRS, I really fear that this country would be broke today.
    My question is what possible gain do you guesstimate, Mr. 
Maxwell, that could be had by those who promoted this 
philosophy? Is there a benefit that you see they might derive 
from such a philosophy of just hands off the oil companies?
    Mr. Maxwell. Sir, I don't understand the political 
ramifications or how these things change, but the whole culture 
has changed. Changed dramatically.
    I believe in the years preceding I was very aggressive in 
pursuing the oil companies. If we put an order out and we are 
pursuing something, I don't care if the oil companies sue us. 
If we are right and we need to establish a principle or enforce 
a regulation or a law or to find out if something is, let us 
litigate it. There are hundreds of millions of dollars or 
billions, and I think to be scared that we are going to be sued 
by an oil company is ridiculous.
    The culture changed, and it changed in such a broad scale 
it was almost unbelievable because there were statements made. 
Don't bother the oil companies. Let us go to this new 
compliance system. We do not want you to be getting records 
like you did before, you know, getting massive amounts of 
records.
    So it changed drastically, and a lot of the people we were 
hiring and putting in positions for compliance reviews had 
different backgrounds. The basic requirement used to be to be 
an auditor or an accountant you had 24 hours in accounting, 
which could include business law, statistics, et cetera.
    We quit pursuing that type of background, and we would move 
different people in maybe from administrative areas or 
different areas. I am not opposed to doing that, but I think 
the basic requirement should have been if you move into those 
positions go get your 24 hours of college level courses because 
when we audit oil and gas companies they have some of the best 
and brightest, and any gray area they are not going to pay 
royalties on if they don't have to.
    I don't blame them. If I was on their side, any gray areas 
I would interpret to my benefit. However, you need people that 
can realize what the accounting records are, different methods 
of depreciation, transportation, and to be able to apply the 
regulations, laws and lease terms. You have to have people that 
can think, can work diligently and would be on site at the oil 
companies.
    And so when we started pulling away from that back to a 
compliance review to where people would work in the office and 
try to review without going on site to the companies, without 
talking to the marketing personnel, the field personnel, you 
really lose a lot of expertise in that culture.
    I think that is why we saw the huge drop in royalty 
collections. I don't think it was because the oil companies 
just turned honest one year. I think it is because we stopped 
auditing.
    I might add, when we have talked about compliance reviews 
there is a definite place for compliance reviews, but I think 
you don't start with a compliance review and then see what you 
need to audit. I think you start with the detailed audits, and 
then you back off into what compliance reviews are sufficient 
to monitor on an ongoing basis.
    The Chairman. Was there any time that you conducted an 
audit and you found that money was not owed?
    Mr. Maxwell. I don't believe I ever had an audit that we 
didn't collect anything.
    The Chairman. The answer is no?
    Mr. Maxwell. The answer is no, sir. That is right.
    The Chairman. Mr. Gambrell, would you answer the same 
question?
    Mr. Gambrell. Yes. No.
    The Chairman. The answer is no as well.
    Let me explore with you just a bit more, Mr. Maxwell. Was 
this a philosophy that you would say started at the grassroots 
within the MMS and percolated up, or was it something that 
started at the top and flowed downward?
    Mr. Maxwell. Definitely started at the top and flowed down. 
We were directed that we would support this new reengineered 
method, the compliance. We would. We were directed at senior 
manager meetings that dissent would not be tolerated. They said 
we are making the change. We are making the transition, and it 
is your job to go out and sell it and enforce it.
    The Chairman. So it was a trickle down philosophy then?
    Mr. Maxwell. Yes, sir.
    The Chairman. Mr. Flake?
    Mr. Flake. Thank you.
    Mr. Maxwell, I am interested in you were at MMS until? When 
did you leave?
    Mr. Maxwell. 2005 the last time.
    Mr. Flake. 2005?
    Mr. Maxwell. Yes, sir.
    Mr. Flake. What is the appropriate balance where somebody 
works and gets official information and then decides to go out 
on their own and file under the False Claims Act? Why wouldn't 
more people do that using information that way, and where is 
the proper balance between recouping money for the taxpayer or 
somebody's private interest doing that?
    Mr. Maxwell. I think that is a great question because I 
looked at that, thought about it and struggled with it also.
    In your employment situation, our responsibility is to the 
American taxpayer and also to MMS, our employer. I think that 
our job is to bill and the underpayments, to pursue them, to 
litigate them, through the MMS or the government when it will 
do it.
    I think the False Claims Act only seems applicable to me 
when the agency refuses to do its job, and I think there could 
be three reasons that happens. One could just be corruption. 
Two could be just ignorance. You could have people that are 
incompetent. Three, you could have not enough personnel to do 
the job.
    I think there has to be extraordinary circumstances for an 
employee to file a false claims on their own.
    Mr. Flake. And you felt that that test was met here in this 
case?
    Mr. Maxwell. I do, sir, for a couple of reasons. Number one 
is the director was aware of the issue, the Office of the 
Solicitor. I discussed it with the Office of Enforcement, so I 
believe it was well known. I was told the order would not go 
out.
    Mr. Flake. Is there a protocol? Is there an order that you 
have to go through, and did you follow that?
    Mr. Maxwell. I believe I did. I discussed it with the 
Office of Enforcement, and at one time in 2003 I had an 
interview with the Inspector General on another matter, which 
was the matter of not being able to audit royalty-in-kind.
    It wasn't set up for this specific reason of this Kerr-
McGee because I didn't know for sure at that time, but on the 
other meeting that was set up, the meeting never took place.
    Mr. Flake. MMS disputes some of these meetings or the 
follow-up. Do you have any comment on that?
    Mr. Maxwell. I don't doubt that. No, I have no comment, but 
it doesn't surprise me.
    Mr. Flake. Ms. Alexander, what is your feeling on that 
balance? Should a former employee be able to file under the 
False Claims Act using information that was gathered when the 
person was an employee? Where do you strike the best balance 
for the taxpayer in this regard?
    Ms. Alexander. You know, I am not an expert in the False 
Claims Act so I don't know the legal and technical requirements 
under the Act. I think from our perspective we are happy that 
anybody is pursuing royalties on behalf of the taxpayers, and 
it would obviously be the best situation if there weren't a 
need, if there was no need for a False Claims Act.
    I think it is difficult for me to really testify in general 
about a balance without knowing more about the law.
    Mr. Flake. In your opinion, has MMS straightened up over 
the past year or so?
    Ms. Alexander. It is hard to tell, but I certainly liked 
some of what I heard this morning. It sounds like they are 
making efforts to be more aggressive about collecting 
royalties, but, given their track record, you know, we are 
going to look at that with a great deal of skepticism.
    Mr. Flake. Under the False Claims Act, Mr. Maxwell, how 
much do you stand to gain if the current numbers carry forward?
    Mr. Maxwell. We currently have no judgment entered in the 
record by the judge so we don't have any dollars, but when the 
judgment is and if we eventually win, 100 percent of that money 
goes to the Federal government. Then we deal with the Federal 
government, but the percentage could range from 25 to 30 
percent of the gross amount.
    Mr. Flake. With regard, going back again to MMS and your 
time there, are there the proper protocols in place right now 
for an employee to say I have exhausted my remedy within the 
organization before it goes out, or do we need to change those?
    Mr. Maxwell. I have been gone for several years and so I am 
not sure, but I think it should be well in place and very well 
communicated, but I really don't know what they have right now 
at this point.
    Mr. Flake. You have been gone since 2005?
    Mr. Maxwell. Yes. I have been gone for over two years.
    Mr. Flake. All right. Thank you, Mr. Chairman.
    The Chairman. Ms. Alexander, let me ask you. Do you agree 
with the statement I made that if the IRS were run like this 
agency was that our country would be broke?
    Ms. Alexander. It seems like a kind of broad statement. I 
don't have enough knowledge, but I will agree with it.
    The Chairman. Mr. Gambrell, let me ask you. Mr. Lester will 
state in a few moments in his testimony that Federal offshore 
mineral leasing laws do not allow tribes to prohibit oil 
companies from reducing payments by claiming overpayment in 
previous years.
    You claim, and I quote, ``Unilateral adjustments are often 
made without the tribe's knowledge and lack review or oversight 
by MMS.'' If that is accurate, this seems quite egregious to 
me, and I would ask you if you would concur with Mr. Lester.
    Mr. Gambrell. I am not quite sure what is meant by the 
offshore as an offset to Indian leases. I don't understand what 
that means.
    The Chairman. Is there no statute of limitations, I guess 
is my question, for companies to claim overpayment?
    Mr. Gambrell. My understanding is there is a statute of 
limitations to claim certain adjustments.
    I also am aware that there are adjustments made in very 
small amounts that add up to the millions of lines of 
adjustments that go back quite some time to the 1990s, maybe 
even into the 1980s. I have looked at royalty reports where I 
have seen adjustments back in the 1980s.
    The Chairman. Are companies required to provide proof of 
overpayment to the Department of Interior?
    Mr. Gambrell. Yes, if they want to recoup. Well, within my 
office--I can't speak for the entire MMS, but within my 
office--we required some type of documentation to recoup.
    The Chairman. And who would have authority over these 
issues?
    Mr. Gambrell. Us.
    The Chairman. And do you have any recourse?
    Mr. Gambrell. If the company claimed an overpayment without 
justification, we could collect. We might collect a bond. We 
may issue a notice of noncompliance. We may cancel the lease.
    The Chairman. OK. That ends my questions.
    Do you have any further questions, Mr. Flake?
    Mr. Flake. Not at this time. Votes are starting up in a 
minute. Will this panel be finished, or will they be held over 
until we are done?
    The Chairman. They will be finished if there are no further 
questions at this point. You may proceed, or we can submit in 
writing at a later time.
    Mr. Flake. I will conclude at this time.
    The Chairman. Once again, we want to thank the panel for 
being with us today.
    Mr. Flake. Thank you.
    The Chairman. We will proceed with our third panel with the 
caveat that there are roll call votes expected on the Floor 
momentarily, and we may have to recess and come back, but I 
will call the panel to the table at this time.
    Mr. Dennis Roller, Audit Manager, North Dakota State 
Auditors Office, Royalty Audit Section; Mr. A. David Lester, 
Executive Director, Council of Energy Resource Tribes; Mr. 
Michael Geesey, Director, Wyoming Department of Audit; and 
Professor Pamela Bucy, Frank M. Bainbridge Professor of Law, 
University of Alabama School of Law.
    As the votes are now starting, I would suggest that the 
Committee take a half hour recess, and we will come back and 
start at the top of the list I just announced. The Committee 
stands in recess.
    [Recess.]
    The Chairman. The Committee will resume its sitting, and 
the panel will proceed with Mr. Roller going first.
    We do have your prepared testimony. It will be made part of 
the record as if actually read, and you are encouraged to 
summarize and stay within the five minute limit.

 STATEMENT OF DENNIS ROLLER, AUDIT MANAGER, NORTH DAKOTA STATE 
            AUDITOR'S OFFICE, ROYALTY AUDIT SECTION

    Mr. Roller. Mr. Chairman and Members of the Committee, I 
want to thank you for the opportunity to comment and share my 
views on some of the challenges faced by the Minerals 
Management Service and the North Dakota delegation.
    Let me begin with a quick history of the North Dakota 
delegation. The North Dakota delegation was created in 1982 
under the authority of Section 205 of the Federal Oil and Gas 
Royalty Management Act of 1982. For the past 25 years, the 
North Dakota delegation has performed compliance work on 
Federal mineral royalties paid in North Dakota with some very 
successful results.
    As shown on Exhibit 1 of my written testimony, the North 
Dakota delegation from 1982 through 2001 collected over $26.6 
million. During that same period, the costs of the North Dakota 
delegation were less than $4.2 million. That is almost $6 of 
revenue for every $1 spent.
    Given the North Dakota delegation's success in the past, I 
now would like to discuss some of the challenges the MMS and 
the North Dakota delegation are facing. The first area is a 
state of misreporting for the MMS 2014s or the payment 
reporting document and the oil and gas operations report, the 
OGOR, or the production reporting document.
    With the MMS reengineered system that went on line November 
1, 2001, the MMS stopped doing any automated comparison of 
these two documents. Without any automated check, company 
reporting accuracy has deteriorated. This OGOR 2014 comparison 
process was a recommendation of the fiscal accountability of 
the nation's Energy Resources Committee of January 1982, 
commonly referred to as the Linowes Commission, which was a 
driving force for the creation of MMS.
    Recommendation No. 5 of the Internal Control section of the 
Linowes Commission report states that the Federal royalty 
managers incorporate production data into the royalty 
management system in order to cross check the data with sales 
and royalty data for all leases each payment period.
    The MMS did this comparison, commonly known as the AFS/PAAS 
comparison, prior to the implementation of the new system, and 
per the 2001 MMS budget justification document the AFS/PAAS 
comparison process collected $56.2 million in additional Fiscal 
Year 1998 royalties.
    Because of the level of misreporting, the North Dakota 
delegation requested the authority to perform volume and 
royalty rate automated verifications using a North Dakota 
developed tool. We have been performing these reviews using our 
tools since October 1, 2006.
    Using this tool which compares the 2014s and OGORs, the 
North Dakota delegation has discovered countless reporting 
issues, nonpayment issues, missing document issues, 
nonreporting issues, two companies that just quit paying their 
Federal royalty obligation in North Dakota and well over 
$100,000 in additional royalties, not including the two 
companies that just quit paying their Federal royalties, all at 
a cost of less than $10,000.
    The North Dakota delegation has taken on this comparison 
process, a process the MMS used to perform, at a time when 
North Dakota's funding has went from six FTEs and 4.5 FTE. The 
reporting issue goes to the core of having an effective royalty 
management program. Without correct reporting, the MMS does not 
know what their universe of receivables is and consequently 
cannot compare that universe to what was actually received, a 
basically principle for any business.
    A second major area is the collection and information 
management system or CIMS. CIMS is the most current MMS 
collection tracking system that was made available to the North 
Dakota delegation in January of 2006. The previous collection 
tracking system was shut down in late 2001. The North Dakota 
collection information in the old MMS system was complete and 
accurate, and the North Dakota collection information in CIMS 
is incomplete and inaccurate.
    A third area is the MMS reengineered system was not capable 
of calculating and billing late payment and collection interest 
until May 2003. Today the MMS says they are finally caught up 
on the backlog of interest. However, the North Dakota 
delegation has not received a report of the interest that has 
been billed from November 2001 through September 2006.
    Finally, over the last five years what used to feel like a 
partnership of equals between the MMS and the delegations has 
now developed into something else. The MMS is increasingly 
issuing directives, requirements and mandates to delegations on 
almost every aspect of our delegation of authority with no 
negotiation or consultation.
    In closing, the North Dakota delegation has been very 
successful in the past at collecting additional royalties owed 
from Federal lands. The level of misreporting and nonreporting 
has drastically increased. The collection information, CIMS, is 
incomplete and inaccurate. Interest since November 2001 is 
still an unknown, and, finally, the MMS has moved away from a 
partnership with the delegations.
    This concludes my formal testimony. Thank you for the 
opportunity to appear before the Committee today, and I will be 
happy to answer any questions you may have on my oral or 
written testimony.
    [The prepared statement of Mr. Roller follows:]

              Statement of Dennis Roller, Audit Manager, 
                  North Dakota State Auditor's Office

