[Senate Hearing 110-386]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-386
 
OVERSIGHT OF THE OIL, GAS, AND MINERAL REVENUE PROGRAMS MANAGED BY THE 
                       DEPARTMENT OF THE INTERIOR 

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                   FEBRUARY 26, 2008--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


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                      COMMITTEE ON APPROPRIATIONS

                ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont            TED STEVENS, Alaska
TOM HARKIN, Iowa                     ARLEN SPECTER, Pennsylvania
BARBARA A. MIKULSKI, Maryland        PETE V. DOMENICI, New Mexico
HERB KOHL, Wisconsin                 CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             MITCH McCONNELL, Kentucky
BYRON L. DORGAN, North Dakota        RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         JUDD GREGG, New Hampshire
RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island              SAM BROWNBACK, Kansas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee
                    Charles Kieffer, Staff Director
                  Bruce Evans, Minority Staff Director
                                 ------                                

 Subcommittee on Department of the Interior, Environment, and Related 
                                Agencies

                 DIANNE FEINSTEIN, California, Chairman
ROBERT C. BYRD, West Virginia        WAYNE ALLARD, Colorado
PATRICK J. LEAHY, Vermont            LARRY CRAIG, Idaho
BYRON L. DORGAN, North Dakota        TED STEVENS, Alaska
BARBARA A. MIKULSKI, Maryland        THAD COCHRAN, Mississippi
HERB KOHL, Wisconsin                 PETE V. DOMENICI, New Mexico
TIM JOHNSON, South Dakota            ROBERT F. BENNETT, Utah
JACK REED, Rhode Island              JUDD GREGG, New Hampshire
BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee
                           Professional Staff

                            Peter Kiefhaber
                              Ginny James
                             Rachel Taylor
                             Scott Dalzell
                             Chris Watkins
                       Leif Fonnesbeck (Minority)
                        Rebecca Benn (Minority)
                     Rachelle Schroeder (Minority)

                         Administrative Support

                         Katie Batte (Minority)


























                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Dianne Feinstein....................     1
    Question submitted by........................................    23
Opening statement of Senator Wayne Allard........................     2
Statement of Senator Larry Craig.................................     4
Statement of C. Stephen Allred, Assistant Secretary for Lands and 
  Minerals Management, Minerals Management Service, Department of 
  the Interior...................................................     5
    Prepared statement of C. Stephen Allred......................     8
1998/1999 Leases--Kerr-McGee.....................................     5
Royalty Policy Subcommittee......................................     6
1998-1999 OCS Leases Without Price Thresholds for Royalty Relief.     8
Royalty Policy Committee Report..................................     8
Implementation of Subcommittee Recommendations...................    10
Statement of Randall Luthi, Director, Minerals Management 
  Service, Department of the Interior............................    12
Royalty Policy Subcommittee Report...............................    12
1998/1999 Leases.................................................    14
Royalty Policy Subcommittee Recommendations......................    15
Automated Billing................................................    15
Lease Sales......................................................    17
Losses From Barring Companies....................................    17
Status of 1998/1999 Royalty Rate Relief Negotiations.............    18
Kerr-McGee Litigation............................................    19
Status of 1998/1999 Royalty Rate Relief Negotiations.............    20
Processing fee...................................................    21
Royalty Policy Subcommittee Trust Fund...........................    21
Debt Collection Improvement Act..................................    22
Closure of Audit Recommendations.................................    22
Noncompliance C, Finding: Debt Collection Improvement Act of 1996    22
Recommendation...................................................    22
Implementation of Recommendation.................................    22
1998-1999 Deepwater OCS Leases...................................    23
Royalty Revenue Report...........................................    24
1998-1999 Oil/Gas Leases/Kerr-McGee Case.........................    30
Kerr-McGee Case..................................................    30
Naval Oil Shale Reserve..........................................    33
Administrative Fees on Onshore Leases............................    34


OVERSIGHT OF THE OIL, GAS, AND MINERAL REVENUE PROGRAMS MANAGED BY THE 
                       DEPARTMENT OF THE INTERIOR

                              ----------                              


                       TUESDAY, FEBRUARY 26, 2008

                           U.S. Senate,    
Subcommittee on Department of the Interior,
                 Environment, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:28 a.m., in room SD-124, Dirksen 
Senate Office Building, Hon. Dianne Feinstein (chairman) 
presiding.
    Present: Senators Feinstein, Bennett, Craig, and Allard.


             opening statement of senator dianne feinstein


    Senator Feinstein. I want to begin by thanking the ranking 
member for his cooperation in being able to begin this hearing 
early on. We have a number--as many as five--stacked votes, 
which will begin sometime after 10 o'clock, which will make 
holding the hearing extraordinarily difficult.
    So thank you very much Senator Allard for allowing us to 
move this up to 9:30.
    Senator Allard. You're welcome. I appreciate you 
recognizing a problem and addressing it quickly.
    Senator Feinstein. Thank you, thank you. Mr. Secretary, 
we'd both like to thank you for your cooperation in making this 
extra effort in being here a half-hour early. I know other 
members may be coming along and I hope they can come along 
shortly, so that we can conclude this in about 45 minutes, if 
possible.
    The Minerals Management Service is responsible for managing 
the Federal Government's oil and gas royalty programs on public 
lands and waters. Last year, MMS collected $11.4 billion in 
royalties and rents associated with 29,000 onshore and offshore 
oil and gas leases.
    Of that amount, $2.5 billion was distributed to State and 
tribal governments, while the Federal share was used to fund 
the Land and Water Conservation Fund, the Historic Preservation 
Fund, and the Reclamation Fund, in addition to general 
government operations.
    Mr. Allred, we've asked you to address three specific 
subjects this morning in your testimony.
    First, we'd like you to update the committee on the status 
of your negotiations with the oil companies holding leases 
issued in 1998 and 1999 for which MMS is not collecting 
royalties due to the United States. This is potentially, as you 
well know, a $10 billion loss to the taxpayer. We need to know 
what the Department is doing to make the Treasury whole.
    Second, we've asked you to address the ongoing litigation 
between Kerr-McGee, which is now Anadarko Oil, and the Interior 
Department over the legality of price thresholds for all 1996 
to 2000 leases. We're aware of the recent District Court 
decision that went against the government, but the Committee is 
eager to hear the status of the case and the Department's 
outlook on its final outcome. As I understand, this is another 
potential loss of $21 billion should this judgment be 
sustained.
    Finally, we've asked you to speak to the findings and 
recommendations contained in a December 17 report from the 
Royalty Policy Committee concerning mineral revenue collection 
on Federal lands. As you know, this report was authored by our 
former colleagues, Senator Bob Kerrey and Jake Garn, who co-
chaired the Special Committee that investigated and reported on 
nearly every aspect of Federal performance in carrying out its 
oversight and revenue collection duties. We do have the 100 
recommendations that the report made. I've read them, so I am 
somewhat aware of what they have proposed.
    I also see we're joined by Mr. Lufti--Excuse me, Luthi--I 
want to thank you for making the effort. I know you came in on 
a plane, and I really appreciate you're being here. So thank 
you very much.
    Mr. Luthi. Thank you, Senator. It's my pleasure to be here.
    Senator Feinstein. You're welcome. And now, I'll turn to 
the ranking member Senator Allard, for any opening statement 
you may have.