    Mr. Chairman and members of the committee, I want to thank you for 
the opportunity for me to comment and share my views concerning the 
wide array of challenges faced by the Minerals Management Service and 
State and Tribal delegations.
    Let me begin with a quick history of the North Dakota State 
Auditor's Office Royalty Audit Section (ND delegation). The ND 
delegation was created in 1982 under the authority of section 205 of 
the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA). For 
the past 25 years, the ND delegation has performed compliance work on 
Federal mineral royalties paid in North Dakota, with some very 
successful results. I was an auditor for the ND delegation for over ten 
of those years and have been the audit manager for the ND delegation 
for the last three years.
    As shown at Exhibit 1, the ND delegation from 1982 through 2001 
collected over $26.6 million in additional Federal royalties. During 
that same period, the costs of the ND delegation were less than $4.2 
million as shown at page 2 of Exhibit 1. That's almost $6 of revenue 
for every $1 spent. For all State's that had a 205 delegation for 1982 
through 2001 the total additional royalty collections were over $296.5 
million, while costs were under $58.5 million. Exhibit 1 does not 
include any 202 Tribal delegation collections or costs as several 
Tribes prefer not to share that information. However, the ND delegation 
believes that 202 Tribal delegations have had similar success. Exhibit 
1 is only through 2001 as that is the last date through which the MMS 
has accurate collection information. I will go into greater detail on 
the Collections and Information Management System (CIMS) later. These 
successful collection figures represent only the direct collections. 
For example, the ND delegation findings often have a residual financial 
effect due to future royalty payments being calculated correctly.
    Given the ND delegation's success in the past, I now would like to 
discuss some of the challenges the MMS is facing that are recently 
limiting the efficiency of the ND delegation.
    The first area is the state of misreporting for the MMS 2014s, the 
payment reporting document, and the Oil and Gas Operations Report 
(OGOR), the production reporting document. With the re-engineered 
system that was put in place on November 1, 2001, the MMS changed the 
property numbering system used by companies to report the 2014s. The 
MMS also stopped doing any automated comparison of these two documents. 
Without any automated check, company reporting accuracy has 
deteriorated. Our audits now often entail a reconciliation of every 
single payment made by a company for the review period in order to 
determine what the company intended to report and pay.
    This OGOR-2014 comparison process also was a recommendation of the 
Fiscal Accountability of the Nation's Energy Resources Committee of 
January 1982, commonly referred to as the Linowes Commission, which was 
the driving force for the creation of the MMS. Recommendation #5 of the 
internal controls section (Chapter 3) of the Linowes Commission report 
states ``That the Federal royalty managers incorporate production data 
into the royalty management system in order to cross check the data 
with sales and royalty data for all leases each payment period.'' 
(emphasis added) The MMS did this comparison prior to implementation of 
the re-engineered system and per the 2001 MMS budget justification 
document, this comparison process collected $56.2 million in additional 
FY98 royalties.
    The deterioration of reporting has added a tremendous amount of 
hours to our audits. In order to combat this, the ND delegation 
requested the authority to perform volume and royalty rate automated 
verifications on October 1, 2005, as allowed for under the Federal Oil 
and Gas Royalty Simplification and Fairness Act of 1996 (FOGRSFA), see 
exerts from the request at Exhibit 2. The ND delegation was denied that 
request on January 20, 2006. However, the ND delegation was later 
granted the ability to perform limited scope compliance reviews using 
the comparison tool the ND delegation developed. The ND delegation tool 
uses the OGOR reported sales and the two known factors in the royalty 
equation, the Federal Governments allocation percentage and the royalty 
rate, to compare to what the company reported as owed on the 2014. The 
only remaining royalty equation factor is the unit value, which 
includes allowances and transportation. The ND delegation has been 
performing these limited scope oil volume and royalty rate compliance 
reviews since October 1, 2006. Using this comparison, the ND delegation 
has discovered countless reporting issues, non payment issues, missing 
documents issues, two companies that just quit paying their Federal 
royalty obligation in ND and well over $100,000 in additional 
royalties, not including the amount owed by the two companies that just 
quit paying, all at a cost of less than $10,000. The ND delegation has 
taken on this comparison process at a time when funding has been 
reduced from 6 FTE to 4.5 FTE and for FY08 the MMS has stated they will 
only fund the ND delegation at 4 FTE.
    What the ND delegation has been finding with our comparison process 
is that companies are willing to correct their reporting when it is 
brought to their attention. MMS is no longer bringing it to the 
companies' attention and in fact we have had a company tell us that it 
can't be reported wrong because the MMS hasn't notified them that it's 
wrong.
    This issue goes to the core of having an effective royalty 
management program. Without correct reporting, the MMS does not know 
what their universe of receivables is and consequently cannot compare 
that universe to what was actually received. This is a basic principle 
for any business.
    A second major area is CIMS as I mentioned earlier. CIMS is the 
current MMS collection tracking system that was brought online January, 
2006. The previous collection tracking system, CTS, was shut down in 
late 2001. The information in CTS agreed with the ND delegation's 
collection data. Four years later when CIMS comes online the data is 
inaccurate and incomplete. The MMS, on more than one occasion, has 
asked the delegations for help in correcting and reconciling CIMS. The 
ND delegation decided to use some of our limited resources to reconcile 
the CIMS information to our state data. After performing this 
reconciliation in mid 2006, it was determined that the reports that the 
ND delegation can generate from CIMS are not accurate. The reports do 
not reflect all the collections in CIMS for the ND delegation and there 
is no way for the ND delegation to generate a correct report.
    Thirdly, the MMS re-engineered system did not have an interest 
module to bill late payment and additional royalty collection interest 
until May 2003. Today MMS says they are finally caught up on the back 
log of interest. However, the ND delegation has not received a correct 
report of the interest that has been billed from November 2001 through 
September 2006. The ND delegation did receive a report for interest 
from November 2001 through April 2006, but the report information was 
incorrect due to an error in the query.
    On January 9, 2007, the MMS provided a report of interest for the 
quarter of October 1, 2006 through December 31, 2006. The ND delegation 
randomly reviewed two late payment interest billings from that report. 
For the first case, no late payment interest was actually owed. MMS 
billed late payment interest because the company misreported the sales 
month. The company reported the May 2002 sales month royalties as 
February 2002. So if the royalties were reported correctly, there would 
not have been interest owed.
    The second case the ND delegation looked at was one for which the 
company claims they paid the royalty amount and MMS claims they didn't. 
This dispute centers on the matching or bookkeeping process the MMS 
has, a fourth area of concern. If a company reports on a 2014, that 
they owe $100,000, but pays only $90,000 the MMS matches the money as 
best they can. Normally the MMS would apply 90% to each of the detail 
lines of the $100,000 report. In this case, the MMS determined that one 
sales month for one property for one product was not paid and thus 
billed the company interest for that one property, product, sales 
month. Putting aside the dispute over whether the amount initially was 
paid or not, the interest bill incorrectly calculated interest starting 
February 1, 2000 when the royalty was not due until March 1, 2000. 
Interest remains a concern for the ND delegation as the ND delegation 
has no report of interest billings from November 2001 through September 
2006 and is concerned with the accuracy of the billings for October 
2006 through December 2006.
    Once again, the Linowes Commission provided a useful guideline for 
the MMS matching problem. In the summary section of the report, the 
commission stated ``The Federal government should perform an oversight 
role. It must not waste its limited resources on tasks that are the 
industry's responsibility. In managing royalty collection, it should 
not remain mired in bookkeeping details that rightly belong to the 
lessee.'' The commission went on to state ``The oil and gas industry 
should carry out its obligation, as lessee, to pay royalties in full 
and on time. The industry, not the government, has primary 
responsibility for the detailed record keeping needed to assure that 
all royalties are paid.''
    To further demonstrate the extent of how MMS has moved away from 
putting the accounting responsibility on the companies, the ND 
delegation has not issued an order to perform restructured accounting 
in over 5 years. In the past, whenever the ND delegation encountered a 
systemic problem, a problem for every test month or every property 
covered by a contract, the ND delegation requested the company to pay 
the additional royalties for the test months and then to perform 
restructured accounting (recalculate) the royalties for all the non 
test months. The MMS no longer is willing to sign orders to perform 
restructured accounting so instead the ND delegation has to test all 
months or project the non tested months. Unfortunately, if a projection 
is used, the dispute becomes the projection method rather than if 
additional royalties are actually owed.
    The ND delegation concerns surrounding the financial system don't 
end with the matching or bookkeeping issue. Within the last year, the 
ND delegation has identified where an audit collection of $5,665 was 
distributed to ND at 50% of $5,640. An immaterial difference, but no 
explanation has been provided by the MMS for the difference. Another 
issue identified in the last six months is the MMS effectively borrowed 
ND's 50% share of the royalties for a property for up to three years 
and no explanation has been given. This issue is that several payments 
for ND's share of 2001 royalties for a property were backed out in 
October 2003, even though the company did not change their royalty 
reporting. Some of the amounts backed out were paid back three months 
later, some 12 months later and the final amounts were paid back 36 
months later. Was the ND delegation paid late disbursement interest and 
how often has this occurred? Additional questions the ND delegation has 
not been provided answers for. Ideally the MMS financial system should 
be an automated process, but as MMS has recently stated to the 
delegations, there are way too many manual processes.
    A fifth area that the ND delegation has found to be ineffective is 
MMS' Government Performance Result Act (GPRA) goals. The MMS goals are 
tied solely to reviewing a certain percentage of the revenue 
voluntarily paid by the companies. As the recent IG report points out, 
this goal results in only large companies being reviewed while there 
are hundreds of smaller companies that are never looked at. In fact, 
the ND delegation has found that it encourages the delegation to not 
look at companies that are severely underpaid. For example, the ND 
delegation put a company on our work plan that paid $0 in Federal 
royalties during the review period. The ND delegation got 0% credit 
towards the goal. However, the ND delegation knew this company owed 
over $100,000 of Federal royalties and had just failed to pay it.
    Finally, the ND delegation has concerns about the working 
relationship between the MMS and the State and Tribal delegations. The 
delegation that has supported the MMS the most recently, has stated 
during STRAC (State and Tribal Royalty Audit Committee) only meetings 
that the limiting of the STRAC meetings to one a year by the MMS is in 
retaliation to STRAC going to congress with letters about MMS. At the 
last such STRAC only meeting, this delegation stated that it is a fact 
that the MMS is looking at legal ways of getting rid of STRAC. As you 
may be aware the MMS has reduced the number of STRAC meetings from 
quarterly to one a year and has eliminated the STRAC only portion of 
those meetings. See Exhibits 3 through Exhibit 13 for individual 
delegation letters written to MMS in support of keeping the STRAC 
meetings. This is a great concern to the ND delegation as the State and 
Tribal delegations have had great success in collecting additional 
Federal royalties and protecting the United States Citizens mineral 
interests.
    In closing, the delegations have been very successful in the past 
at collecting additional royalties owed from Federal lands. The ND 
delegation concurs with the recent IG report finding that the MMS 
management lacks reliable information to manage the compliance program. 
The collection information, CIMS is incomplete and inaccurate. The 
level of misreporting and non-reporting has drastically increased. 
Interest since November 2001 is still an unknown. The MMS is mired down 
in detailed bookkeeping which should be the responsibility of the 
industry. Goals encourage looking at high dollars and away from where 
it is likely that there is a significant percentage of additional 
royalties owed by a company. Finally, over the last five years the ND 
delegation has noticed a disturbing trend of the MMS in moving away 
from a partnership to a dictatorship in dealing with the delegations.
    Thank you for the opportunity to provide written testimony to the 
Committee today. I will be happy to answer any questions you may have 
or provide further details and explanations surrounding any of these 
issues. My contact information is:
    NOTE: The exhibits attached to Mr. Roller's statement have been 
retained in the Committee's official files.
                                 ______
                                 
    The Chairman. Mr. Lester?

 STATEMENT OF A. DAVID LESTER, EXECUTIVE DIRECTOR, COUNCIL OF 
                     ENERGY RESOURCE TRIBES

    Mr. Lester. Thank you, Mr. Chairman. The Council of Energy 
Resource Tribes is honored to be invited to present its views 
to the Committee on this subject. I am David Lester, Executive 
Director for the Council of Energy Resource Tribes.
    I have with me, who has helped the tribes since the 
enactment of FOGRMA in 1982, Mr. David Harrison and Virginia 
Boylan, attorneys who work with Indian tribes on these matters.
    C.E.R.T., the Council on Energy Resource Tribes, was formed 
in 1975, and one of its first objectives was to get reform of 
how Indian royalty payments to tribes was handled by the 
Department of Interior. As a result of scandals, as Mr. Roller 
indicated, in 1982, Congress passed and the President signed 
into law the Federal Oil and Gas Royalty Management Act to 
reform, to correct the problems that were found in the late 
1970s of the system as it existed then.
    There are over 8,000 Indian leases, but there is no 
official way of finding out how many wells are drilled because 
the reporting is not at the well level. It is at the lease 
level. A lease can cover as little as 160 acres or as much as 
250,000 acres, as little as a small handful of wells or 
thousands of wells. Compounding the data collection problem is 
that the numbers for Indian wells do not correspond to the 
numbering system used by the states and so we can't go and 
cross check well data from state records to Interior records.
    I am going to try to highlight some of the major problems 
that the tribes have asked me to do, but also to request, if 
possible, that the Committee consider coming out to the field, 
perhaps allowing more detailed information to be gathered from 
tribes and individual Indian allottees. We would like to work 
with the Committee in gathering that information for you.
    Compounding the urgency for the tribes in this matter is 
that Indian leases can be held past their primary term if the 
company or the operator continues to produce in the major 
portion paying quantities. In the sense the data is gathered at 
the lease level rather than at the well level, we have no way 
of performing that analysis to determine whether those leases 
that are being held in perpetuity are actually in compliance 
with the terms of the lease.
    In short, even if everyone did their job, the system is not 
designed to fulfill its trust responsibilities to Indian 
individuals or to Indian tribes, a responsibility that is 
distinct in nature from its responsibility to public lands.
    The FOGRMA was passed in 1982, but the final rules were not 
issued until 1990. That is because there was a tremendous 
attempt we believe, from our participation in the rulemaking 
process, of the agency to water down FOGRMA and to in effect 
reestablish the system that previously existed.
    In short, the problems that FOGRMA sought to cure are with 
us today in the agency. Among those are the posted price 
problem. In many fields, the industry establishes a posted 
price which it uses to calculate royalties. Ten years ago the 
MMS abandoned the posted price on Federal leases, but continues 
to allow companies and operators to use posted price in 
calculating royalties owed to Indians and Indian tribes.
    As far as we can see, in abandoning the posted price for 
Federal leases they have collected over $480 million more than 
they would have under the old system. We don't understand why 
they don't make the rule applicable to Indian tribes as well.
    The internal presumption within the agency is that the 
operators and the royalty interest owners have common, in fact 
coterminous, interests. In fact, we have a number of cases of 
well defined adverse interests.
    Major portion analysis. The leases require a major portion 
analysis; that is, that the operators are to pay royalties 
based on the highest price paid in the field on the majority or 
the major portion of that field. Unfortunately, MMS does not 
collect the data to do the analysis and so it is impossible for 
us to know whether the companies are complying with those terms 
of the lease.
    In addition, as I said, we are getting lease level 
reporting rather than well reports and so we don't know what 
the paying quantities are on a well-by-well basis. Companies 
also take their standard deductions, which often result in the 
inability of the tribes to collect payment on liquids taken 
from natural gas, liquids that have market value.
    Audit compliance versus compliance review. Indian audits 
that we have seen collect as much as 30 percent more than what 
has been paid. We have no confidence at all in compliance 
review and collecting what is owed to Indian tribes and Indian 
individuals.
    Advice from the State Tribal Royalty Advisory Committee is 
often ignored. The agency seems to be in denial that there is 
any real problem that exists in the agency. They continue to 
use the honor system. When there is an overpayment claimed by a 
company it is automatically deducted from the payments.
    When a tribe discovers an underpayment, it takes a 
procedure, an onerous procedure, for the tribe to collect the 
underpayment. When we do, the government requires us to sign a 
form that releases any claim that the tribe may have against 
the government, even when it is only about the company's 
payments, which leads us to believe that the government intends 
on reducing our ability to have our grievances rectified in 
Federal courts.
    We want to say that this is not a partisan issue. This is 
not Democrats or liberals versus conservatives. This is about 
living up to the honor--the country and the tribes created the 
trust--about living up to the contractual agreements the 
parties have signed.
    There are some things that are being done right. The lock 
box system seems to be working. The cooperative agreements, 
that is within MMS and BLM, bring tribal participation in. That 
is working and should be expanded rather than reduced, which is 
now the pressure to reduce the amount of money spent to cover 
the field inspections and audits.
    That Farmington office that was earlier referred to, it was 
an example of what can be done when you bring all the agencies 
together, so the coordination and turf problems can be reduced. 
Unfortunately, the progress that was made is now dissipating 
because it no longer is held feet to the fire by the courts.
    The decision making around separating all these Indian 
duties was made in 1982 by James Watt, which the tribes at that 
time opposed, but I want to make sure that we understand. It is 
not about where the boxes are. It is about getting the mission 
right and correcting the culture in the agency that seems to 
put us as adversaries; that the trustee and the beneficiary of 
the trust are inherently adversarial when in fact that should 
not be the case. The trustee should be our advocate and pushing 
for full payment, full reporting, full disclosure, complete 
transparency.
    Free markets depend on transparency, and we are not given 
that opportunity for transparent transactions with respect to 
money owed us and production from our lands. I want to make 
sure that we know that.
    I will finish with this statement. It is about family 
income. It is about capital for economic diversification and 
building a local economy. It is about funding essential 
governmental services at the tribal level. When we lose the 
revenues on nonrecoverable, nonrenewable resources we have 
cheated future generations.
    It is not just about money. It is about what America stands 
for, and that is serving the people, and gaining the trust and 
confidence of the people. That is our government.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Lester follows:]