               opening statement of senator wayne allard


    Senator Allard. Well, thank you, Chairwoman Feinstein, for 
your leadership. I want to thank the witnesses, along with the 
Chairwoman, for adjusting your schedule to meet our change in 
schedule here. What have we got? Oh, okay, we're getting some 
feedback. All right. Now that we've got that taken care of.
    So I know you had to adjust your schedules, so Mr. Luthi 
and Mr. Allred, I welcome you both to the committee hearing.
    I am very excited to have the opportunity to work again, as 
the ranking member on the Interior Appropriations Subcommittee. 
This subcommittee deals directly with the enormous number of 
critical issues that affect my home state of Colorado. I 
recognize that during election, your politics can frequently 
slow the pace of getting things done around here, but I remain 
optimistic that we can accomplish a lot by working together in 
a bipartisan fashion which has always been the tradition in 
this committee.
    I believe the public, which values its public land so 
highly, deserves nothing less than our best efforts to do so. 
Since this will be my last year in the Senate, I will not have 
the opportunity to hold the gavel on this subcommittee. But, 
Senator Feinstein, you've been an excellent chairman to work 
with----
    Senator Feinstein. Thank you.
    Senator Allard [continuing]. And I always appreciate your 
willingness to reach across the aisle. I'm generally thankful 
to finish my tenure here with such a thoughtful and able person 
at the helm.
    Today we examine the Oil, Gas, and Mineral Revenue programs 
managed by the Department of the Interior, most particularly 
those overseen by the Minerals Management Service (MMS). The 
MMS is a comparatively small agency within the Department of 
the Interior, with only about 1,600 people. However, it is also 
one of the most important.
    Not only does it manage all offshore leasing in Federal 
waters, but last year the agency collected and dispersed over 
$11 billion to the U.S. Treasury, States, and Tribes. The 
amounts collected by MMS for the Federal Treasury are second 
only to the Internal Revenue Service. Most of the employees 
that are responsible for these activities are located in my 
State of Colorado in Denver.
    Given the enormous amount of royalties that MMS is 
responsible for collecting and distributing to the States and 
the Treasury, it is critical that the agency operates as 
efficiently as possible. The American people must feel certain 
that the amount owed by oil and gas companies for operating on 
our public lands and in the outer continental shelf is paid in 
full.
    In recent months, the MMS has been involved in a number of 
complex legal and regulatory issues that concern many of us 
here in Congress. Briefly, these included leases that were 
issued pursuant to the Deep Water Royal Relief Act during the 
Clinton administration in 1998 and 1999, which should not 
contain any price thresholds.
    The absence of thresholds means that even though oil prices 
are approaching $100 per barrel, companies with these leases 
are paying no royalties to the Federal Government. While there 
were legislative efforts to force companies with these leases 
to modify them to include thresholds, I did not support this 
approach. I believe in the sanctity of contract.
    I also feared the possibility of lengthy litigation that 
would jeopardize our entire offshore oil/gas program at a time 
when we need to promote additional domestic production to 
become less reliant on foreign sources of energy.
    I believe that my fears concerning the legality of 
legislating on the 1998/1999 leases were borne out. Indeed, 
last October, a Federal District Court sided with Kerr-McGee 
Company and held that the MMS had no authority to include any 
price thresholds in leases issued pursuant to the Deep Water 
Royalty Relief Act.
    Since the act covers leases in deep water from 1996 to 
2000, if the Kerr-McGee case stands, then the government will 
lose not only royalty income from the 1998/1999 leases, but 
also those from the 1996, 1997, and 2000 years. The most recent 
estimates we have from the Department of the Interior indicate 
that this could cost the Treasury in excess of $21 billion.
    The Kerr-McGee case is currently on appeal to the Fifth 
Circuit Court. It is my hope that the lower court decision is 
reversed. I believe that it was the intent of Congress to allow 
price thresholds to be included in leases under the Deep Water 
Royalty Relief Act. However, if the case is reversed, I still 
believe that the 1998/1999 leases pose a separate question 
about the sanctity of contract and whether the Federal 
Government honors its agreements.
    Legislation that would coerce companies to modify these 
leases will only lead to more litigation and potentially chase 
investment in oil and gas production to other places in the 
world.
    Let me conclude my remarks by applauding your decision, Mr. 
Allred, to recommend to Secretary Kempthorne that he appoint an 
independent, bipartisan panel to examine MMS's Mineral Revenue 
Management Program and issue a report.
    I think this was an important response, not only to the 
issues raised by the 1998/1999 lease, but also to address 
concerns raised by the Inspector General concerning whether the 
Department's royalty programs were adequate to assure the 
public that it was collecting all the royalties that were due.
    The panel included former Senators Bob Kerrey and Jake Garn 
and several other distinguished members. The report contains 
over 100 recommendations, so we will not be able to get to all 
of them at this hearing. But I'll be interested in asking you 
some questions about the report and how the Department intends 
to implement these recommendations to ensure that the Royalty 
Management plan is run as effectively as possible.
    Thank you, Madam Chairman. This concludes my opening 
statement.
    Senator Feinstein. Thank you very much, Senator, and let me 
just say, I'm sorry about the retirement. I will certainly miss 
you but we have some time left on the year, fortunately. So, 
that's a good thing.
    Senator Allard. Well, thank you, Madam Chairman. I'm 
looking forward to working with you and other members.
    Senator Feinstein. Thank you. I want to note that Senator 
Craig and Senator Bennett have joined us. Do either of you have 
an opening statement?


                    statement of senator larry craig


    Senator Craig. Madam Chair, I'll be brief. I appreciate 
having Steve and his colleagues with us.
    Let me be brief, but let me be blunt. I'm going at 10 
o'clock to a hearing in Energy to deal with SPRO. Are we 
putting too much oil in, is it too expensive? Should we or 
should we not be? A lot of that oil is royalty in kind oil. Oil 
companies pay it in lieu of royalty into the SPRO, and so we 
are gaining some advantage there.
    You know, I'm a little frustrated that we continue to pick 
around the edges of an issue that was created in another 
administration. In a presidential year, I could be very, very 
political about it, but I won't be, because there was intent at 
the time to get us out into the deep water and to give 
companies the incentive to go there. Now, we're worried because 
we're not filling our pockets.
    What we ought to be worried about is a good inventory--and 
I'm going to challenge this committee to look at that this 
year--of the rest of offshore. Our greatest oil reserves today 
are not in SPRO. They're out at our Continental Shelf that 
we're not even beginning to look at and/or think about tapping. 
Now, that doesn't mean that we don't get it right at Minerals 
Management. We need to get it right, and make sure that we 
appropriately handle the assets of the public's in this 
country--in this case, the citizens of our country.
    But the courts are going to solve this in part, if they 
can, and we ought to be advancing the greater cause of oil 
independence by finding out what the inventory offshore is, and 
where we can and can't go, and should or should not go, and 
give incentives to get there, instead of doing what I think 
we've attempted to do in the last--it really hasn't got us 
anywhere.
    We talk about money lost. We ought to talk about money and 
independence we can create by effectively managing and getting 
offshore. We need an inventory, we need it modern, we need to 
know where the oil is, and we ought to be after it.
    Thank you.
    Senator Feinstein. You're welcome. Senator Bennett, do you 
have a comment?
    Senator Bennett. Yes, Madam Chairman. I know we have a vote 
coming, and so I will not make an opening statement and I will 
submit my questions for the record. But I do want to take the 
opportunity to put on the record, in my statement, our concern 
about the Oil Shale Proposal.
    Oil shale is potentially very important to the State of 
Utah, as it is to Colorado and Wyoming. There's more oil in the 
oil shale in those three States than there is in Saudi Arabia. 
So we're obviously paying very close attention to that, and my 
questions will focus on that, which I will submit for the 
record.
    Senator Feinstein. Thank you very much, Senator Bennett.
    Now, we will turn to our panelists, Secretary Allred and 
Mr. Luthi. If I may, could I ask you to summarize your comments 
and confine them to 5 minutes? I think we really would like to 
engage in a dialogue, and that will perhaps give us some time 
to do so.
    So, thank you, and we'll proceed. Secretary Allred?
STATEMENT OF C. STEPHEN ALLRED, ASSISTANT SECRETARY FOR 
            LANDS AND MINERALS MANAGEMENT, MINERALS 
            MANAGEMENT SERVICE, DEPARTMENT OF THE 
            INTERIOR


                     1998/1999 leases--kerr-mc gee


    Mr. Allred. Thank you, Madam Chairman, Senator Allard, 
Senator Craig, and Senator Bennett. It's a pleasure to be here 
and to talk about these issues.
    I think we have come a long way in the last year.
    When I first came into the Department of the Interior, the 
Minerals Management Service was under heavy fire for a number 
of items. Looking back, I think wrongly so. I'll tell you why 
as we go forward.
    First of all, let me talk a little bit about the 1998/1999 
leases, as you've requested, and the Kerr-McGee litigation. The 
1998/1999 lease issue, at this point in time, is a subset of 
the Kerr-McGee, because it involves the same real questions 
about authority within the Department, under the Deep Water 
Royalty Relief Act.
    Essentially, that case--and I'm not an attorney, so I'm not 
going to get into details--but that case involves two sections, 
one of which gave the Department authority to condition leases 
with price thresholds, and a second provision, which provided 
for mandatory royalty relief.
    The court has found at the district level that the first 
did not apply to the second. We think that is wrong. We intend, 
within the Department, to go forward in challenging that 
decision. As you indicated, the Department of Justice has filed 
a notice of appeal. So, we will be proceeding as the Department 
of Justice thinks best in that process.
    As you also indicated, the monies that are involved are 
about $9 billion as of our last evaluation of what may be 
involved in the 1998/1999 lease issue. Going forward about $1.5 
billion of that is already foregone.
    Senator Feinstein. I beg your pardon. Was already?
    Mr. Allred. Foregone.
    Senator Feinstein. Foregone?
    Mr. Allred. About $19 to $20 million in additional foregone 
revenues, if the----
    Senator Feinstein. Billion.
    Mr. Allred. Billion, excuse me.
    Senator Feinstein. You said million.
    Mr. Allred. Billion, excuse me. In the 1995 through 2000 
leases that the Kerr-McGee case stands, as the District Court 
has indicated.
    In the 1998/1999 leases, I and MMS had discussed issues and 
our desire to negotiate price thresholds on that. Six companies 
came forward and did agree to that. The rest did not. I think 
there's little chance of any additional movement until the 
Kerr-McGee case is resolved.
    I want to point out, though, that beyond that period of 
time, there is no question about the Department's legal 
authority to impose price thresholds. In every case since 2000, 
leases have been conditioned if there was royalty relief with 
price threshold information. The last sale that comes up in 
March, one of those sales has mandatory relief and one does 
not. In the case that does not, we did not offer royalty 
relief.