           Statement of A. David Lester, Executive Director, 
          Council of Energy Resource Tribes, Denver, Colorado

    Good Morning Chairman Rahall, Ranking Member Young and 
distinguished members of the House Committee on Natural Resources. 
Thank you, Mr. Chairman and Congressman Young for convening this 
hearing and the strong support you have shown for Indian Tribes and 
Native people over the years. I am David Lester, the Executive Director 
of the Council of Energy Resource Tribes (CERT) and an enrolled member 
of the Creek Nation of Oklahoma.
    CERT was formed in 1975 in response to the energy crisis then 
gripping the United States and our national need to increase domestic 
production of oil, gas and hard rock mineral resources. CERT is an 
organization formed by Indian Tribes to work for Indian Tribes and is a 
true Inter-Tribal organization. CERT's membership includes 53 Federally 
recognized Tribes and three First Nations from Canada.
    Thirty-two years after its formation, CERT's mission remains the 
same: to support its member Tribes in their efforts to develop 
management capabilities and use their energy resources to help build 
stable, diversified, self-governing economies according to each Tribe's 
own values and priorities. CERT's programs include policy advocacy, 
technical assistance, education and capacity-building partnerships. As 
part of capacity-building and information sharing, CERT disseminates 
knowledge through www.certredearth.com and other media.
    I very much appreciate the opportunity to present testimony to the 
Committee on a matter of great concern to our member Tribes. Because 
CERT is a tribal organization, my testimony will focus on mineral 
activity on tribal trust lands and transactions involving leases 
between Indian Tribes and their private sector partners. Individual 
Indians whose lands are leased for mineral activity, and to whom the 
Minerals Management Service (MMS) also owes a trust responsibility, 
have a related but distinct set of issues that I trust the Committee 
will explore through the testimony of other witnesses. Similarly, my 
testimony is related primarily to oil and gas leases, rather than 
issues related to royalties from coal production even though MMS also 
collects royalties from tribal coal leases. We do understand there are 
myriad problems with undervaluation and underreporting on hard rock 
mineral leases that are similar to oil and gas development.
    I am pleased to be accompanied today by David Harrison, an attorney 
from Albuquerque, New Mexico. Mr. Harrison is a former director of the 
Bureau of Indian Affairs trust office and has long experience in 
dealing with MMS and the issues facing Tribes in the area of royalty 
accounting. Mr. Harrison is here to assist me in answering questions of 
a technical nature that the members may have.
ROLE OF THE FEDERAL MINERAL MANAGEMENT SERVICE
    At the outset, it is important to note that because the United 
States (U.S.) holds legal title to the vast mineral estate that lies 
below Indian tribal lands, the U.S. is bound to act as trustee for the 
benefit of the Tribes and tribal members.
    Federal laws such as the Indian Mineral Leasing Act and the Indian 
Mineral Development Act require Federal approval of the terms and 
conditions under which Indian energy resources are developed. The 
Federal government invariably has some role in monitoring such 
development and in overseeing the payment of royalties to the Indian 
resource owner.
    In this situation, Indian Tribes are often dependent on the MMS in 
the Department of the Interior to provide accurate and timely 
accounting and collection of royalties from gas, coal, and oil 
companies engaged in mineral activity on tribal trust lands. However, 
the Federal Oil and Gas Royalty Management Act also provides a 
mechanism that allows Tribes to enter into contracts with the MMS to 
perform audits of their own leases under MMS supervision. A number of 
energy producing Tribes have entered into cooperative audit agreements 
with the MMS and have been conducting royalty audits for many years.
    Just as participation in audit review reflects greater tribal 
involvement in resource management, other recent developments further 
illustrate the evolving nature of Federal Indian law and policy 
regarding tribal energy resource development. The Energy Policy Act of 
2005 includes as Title V the Indian Tribal Energy Development and Self-
Determination Act, which authorized Indian Tribes to negotiate and 
enter into with the Secretary of the Interior ``Tribal Energy Resource 
Agreements'' (TERAs) for purposes of energy development, land 
management, and environmental regulation on tribal lands. The major 
element of such a TERA, once approved by the Secretary, is that the 
Indian Tribes themselves will have the decision-making authority over a 
host of energy and related matters that are currently relegated to the 
U.S.
    Indian tribal regulatory capacity is ever-increasing and that, 
coupled with the Tribes' business sophistication, will bring a new day 
in the near future when the advances in tribal authority made possible 
by Title V might be expanded to include lease monitoring and royalty 
verification functions that are currently relegated in large measure to 
the MMS.
THE STATE AND TRIBAL ROYALTY AUDIT COMMITTEE EXPERIENCE
    CERT believes this hearing is not just timely, it is, in truth, 
long overdue. Some of the Tribes from whom CERT solicited input for 
today's hearing have reported long and sometimes very difficult tales 
about their dealings with the MMS. Although issues of concern to Tribes 
are well known to the officials at MMS, the resolution of these 
concerns has never been a priority of that agency and these concerns 
continue to reside in the never-never land of the Federal bureaucracy.
    The experience of the State and Tribal Royalty Audit Committee 
(STRAC) is illustrative. STRAC was established in 1986 as an 
association of royalty auditors for states and Tribes, who had entered 
into delegation agreements or cooperative agreements with the MMS to 
perform royalty audits. Members of STRAC have long been committed to 
excellence in auditing, and the STRAC organization has provided a forum 
for discussion of common audit issues, peer review, and development of 
policy recommendations for improvements in valuation and auditing 
policies and practices. In recent years, many members of STRAC have 
expressed concern about emerging MMS policies and practices that may 
adversely affect the collection of royalties by the Federal government, 
states, and Tribes under Federal and tribal leases. Some Members of 
Congress have also expressed concern about these matters.
    Following up on a February 2006 letter from STRAC to the MMS, in 
April 2006, seven Members of Congress, Representatives Carolyn Mahoney, 
Henry Waxman, George Miller, Raul Grijalva, Edward Markey, Maurice 
Hinchey, and Rahm Emanuel, wrote to MMS Director R.M. ``Johnnie'' 
Burton requesting information about MMS's compliance review program. In 
particular, the letter sought information and analysis from MMS about 
the cost and effectiveness of ``compliance reviews'' (CRs) compared to 
more traditional audits covering leases of Federal and Indian tribal 
lands. See attached April 3, 2006 letter. Compliance reviews are a 
short-cut method of reviewing unverified company reports to determine 
company compliance with royalty payment obligations.
    In May 2006, Director Burton responded and indicated that, among 
other things, in the five-year period between 2000 and 2005, CRs grew 
from 34% of agency costs to 63% of agency costs as compared to more 
traditional audits. Director Burton stated that ``[w]ith over 27,000 
producing Federal and Indian mineral leases under our jurisdiction, 
there are simply too many properties to rely on the traditional audit 
approach alone.'' See attached May 17, 2006 letter. Director Burton 
defended the agency shift to CRs by comparing historical audit 
collections with the collections obtained under CRs.
    The Southern Ute Indian Tribe, a member of the STRAC, received a 
copy of Director Burton's May 2006 response and, in turn, sent a letter 
to Director Burton taking exception to the inaccurate information and 
representations contained in Burton's response. The Tribe was very 
concerned that, in defending the shift away from audits to CRs, 
Director Burton had significantly understated the amounts actually 
collected by states and Tribes through audits. The Tribe requested that 
Director Burton and MMS dedicate additional staff and initiate 
corrective action and communications with the congressional recipients 
of the erroneous information. See attached June 21, 2006, letter.
    CERT was encouraged to learn that in July 2006 the Southern Ute 
Indian Tribe was notified that additional MMS staff would be dedicated 
to rectify the erroneous collections information. We hope that 
Congress, as well as the states and Tribes that received the May 2006 
letter from Director Burton will soon receive correspondence informing 
them of the agency's corrective action, along with updated information. 
Because this information appears to be a key justification for the 
shift from traditional audits to CRs, its accuracy is important in any 
meaningful discussion of the relative merits of CRs and audits.
    CERT trusts that this Committee will provide the guidance that is 
needed to the MMS to inspire Tribes to ensure that the degree of 
monitoring, audits and accountings and royalty payments owed them are, 
without question, accurate and will be paid in a timely manner.
    In addition to the need for accurate accountings and disbursements, 
Indian Tribes need assurance that when disputes inevitably arise 
between Tribes and their private sector partners, the Department of the 
Interior will act to fulfill its obligations to the Tribes and will not 
be an active impediment to settlements between Tribes and the 
companies. Tribal officials have asked that CERT bring to the 
Committee's attention the following issues of concern. Many of these 
matters are interrelated but I have tried to organize them so that the 
potential solutions to each are clear.
THE HONOR SYSTEM FOR OIL VALUATION
    At the outset, I want to impress upon the Committee that the 
current legal framework and business model under which companies report 
their own production, and therefore the royalties owed tribal resource 
owners, can only be described as ``the honor system'', and it remains a 
major problem for Tribes. The reality is that the conclusions of the 
Linowes Commission in 1982 that companies were on an ``honor system'' 
is still true today, at least with regard to royalties payable on 
tribal leases. You will recall that the Linowes Commission was 
established to investigate allegations of Federal mismanagement of oil 
and gas royalties. Its findings led the Congress to enact the Federal 
Oil and Gas Royalty Management Act (FOGRMA).
    FOGRMA, in turn, led the Department of the Interior to engage in 
what we in Indian Country have grown accustomed to witnessing over the 
years in the face of malfeasance or nonfeasance from our Federal 
trustee: an internal ``reorganization'' that resulted in no substantial 
improvement in MMS performance. Consequently, hundreds of millions of 
dollars were spent on computer systems and automated reporting regimes, 
scores of pages of fine print regulations were promulgated to deal with 
valuation and accounting issues. Sadly, if the Linowes Commission were 
reconstituted, it would report that the minerals industry is still 
operating on the honor system, at least with respect to tribal mineral 
leases.
    Since 1998, the Navajo Nation and other Indian Tribes have been 
urging the MMS to issue regulations governing oil royalty valuation for 
Indian tribal mineral leases. MMS has issued regulations on oil royalty 
valuation for Federal leases, but the regulation governing Indian 
tribal mineral leases has been withdrawn. The result is that oil 
production on tribal leases is still valued under rules that went into 
effect on March 1, 1988. As the Committee might guess, the oil 
marketing practices of the industry were vastly different 19 years ago 
than they are today but Indian Tribes and Indian allottees still have 
to rely on ``posted oil prices'' that are set by the industry itself. 
These prices do not represent fair market value, and the Committee 
should understand this as it moves ahead with its oversight efforts.
    The honor system unfailingly results in underpayment of amounts 
owed, and sometimes the underpayments are huge. In the 1980s, MMS 
proposed as a conclusive presumption that an operator in an arms-length 
transaction with an Indian Tribe was dealing in the best interest of 
the royalty owner as well as himself. The royalty owners, including 
Tribes, were successful in persuading the MMS to reject the idea of a 
conclusive presumption. The MMS abandoned the notion that the interests 
of producers and royalty owners are co-terminus, and it also abandoned 
the notion that posted prices represent the true value of crude oil. 
The MMS changed the regulation with respect to production of oil from 
Federal leases, but has not acted with respect to Indian tribal royalty 
owners. Thus, the honor system persists, but only to the detriment of 
Indian royalty owners. We believe the Committee will agree that this is 
unconscionable and needs to be revisited.
RELEASE OF CLAIMS AGAINST THE UNITED STATES
    Because the U.S. holds title to Indian-owned energy resources such 
as oil, gas, and coal, when either the U.S. or the Tribe discovers that 
a company has underpaid significant amounts of royalties, the MMS makes 
demands for compensation against the company. When settlements are 
reached, MMS lawyers routinely insist that settlements contain hold 
harmless provisions protecting the U.S. from any other claims relating 
to that same production that are not covered by the particular 
settlement agreement.
    In all cases, it is the task of the MMS to value and collect 
royalties accurately. Only when it fails to do so and the underpayment 
is discovered, usually by the Tribe, does this issue arise. While the 
U.S. retains responsibility for the enforcing the terms of the leases, 
it does not accept any liability for failure to do its job. Claims may 
be unknown to the Tribe at the time of settlement and it is an onerous 
burden to require Tribes to pursue and prosecute these issues. CERT 
recommends that the Committee direct the MMS to accept settlement 
agreements without also requiring release by Tribes of collateral 
claims against the U.S.
MAJOR PORTION PRICING
    Standard Bureau of Indian Affairs Indian tribal mineral leases 
require that royalties be paid on not less than the highest price paid 
for a ``major portion'' of like quality production on the same field or 
area during the production period. In trying to apply this requirement 
over the years, it has been agreed to apply it only to arms-length 
agreements. The problem is that the MMS has never collected the 
information necessary to perform any analysis of either ``major 
portion'' or what constitutes an ``arms-length'' agreement. Whether 
this failure to act is caused by understaffing or by simple neglect, 
the fact is that Indian tribal leases continue to be significantly 
undervalued and thus underpaid.
    The data collected by the MMS regarding production under Indian 
tribal leases is not sufficient to support or fulfill the trust 
obligation of the U.S. Revenue collected by the MMS from Indian leases 
is only about two percent (2%) of the total production income from all 
leases on Federal or tribal lands. It is our view, however, that this 
is the most important percentage of collections because it represents 
only a fraction of the true value of the tribal resources that, once 
extracted, are lost forever. CERT respectfully suggests that this 
Committee take the necessary steps, whether in the form of additional 
funding for the MMS or in clarifying the law, to ensure that Indian 
Tribes (and individual Indians) are paid accurately and fully for the 
value of their resources. Once the resources are extracted, they cannot 
be replaced.
NEGATIVE PAYMENTS
    Federal offshore mineral leasing laws prohibit companies from 
claiming recoupment of overpayments for a prescribed number of years. 
This is not the case with leases on Indian lands. Thus, if a company 
decides in 2007 that it overpaid for minerals extracted in 2006, it can 
simply reduce currently owed payments by the amount it claims it 
overpaid the year before. These unilateral adjustments are often made 
without the Tribes' knowledge and, more important, without review or 
oversight by the MMS. Similarly, a recoupment might occur at any time 
because a mineral lessee might seek to recoup overpayments against 2007 
production from years ago. If an Indian Tribe is not in a position to 
know about these calculations and private company decisions, negative 
payments just happen. The current system, if left untouched, will 
continue to fail tribal resource owners.
COOPERATIVE AGREEMENTS AND LOCKBOXES
    On a positive note, the MMS has entered into cooperative agreements 
with several Indian Tribes under which companies simultaneously issue 
production reports to the U.S. and to the Indian tribal mineral owner. 
In these situations, royalty payments are sent directly to the Tribe's 
financial institution. At one time, it took some Tribes years to get 
duplicates of lease payment reports, and, consequently money transfers 
and confirmations were not made in a timely fashion, which resulted in 
confusing and often wildly inaccurate bookkeeping on the underlying 
production.
    Not all Tribes have cooperative agreements, but those that do seem 
genuinely pleased with the timeliness of the payments and the lockbox 
system. CERT recommends that the Committee encourage these types of 
cooperative agreements and expand their use.
RESISTANCE TO WELL-BY-WELL REPORTING
    A mineral operator can keep a lease in force in perpetuity, even 
after the primary lease term has expired, as long as the lease is 
producing ``in paying quantities'' on a major part of the lease. This 
is true whether the lease is for 160 acres or 250,000 acres, and 
regardless of the number of wells. If the operator does not report on a 
well-by-well basis, however, there is no accurate way to know whether 
the production is ``in paying quantities.'' When the ``major part'' of 
the lease is not producing ``in paying quantities,'' the wells must be 
shut in and the lease expires. Once wells are shut in, the only way to 
resume production is to negotiate a new lease. To ensure correct 
pricing, the mineral operator's production on a well-by-well basis 
should be recorded.
AUDIT COMPLIANCE
    The MMS has established an audit compliance and review program 
related to its royalty accounting system. At the outset, most Tribes 
believe that the MMS's reliance on voluntary submission by the company 
of their respective oil and gas sales contracts is misplaced. CERT 
Tribes agree with such an assessment, based on the past and present 
performance of the industry. Further, technical compliance tools that 
are being used successfully by Onshore and Indian Compliance Asset 
Management organizations at the Minerals Revenue Management offices 
simply do not work from the desk stations of auditors in remote tribal 
headquarters. In these cases, Tribes rightly place little faith in data 
generated by MMS' system to perform audits.
CONCLUSION
    At least one person who audits company-reported oil and gas 
payments for a Tribe in the Southwest routinely reports a 30% 
underpayment for natural gas produced on tribal lands. Any system that 
allows such underpayments, especially underpayments of this magnitude, 
is immoral and untenable. As with so many other activities and 
functions in other areas that are supposed to be performed by the U.S., 
the only way some Indian Tribes have been able to monitor the payments 
is by doing it themselves.
    Some Tribes actually monitor payments under contracts with the MMS. 
However, monitoring is an MMS responsibility. If Tribes are routinely 
finding these kinds of underpayments, it makes one seriously question 
the ability or willingness of the MMS to account for the other 98% of 
mineral leases where royalty payments are supposed to go to the U.S. 
Treasury.
    On behalf of the member Tribes of CERT, I again thank you for the 
opportunity to appear before you today on this very important matter 
and am happy to answer any questions you might have.
    NOTE: Attachments to Mr. Lester's statement have been retained in 
the Committee's official files.
                                 ______
                                 
    The Chairman. Mr. Geesey?

            STATEMENT OF MICHAEL GEESEY, DIRECTOR, 
                  WYOMING DEPARTMENT OF AUDIT

    Mr. Geesey. Mr. Chairman, Members of the Committee, I would 
like to thank you for the opportunity to talk about the Federal 
royalty management program. I am Mike Geesey with the State of 
Wyoming, Department of Audit.
    I am here today at the Chairman's invitation. As the 
Chairman is well aware, Wyoming has a large amount of onshore 
mineral production where Federal royalties are paid. Wyoming's 
Department of Audit contracts with the Federal government to 
audit royalty payments from that production.
    I offer the following comments from a state's point of 
view. In 1998, KPMG Peat Marwick presented an independent 
report titled Cost Allocation of Royalty Management Program, A 
Function Performed by the Minerals Management Service. The role 
of KPMG was to present, among other analysis, an independent 
report on the allocation of existing Federal and state audit 
resources.
    The conclusion in short was that the state audit programs 
are resource effective and cost efficient. However, some states 
were underfunded and other states were overfunded, thus 
necessitating the need for a reallocation of the resources.
    Wyoming has worked with the Minerals Management Service to 
allocate those limited resources to match the risk and 
oversight needed to ensure a proper onshore Federal royalty 
payment compliance. In 2000, we received about 20 percent of 
the funds budgeted for all state audit programs with over 40 
percent of the onshore royalty payments being made from Federal 
leases in Wyoming.
    Last year, 2006, Wyoming received 30 percent of the state 
audit funding with over 50 percent of the onshore payments 
being made from leases in Wyoming. I believe there still needs 
to make additional reallocation of the present budgeted funds 
to balance the funding of royalties at risk. Given Wyoming's 
current Federal production, the reduction in any funding could 
potentially place some of the Federal royalty payments at risk.
    The Department of Audit is proud of the role that we have 
played in helping the Minerals Management Service with its 
onshore royalty management program. We have consistently 
strived to improve our audit program. Likewise, the Minerals 
Management Service's efforts to do the same includes the 
implementation of a compliance review program.
    The State of Wyoming Department of Audit has always had a 
professional working partnership with the Minerals Management 
Service and sees the compliance review program as an additional 
tool in the audit process. Wyoming acknowledges that this 
program complements the current onshore royalty audit program 
by enhancing the risk assessment process and providing early 
detection of noncompliant Federal royalty payments.
    This process has not and will not reduce the number of full 
audits we plan to undertake. It only helps focus our limited 
resources toward Federal royalty payments at risk.
    Wyoming is disappointed to read that the Minerals 
Management Service's 2008 budget is considering amending 
Section 35 of the Mineral Leasing Act to syphon off 
administrative costs for the singular act of calculating 50 
percent of the total royalties paid in a state and writing a 
check for that statutory payment. Those costs, using 2006 
onshore royalties, would amount to over $44 million in reduced 
Federal royalty payments to the states.
    Presently this is in conflict with Section 503 of the 
Mineral Payment Clarification Act of 2000. Wyoming sees no 
reason to return to the controversial net receipt policy.
    I thank you for giving me the opportunity to make some 
comments. Thank you.
    [The prepared statement of Mr. Geesey follows:]

                  Statement of Mike Geesey, Director, 
             Wyoming Department of Audit, Cheyenne, Wyoming

    Mr. Chairman and members of this committee, I would like to thank 
you for the opportunity to talk about the federal royalty management 
program. I am Mike Geesey, with the State of Wyoming, Department of 
Audit. I am here today at the Chairman's invitation. As the Chairman is 
well aware, Wyoming has a large amount of onshore mineral production 
where federal royalties are paid. Wyoming's Department of Audit 
contracts with the Federal Government to audit royalty payments from 
that production. I offer the following comments from a State's point of 
view.
State funding of Federal Royalty Audits
    On January 23, 1998 KPMG Peat Marwick LLP (KPMG) presented an 
independent report ``Cost Allocation for Royalty Management Program 
(RMP) Functions Performed by Minerals Management Service (MMS).'' The 
role of KPMG was to present, among other analysis, an independent 
report on the appropriate allocation of existing federal and state 
audit resources. The conclusion, in short, was that state audit 
programs are resource effective and cost efficient. However some states 
were over funded and other states were under funded, thus necessitating 
the need for a reallocation of audit resources. Wyoming worked with the 
MMS to allocate those limited resources to match the risk and oversight 
needed to ensure proper onshore federal royalty payment compliance. In 
2000, we received about 20% of the funds budgeted for all the state 
audit programs, with over 40% of the onshore royalty payments being 
made from federal leases in Wyoming. Last year 2006 Wyoming received 
30% of the state audit funding with over 50% of the onshore payments 
being made from leases in Wyoming. I believe their still needs to be an 
additional reallocation of the present budgeted funds, to balance audit 
funding with royalties at risk. Given Wyoming's current federal 
production, any reduction in funding could potentially place some 
federal royalty payments at risk.
Compliance Review program
    The Wyoming Audit Department is proud of the role we have played in 
helping MMS with its onshore Royalty Management Program. We are 
constantly striving to improve our audit program. Likewise, Mineral 
Management Service's efforts to do the same, includes the 
implementation of a compliance review program. The State of Wyoming, 
Department of Audit has always had a professional working partnership 
with the MMS and sees the compliance review program as an additional 
tool in the audit process. Wyoming acknowledges that this program, 
compliments the current onshore royalty audit program, by enhancing the 
risk assessment process and providing early detection of noncompliant 
federal royalty payments. This process has not and will not reduce the 
number of full audits we plan to undertake. It only helps focus limited 
resources towards federal royalty payments at risk.
MMS budget concerns
    Wyoming is disappointed to read MMS's 2008 budget is considering 
amending Section 35 of the Mineral Leasing Act (30 U.S.C. 191) to 
siphoned off administrative costs for the singular act of calculating 
50% of total royalties paid in a state, and writing a check for that 
statutory payment. Those cost using 2006 onshore royalties would amount 
to over $44 million in reduced federal royalty payments to the states. 
Presently this would conflict with section 503 of the Mineral Payments 
Clarification Act of 2000. Wyoming cannot see any reason to return to a 
controversial policy of ``net receipt sharing.''
                                 ______
                                 

    STATEMENT OF PROFESSOR PAMELA BUCY, FRANK M. BAINBRIDGE 
     PROFESSOR OF LAW, UNIVERSITY OF ALABAMA SCHOOL OF LAW

    Ms. Bucy. I would like to thank the Committee for the 
invitation to appear before the Committee. I am a law 
professor. I was a Federal prosecutor prosecuting almost 
exclusively white collar crime, and now I teach, publish and 
speak on the Civil False Claims Act.
    In my statement I would like to address four points. First, 
the goal of the False Claims Act; second, how that goal is 
affected when government employees who get the information 
through their employment bring lawsuits under the statute;
    Third, how the statute could be amended to remedy the 
problems that are created when such employees bring lawsuits; 
and, fourth, how to better remedy the problem that Mr. Maxwell 
and other government employees run into when the agency that 
they work for is not responsive to the problems. There is a 
better solution for doing that rather than going through the 
False Claims Act.
    Whether you like the False Claims Act, which the Department 
of Justice does, or you hate it, which most industry does, 
there is no controversy at all that it is effective. It is 
recognized as the premiere fraud fighting tool of the Federal 
government. Last year, of course, Congress passed legislation 
requiring all of the states to pass their own Civil False 
Claims Act that mirrored the Federal statute.
    The statute is unusual in that it allows a private person 
known as a qui tam relator to bring the lawsuit, as well as the 
Federal government. This private person need not be damaged or 
affected at all by the fraud. All they have to have is 
information that someone else has filed false claims with the 
government, and that allows them to bring the lawsuit.
    That person, the relator, is guaranteed a percentage of the 
judgment, so, for example, even though Mr. Maxwell does not 
know what percentage he will get, he is guaranteed 15 percent 
under the statute. The False Claims Act after the 1986 
amendments is now silent on the question that this committee 
has raised, and that is whether government employees can serve 
as qui tam relators.
    The courts have weighed in on this, and there is a split in 
the Circuits. Two of the Circuits say government employees do 
qualify, and two of the Circuits say they do not. On each side 
there is an en banc opinion, so clearly this is ripe for the 
U.S. Supreme Court to take.
    All of the courts that have addressed it, even the ones 
that say that the statute does not allow the court to preclude 
the government employees from serving as relators, all of the 
courts agree that allowing government employees who get the 
information through their employment frustrates the goal of the 
statutes, so that is the point that I would like to cover is 
how that does frustrate the goal.
    I think it is also worth noting that every single court 
that has addressed it has asked that Congress remedy this 
problem because it is an ambiguity in the statute.
    The major goal of the Civil False Claims Act is to bring 
information of fraud to the Federal government. Fraud is hard 
to investigate. You need an insider. You need somebody who can 
tell you who did it, where the documents are and how it 
happened. The False Claims Act incentivizes insiders to come 
forward.
    But, to allow a government employee who gets that 
information through their government duties is parasitic, and 
that is not the goal of the False Claims Act, which is to bring 
information the government otherwise cannot get.
    It also creates seven perverse incentives, and this is how 
the courts talk about it, even the ones that say they don't 
have the authority and Congress has to do it. The first 
incentive is that it is going to give a government employee who 
is going to be allowed to bring a lawsuit under the Civil False 
Claims Act, the first incentive is to conceal information, to 
conceal information about the fraud from their superiors, from 
their co-workers and from government prosecutors so that they 
can bring the lawsuit themselves.
    The second incentive is to race to the courthouse to beat 
the government in filing the house. The third incentive is to 
prematurely disclose information which could cause the parties 
that are being investigated to destroy documents or to get 
their stories together.
    The fourth incentive, contractors will be deterred from 
being honest with auditors because they have to wonder am I 
providing this confidential proprietary information to this 
person so they can go file a lawsuit on their own behalf or so 
that we can get this problem remedied to help the taxpayers.
    Fifth incentive, the auditors who are often going to be in 
the position to become these qui tam relators are also the key 
government witnesses in any prosecution. Those witnesses' 
credibility is destroyed once they become a plaintiff in a 
case.
    Sixth, the public confidence is destroyed whenever you have 
to worry about your government official taking care of 
themselves rather than their fiduciary duty to the public. 
Seventh, of course it is inconsistent with all of the conflict 
of interest requirements for government officials that they not 
use their public position for private gain.
    How to fix this. It is easy to fix. Congress passed a qui 
tam provision to prevent bank fraud that is actually mirrored 
after the False Claims Act and in that did what needs to be 
done here. It is 15 words that disqualify a current or former 
government employee who discovered or gathered the information 
in the qui tam lawsuit in whole or part while acting within the 
course of their government employment. That is all it would 
take to fix this problem.
    There is still the issue of what to do if you are working 
for an agency that has not responded, and I would suggest that 
that has already been taken care of in the context of public 
companies. The Sarbanes-Oxley statute gave the impetus to the 
SEC and to the ABA for lawyers to pass reporting up and 
reporting out requirements.
    That would require that there be an established protocol to 
report within your agency, to report to the IG and report to a 
fraud expert in the Civil Division at Department of Justice. 
Those reportings would need to be legitimate reportings, not a 
canceled appointment with the IG as in Mr. Maxwell's case.
    This concludes my opening remarks. I have all of this in my 
written statement, and I will be more than happy to answer any 
questions.
    [The prepared statement of Ms. Bucy follows:]

Statement of Pamela H. Bucy, 1 Frank M. Bainbridge Professor 
              of Law, University of Alabama School of Law
---------------------------------------------------------------------------