                      royalty policy subcommittee


    Now, if I could talk a little bit about the Royalty Policy 
Subcommittee report. One of the concerns I indicated as I took 
office 1\1/2\ years ago, was that there was not a real 
objective look at what was going on through Minerals Management 
Service. I, as many, was very concerned about the reports that 
were coming out. So I undertook my own review of Minerals 
Management Service, and traveled to the various offices, and 
got to know the processes.
    After I did that, I did not feel there was a significant 
fatal flaw in the programs of the Minerals Management Service, 
and that the royalties that were due to the United States were 
being collected. However, as with any complex operation--and 
that is a very complex operation--there were numerous areas 
that could be improved. So I suggested to the Secretary, as you 
indicated--or Senator Allard indicated--that we put together a 
committee that had two purposes.
    One of them was to give an in-depth look, probably the most 
in-depth look of the processes of any agency, certainly that 
I'm familiar with. Second, we needed, if there was not a 
problem, to help restore the credibility of the Minerals 
Management Service in the eyes of the public.
    I think that what came out was very successful in meeting 
those objectives. First of all, they found a lot of reasons for 
improvement. Most of those can be implemented by the Minerals 
Management Service, and Director Luthi is here to tell you how 
he is going forward doing that. But also, it did not find any 
serious--what I'll call fatal flaws. In fact, it was very 
encouraging in things like the RIK Program, and found that it 
was a very innovative, very progressive program that they 
encouraged.
    Now, there are some things that they've identified that 
need to be done to improve the program, but I think it pretty 
well justifies my early conclusions that it is a good 
operation. As with any, it can be improved, but it is a good 
operation, and it's going forward, and I think that it's, as 
they indicate, collecting the revenues that are due to the 
United States.
    We might just quickly touch on what we asked the 
subcommittee to do. We asked them to look at the procedures and 
processes, and make sure that MMS was collecting the amounts 
that were due. We asked them to look at the audit and 
compliance program and to make recommendations as to what 
should be done with regard to improve that. We asked them to 
look specifically at the royalty in kind.
    The people who were on the committee, Senator Bob Kerrey 
and Senator Jake Garn, did an excellent job. I just can't tell 
you how much I appreciate the time and effort they put in at no 
cost to the U.S. Government to do this.
    But there were some other very helpful people. Cynthia 
Lummis, who is the former Wyoming State Treasurer, and probably 
Wyoming is one of the largest recipients of royalty money, also 
participated in many of the royalty audit programs that we 
conduct. Perry Shirley, who's with the Navajo Nation had 
certainly good insight into the monies that are being paid to 
the Indian Royalty Program.
    Of most importance, I think, was Robert Wenzel. This was a 
very excellent opportunity for us to look at how other agencies 
do this stuff. Robert Wenzel was the highest ranking career 
official in the Internal Revenue Service from 1998 to 2003, 
when he retired. As you can imagine, his insight into this 
program--because it is to some extent similar to what the IRS 
does--was very valuable.
    We had Dr. Mario Reyes, who is an academic, so we brought 
that side of the view here. Dr. David Deal, because this was a 
subcommittee of an established committee and there had to be a 
committee member on it. He also has had much background in oil 
and in the royalty programs.
    Those were the five, and I think we were very lucky to have 
that quality of people on it. I really appreciate, again, the 
tremendous effort. They were meeting very frequently, many 
hours, and did an excellent job.
    What I would like to do now, if we could, is to turn to Mr. 
Luthi, and to talk about how we are going about implementing 
the 100 recommendations that you referred to.
    Senator Feinstein. Thank you very much, Mr. Secretary.
    [The statement follows:]
                Prepared Statement of C. Stephen Allred
    Madame Chairman and members of the committee, we appreciate the 
opportunity to testify today. This Committee has been instrumental in 
shaping our domestic energy program, particularly with regard to the 
sound development of our domestic oil and gas resources on the Outer 
Continental Shelf (OCS) and the management of mineral revenues from the 
OCS and from onshore Federal and Indian lands.
    Today's testimony will focus on three areas:
    1. The OCS leases that were issued in 1998 and 1999 without price 
thresholds.
    2. The recent District Court decision in the Kerr-McGee litigation.
    3. The recently issued report from the Subcommittee on Royalty 
Management and our subsequent implementation efforts.
    The Department of the Interior and its agencies serve the public 
through careful stewardship of our Nation's natural resources. The 
Department also plays a vital role in domestic energy development: 
Approximately one third of all energy produced in the United States 
comes from resources managed by the Interior Department. The 
Department, through MMS, is also responsible for managing and providing 
the American people with an accurate and transparent accounting of the 
revenue this production generates. For example, since 1982 MMS has 
distributed approximately $176.6 billion to Federal, State, and Indian 
accounts and special funds, including the following:
  --$107.8 billion to the U.S. Treasury and other Federal agencies;
  --$22.6 billion to the Land and Water Conservation Fund;
  --$22.3 billion to States;
  --$14.7 billion to the Reclamation Fund;
  --$5.7 billion for American Indian Tribes and allottees; and
  --$3.5 billion for the Natural Historic Preservation Fund.
    1998-1999 ocs leases without price thresholds for royalty relief
    The Deep Water Royalty Relief Act of 1995 (DWRRA) required deep 
water leases issued from 1996-2000 to include a royalty incentive that 
allowed companies to produce a set volume of oil and gas before they 
began paying royalties. Price thresholds, which limit royalty relief 
when oil and gas prices are high, were included in leases issued in 
1996, 1997 and 2000. However, they were not included in leases issued 
in 1998 and 1999.
    A recent Federal District Court decision has called into question 
MMS's authority to establish price thresholds under the authority of 
the DWRRA. In the Kerr-McGee case, the District Court for the Western 
District of Louisiana ruled that MMS did not have the authority to 
apply price thresholds to the royalty relief provided in the deepwater 
leases issued in 1996-2000. On December 21, 2007, the Department of 
Justice filed a timely notice of appeal with the 5th Circuit Court of 
Appeals to protect the interests of the United States in the Kerr-McGee 
litigation. The 1998-1999 lease issue and the question of price 
thresholds is a sub-issue of the larger Kerr-McGee case.
    The question of whether the Department has the authority to include 
price thresholds in royalty relief provisions for leases issues after 
2000 is not at issue in the Kerr-McGee litigation. All leases issued 
after 2000 that include royalty relief also include price thresholds, 
and there is no dispute that MMS has the authority to condition this 
relief on the prices of oil and gas.
    In an attempt to address the missing price thresholds in the OCS 
oil and gas leases issued during 1998 and 1999, early in my tenure as 
Assistant Secretary, I met with several oil companies. As a result of 
those meetings, voluntary agreements were reached with six companies, 
each of which has been paying royalties consistent with the terms of 
the agreement. We remain open and willing to discuss agreements with 
the remaining companies that hold leases issued without price 
thresholds.
    If the District Court's decision in Kerr-McGee is not reversed, 
whether the leases issued in 1998-1999 contain price thresholds becomes 
moot. While we have had at least preliminary discussions with all 
companies holding leases issued in 1998-1999, I do not believe that any 
additional lessees will agree to price thresholds until they see the 
outcome of the Kerr-McGee case.
                    royalty policy committee report
    As you know, we recently received a report that contains 
recommendations developed by the Royalty Policy Committee's 
Subcommittee on Royalty Management. I would like to discuss how the 
subcommittee came to be established, its composition, and areas of 
responsibility. Director Luthi will address the current status of our 
efforts to implement the recommendations contained in the report.
    On March 22, 2007, upon my recommendation, Secretary Kempthorne 
appointed the Subcommittee on Royalty Management (``the Subcommittee'') 
to conduct an independent examination of MMS's minerals revenue 
management program. As you are aware, reports from the Department's 
Office of Inspector General and others questioned whether the 
Department's royalty programs were adequate to assure that the public 
received the royalties that Congress had intended. While I had 
concluded at the time that there were not major problems in the royalty 
program, I felt there were many opportunities to improve those 
operations. As a result, the Secretary determined that a fully 
independent examination of the program was warranted, both to restore 
credibility to this important revenue-generating program, and to focus 
on the improvements that were needed.
    Specifically, we asked the Subcommittee to review:
  --the extent to which existing procedures and processes for reporting 