    \1\ Bainbridge Professor of Law, University of Alabama School of 
Law (law faculty at UA School of Law, 1987 to present); Assistant 
United States Attorney, E.D. MD., 1980-1987; Law Clerk, The Honorable 
Theordore McMillian, United States Court of Appeals for the Eighth 
Circuit, 1978-1979; J.D., Washington University, 1978.
    I am most appreciative to Daniel Everett and to the following 
students in my course on White Collar Practice who helped me prepare 
this testimony: Bob Elliott, Prim Formby, Clay Gunn, Matthew Harris, 
Emily Hines, Glenn Jones, Emily Kornegay, Mike Kuffner, Will McComb, 
Monique Nelson, Robert Pitman, Oscar Price, Scott Sanders, Sirena 
Saunders, Matt Shelby, Joseph Sherman, Harrison Smith, Derrick 
Williams.
    I am also greatly appreciative to Creighton Miller and Penny Gibson 
at the University of Alabama School of Law Library, and to Erica 
Nicholson, my assistant.
---------------------------------------------------------------------------
    Part One of this Statement provides an overview of the civil False 
Claims Act. Part Two discusses court decisions and policy issues in 
allowing government employees to qualify as ``relators'' under the 
civil False Claims Act. 2 Part Two also addresses the recent 
case of United States ex rel. Bobby Maxwell v. Kerr McGee Oil & Gas 
Corporation. 3 Part Three proposes an amendment to the False 
Claims Act to clarify when government employees should qualify to serve 
as relators under the civil False Claims Act.
---------------------------------------------------------------------------
    \2\ 31 U.S.C. Sec. 3729 et seq.
    \3\ Case 1:04-CV-01224-PSF-CBS (D.Colo., March 30, 2007).
---------------------------------------------------------------------------
               I. Overview of the Civil False Claims Act
    The False Claims Act, 4 first passed in 1863, 
5 and amended several times since, 6 most 
dramatically in 1986, 7 is recognized by the United States 
Department of Justice as its ``primary'' civil enforcement tool. 
8 The Act grows out of a long tradition of using private 
parties to supplement law enforcement efforts. 9
---------------------------------------------------------------------------
    \4\ 31 U.S.C. Sec. 3729 et. seq.
    \5\ Act of March 2, 1863 at ch. 67, 12 Stat. 696-98.
    \6\ Rev. Stat. 3490-94 and 5438 (1875); 89 Cong. Rec. S7606 (Sept. 
17, 1943); Pub. L. 99-562, 100 Stat. 3153 (1986); Pub. L. 103-272, 108 
Stat. 1362 (1994).
    \7\ Pub. L. 99-562, 100 Stat. 3153 (1986).
    \8\ Hearings Before House Comm. On Judiciary, Subcomm. on 
Immigration and Claims, 105thCong., 2d Sess.14 (1998) [hereinafter 
Subcomm. on Claims Hearings] (Testimony of Donald K. Stern, U.S. 
Attorney, Dist. Mass. and Chair, Attorney General's Advisory Comm., 
U.S. Dept. of Justice).
    For example, in FY 2000 the United States collected $1.5 billion in 
civil fraud recoveries, most of which, $1.2 billion, was collected 
through a private justice action, the qui tam provisions of the False 
Claims Act (FCA). Press Release, United States Department of Justice, 
November 2, 2000 at www.USDOJ.Gov, 21 TAF Qtrly. Rev. 18 (Jan. 2001) 
[hereinafter Press Release, DOJ, Nov. 3, 2000].
    As one Department of Justice official explained in 1996: ``The 
recovery of over $1 billion demonstrates that the public-private 
partnership encouraged by the Statute [the FCA] works and is an 
effective tool in our continuing fight against fraudulent use of public 
funds.'' Taxpayers Against Fraud, The 1986 False Claims Act Amendments, 
Tenth Anniversary Report 15 (1986) (quoting Frank W. Hunger, Assistant 
Attorney General, Civil Division, U.S. Dept. of Justice).
    See also, Hearings Before House Comm. On Judiciary, Subcomm. on 
Immigration and Claims, 105thCong., 2d Sess.14 (1998) [hereinafter 
Subcomm. on Claims Hearings] (Testimony of Donald K. Stern, U.S. 
Attorney, Dist. Mass. and Chair, Attorney General's Advisory Comm., 
DOJ) (``[T]he False Claims Act...has been the Department's primary 
civil enforcement tool to combat fraud...''); Id. at15 (Testimony of 
Lewis Morris, Assistant Inspector General, Dept. of HHS) (``The False 
Claims Act has been an essential tool to protect the integrity of the 
Medicare program.'' ``To achieve this goal...of ``zero tolerance'' of 
Medicare fraud and abuse...the Government relies on a number of 
enforcement options--criminal, civil, and administrative, as well as 
educational outreach efforts. Chief among the enforcement tools has 
been the False Claims Act.''); Id. at 25. (Testimony of Robert A. 
Berenson, Director for Health Care Plans and Provides Administration, 
Health Care Financing Administration, Dept of HHS)(``[T]he False Claims 
Act is an important tool for...law enforcement...to pursue fraud and 
abuse.''); Id. at 63. (Statement of Ruth Blacker, National Legislative 
Counsel, American Association of Retired Persons) (``...Congress in 
recent years [has] expand[ed] statutory authority and income resources 
to deal with the problem [of heath care fraud and abuse]. However, none 
of these things are likely to play a more important role in recovering 
improper payments to in acting as a deterrent than the False Claims 
Act. Use of the FCA by Federal authorities has become an important tool 
for fighting fraud and abuse in many programs, including the Medicare 
program.'')
    \9\ Bucy, Private Justice, 75 S.C.L. Rev. 1, 13-54 (2002); Pamela 
H. Bucy, Information as a Commodity in the Regulatory World, 39 Hous. 
L. Rev. 905, 909-917 (2002) [hereinafter Bucy, Information as a 
Commodity]; J. Randy Beck, The False Claims Act and the English 
Eradication of Qui Tam Legislation, 78 N.C.L.Rev.539 (2000) 
[hereinafter Beck, English Eradication]; Note, The History and 
Developments of Qui Tam, 1972 Wash U. L. Q. 81 [hereinafter History and 
Developments].
---------------------------------------------------------------------------
    In American jurisprudence today there are a number of actions that 
private parties may bring alleging that a defendant has violated some 
federal or state law. 10 To the extent these actions 
supplement the efforts of law enforcement in detecting, proving and 
deterring lawbreaking, the private parties who bring them serve as 
``private attorney generals.'' In almost all of these actions, the 
private party who brings the action has been personally injured by the 
defendant's conduct. The False Claims Act is unique among these actions 
because it allows a private party who has not been personally injured 
to bring the FCA action alleging violation of public laws by the 
defendant.
---------------------------------------------------------------------------
    \10\ See, e.g., The Economic Communications Privacy Act, 18 U.S.C. 
Sec. 2520 et seq.(2000 & Supp. 2001); American Disabilities Act, 42 
U.S.C. Sec. 12188 (a)(1) (1995); The Civil Rights Act of 1964, 42 
U.S.C. 1981 et seq (1994) (implied under Title VI, Guardian Assn. v. 
Civil Service Comm'n of the City of New York, 463 U.S. 582, 594 (1983) 
and Title IX, Cannon v. University of Chicago, 441 U.S. 677, 717 
(1970).
---------------------------------------------------------------------------
    The FCA provides that a person who believes that he has information 
and evidence that someone else (individual or company) has filed false 
claims against the federal government, may file a lawsuit making such 
allegations (termed a ``qui tam action). 11 This plaintiff 
(termed a ``relator'') is required to file his lawsuit under seal (not 
even serving it on the defendant). The relator is also required to give 
a copy of the lawsuit to the United States Department of Justice, along 
with a written report of ``all material evidence and information'' the 
relator possesses. 12 The lawsuit stays under seal, often 
for two years or more, to allow DOJ to fully investigate the charges 
made by the relator. The secrecy provided by sealing the complaint not 
only protects a defendant's reputation if the relator's information 
amounts to nothing, but also facilitates DOJ's further investigation of 
the relator's information.
---------------------------------------------------------------------------
    \11\ 31 U.S.C. Sec. 3730(b)(1).
    \12\ Id. at Sec. 3730(b)(2).
---------------------------------------------------------------------------
    At the conclusion of its investigation, DOJ decides whether it will 
intervene in the lawsuit as an additional plaintiff. If it does, DOJ 
assumes ``primary responsibility'' for the case although the relator 
remains as a plaintiff and is guaranteed a participatory role. 
13 In some cases, DOJ handles the entire case after 
intervening; in others, relators work hand-in-hand with government 
prosecutors. In some cases, relators and their attorneys assume the 
bulk of the investigative and litigative duties. 14
---------------------------------------------------------------------------
    \13\ 31 U.S.C. Sec. 3730(b)(2)(2002).
    \14\ For other examples of FCA qui tam cases where the relator and 
relator's counsel assumed large amounts of responsibility for the 
preparation of the case, see United States ex rel. Alderson v. Quorum 
Health Group, Inc., 171 F. Supp.2d 1323 (M.D. Fla. 2001); United States 
ex rel. Merena v. SmithKline Beecham Corp., 114 F. Supp. 2d 352 
(E.D.Pa. 2000)(facts more fully discussed in Merena, 52 F.Supp. 2d 420 
(E.D.Pa. 1998) rev'd 205 F.3d 97 (3rd Cir. 2000))
---------------------------------------------------------------------------
    If DOJ does not join the lawsuit, the relator may continue pursuing 
the case, litigating it alone. 15 Even if DOJ does not join 
a relator's case, it retains authority over the relator's lawsuit in 
several ways: DOJ monitors the case and may join it at any time, even 
for limited purposes, such as appeal; 16 DOJ may settle or 
dismiss a relator's suit over the relator's objections as long as the 
relator has been given an opportunity in court to be heard; 
17 DOJ may seek limitations on the relator's involvement in 
the case, 18 or seek alternative remedies (such as 
administrative sanctions ) in lieu of the relator's lawsuit. 
19
---------------------------------------------------------------------------
    \15\ Id. at Sec. 3730(c)(3)(2002).
    \16\ Id. at Sec. 3730(c)(3)(2002).
    \17\ 31 U.S.C. Sec. 3730(c)(2)(A) and (B).
    \18\ 31 U.S.C. Sec. 3730(c)(2)(C).
    \19\ Id. at Sec. 3730(c)(5).
---------------------------------------------------------------------------
    If the government joins the relator's case, the relator is 
guaranteed at least 15% of any judgment or settlement and the court can 
award more--up to 25%. If the government does not join the lawsuit, the 
relator is guaranteed 25% and could receive up to 30%. 20 
The amount within the statutory award depends upon the relator's 
helpfulness to the government. Because the FCA's damages and penalty 
provisions tend to generate exceptionally large judgments, relators' 
percentages involve substantial sums. 21
---------------------------------------------------------------------------
    \20\ 31 U.S.C. Sec. 3730(c)(3).
    \21\ Recent relators' awards include $95 million, $44.8 million, 
$28.9 million, and $18.1 million. 21 TAF Q. Rev. 20-21 (Jan. 2001).
---------------------------------------------------------------------------
    The case of United States ex rel. Alderson v. Quorum Health Group, 
22 demonstrates how the FCA works. It is typical in that it 
shows the steps of a FCA qui tam action. It is atypical because of the 
unusual contribution made by the relator to pursuing the case; in this 
respect, Alderson exemplifies the FCA working to its fullest potential.
---------------------------------------------------------------------------
    \22\ 171 F. Supp.2d 1323 (M.D. Fla. 2001).
---------------------------------------------------------------------------
    In the 1980s, Alderson was the Chief Financial Officer at North 
Valley Hospital in Whitefish Montana. He had been so employed for six 
and one-half years. 23 In August, 1990, Quorum Health Group 
took over as the management company for the hospital. Soon thereafter a 
Quorum representative instructed Alderson to prepare two Medicare cost 
reports. Hospitals that participate in the Medicare program by treating 
Medicare patients must submit annual cost reports. These are lengthy, 
detailed reports that provide extensive information about a hospital's 
costs. 24 Alderson was told to prepare an ``aggressive'' 
cost report to submit to Medicare, and a ``reserve'' report to be used 
internally. 25
---------------------------------------------------------------------------
    \23\ Id. at 1325.
    \24\ Form HCFA 2552, Cost Reports for Hospitals. Cost reports are 
lengthy and complex, consisting of hundreds of worksheets and requiring 
detailed information about the facility, its staff and operation. 
Providers are required to allocate various costs, including capital 
expenditures, medical education costs, travel, malpractice insurance 
premiums and payments, and every type of patient care costs to various 
centers, designated by whether the patient was a Medicare patient and 
whether the expense is properly reimbursable to the Medicare program. 
Robert Fabrikant, Paul E. Kalb, mark D. Hopson & Pamela H. Bucy, Health 
Care Fraud, Enforcement and Compliance Sec. 2.02[4] (LJSP 2003) 
[hereinafter Fabrikant et al, Health Care Fraud].
    \25\ Id.
---------------------------------------------------------------------------
    Alderson refused to prepare the two inconsistent reports. He was 
terminated four days later. 26 Within months Alderson filed 
a wrongful termination suit. 27 During depositions regarding 
his termination, Alderson learned of additional irregularities in 
Quorum's cost-reporting practices. He sought documents that would shed 
further light on such practices and engaged a forensic accounting 
expert. 28 In 1992, two years after his termination by 
Quorum, Alderson filed a pro se FCA qui tam complaint alleging that 
Quorum's cost reporting practice defrauded the Medicare program. As 
required by the FCA, Alderson provided the federal government with a 
copy of his complaint and a written statement of the information and 
evidence he had gathered supporting the charges in his complaint. 
29
---------------------------------------------------------------------------
    \26\ 171 F. Supp. 2d at 1325.
    \27\ Id.
    \28\ Id.
    \29\ Id. at 1325.
---------------------------------------------------------------------------
    Unable to find another job after being fired from North Valley 
Hospital, Alderson and his family suffered financially for years after 
his termination. His family was forced to move from its comfortable 
home to a cramped apartment in another town. They used the college 
savings they had accumulated for their two teenage children. 
30
---------------------------------------------------------------------------
    \30\ Kurt Eichenwald, He Blew the Whistle, and Health Giants 
Quaked, N.Y.Times, Oct. 18, 1998, at Sec. 3, Page 1.
---------------------------------------------------------------------------
    For nine years after he filed his pro se FCA complaint, Alderson 
spent thousands of hours working on his FCA case, 31 
retained two different law firms to represent him in the action, 
32 and either by himself or with his attorneys, met often 
with DOJ attorneys and/or investigators, mostly in Washington D.C., and 
at his own expense. 33 At these meetings, Alderson explained 
how Quorum's reserve cost report practice defrauded the Medicare 
Program. 34 When DOJ attorneys expressed concern about a 
legal theory to support an FCA case, or what they viewed as weak 
evidence or minimal damage, 35 Alderson addressed their 
concerns. 36 The forensic accountant Alderson retained, and 
continued to pay, met with DOJ officials in Washington D.C. to assist 
Alderson in explaining the fraud to DOJ attorneys. 37
---------------------------------------------------------------------------
    \31\ 171 F. Supp. 2d at 1330.
    \32\ Approximately one year after filing his pro se qui tam 
complaint, Alderson retained a law firm that specialized in health care 
law to handle his qui tam case. 171 F. Supp. 2d at1325. In 1995, 
Alderson changed to a law firm that specialized in FCA qui tam cases. 
Id. at 1327. This firm represented Alderson until the case was 
resolved.
    \33\ 171 F. Supp. 2d at 1325-1329.
    \34\ Id.
    \35\ DOJ attorneys believed the fraud to be $10 million or less, 
too low to consider. Id. at 1325 -1331.
    \36\ Id.
    \37\ Id. at 1325.
---------------------------------------------------------------------------
    Working with the DOJ attorneys and investigators, Alderson 
identified voluminous documents that government investigators should 
subpoena from Quorum. 38 At DOJ's request, he reviewed the 
documents obtained by subpoena. 39 These were extensive: 
eight boxes of more than 11,000 records from 197 hospitals for seven 
years. For one year, working alone, Alderson analyzed the records and 
prepared a spread sheet summary of relevant cost reserve information. 
He culled a set of 2,500 documents that corroborated specific reserve 
information and presented his summary, spreadsheet and relevant 
documents to DOJ. 40
---------------------------------------------------------------------------
    \38\ Id.
    \39\ Id.
    \40\ Id. at 1326.
---------------------------------------------------------------------------
    Seven years after Alderson filed his action 41 DOJ 
agreed to intervene in Alderson's lawsuit, but only after receiving 
``assurances from Alderson's counsel of their ability and willingness 
to commit the necessary resources to the case and to undertake the 
principal role in prosecuting the litigation.'' 42
---------------------------------------------------------------------------
    \41\ Id.
    \42\ Id.
---------------------------------------------------------------------------
    The case ultimately settled for $85.7 million. Alderson's share was 
$20.6. 43 The average relator's award, when the government 
intervenes, is 16 % of judgment recovered. 44 When awarding 
Alderson an unusually large award of 24 %, the Court looked to the FCA, 
its legislative history, DOJ Guidelines for Relator's Award, 
45 Alderson's persistence, 46 expertise, the 
personal sacrifices he made to help the government, 47 and 
the significant contribution of Alderson's counsel in pursuing the 
case. 48 Alderson's attorneys were awarded $2.7 million in 
attorneys fees pursuant to the FCA's requirement that culpable 
defendants should pay ``reasonable attorneys' fees and costs.'' 
49
---------------------------------------------------------------------------
    \43\ Id. at 1339.
    \44\ Panel: FCA Enforcement in the Post-Stevens World, ABA Nat'l 
Inst. On The Civil False Claims Act and Qui Tam Enforcement, Nov., 2000 
(Discussion with Michael Hertz, Director, Commercial Litigation Branch, 
Civil Division, U.S. Dept. of Justice).
    \45\ 171 F. Supp. 2d at 1331-34.
    \46\ According to the court, ``Only [Alderson's] dogged resolution, 
eventually supported by competent professionals and an occasionally 
reluctant government, resulted in the millions now available for 
distribution.'' Id. at 1337.
    \47\ Id. at 1337-1338.
    \48\ According to the court, ``The record establishes that 
Alderson's counsel contributed significantly (in both quality and 
quantity) and at certain moments crucially to this case. That 
contribution deserves manifest and telling weight in determining the 
proper relator's award.'' Id. at 1335. The award of attorneys fees and 
costs was in addition to the contingency portion of his award that 
Alderson agreed to pay to his attorneys. Id.
    \49\ 31 U.S.C. Sec. 3730(d)(1)(2002).
---------------------------------------------------------------------------
    The court that determined Alderson's share described Alderson's 
contribution to the case: ``[t]he record graphically demonstrates 
Alderson's profound personal and professional commitment to success in 
this litigation. His commitment manifested itself in his persistent 
labors and those of his attorneys and accountants, all of whom 
contributed mightily both before and after the United States 
intervened.'' 50
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    \50\ Id. at 1338.
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 II. Government Employees as Relators Under the Civil False Claims Act
A. Policy Reasons and Court Decisions
    Because the civil False Claims Act (FCA) is widely recognized as 
the most powerful tool available for pursuing fraudulent government 
contractors and because government employees often learn of such fraud 
in the course of their duties, the issue of whether government 
employees qualify to sue under the FCA is significant, arises often, 
and needs to be clarified by Congress.
    Given the consensus by courts and policy makers that allowing 
government employees to bring FCA actions creates serious enforcement 
and fairness problems, and courts expressed frustration in their 
ability to address these problems vis a vis Congress's authority to do 
so, Congressional attention is needed. The FCA is an outstanding fraud-
fighting tool but to remain effective it needs clarification on the 
issue of whether government employees qualify as FCA plaintiffs.
    The courts that have addressed this issue disagree on the question 