        and accounting for Federal and Indian mineral revenues are 
        sufficient to ensure MMS receives the correct amount;
  --MMS's audit, compliance and enforcement procedures and processes to 
        determine if they are adequate to ensure mineral companies are 
        complying with existing statutes, lease terms, and regulations 
        as they pertain to payment of royalties; and
  --the operations of the Royalty in Kind Program to ensure that 
        adequate policies, procedures, and controls are in place to 
        ensure the decisions to take Federal oil and gas royalties in 
        kind result in net benefits to the Federal government.
    Subsequently, the Subcommittee was also asked to review procedures 
promulgated by the Department in response to the lack of price 
thresholds in Gulf of Mexico leases from 1998 and 1999 sales to ensure 
that future leases include price thresholds.
    The panel, which was organized as a Subcommittee of the Royalty 
Policy Committee (RPC), a Federal Advisory Committee Act (FACA) body 
that advises the Secretary on matters related to mineral revenues, was 
comprised of seven distinguished members:
  --Former U.S. Senator and Nebraska Governor Bob Kerrey and former 
        U.S. Senator Jake Garn, of Utah;
  --Cynthia Lummis, a former Wyoming official who served as State 
        Treasurer, and as a member of the Wyoming House and Senate, 
        concentrating on natural resource and taxation issues;
  --Perry Shirley, Assistant Director of the Navajo Nation's Minerals 
        Department, who serves as the Principal Investigator 
        responsible for administering a Cooperative Agreement between 
        the Navajo Nation and the Minerals Management Service;
  --Robert Wenzel, the highest ranking career official in the Internal 
        Revenue Service from 1998 to 2003, whose responsibilities 
        included the day-to-day operation and strategic management of 
        the United States tax administration system;
  --Dr. Mario Reyes, Associate Dean for Administrative Affairs and 
        Director of Business Economics Programs in the College of 
        Business and Economics at the University of Idaho; and
  --David Deal, who serves as the vice-chair of the full Royalty Policy 
        Committee.
    To ensure independence, the subcommittee staff came primarily from 
the Department's Office of Policy Analysis, but also included Bureau of 
Land Management staff and an independent staff member, Loretta 
Beaumont, who was selected by the co-chairs. MMS played no role in the 
subcommittee's work beyond responding to requests for information.
    I want to express my deep appreciation to each member of the 
subcommittee and staff for their hard work in the preparation and 
completion of this thorough report.
    The subcommittee issued its report on December 17, 2007, as a 
public document and in a public meeting on January 17, 2008, the RPC 
voted to accept the subcommittee's report. By letter dated January 25, 
2008, the RPC Chairman transmitted the report to the Secretary.
    The subcommittee concluded that MMS is an effective steward of the 
Minerals Revenue Management Program, and that MMS employees are 
genuinely concerned with fostering continued program improvements. The 
subcommittee members unanimously agreed that MMS is the Federal agency 
best suited to fulfill the stewardship responsibilities for Federal and 
Indian leases. However, as we expected, the report identified many 
areas that warranted management attention to ensure public confidence.
    The report contains 110 recommendations, including 35 
recommendations related to Collections and Production Accountability; 
30 regarding the Royalty in Kind (RIK) Program; 27 on Audits Compliance 
and Enforcement; 10 related to Coordination, Communication, and 
Information Sharing among MMS, the Bureau of Land Management (BLM) and 
the Bureau of Indian Affairs (BIA); and 5 on OCS Royalty Relief (See 
Attachment #1). At least three of the recommendations would require 
legislative action. Notably, the Report concluded, ``the advantages of 
including an RIK approach among MMS asset management options are clear 
and MMS's process for evaluating the feasibility of RIK versus Royalty 
in Value (RIV) appears to be rigorous and effective. Nevertheless, in 
order to ensure the program's successful operation, a number of 
challenges must be addressed.''
    The report's recommendations span the responsibilities of all three 
Departmental Bureaus involved in royalty management--MMS, BLM, and BIA 
(See Attachment #2). Of the 110 recommendations, MMS is solely 
responsible for 73 and BLM is solely responsible for 15. The remaining 
22 recommendations require coordination among the Bureaus. We are in 
the process of establishing a Production Coordination Committee with 
representatives from the BLM, MMS, and BIA whose task will be not only 
to coordinate and implement the cross cutting recommendations contained 
in the subcommittee's report, but to also provide on-going coordination 
of issues related to the management of Federal and Indian mineral 
leases as suggested by one of the recommendations contained in the 
Report.
             implementation of subcommittee recommendations
    In a memorandum dated January 14, 2008, Secretary Kempthorne asked 
the Department to review the report, develop an action plan, and begin 
implementing the subcommittee's recommendations. I am pleased to report 
that as of February 11, 2008, 16 of the 110 recommendations are already 
complete (See Attachment #3). Of the remaining 94 recommendations, 29 
are underway. We have developed a Joint Action Plan to address all of 
the report's recommendations.
    The plan identifies by recommendation the responsible Bureau, 
estimated timeframes for completion, and status. Points of contact are 
designated within each Bureau to monitor implementation and report on 
progress on a monthly basis. Many of the recommendations require 
further evaluation, and to that end, teams are being formed to 
determine appropriate actions and schedules. Likewise, many 
recommendations will need to be explored further through consultations 
with State and Tribal officials, and other organizations before they 
can be adequately implemented. We have developed a tracking system and 
have been and will continue to hold regular meetings to assess progress 
on the implementation of each action item.
    Examples of the major focus areas contained in our Joint Action 
Plan include the following:
  --Ensuring collection of sufficient data to make certain that 
        royalties are being paid on the correct volume of oil and gas 
        from Federal and Indian lands.
  --Improving the coordination, collaboration, communication, and 
        information sharing between BLM, MMS, and BIA.
  --Requiring more reporting of data electronically and ensuring that 
        bureaus have easy access to each other's systems.
  --Implementing a risk-based compliance strategy and determining the 
        extent to which a more flexible approach to audits, similar to 
        that used by the IRS, is feasible.
  --Ensuring the RIK program has the right personnel with the right 
        skills to get the job done.
  --Ensuring that all staff receive ethics training, including training 
        focusing on public-private sector interactions.
  --Ensuring that we have sufficient staff to support the Department's 
        onshore and offshore royalty management activities.
    Secretary Kempthorne and I are grateful to the subcommittee for the 
time and energy it devoted in its review. The Department is committed 
to working with our stakeholders to implement the recommendations 
contained in the report. We agree with the statement of the 
subcommittee that implementing the recommendations in this report will 
greatly strengthen the management of the program, will restore public 
confidence, and will ensure maximum value for the U.S. taxpayer.
                               conclusion
    I am pleased with the results of our efforts thus far, but 
recognize that there is much more work to be done. MMS will continue to 
review and improve its royalty program. I have every confidence that 
MMS will successfully implement the Subcommittee on Royalty 
Management's recommendations which will assist MMS in ensuring that the 
American people receive a fair return from the important public 
resources the Department manages. I welcome your input on all of these 
initiatives, and we look forward to working with you. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Feinstein. Mr. Luthi, I know you made an effort to 
be here under trying circumstances. I want you to know it is 
very much appreciated. I think the subcommittee knows Mr. Luthi 
is the Director of the Minerals Management Service, so we're 
very pleased to have you here. Thank you.
STATEMENT OF RANDALL LUTHI, DIRECTOR, MINERALS 
            MANAGEMENT SERVICE, DEPARTMENT OF THE 
            INTERIOR
    Mr. Luthi. Thank you, Madam Chairman, and Senator Allard, 
and Senator Bennett. I am a native of Wyoming, an old 
legislator from Wyoming, and it's nice to have neighbors. I 
think--we'll see before the morning is over. I appreciate the 
opportunity to be here.
    I've just passed the 7-month mark as the Director of MMS. 
You have your eyes opened as to what you read in the press. My 
predecessor, Johnnie Burton, was also from Wyoming. I knew her 
to some degree. I wished her well, and frankly, wished she was 
still Director of MMS.
    Senator Feinstein. That means the honeymoon is over.
    Mr. Luthi. The honeymoon is over, I fear. But one of the 
first things I did was try and get out and visit our people in 
the field. We have several regional offices, district offices, 
and I've just about completed that. In fact, last week I was in 
our Farmington, New Mexico office, which serves the Indian 
country very well in the Four Corners area.

                   ROYALTY POLICY SUBCOMMITTEE REPORT

    I agree with the report that this subcommittee came up 
with. I believe we have the best people we can find to work on 
royalty management. I believe they're dedicated to it. I 
believe they want to do the right thing. That's what I've 
found, and that's what I'm here to do, to try and make sure 
that they have the tools to do the right thing.
    As you have mentioned, we do collect a lot of money. I 
think whenever you collect money, there is always the scrutiny 
that, ``Maybe you could collect more money.'' As I said, I'm a 
legislator. I know what it's like when that check comes from 
the Federal Government. We always want to have more. But 
there's always ways we can improve the way we collect money, 
the way to improve the way we do business.
    To get to the report's recommendations, as you've mentioned 
there are over 100. In fact, there are 110 recommendations. 
Most of them involve MMS, but they also involve the Bureau of 
Land Management and the Bureau of Indian Affairs, as well.
    As of February 11, 16 of the 110 recommendations are 
already complete. That's a good start. But frankly, as you 
might guess, Madam Chairman, those are the easy ones. Those are 
the ones that we largely had underway while the report was 
ongoing, and therefore, we were able to wrap them up in a 
hurry.
    Right now, 29 are currently in the process of being 
implemented. Those are ones that are requiring coordination 
between BLM and MMS. When you're in an agency for awhile, we 
get somewhat in our stove-piped bureaucracy, and that's one 
thing the subcommittee did so well to point out, ``You have to 
open up. Make sure those communication lines are open between 
the various state agencies.''
    For example, the BLM gives us information about a lease. 
Based on that information is how we collect the royalties. The 
same is true of information from the BIA. We collect the money 
and we distribute the money. Often, particularly on the area of 
Indian allotees, we may have a lease that may have 30 or 40 
different recipients, based upon the age of the lease and 
what's been done within that particular lease, to make sure we 
give that money to. We need to get it to them accurately, and 
we need to get them to them as quickly as possible.
    What we've done is developed a Joint Action Plan. It 
involves all three Bureaus. The heads of all three Bureaus are 
involved, because we want to make sure this is completed upon 
our watch and we feel strongly about it. We have points of 
contact within every Bureau. We are monitoring it on a monthly 
basis, and we believe that we are going to be able to proceed 
and implement many of those evaluations.
    Some of those recommendations, of course, we're going to 
talk about. Will they work? How do we make them work? A few of 
them could involve legislation. In that case, we wanted to take 
time and make sure we work closely with the Members of Congress 
to see if that's a good idea from your point, as well.
    We've developed a tracking system. I've had two meetings on 
this since February 11, and it's interesting. It's exciting. 
I'd say it's exciting to have people call in or be at the 
meetings and say, ``This is what we've got done. This is how 
we're going to do it. This is what we can do.''
    Basically, the recommendations focused in on a few areas, 
and I think they make sense, and it's to assure the accuracy of 
the process, assure the communications of the process. It also 
asks to bring us into the modern world of technology. A lot of 
our reports have been, and some still are, largely on paper, 
and only on paper. In some instance, we've been collecting 
checks, which is almost unheard of in today's world, with 
electronic transfer of funds available now.
    So what we will do is eventually--and we're almost there in 
many areas--have a better electronic system that, as reports 
come in, they will be better identified, if there could be 
errors, and we can deal directly with the companies, possibly 
as an electronic method. That's one of the things that they 
recommended.
    The other area was the RIK, which we are moving to assure 
that we're getting the value that's necessary for that oil and 
gas, and that we're doing that program as efficiently as 
possible.
    Just to sum up, Madam Chairman, RIK's actually been a very 
positive thing. We actually bring more money in than we do when 
we collect money from the Royalty in Value Program. But it's 
also a program that we need to keep an eye on, because it's a 
little different for government to be in that business.
    With that, as the Assistant Secretary just nudged me, and 
reminded me that old politicians seldom can keep their comments 
under 5 minutes. But I am available for questions and would be 
glad to answer them.
    Senator Feinstein. Well, thank you very much, and you both 
did very well. It's appreciated.

                            1998/1999 LEASES

    Mr. Allred, you will recall that I proposed legislation 
last year that would have required all companies that hold oil 
and gas leases without the requirement to pay royalties to 
either start paying voluntarily or be blocked from future 
leases.
    I came within one vote of having that passed on the 
Appropriations Committee. You testified to this subcommittee 
last year that the Interior Department was opposed to that 
requirement. You told us that you were in the process of 
negotiating with the 39 companies, and that you'd already 
gotten six holding the 1998/1999 Deep Water leases to 
voluntarily pay royalties.
    You have, in your opening comments, mentioned that no 
others have come forward and you didn't believe, or you don't 
believe, that others will come forward until the litigation is 
settled.
    You indicated that you estimate that about $1.3 billion has 
been lost--or foregone, as you put it--by the end of 2007, and 
that that figure could grow to $10 billion by the time the 
leases expire.
    Now, you also, I think--and this is what I wanted to clear 
up--mentioned that the Kerr-McGee or the Anadarko suit does not 
really go to your ability to charge royalties, if I understood 
you correctly. That some $20 billion is at stake in this case. 
You've mentioned that the intent to file an appeal has been 
made. This Senator believes that it is extraordinarily 
important that that appeal be carried out.
    I also believe that the American people believe that 
royalty payments are appropriate, considering the nature of the 
waters and the lands. I guess what I want you to know is that I 
intend to persevere, and hopefully you do, as well. If I don't 
win this year, there will be next year. If I don't win next 
year, there'll be the year after.

              ROYALTY POLICY SUBCOMMITTEE RECOMMENDATIONS

    But I think that this is, to the extent that I've seen it, 
one of the largest sources of revenue for the Federal 
Government at a time when all these programs are really 
stressed for dollars. Now, my question really goes to asking 
you your Department's response on one of the recommendations of 
the Kerrey-Garn Commission, and that concerns the 30 percent of 
offshore natural gas royalties paid at the wellhead, 70 percent 
paid at the gas plant. MMS relies on the gas plant's efficiency 
data to determine these royalties. But the report recommends 
that MMS should establish a prioritized gas plant compliance 
review or audit schedule to examine gas plant efficiency. Will 
you follow that recommendation?
    Mr. Allred. Madam Chairman, yes, we do. As you can imagine, 
the gas plants handle a lot more material than just that which 
we produce--these are gas plants on lines that handle all of 
the gas within the United States.
    But it is our intention--and Mr. Luthi perhaps can talk 
more about it--to try to do that. That also relates to our 
Risk-Based Audit Program that we're implementing.
    Senator Feinstein. So the answer is ``yes.''
    Mr. Allred. Yes. The answer is ``yes.''
    Senator Feinstein. All right. Let me go on. The report 
states on page 20 that, ``MMS and BLM do not consistently 
request gas analysis reports to verify Btu values that are 
reported by oil and gas operators.''
    If these Bureaus are not verifying production, how can we 
be sure that the operators are paying the royalties that are 
due? What do you intend to do about it?
    Mr. Allred. Madam Chairman, again, I'll refer to what 
Director Luthi is doing. But when we talk about the production, 
it's not of the quantity. It is of the quality of the gas. We 
need to do more of that. This is just one of the examples of 
where we need to fill in the kinds of things that we audit.
    Senator Feinstein. So if we follow up next year, you will 
have progress.