whether the FCA, in its current form, permits government employees to 
bring suit under the FCA. The First 51 and Ninth Circuits 
have held that government employees who obtain information in the 
course of their official duties do not qualify to sue under the FCA. 
52 The Tenth and Eleventh Circuits have held that government 
employees do qualify. 53 All of these courts, however, 
uniformly agree that it is poor public policy to allow government 
employees to bring lawsuits under the FCA. The only point on which they 
disagree is whether the courts, or Congress, should remedy the problem. 
As the Tenth Circuit noted in reluctantly holding that government 
employees were eligible to bring FCA lawsuits: ``Although there may be 
sound public policy reasons for limiting government employees' ability 
to file qui tam actions, that is Congress' prerogative, not ours.'' 
54
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    \51\ view is more nuanced that simply holding, as the court did, 
that the FCA as currently constructed does not bar all government 
employees from bringing FCA actions. The Court went on to hold that the 
relator in the case before it, an attorney with the United States 
Department of Defense whose job was to review defense contracts for 
fraud, was barred from bringing an FCA action. In so holding, the court 
reasoned that the relator's ``responsibility, a condition of his 
employment [was] to uncover fraud. The fruits of his effort belong to 
his employer--the government.'' LeBlanc, 913 F.2d at 20.
    \52\ United States ex rel. Fine v. Chevron, 72 F.3d 740, 745 (9th 
Cir. 1995); United States ex rel. LeBlanc V. Raytheon Co., 913 F.2d 17, 
20 (1st Cir. 1990).
    \53\ United States ex rel. Holmes v. Consumer Ins. Group, 318 F.3d 
1199, 1214 (10th Cir. 2003); cf. United States ex rel. Williams v. NEC 
Corp., 931 F.2d 1493, 1501 (11th Cir. 1991).
    \54\ Holmes, 318 F.3d at 1214. See also, Williams, 931 F.2d at 
1503. (``We recognize that the concerns articulated by the United 
States may be legitimate ones, and that the application of the False 
Claims Act since its 1986 amendment may have revealed difficulties in 
the administration of qui tam suits, particularly those brought by 
government employees. Notwithstanding this recognition, however, we are 
charged only with interpreting the statute before us and not with 
amending it to eliminate administrative difficulties.'')
---------------------------------------------------------------------------
    The courts are right. There are significant policy reasons that 
government employees who obtain information about fraud in the exercise 
of their official duties, should not qualify to bring FCA lawsuits. 
Termed ``perverse incentives'' by the U.S. Department of Justice, 
55 these policy considerations are as follows:
---------------------------------------------------------------------------
    \55\ As described by the Department of Justice, Holmes, 318 F.3d at 
1212.
---------------------------------------------------------------------------
    (1)  Access to confidential information. This may be the most 
fundamental problem created when government employees who learn of 
fraud in the course of their official duties are allowed to file suit 
under the FCA. By virtue of their official position, government 
auditors, investigators, attorneys and employees whose duty is to 
investigate fraud by government contractors, obtain access to 
confidential, proprietary, and privileged information of companies that 
serve as government contractors. These government officials also have 
access to internal governmental information including confidential and 
non-public records and experts. Access to all of this information is 
granted only because of the government employees' public position. It 
is wrong for a government employee to use this access for his personal 
benefit, rather than to serve the public interest. 56
---------------------------------------------------------------------------
    \56\ See discussion of this problem at Holmes, 318 F.3d at 1217 
(Tacha, dissenting); Fine, 72 F.3d at 745 (citing with approval 
arguments made by the government).
---------------------------------------------------------------------------
    (2)  Conceal information. An FCA private plaintiff (``relator'') 
qualifies to serve as a relator only if the information in the 
relator's FCA lawsuit is non-public. 57 This is a wise 
limitation for it helps ensure that the relator brings something of 
value to law enforcement before the government has to share its 
recovery with the relator. However, when the relator is a government 
employee who obtained information about fraud in the course of his 
official duties, this provision of the FCA encourages the government 
employee to conceal information about fraud from his superiors, co-
workers and government prosecutors. By concealing such information, the 
relator can investigate and develop the case for himself and preserve 
his eligibility to bring an FCA suit. 58
---------------------------------------------------------------------------
    \57\ Section 3730(e)(4) of the FCA specifies the type of public 
information that bars a private plaintiff from bringing suit. 
``Public'' for these purposes is only: ``public disclosure of 
allegations or transactions in a criminal, civil, or administrative 
hearing, in a congressional, administrative of Government Accounting 
office report, hearing, audit, or investigation, or from the news 
media...'' If the information is ``public,'' the private plaintiff must 
prove that he is the ``original source'' of the information. Id.
    \58\ See Fine, 72 F.3d at 745 (citing with approval this argument 
made by the government).
---------------------------------------------------------------------------
    (3)  Race to the courthouse. The FCA provides that only the first 
relator to file may bring an FCA lawsuit. Again, this provision is wise 
policy for this helps ensure that the information the relator brings to 
the government is not repetitive and justifies DOJ's sharing of its 
judgment with the relator. This provision also limits, appropriately 
so, the number of private individuals who share in the government's 
recovery. However, this provision creates three temptations for the 
government employee who wants to file his own FCA action.
    First, it gives the government employee an incentive to delay the 
official investigation of the fraud so that the employee has time to 
prepare and file his FCA lawsuit before another potential relator files 
suit.
    Second, this provision encourages the government employee to steer 
the official investigation in an unproductive or otherwise inefficient 
direction so as to obfuscate for other potential relators key facts 
that would enable those persons to file a FCA action and thus beat the 
government employee in the first-to-file race. For example, if a 
government employee who is investigating fraud by a government 
contractor is planning to file his own FCA lawsuit and is concerned 
that interviewing a particular witness may cause that witness to file 
his own FCA action, the employee may be tempted to delay the interview 
until after the employee has filed his own FCA action.
    Third, the first-to-file requirement may encourage a government 
employee to file his FCA lawsuit too early, thereby short-circuiting or 
derailing other productive avenues of official investigation such as 
grand jury investigations.
    While some of these ``race to the courthouse'' problems may arise 
with any relator, they are exacerbated when the relator is a government 
employee because of the unusual access to information and ability to 
derail the investigation by a government employee who investigates the 
fraud as part of his duties.
    (4)  Premature disclosure. Although FCA lawsuits filed by relators 
are filed under seal, and thus presumably unknown to the outside world 
including defendants, the government's deadline for reviewing and 
investigating the case, and deciding whether to join in the case, will 
begin to run as soon as the relator files suit. In this sense relators 
drive DOJ's agenda. This is, of course, true whether or not the relator 
is a government employee. However, because the government employee has 
access to information not available to other relators, the government 
employee can file her FCA action even earlier than most other relators.
    (5)  Damaged credibility. Often the government auditor or agent who 
investigated fraud by a contractor is a key witness at any civil or 
criminal trial or administrative hearing. These persons often testify 
as summary expert witnesses, explaining billing requirements and 
tracing how the defendant's conduct violated these requirements. When 
this individual has filed a lawsuit under the FCA in his own name and 
stands to profit personally by doing so, his credibility as a witness 
is ruined. This cripples the government's case. 59
---------------------------------------------------------------------------
    \59\ See Fine, 72 F.3d at 745 (citing with approval this argument 
made by the government).
---------------------------------------------------------------------------
    (6)  Conflict of interest. There are specific prohibitions against 
federal employees using ``nonpublic government information...to further 
any private interest, 60 participating in a government 
matter in which the employee has a financial interest, 61 
using public office for private gain, 62 using government 
property or time for personal purposes, 63 and holding a 
financial interest that may conflict with the impartial performance of 
government duties.'' 64 There are also criminal penalties 
for federal government employees who participate in matters in which 
they have financial interests. 65
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    \60\ 5 C.F.R. Sec. Sec. 2635.101(b)(3), 2635.703(a).
    \61\ 5 C.F.R. Sec. Sec. 2635.402, 2635.501, 2635.502
    \62\ 5 C.F.R. Sec. Sec. 2635.101(b)(7), 2635.702
    \63\ 5 C.F.R. Sec. Sec. 2635.704, 2635.705.
    \64\ 5 C.F.R. Sec. 2635.403; Holmes, 318 F.3d at 1225 (Tacha, 
dissenting); cf. Fine, 72 F.3d at 746 (Kozinski, concurring) and at 747 
(Trott, concurring).
    \65\ 18 U.S.C. Sec. 208.
---------------------------------------------------------------------------
    When a government employee who obtains information of fraud by a 
government contractor in the course of the employee's duties, files an 
FCA action in his own name, all of the above regulations and statutes 
are violated. They are violated when the government employee reviews 
documents, interviews witnesses, and discusses strategy and 
investigative direction with other government employees with expertise 
in such matters. Access to such information and expertise would not be 
available to the government employee if anyone knew that the employee 
was going to use it to reap private gain. 66
---------------------------------------------------------------------------
    \66\ For discussions of this conflict of interest issue see Holmes, 
318 F.3d at 1212 (citing arguments made by the government); 318 F.3d at 
1224-1225 (Tacha, dissenting); Williams, 931 F.2d at 1503 (citing 
arguments made by the government).
---------------------------------------------------------------------------
    (7)  Erosion of public confidence. When potential defendants or 
witnesses know that the government employee who is investigating fraud 
may be working for himself and his own profit, they are less likely to 
come forward to voluntarily cooperate, or to be fully forthcoming. 
67
---------------------------------------------------------------------------
    \67\ See Fine, 72 F.3d at 745 (citing with approval this argument 
made by the government).
---------------------------------------------------------------------------
B. United States ex rel. Bobby Maxwell v. Kerr McGee Oil & Gas 
        Corporation
    On June 14, 2004, Bobby Maxwell filed a qui tam action under the 
civil False Claims Act. He filed his FCA action as a private person 
even though Maxwell was at the time employed as a senior auditor with 
the Minerals Management Service (``MMS''), 68 of the United 
States Department of Interior. In his FCA action, Maxwell alleged that 
Kerr-McGee underpaid royalties it owed to the federal government 
pursuant to fifty-seven leases under which Kerr-McGee produced oil 
offshore in the Gulf of Mexico. 69
---------------------------------------------------------------------------
    \68\ Case 1:04-CV-01224-PSF-CBS (Order of Dismissal for Lack of 
Subject Matter Jurisdiction) at p. 4 (D.Colo., March 30, 2007).
    \69\ Id. at 2 and 5.
---------------------------------------------------------------------------
    The federal government declined to join in Maxwell's FCA action. 
70 Kerr-McGee filed a motion for summary judgment prior to 
trial arguing that Maxwell, as a government employee who obtained 
information of Kerr-McGee's alleged fraud in the performance of his 
official duties, was precluded from bringing suit under the FCA. The 
court deferred ruling on Kerr-McGee's motion until after trial. A jury 
trial was held from January 16, 2007, to January 23, 2007. The jury 
returned a verdict in favor of Maxwell and found damages of $7.5 
million. 71 On March 30, 2007, the District Court granted 
Kerr-McGee's motion for summary judgement, holding that Maxwell did not 
qualify as an FCA relator. 72
---------------------------------------------------------------------------
    \70\ Id. at 11.
    \71\ Id. at 1 and 6. This amount would be trebled according to the 
FCA.
    \72\ Id. at 28.
---------------------------------------------------------------------------
    In granting Kerr-McGee's motion for summary judgment, the District 
Court noted that it was bound by Tenth Circuit precedent in United 
States ex rel. Holmes v. Consumer Insurance Group, 73 in 
which the Tenth Circuit held that ``[a]lthough there may be sound 
public policy reasons for limiting government employees' ability to 
file qui tam actions [under the FCA], that is Congress' prerogative, 
not ours.'' 74 For this reason, the District Court reasoned, 
it could not hold that Maxwell was precluded from filing suit solely by 
virtue of his status as a government auditor who discovered the alleged 
fraud in the regular course of his duties.
---------------------------------------------------------------------------
    \73\ 318 F.3d 1199 (10th Cir. 2003).
    \74\ Id. at 10 citing Holmes, 318 F.3d at 1214.
---------------------------------------------------------------------------
    The District Court noted, however, that Maxwell obtained the 
information in his FCA suit as part of his official duties. 
Specifically, the court noted that as the senior auditor charged with 
determining whether Kerr-McGee's conduct was ``correct...and not 
fraudulent,'' Maxwell: 75
---------------------------------------------------------------------------
    \75\ Id. at 2.
---------------------------------------------------------------------------
      ``...frequently was on site at Kerr-McGee and took 
documents back to his office to review ``whenever possible.'' 
76
---------------------------------------------------------------------------
    \76\ Id. at 3.
---------------------------------------------------------------------------
      ``...designed the subject audit of Kerr-McGee.'' 
77
---------------------------------------------------------------------------
    \77\ Id. at 9.
---------------------------------------------------------------------------
      requested documents from the field auditors which they 
obtained pursuant to his requests. 78
---------------------------------------------------------------------------
    \78\ Id. at 9.
---------------------------------------------------------------------------
      ``...personally conducted a comparison of the Texon sales 
price data 79 to fair market value and to the values 
reported by other companies, and discovered a vast difference.'' 
80
---------------------------------------------------------------------------
    \79\ Texon was a subcontractor Kerr-McGee dealt with. Id. at 3.
    \80\ Id. at 9.
---------------------------------------------------------------------------
      ``...discovered two internal Kerr-McGee memorandums that 
would later be used to show that Kerr-McGee considered the Texon 
arrangement to be to its economic advantage.'' 81
---------------------------------------------------------------------------
    \81\ Id. at 10.
---------------------------------------------------------------------------
      ``...signed the letter from MMS to Kerr-McGee determining 
that Kerr-McGee had underreported its royalties, 82 and 
drafted follow-up responses.'' 83
---------------------------------------------------------------------------
    \82\ Id. at 3.
    \83\ Id. at 4.
---------------------------------------------------------------------------
    Procedural provisions unique to the FCA require that all relators 
must qualify as an ``original source'' before they may file an FCA 
action if the information in the action has been ``publicly 
disclosed.'' The District Court found that there had been public 
disclosure of the information in Maxwell's FCA action. The court then 
held that because of Maxwell's duties as a government employee, he 
failed to qualify as an ``original source'' and thus, was ineligible to 
bring his action under the FCA.
    The Maxwell case aptly demonstrates the unfairness in allowing a 
government employee who has access to a company's confidential, 
proprietary and non-public information and access to governmental 
records and experts, to use the FCA for his personal gain rather than 
for the public interest. Every bit of the information Maxwell gathered 
about Kerr-McGee's alleged fraud was because of his status as a 
government auditor.
    Although the District Court of Colorado ultimately held that 
Maxwell failed to qualify to bring an FCA lawsuit, and thus reached the 
``right'' conclusion, it was precluded, by Tenth Circuit precedent, 
from doing so on the ground that Maxwell was ineligible to bring suit 
under the FCA because he was a government employee who obtained the 
information in his FCA action in the course of his official duties. The 
court reached the same conclusion but had to labor through the ``public 
disclosure'' and ``original source'' analysis to do so. It would have 
made more sense from a policy perspective if the District Court could 
have dismissed Maxwell's lawsuit at the beginning of the case simply 
because he was a government employee who obtained information in the 
course of his duties.
    In addition and significantly, the resolution in the Maxwell case 
was highly fact-specific. It was fortuitous that the court was able to 
resolve the matter on grounds unrelated to Maxwell's status as a 
government employee. Other instances of government employees who 
capitalize on their access as government officials for personal gain, 
may present different facts and may not be subject to dismissal. An 
amendment to the FCA clarifying that government employees who discover 
alleged fraud in the course of their official duties should not qualify 
to bring FCA lawsuits is needed.
                        III. Proposed Amendment
    There is no question that government employees who do not obtain 
information of fraud in the usual course of their duties should 
qualify, just like anyone else, to file private actions as relators 
under the False Claims Act. Thus, for example, a government employee 
who discovers fraud through friends or social connections in her 
community should qualify as a relator. The problem arises only when 
government employees who discover fraud in the course of their 
governmental duties use that knowledge to profit personally by filing 
an FCA action. The following proposed amendment to the FCA achieves 
this balance. Significantly, Congress had recognized and addressed this 
issue when creating private causes of action for those who know of bank 
fraud. Congress did so by including the following language in the 
Financial Institutions Anti-Fraud Enforcement Act of 1990. 
84 This statute contains a qui tam provision similar to that 
in the FCA.
---------------------------------------------------------------------------
    \84\ PL 101-647 (Nov. 29, 1990).
---------------------------------------------------------------------------
        ``the declaration is filed by a current or former officer or 
        employee of the Federal or State government agency or 
        instrumentality who discovered or gathered the information in 
        the declaration, in whole or in part, while acting within the 
        course of the declarant's government employment.'' 
        85
---------------------------------------------------------------------------
    \85\ 12 U.S.C. Sec. 4204(a)(1).
---------------------------------------------------------------------------
    Such an amendment to the FCA would address the problem of 
government employees who seek to profit by filing suit under the FCA 
using information they obtained in their official capacity. It would 
also appropriately and fairly allow government employees who obtain 
information of fraud independently of their official duties, to qualify 
as relators under the FCA.
                                 ______
                                 