                           AUTOMATED BILLING

    The report also says, on page 25, that ``MMS computer 
systems are unable to automatically import volume statements 
from Federal onshore and offshore Gulf of Mexico gas 
producers.''
    Why is MMS still using manual data reporting with all the 
room for error that that includes?
    Mr. Allred. Madam Chairman, I wish we had all of our 
systems up to what I think is state of the art. We're trying to 
get there, but it is a long process. As you have, I'm sure, 
observed in several budget requests, it requires dollars to do 
that. This committee has given us resources to do that, and 
we're trying to do that as quickly as possible.
    With regard to this specific implementation of this 
specific recommendation, it's our intent to try to do all of 
these.
    Senator Feinstein. All right. Let me make clear that you 
have never made a request for funds of this subcommittee to 
carry out this mission. I've just been informed by the chief 
clerk. So I view it as an extraordinarily important mission.
    Mr. Allred. Madam Chairman, we have both money in the 2008 
and the 2009 request. It's characterized as to upgrade, for 
example, our ability to----
    Senator Allard. Madam Chairman, may I add to this 
discussion at this point?
    Senator Feinstein. Certainly, go ahead.
    Senator Allard. We have information that in the 2007/2009 
budget, there was $1.7 million.
    Senator Feinstein. The majority says that's not right.
    Senator Allard. Oh, it's not enough.
    Senator Feinstein. So what we need to do----
    Senator Allard. It's not enough.
    Senator Feinstein. Or it's not enough.
    Senator Allard. Oh, it's not enough. Okay.
    Senator Feinstein. Well, then I think we need to perhaps 
work together to try to get a fixed amount. If there is--
because this should be a priority.
    Mr. Allred. Yes, we agree.
    Senator Feinstein. If you agree, both sides will work with 
you to try to get it done, so that funding is adequate, to the 
extent we can.
    Mr. Allred. Madam Chairman, we would appreciate that. I 
have a copy, which I'll be glad to give you, of what's in the 
2008 and the 2009 budget request.
    Senator Feinstein. But is it true that this is the first 
time that you've asked for that money?
    Mr. Allred. No. Madam Chairman, in the 2008 increases, 
there's $1.4 million for interactive payment reconciliation of 
billing, which is part of what you're talking about. There is 
$940,000 for adjustment line monitoring initiative, which again 
is part of what you're talking about. Now, that is not 
sufficient to do everything we ought to be doing.
    In the 2009 budget request, there are increases of $1.7 
million for the improved automated interest billing, and $2 
million to implement compliance and audit recommendations of 
this case, the OIG, but those are also some of the 
recommendations that were in the subcommittee report.
    Senator Feinstein. So is it fair to say you have $3.7 
million now, on hand, to carry this out?
    Mr. Allred. Madam Chairman, in the 2009 request it's an 
increase of $3.7 million.
    Senator Feinstein. Well, if----
    Mr. Allred. In the 2008 increases that you've given us, 
it's about $2.3 million for improved MRM systems.
    Senator Feinstein. So the money on hand is how much?
    Mr. Allred. In the 2008 approved budget, it would be about 
$203 million--$2.3 million, excuse me.
    Senator Feinstein. $2.3 million?
    Mr. Allred. $2.3 million.
    Senator Feinstein. Okay. All right. So we know where we 
are. Thank you very much. Senator Allard?

                              LEASE SALES

    Senator Allard. You bet. Thank you, Madam Chairman. I want 
to follow up a little bit on the 1998/1999 leases, and I admire 
your tenacity, Madam Chairman, on this issue. But I do want to 
get one thing cleared up.
    I'm told that in the bid, in October 3, 2007, on the Gulf 
of Mexico lease sale, that there were a number of companies 
that participated that would not be able to participate if we 
had the 1998/1999 group of companies embargoed, so they 
couldn't bid on future sales.
    In that sale alone, the Government received $2.9 billion in 
high bids. I know that you testified at previous hearings of 
the potential loss to the Government if a producer were to 
challenge the statute and the Court were to enjoin future 
leases.
    My question to you, do you have an estimate of what the 
Government could lose in reduced bonuses if the companies 
subject to the lease bar were not able to participate in future 
lease sales?
    Mr. Allred. Mr. Chairman, Senator Allard, I don't have an 
estimate of that, but it would be a large amount of money. Even 
in the Chukchi sale, we were surprised by what the bonus bids 
here just last week. We estimated originally that it might be 
about less than $100 million and it ended up being two point--
--
    Senator Feinstein. Six.
    Senator Allard. Six.
    Mr. Allred [continuing]. $2.6 billion, just in the bonus 
bids.
    Senator Allard. Can you get us some kind of an estimate for 
the subcommittee?
    Mr. Allred. Sir, we will try. We'll get you an estimate. I 
don't know how good it will be.
    Senator Feinstein. The names of the companies, please.
    Senator Allard. Yeah, that's the next question I was going 
to have. If we could have the names of the companies, of the 
six companies that are participating in the sale, I think would 
be helpful on that.
    Senator Feinstein. Yes. But the six companies that you 
refer to here----
    Senator Allard. Yeah. Well----
    Senator Feinstein [continuing]. That won't bid, I would be 
curious----
    Senator Allard. Oh, okay. Yeah. Okay. That's another six 
companies.
    Senator Feinstein. Yes.
    [The information follows:]
                     Losses From Barring Companies
    Although there is considerable uncertainty in trying to predict 
bidder behavior, as evidenced by the unexpectedly large bonus bids 
received in recent lease sales, the government's losses from barring 
certain companies from bidding in future sales could be substantial. If 
realized, the proportional losses would likely vary through time and 
across OCS regions.
    The composition of the barred companies will change over the next 
few years as leases expire upon reaching the end of their 10-year 
primary terms in 2008 and 2009. A recent count identified 44 companies, 
as listed on the original enclosure, which could be subject to being 
barred. We estimate this number would be reduced to about 28 companies 
by the time all of the 1998 and 1999 leases reach the end of their 
primary terms, around the beginning of fiscal year 2010, leaving only 
leases in development or in production still active.
    We analyzed the results of central Gulf of Mexico Sale 205, held in 
October, 2007, under two scenarios to obtain a future baseline. The 
first scenario assumed that the 44 companies noted above were barred 
from bidding, while the second scenario assumed that the reduced set of 
28 companies was barred. In both cases, we stipulated that: (1) bidding 
by other companies would not have changed in the presence of certain 
companies being barred, (2) in the case of a multiple bid tract with 
the high bid submitted by a barred company, the revised hypothetical 
high bid would be the next highest bid submitted by a non-barred 
company, and (3) in the case of a joint high bid involving one or more 
barred companies, the high winning bid would have remained the same as 
long as the barred companies' share of the joint bid was less than 50 
percent; otherwise, the bid would not have been made.
    We found that under these assumptions, the sum of the resulting 
high bids in Sale 205 would have fallen by 51.5 percent if the 44 
companies had been barred and by 29.6 percent if the identified reduced 
set of 28 companies had been barred. We then applied the proportional 
losses in high bids for the 44 company case to the next three Gulf of 
Mexico sales beginning with the western Gulf of Mexico sale in August, 
2008, and applied the proportional losses in high bids for the 28 
company case to the subsequent six Gulf of Mexico sales ending with the 
western Gulf of Mexico sale in August, 2012.
    We previously estimated for the President's budget that absent any 
Congressional action to bar companies, the sum of the high bids in 
these nine sales would amount to $2.7 billion. Our analysis showed that 
in the presence of Congressional action barring certain companies from 
bidding in future sales, the sum of the high bids would be reduced by 
$1.1 billion, equal to 40 percent.
    In contrast, barring the same set of companies from offshore sales 
in Alaska would appear to have a far more modest effect on bidding 
results. For example, in the Chukchi sale 193, which had high bids of 
$2.6 billion, the direct losses from barring the same set of 44 
companies would only have been $30 million, or slightly more than one 
percent of the high bids.
    It is reasonable to think that the effects on bonus bids from 
barring companies could be even greater than estimated here. For one 
thing, the remaining bidders may well lower their bids in the 
expectation of less competition. For another, when we analyze the four 
Gulf of Mexico sales held prior to Sale 205 in the scenario where 44 
companies are barred, the results show losses of about 60 percent, 
instead of losses around 50 percent (actually, 51.5 percent) that we 
found in Sale 205. Finally, the specification of the 28 company case 
reflects a limited assessment of leases that will be held beyond their 
primary terms--more leases will likely be held, but their identity and 
the lease owners cannot be currently determined. So, for those reasons, 
we believe the $1 billion loss over the next 5 years calculated here is 
a conservative estimate of the adverse fiscal effects from 
Congressional restrictions on bidding and competition in future OCS 
sales.
          Status of 1998/1999 Royalty Rate Relief Negotiations
                 companies with signed agreements \1\ 
---------------------------------------------------------------------------
    \1\ Agreement signed December 2006.
---------------------------------------------------------------------------
    BP Exploration & Production Inc.; Conoco Phillips & Burlington 
Resources Offshore, Inc.; Marathon; ShelI; Walter Hydrocarbons; and 
Walter Oil & Gas.
                companies without signed agreements \2\
---------------------------------------------------------------------------
    \2\ List of companies holding interests in subject leases as of 
January 2008.
---------------------------------------------------------------------------
    Anadarko-Kerr-McGee Oil & Gas; ATP Oil & Gas Corporation; BHP 
Billiton; Callon Petroleum Operating Company; Challenger Minerals Inc.; 
Chevron U.S.A./Union Oil; Cobalt International Energy, L.P.; Devon 
Energy Production Company; El Paso E&P Company, L.P.; Energy Partners, 
Ltd; Energy Resource Technology; Energy XXI GOM, LLC; Eni Petroleum; 
EOG Resources, Inc.; Explore Louisiana LLC; Exxon Mobil Corporation; 
HE&D Offshore, L.P.; Hess Corporation; LLOG Exploration Offshore; 
Maersk Oil Gulf of Mexico Two LLC; Mariner Energy, Inc.; Marubeni Oil & 
Gas (USA) Inc.; Maxus (U.S.) Exploration; MitEnergy Upstream LLC; 
Murphy Exploration & Production; Newfield; Nexen Petroleum Offshore; 
Nippon Oil Exploration; Noble Drilling Exploration; Noble Energy, Inc.; 
OXY USA Inc.; PALACE EXPLORATION; Petrobras America Inc.; Plains 
Exploration & Production; Red Willow Offshore, LLC; Repsol E&P USA 
Inc.; Samson Offshore Company; Statoil/Hydro; Stephens Production 
Company, LLC; Tana Exploration Company LLC; Teikoku Oil (North America) 
Co., Ltd.; TOTAL E&P USA, INC.; W&T Offshore, Inc.; and Woodside Energy 
(USA) Inc.