    The Chairman. The Chair thanks the panel for being with us 
today.
    I want to begin my questions with Mr. Roller. I am quite 
impressed that North Dakota collects almost $6 for every $1 you 
spend on audits, increasing Federal royalty collections in 
North Dakota alone during the period of 1982 through 2001 by 
$26.6 million. According to your testimony, this experience is 
multiplied and seen across a spectrum of states and tribes that 
participate in the MMS delegated audit program.
    Mr. Geesey, does the Wyoming program enjoy the same level 
of success? I am at a loss, therefore, to understand. Well, let 
me ask you that question first.
    Mr. Geesey. Mr. Chairman, I don't have the exact numbers, 
but I can give you our total collections, which would include 
Federals, because we do audits for both the Federal and our 
state side, and right now we stand at about last year we 
collected about $68 million in additional assessments at a cost 
of around $3 million.
    The Chairman. Let me turn it over to Mr. Costa in my 
absence.
    I am sorry. Let me go ahead and recognize the Ranking 
Member, Mr. Pearce.
    Mr. Pearce. Thank you, Mr. Chairman. I really am sorry I 
missed the second panel. We had another obligation.
    I was looking forward to hearing Mr. Maxwell. He has been 
honored on the Floor of the House of Representatives as the one 
guy who accomplished what the Administration would not and 
could not do prior to that, bringing up possible negligence, 
lost his job, standing up. It just sounds like the Paul Revere 
of royalties.
    Out in our area we have the Texas Rangers. They enforce the 
law. It sounds like Mr. Maxwell was really a Texas Ranger. 
Maybe we could call him a Royalty Ranger at this point for his 
great service.
    I would like to submit a couple of documents. Mr. Maxwell 
testified that he reported his concerns regarding the Kerr-
McGee litigation to both the Office of Enforcement and the IG, 
so first of all, Mr. Chairman, I would like to have unanimous 
consent to submit the MMS procedure that requires auditors to 
report their concerns regarding illegal acts to the Office of 
Enforcement or IG.
    Second, I would like to submit a statement from the MMS 
stating that Bobby Maxwell never, never bubbled this 
information up to the IG or the Office of Enforcement and that 
he then carried it out and used it to apply in court for 
something that possibly could bring him up to 10 million. I 
think we have significant concerns about why he did not bubble 
these things up through the system the way the law requires.
    The next thing I would like to have introduced is the 
opinion of MMS's third party auditors, people who say they are 
doing a fairly good job, and that is from Thompson, Cobb, 
Brazilio & Associates.
    With your consent, Mr. Chairman, we will enter those into 
the record.
    Mr. Costa [presiding]. With no objection I would be willing 
to do that.
    Mr. Pearce. OK. Thank you.
    Mr. Costa. I, as a point, would like to note that with your 
references Mr. Maxwell was completely exonerated of the 
charges.
    You know, I understand the point you made, but the fact is 
that the real problem of mismanagement at the Minerals 
Management Service has existed. Mr. Maxwell took the matter to 
court.
    Mr. Pearce. Mr. Chairman, am I yielding back my time?
    Mr. Costa. Let me finish my point, and I will be happy to 
yield back.
    Mr. Pearce. If I could stop the timer. That is the point.
    Mr. Costa. No. I am very generous with the time, the 
gentleman from New Mexico.
    Mr. Pearce. OK. Thank you.
    Mr. Costa. I have proven that in the previous hearings we 
have held.
    I think it is important, and without objection we will 
submit the information that you provided. I think it is 
important to note that he was totally exonerated by the courts, 
and the documentation is there to prove that.
    Without objection, we will submit that as well.
    [NOTE: The information submitted for the record by Mr. 
Pearce has been retained in the Committee's official files.]
    Mr. Costa. I will allow you to continue. The gentleman from 
New Mexico?
    Mr. Pearce. Thank you. I thank the Chairman for his 
indulgence.
    I would point out that the case with Kerr-McGee is still in 
process, so I am not sure exactly which court exonerated.
    Additionally, Mr Chairman, I would point out that the Code, 
5 C.F.R. 2635.101(b)(3), 2635.703(a), they prohibit a Federal 
employee from using nonpublic government information to further 
their private interests and so I have serious concerns about 
Mr. Maxwell's legitimacy and in fact his standing whether or 
not these cross the line at being criminal acts.
    Also I would refer to C.F.R. 2635.402, 2635.501, 2635.502, 
which prohibit a government employee from participating in a 
government matter in which the employee has a financial 
interest. Additionally I would point out 2635.101(b)(7), 
2635.702, which prohibits a person from using public office for 
private gain.
    I would also point out C.F.R. 2635.704, 2635.705, which 
prohibits a government employee from using government property 
or government time for gain, and finally in fact 18 U.S.C. 
1905, which in fact it is a crime for government employees to 
disclose information gathered in the course of their 
employment.
    These are all things which raise grave concerns on the part 
of the Minority about the testimony and in fact the actions by 
Mr. Maxwell.
    I would go next to a question that--well, I see my time has 
elapsed. If we get a second round, I will gladly take a second 
round. I yield back.
    Mr. Costa. Thank you very much, the gentleman from New 
Mexico.
    As all of us are certainly entitled to our point of view, I 
am not an attorney and that is a point I will make throughout 
the 110th Congress as I chair this subcommittee. I certainly 
appreciate everybody's perception.
    Cases that are pending or cases that have been rendered on 
we can certainly comment here on the Committee, but I would 
like to focus back on this third panel. I want to apologize for 
not having listened to your testimony. I had read it last 
night. Unfortunately, this is one of those days.
    Mr. Geesey, I heard one of the previous witnesses I did 
catch on the second panel talk about his experience on tribal 
lands both in the sector in his service to government and 
beyond.
    Do you have the experience to comment on communication and 
cooperation between states and tribes with the Minerals 
Management Service and give us a flavor from your own vantage 
point?
    Mr. Geesey. Mr. Chairman, no, I don't.
    Mr. Costa. OK. Well, as I would not give you legal advice, 
I am pleased that you are not going to give us advice in an 
area that you don't feel comfortable with.
    Mr. Roller, how about yourself?
    Mr. Roller. As for communication between states and tribes 
within the MMS are you talking?
    Mr. Costa. Yes.
    Mr. Roller. It mainly is at STRAC meetings. Other than 
that, I don't know. I guess I don't have any experience to 
comment other than that.
    Mr. Costa. Mr. Lester looks like the gentleman who is 
nodding his head in great fashion, so maybe you are the best 
person to ask that question to.
    Mr. Lester. I was agreeing with Mr. Roller that the 
principal communication and interaction between tribes and 
states is through the State Tribal Royalty Advisory Committee, 
and that was formed because so many different Federal agencies 
of the Department of Interior and so many of the stakeholders 
needed a forum in which to communicate with one another.
    In addition, the Department has an intradepartment, an 
interagency committee, a steering committee on Indian minerals 
because there is perhaps as many as 12 Interior agencies 
involved with respect to the development, production and 
payment to tribes and individuals from Indian lands. The 
coordination within the Department and with the stakeholders is 
a serious problem, Mr. Chairman.
    Mr. Costa. Are any efforts being done, to your knowledge, 
to try to address that?
    Mr. Lester. I know that there are individuals who are 
trying to address it within their scope of work, but there is 
no one in the Department whose job it is to see that the 
Department fulfills its responsibilities to Indian lands in the 
mineral development, production and payment arena.
    Mr. Costa. Mr. Lester, quickly because I have about a 
minute and 20 left. Do you think that the current Federal laws 
on the Indian Mineral Leasing Act and the Mineral Development 
Act are sufficient today to ensure that Indian energy resources 
are properly developed and monitored?
    Mr. Lester. I think if they were properly implemented, sir, 
they are except with respect to the interests of the individual 
Indian landowner whose land is held in trust or is restricted. 
They have little voice in the process, and that aspect needs to 
be strengthened.
    How to do it? I would turn to the Indian Lands Working 
Group to provide the information on how best to do that.
    Mr. Costa. All right. I thank you for the suggestion.
    Mr. Geesey, before my time expires, please explain why the 
State of Wyoming and private parties deduct fewer costs from 
royalties on the transportation of coalbed methane than 
Minerals Management Service does. Would you recommend that 
Minerals Management Service adopt the Wyoming method?
    Mr. Geesey. Mr. Chairman, we have been in discussion with 
the Minerals Management Service regarding the coalbed methane 
issue, and it is a simple matter of we think the marketable 
condition is in a different place than the Minerals Management 
Service believes it is.
    The company thinks it is in another different place. All of 
that is being litigated, as a matter of fact, because of the 
complications of the statutes and stuff. I mean, every one of 
them has a legitimate reason why it ought to be there.
    We think ours is the most legitimate, but that is just our 
feeling.
    Mr. Costa. And it raises the most money for the public.
    Mr. Geesey. In our mind, and of course for the State of 
Wyoming, which is who we are trying to look out for.
    Mr. Costa. Well, that is your job.
    My time has expired. The gentleman from New Mexico?
    Mr. Pearce. I thank the Chairman.
    Mr. Geesey, tell me a little bit about what you think about 
STRAC and its relationship with MMS and very shortly. We have a 
lot of questions. Does it work or not? That is all I want to 
know.
    Mr. Geesey. Mr. Chairman, I don't think it works all that 
well.
    Mr. Pearce. OK.
    Mr. Geesey. I think it is a good place where we can talk 
some issues over. I have had this job now for 12 years, and----
    Mr. Pearce. All right. You bet. That is good enough. I 
appreciate it. I have heard it doesn't work all that well. I 
mean, we don't cut with a very fine tooth blade up here.
    Tell me, Mr. Roller. You get you said $6 for every $1 you 
spend on audits. When I look at the chart over here, if I can 
get my staffer to hold that up, I wonder why you get more 
dollars per audit than some of the other states.
    In other words, why don't you just contract out with New 
Mexico? We do a pretty good job. We collect pretty good 
revenues. It costs you about seven times what it does in New 
Mexico. Why is that?
    Mr. Roller. I can't answer why New Mexico doesn't contract 
for our services in North Dakota. I can just tell you those are 
the statistics. They are MMS statistics. They are not my 
statistics.
    Mr. Pearce. OK. And you all do great work?
    Mr. Roller. Yes.
    Mr. Pearce. OK. Now, what I am reading down through here, 
when I read the amount of dollars that you collect for what you 
spend, I read that North Dakota only collects $60 for every $1 
that you spend to audit. Louisiana gets $1,400 for every $1 
they spend. New Mexico gets $711 for every $1 they spend. 
Wyoming, who I have heard criticism of their program today, 
gets $628.
    When I look at the way we overcompensate you and the very 
paltry returns you get, I am not sure I can verify with dollars 
on a piece of paper that your service works quite as well as 
what I have heard in testimony today.
    Mr. Geesey, tell me what you feel about the compliance 
reviews versus straight out audits.
    Mr. Geesey. We believe that it is a tool to be used. We 
have some matching tools and so we used that tool. We were glad 
that the Minerals Management Service gave us some additional 
resources to do that.
    We have already found some additional funds through that 
process, and we are glad to do it. It is any kind of 
enhancement of the audit process itself. I mean, as I stated in 
my testimony, it doesn't slow down the number of audits we do.
    In fact, it focuses us a little bit better than we were 
able to before because of course it enhances our risk 
assessment model by going through there and seeing those 
anomalies that do exist when you look at the entire database 
using the compliance review process.
    Mr. Pearce. OK. Ms. Bucy, in your testimony you gave 
several things about really allowing Federal employees to take 
very privileged information and take that information and go 
into court as private citizens and collect money.
    You itemized a series of things. Do you think that that is 
a circumstance that exists? Are you familiar with Mr. Maxwell's 
case against Kerr-McGee?
    Ms. Bucy. I have read the court opinions, yes.
    Mr. Pearce. You have read the court opinions? From your 
experience as a prosecutor, is that something you would be 
concerned about?
    In other words, that Federal employee who took privileged 
information and then went into the courts and filed a lawsuit 
as if he were a private citizen. Did that cross that threshold 
that you as a prosecutor would have been concerned about?
    Ms. Bucy. Yes. Yes, sir, it does in two respects. First of 
all, I am not so sure that what Mr. Maxwell has identified is 
fraud. It may just be accounting differences.
    I am not so sure that a jury is really capable of telling 
the difference, so I would feel better if a prosecutor had 
signed off on it, somebody who knows fraud, and in fact the 
Department of Justice had the chance to review his case and 
turned it down because they said it was not fraud; it was just 
accounting differences.
    First of all, I don't know that it is fair to a defendant 
to have people going around saying that stuff is fraud when it 
is not. Second, if it is fraud and I as a prosecutor was going 
to have to prosecute it one of the key witnesses would be the 
government auditor who reviewed it, and if that person becomes 
a qui tam relator their credibility is shot and so they have 
ruined any chance of the government using them as a witness to 
prosecute that case.
    So it is unfair to the government and it is also unfair to 
the defendant to have government employees pursuing these qui 
tam cases.
    Mr. Pearce. Thank you. I yield back.
    Mr. Costa. Mr. Lester, as I read and I believe you 
testified that you think in terms of as we look at the review 
that the Committee should provide guidance to the Minerals 
Management Service as it relates to the degree of monitoring 
the audits, as well as the royalty payments, so that they are 
accurate and timely. You also state that there needs to be 
greater assurances I guess from the Department of Interior that 
they won't serve as an impediment.
    I am wondering on the settlements between the tribes and 
the private sector parties. Would you please provide examples 
of how the U.S. Government, which is bound under the Federal 
law to act as the trustee for the benefit of the tribes, has 
hindered these dispute settlements?
    Mr. Lester. They have hindered in the sense that the data 
that the tribes depend on often is late and inaccurate, and the 
tribes' access to company records often is very difficult to 
obtain.
    Often tribes will have to go and dig into reports companies 
have made to states and compare data on production from the 
wells because the states also collect taxes from those wells 
and so they are able to go to the state for information that 
they can't get from MMS or BLM relative to production.
    When the company and the tribe does reach agreement on the 
settlement of what is owed then MMS or the Federal government 
requires the tribe to release the government as trustee from 
any claims; not just about the settlement, but any claims that 
the tribe may have.
    Mr. Costa. That is helpful, Mr. Lester. What I would ask 
you to do is to submit some suggestions to the Committee on how 
we might improve this process.
    Mr. Lester. Thank you. I would be happy to do that.
    Mr. Costa. Yes.
    Mr. Geesey, a couple quick questions to you and Mr. Roller 
before my time expires. In 2006, I understand that the State of 
Wyoming voiced its opposition to a plan by Minerals Management 
Service to curtail meetings held between state and tribal 
auditors.
    Despite Wyoming's opposition and others', MMS went ahead 
with the plan. Can you explain why you opposed this plan?
    Mr. Geesey. Mr. Chairman, I am not sure I understand what 
the question is in terms of a plan.
    Mr. Costa. The plan that we were told was meetings between 
the state and tribal auditors that limited the numbers that 
Minerals Management Service conducted.
    Mr. Geesey. I don't know of any time when we would oppose a 
meeting with STRAC. We probably think that the number of STRAC 
meetings is too many, but I don't know that.
    Mr. Costa. That is fine. Mr. Geesey and Mr. Roller, 
according to the whistleblowers, Minerals Management Service 
moved forward on a plan in 2002 to close hundreds of pending 
audits so that it could receive a clean audit opinion after 
four years of unqualified audit opinions.
    Were the findings of these audits collected, or did MMS 
simply walk away from, in your opinion, money that may have 
been owed to the taxpayer?
    Mr. Roller. From North Dakota's perspective, those audits, 
if they were a North Dakota audit, we followed up on them, but 
I believe the majority of those audits that were closed were 
Minerals Management Service audits, which I wouldn't have any 
information on.
    Mr. Costa. Mr. Geesey?
    Mr. Geesey. I would echo the same thing.
    Mr. Costa. All right. Very good. I will yield back the 
balance of my time.
    This will be the last round. Following the gentleman from 
New Mexico's questions or comments we will adjourn the hearing, 
and we want to thank you for your time and your testimony.
    Mr. Pearce. Thank you, Mr. Chairman. Again, a great 
hearing.
    Mr. Lester, you stated some concern about the MMS. You talk 
about some of the tribes doing the monitoring themselves, and I 
will tell you that I am always talking to the tribes in my 
district about more self-determination.
    Why don't you pick it up and do it? Why don't more tribes 
just pick this up and do it themselves rather than depending on 
MMS or whoever?
    Mr. Lester. Our ability to enforce contracts and to enforce 
the law against non-Indians is very limited by Federal law.
    We do require the backing, in fact the enforcement 
authority, from the Federal government as trustee because of 
that very limited amount of jurisdiction we have over non-
Indians.
    Mr. Pearce. OK. I appreciate that. That is something that I 
am sensitive to.
    Professor Bucy, if I understand the case, and we are going 
back to Maxwell one more time. If I understand the case, what 
happened is that Kerr-McGee were contracting with Texon to sell 
their production, and Mr. Maxwell said no, that is not 
appropriate. You could have made more money if you had done 
this.
    Now, each one of us, and I have never sold a house on my 
own. I have sold lots of houses. We contract with a realtor to 
get the best we can. We don't know the process. So basically 
what Kerr-McGee did is contract with the realtor to sell some 
property. They contracted with Texon to sell their oil. Mr. 
Maxwell said in his professional opinion they could have made 
more money. They paid $110 million, and he said now if you had 
done it this way you could have made $120 million.
    Talk a little bit about the legal implications. If this 
case goes through and Mr. Maxwell is allowed to profit by this 
private information that he got while he was a public employee, 
but furthermore if he can direct someone.
    Can the IRS come back and tell every American? Can every 
IRS agent then go into American homes and say you used a 
realtor to sell your property. If you had sold it yourself, you 
would have been better off.
    Talk a little bit about the risks throughout the system, 
the shockwaves.
    Ms. Bucy. What is at heart in the case against Kerr-McGee 
is whether or not it got fair market value. You know, that is 
in the eye of the beholder what is fair market value.
    I think it is significant to note that whatever might be 
the problems with MMS, MMS said this was not fraud. This was a 
difference in opinion of fair market value. Then it went up to 
the Department of Justice, and the Department of Justice looked 
at it for fraud and said no, there is not fraud here. This is a 
difference in opinion of fair market value.
    The ramifications of that judgment standing are significant 
because not only do you have all of these problems of a 
government employee having access to confidential proprietary 
information, but using it to say that there is fraud when it is 
just a difference of opinion is going to completely undercut 
the effectiveness of the False Claims Act.
    Mr. Pearce. And that undercutting would then generate these 
perverse incentives that cause good government employees to act 
in a parasitic way. I think that is a very disconcerting 
possibility.
    Would you outline the legislative fix that you had 
suggested in your testimony just briefly? How would it be fair 
to government employees and yet be fair to the people and not 
incentivize people to act like parasites?
    Ms. Bucy. The language would only prevent government 
employees from serving as qui tam relators if they got that 
information acting in the course of their government 
employment, so obviously it would apply to attorneys, auditors, 
anybody who is getting confidential proprietary information in 
the course of their employment from turning around and using it 
for private gain.
    It would still allow, and I think appropriately so, 
government employees to be qui tam relators if they get the 
information totally aside from their government duties.
    Mr. Pearce. So it would give fairness, but also not 
incentivize with perverse incentives this parasitic behavior?
    Ms. Bucy. Exactly. Exactly.
    Mr. Pearce. OK.
    Ms. Bucy. I should note this is something that Congress 
passed. I mean, that language is not my own. It is something 
that Congress has already passed, but with regard to qui tam 
provisions in bank fraud.
    Mr. Pearce. In your opinion, was there court shopping going 
on here? In other words, it should have been filed in the 
Fifth, but it was instead in the Tenth.
    Ms. Bucy. Absolutely. Well, forum shopping in the sense 
that that is what plaintiffs' attorneys do and are allowed to 
do, properly so, according to the courts.
    The contract was in the Gulf of Mexico. That is the Fifth 
Circuit. The Tenth Circuit is where it was filed, and that is 
because the Tenth Circuit allows these parasitic lawsuits by 
the government employees to go forward whereas other Circuits 
would not.
    The Fifth has not yet ruled on it, but the Tenth has, and 
it is favorable to the government employees.
    Mr. Pearce. Thank you.
    Ms. Bucy. The First Circuit and the Ninth Circuit are the 
ones that have clearly ruled that these are inappropriate 
lawsuits.
    Mr. Pearce. Thank you, Mr. Chairman. A great hearing. I 
appreciate it.`
    Mr. Costa. All right. I want to thank those who testified 
on the third panel, the second panel and the first panel on 
behalf of Chairman Rahall and all those who participated today.
    I thank the Members of the Committee. This hearing is now 
adjourned.
    [Whereupon, at 2:28 p.m. the Committee was adjourned.]

    [Additional material submitted for the record follows:]

    [A statement submitted for the record by Erich G. Pica, 
Director of Domestic Programs, Friends of the Earth, follows:]

         Statement submitted for the record by Erich G. Pica, 
          Director of Domestic Programs, Friends of the Earth

    On behalf of Friends of the Earth, I would like to thank the 
Committee on Natural Resources for the opportunity to offer testimony 
for the record on the Department of the Interior's collection and 
management of oil and gas royalties. Friends of the Earth is a national 
non-profit environmental advocacy organization and is a member of 
Friends of the Earth International, the world's largest grassroots 
environmental federation with more than one million members in 71 
countries.
    Last year the New York Times began publishing a series of 
investigative articles that exposed gross mismanagement of the 
Department's royalty program which could cost taxpayers billions. These 
articles spurred welcomed congressional oversight and attention to the 
issue of royalties paid by oil and gas companies for the privilege of 
drilling on federal lands and waters. The articles and subsequent 
congressional investigations have uncovered a pervasive culture of 
ineptitude that has put at risk tens of billions of royalty dollars. 
The failure to collect royalties means that millions of acres of public 
lands and waters are being put at environmental risk without fair 
taxpayer return. These royalties provide needed funding to the Land and 
Water Conservation Fund, the Historic Preservation Trust Fund, the oil-
producing states and the general treasury.
    The Interior Department itself first revealed the problem in last 
year's budget, which noted that ``royalty relief'' would allow 
companies to avoid paying royalties on more than $65 billion worth of 
revenues from oil and gas drilled in the deep waters of the Gulf of 
Mexico over the next five years, costing the federal government 
approximately $9.5 billion over that period 1. It was later 
discovered that a large share of the losses resulted from the failure 
to include price thresholds capping royalty relief in leases issued in 
1998 and 1999 2. According to a draft report by the 
Government Accountability Office, losses to the treasury over 25 years 
could reach a staggering $20 billion due to a combination of the 
missing price thresholds and a recent federal court decision that 
changed the methodology by which royalty relief is calculated. If the 
oil industry is successful in a recent legal challenge, these losses 
could balloon to $80 billion over the same period. 3
---------------------------------------------------------------------------
    \1\ Mineral Management Service. Fiscal Year 2007 Budget 
Justifications and Performance Information, page 169. http://
www.mms.gov/PDFs/2007Budget/FY2007BudgetJustification.pdf
    \2\ Andrews, Edmund L. ``U.S. Has Royalty Plan to Give Windfall to 
Oil Companies.'' New York Times. Feb. 14, 2006. http://www.nytimes.com/
2006/02/14/business/14oil.html?pagewanted=
1&ei=5088&en=87dc413fa6add582&ex=1297573200&partner=rssnyt&emc=r
    \3\ Government Accountability Office Draft Briefing on Oil and Gas 
Royalties. March 27, 2006. http://www.nytimes.com/packages/pdf/
business/29lease.pdf
---------------------------------------------------------------------------
    Unfortunately, the missing price thresholds are only the tip of the 
iceberg. Following the discovery the erroneous 1998 and 1999 leases, 
media, congressional, and departmental investigations and whistleblower 
actions have highlighted the failure of the Minerals Management Service 
(MMS) to audit royalty payments or to seek payment of underpaid 
royalties and interest on the royalties. Now that MMS's failures are 
well-documented, it's time for Congress to insist on badly-needed 
reforms to the agency. Friends of the Earth proposes the following 
reforms that we believe will make oil and gas companies more accounted 
to the American taxpayer.
Establish Independent Auditing
    MMS has lost the confidence of Friends of the Earth, Members of 
Congress and the American public, and cannot be trusted to fully and 
fairly collect royalties from oil and gas companies on behalf of the 
American public. Indeed, MMS is plagued by a culture of ineptitude that 
makes it unfit to manage the nation's royalty collection program. 
Friends of the Earth recommends that MMS's royalty collection and 
auditing functions be either put into receivership with an outside 
auditing firm, or placed under the direct guidance of the Department's 
Inspector General. If these recommendations appear insufficient, 
Friends of the Earth would recommend evaluating the potential of 
housing the royalty collection and enforcement with the Internal 
Revenue Service.
Increase Transparency
    As investigations by the Department's Inspector General and the 
Government Accountability Office have progressed, one common theme 
continues to reappear: the lack of readily available and verifiable 
information regarding oil and gas royalty payments. As a founding 
member of the Publish What You Pay Coalition-US, a coalition of more 
than 300 non-governmental government organizations worldwide helping 
citizens of resource -rich countries hold their governments accountable 
for the management of oil revenues, Friends of the Earth is keenly 
interested in the full, timely and verifiable disclosure of royalty 
payments made to the federal government. Royalty payments, contracts 
between the federal government and companies, must be accessible and 
understood by the general public. In addition, the public must be 
notified about when a company is being audited, the results of the 
audits, and any penalties/rewards levied after the completion of an 
audit.
Increase the Royalty Rates
    Currently, oil and gas companies typically pay a 12 to 16 percent 
royalty on oil and gas they extract from federally owned waters and 
lands. According to the New York Times (Incentives on Oil Barely Help 
U.S., Study Suggests 4), the United States imposes 
significantly lower royalty and tax rates on oil and gas companies than 
other countries. According to the article:
---------------------------------------------------------------------------
    \4\ Andrews, Edmund L. ``Incentives on Oil Barely Help U.S., Study 
Suggests.'' New York Times. December 22, 2006. http://www.nytimes.com/
2006/12/22/washington/22royalty.html?ei=5088&en
=3c13b8d3062224f4&ex=1324443600&adxnnl=1&partner=rssnyt&emc=rss&adxnnlx=
117509
8448-K1vw88CiZYOjyxBNKgCuwg
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    In the United States, the federal government's take--royalties as 
well as corporate taxes--is about 40 percent of revenue from oil and 
gas produced on federal property, according to Van Meurs Associates, an 
industry consulting firm that compares the taxes of all oil-producing 
countries.
        By contrast, according to Van Meurs, the worldwide average 
        ``government take'' is about 60 to 65 percent. And that figure, 
        of course, excludes countries that do not allow any private 
        ownership in oil production.
With annual profits of the big five oil and gas companies exceeding 
more than $110 billion last year, it is time that Congress reevaluates 
the royalties in place for current and future production.
    In addition to the low tax and royalty rates, the impact of royalty 
relief to spur domestic production is dubious. An MMS report entitled 
``Effects of Royalty Incentives for Gulf of Mexico Oil and Gas Leases'' 
5 demonstrates this point. Table 5-9 of Volume 1 reviews 
various royalty relief scenarios and estimates their impact over the 
next 40 years. Under the current royalty relief regime, MMS is 
estimating that 57,281 mmBoE in new reserves will be discovered, they 
estimate that 56,644 mmBoE will be discovered without royalty relief. 
This is a difference of approximately 1.1 percent. This additional 1.1 
percent in discovery will cost taxpayers approximately $48 billion in 
royalty revenues, the difference between the total royalty revenue from 
the current royalty regime and no relief.
---------------------------------------------------------------------------
    \5\ Mineral Management Service Economic Division. ``Effects of 
Royalty Incentives for Gulf of Mexico Oil and Gas Leases.'' Volume 1. 
OCS Study MMS 2004-077.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 


Eliminate Oil Royalty Relief Programs
    For more than a decade, Friends of the Earth has opposed various 
schemes to provide oil and gas companies with royalty relief. We have 
consistently opposed bills such as the Deepwater Royalty Relief Act of 
1996, royalty relief provisions in the Energy Policy Act of 2005, as 
well as other schemes to help oil companies avoid paying royalties. 
Particularly at a time of record oil and gas prices, it is clear that 
companies do not need these incentives. Friends of the Earth was 
pleased that H.R. 6, the CLEAN Energy Act of 2007, repealed royalty 
relief provisions enacted in the 2005 energy bill. We are hopeful that 
the Senate will follow suit, and we urge Congress to repeal additional 
royalty relief provisions such as sections 343 and 353 of the Energy 
Policy Act of 2005 dealing with royalty relief for marginal well 
production and methane gas hydrates.
Collect Royalties from the 1998 and 1999 leases
    Friends of the Earth remains concerned that MMS is not doing enough 
to recapture the royalty revenue lost as a result of the 1998 and 1999 
leases in the Gulf of Mexico. We remain disheartened by statements made 
by Interior officials regarding their ability to renegotiate the 
existing leases, as well as the terms of leases that have been 
renegotiated to date. Members of this Committee played a lead role in 
passing legislation last year that provided a strong incentive to 
companies benefiting from unlimited royalty relief to sit down at the 
negotiating table and agree to begin paying royalties. As Congress 
sought to strengthen the Department of the Interior's hand with these 
measures, administration officials such as MMS Director Burton 
undermined them every step of the way by opposing the congressional 
actions and publicly stating that ``I don't like to say `negotiate' 
because I really don't have anything to trade.'' 6
---------------------------------------------------------------------------
    \6\ Andrews , Edmund L. ``Interior Official Says She Will Not Try 
to Recoup Lease Money.'' New York Times. September 22, 2006. ``http://
www.nytimes.com/2006/09/22/business/22oil.html?ei=
5090&en=cf1f7de8c9d7d739&ex=1316577600&partner=rssuserland&emc=rss&pagew
anted=
print
---------------------------------------------------------------------------
    The terms of the renegotiated leases that six companies have now 
signed are highly unfavorable to the government and illustrate the 
result of MMS's weak attempts to address the problem. Among other 
things, the leases fail to recoup royalties on past production that 
occurred on the 1998 and 1999 leases prior to October, 2006--nearly $1 
billion in lost royalties. The leases also contain a variety of escape 
hatches for the companies, allowing them to terminate the leases if the 
Department reaches ``more favorable'' terms with another company in the 
future or loses a lawsuit filed by Kerr Mc-Gee challenging its 
authority to collect royalties, or if Congress enacts legislation 
intended to address the faulty leases. Rep. Hinchey has drawn attention 
to these flaws, and we share his concern.
    In addition to the favorable renegotiated contracts, the Department 
of the Interior is now asking for authority from Congress to offer 
lease extensions as a means to entice companies to renegotiate. In 
testimony before the Senate Energy and Natural Resources Committee, the 
Assistant Secretary for Lands and Management, Stephen Allred, requested 
additional authority from Congress to allow the Department of the 
Interior to extend leases for companies that choose to renegotiate 
their 1998 and 1999 leases. After opposing legislation to strengthen 
their negotiating stance, and making public statements that weakened 
it, MMS is now asking Congress for authority to give yet another 
giveaway to the oil and gas industry. Needless to say, Friends of the 
Earth would oppose these incentives.
Conclusion
    The oil royalty collections system in the United States is broken. 
The Department of the Interior and the MMS have lost the ability to 
enforce the laws passed by Congress and protect the environment and 
taxpayer interests. I thank the Committee on Natural Resources for 
allowing Friends of the Earth to offer testimony, and hope our 
recommendations will be considered in further debate.

                                 
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