                         KERR-MC GEE LITIGATION

    Senator Allard. Okay, very good. All right. That'd be good.
    All right, now, while this case is being appealed, and this 
is the--I'm going to go to the Kerr-McGee litigation now--while 
this case is being appealed is there anything the Department 
can do to encourage more companies to participate to the table 
and pay royalties on the 1998/1999 leases?
    Mr. Allred. Mr. Chairman, Senator Allard, there are in-
force contracts that we have written, and we are doing that 
against those companies who did sign contracts that might be 
affected by the Kerr-McGee.
    But in the case of the 1998/1999 lease issue, when those 
contracts were signed, they did not include that provision. So 
we have little ability to enforce against anyone with that 
issue. We continue to talk with these people, but it's not very 
serious. They're not serious about it until such time as, I 
think, as this issue is resolved by both the Courts and, to 
some extent, by Congress.
    Senator Allard. So on the Kerr-McGee litigation, the 
companies that are holding leases in 1996, 1997, and 2000, what 
is happening to them? Have they indicated they're not going to 
continue to pay?
    Mr. Allred. Madam Chairman, Senator Allard, for the most 
part, they are paying. The ones that are involved in the 
specific litigation, that have challenged the rulings--and 
that's just a few of them--I don't believe are paying, but we 
are enforcing against them.
    Now, we probably won't be able to resolve that until the 
underlying case is resolved.
    Senator Allard. Okay. As you know, there have been 
legislative efforts to force those oil companies to negotiate 
their contracts. Can you give us a better idea of what the 
impact of any future legislators would likely have on those, 
while the Kerr-McGee case remains on appeal?
    Mr. Allred. Madam Chairman, Senator Allard, we're not 
opposed to congressional action at all. As I cautioned the 
committee, and have done so with others, is we have to be 
careful that there are not unintended consequences to what we 
do. I think we have to be good business partners. There are 
some contract sanctity questions that are extremely important.
    Because if we don't, they will be litigated. If these sales 
are in any way impeded, then you face the loss to the Federal 
Treasury of not only the royalty revenues, but also the bonus 
bids, which is huge. More importantly, if we don't go forward, 
you'll see a big impact upon our energy security.
    Senator Allard. Now, you still have to make a final 
decision whether you're going to appeal this decision. Is that 
correct?
    Mr. Allred. Senator Allard, I believe we have to appeal it. 
The Department of Justice has filed a Notice of Appeal. The 
Department of the Interior can't make that final decision. It's 
made by the Solicitor General of the Department of Justice. I 
think they clearly understand the need to appeal this.
    Senator Allard. Okay. So let's just suppose that there is 
an effort to appeal, and then the United States loses that 
appeal. What sort of congressional remedies do you see in this 
particular case? Are there any remedies that the Government can 
take? This is on Kerr-McGee litigation.
    Mr. Allred. Senator, probably--I'm not sure I could 
identify a path forward, because I don't know what the Courts 
are going to say and I would not expect that the Courts are 
going to be black or white. They're going to have some dictum 
that will give us guidance as to what could be done or could 
not be done.
    As much as I dislike being in this hiatus, as you can 
probably tell, I don't like not being able to do things. I'm 
not sure that we know what to do until the Courts finally make 
a decision. What I'm hoping, obviously, is the Courts say that 
those two provisions have to be read together, in which case 
the contracts that we signed are enforceable.
    Senator Allard. Okay. Now, I want to wrap this up, Madam 
Chairman. On the 1998/1999 leases, those six companies we had 
there, can you share those names of those companies with us 
that had those contracts?
    Mr. Allred. Yes. Madam Chairman, Senator, the companies 
that signed were BP Exploration and Production, Conoco Phillips 
and Burlington Resources Offshore, Marathon, Shell, Walter 
Hydrocarbons, and Walter Oil & Gas.
    Then, I also have--I won't read them--but I also have the 
list of all of the companies that did not sign, and many of 
those companies are current bidders in these offshore leases.
    Senator Allard. We'd appreciate if you'd share that.
    Senator Feinstein. Yes. We could have a list sent to the 
subcommittee----
    Senator Allard. Yeah.
    Senator Feinstein [continuing]. Of all that. That would 
be----
    Senator Allard. Yeah.
    [The information follows:]
          Status of 1998/1999 Royalty Rate Relief Negotiations
                 companies with signed agreements \1\ 
---------------------------------------------------------------------------
    \1\ Agreement signed December 2006.
---------------------------------------------------------------------------
    BP Exploration & Production Inc.; Conoco Phillips & Burlington 
Resources Offshore, Inc.; Marathon; ShelI; Walter Hydrocarbons; and 
Walter Oil & Gas.
                companies without signed agreements \2\
---------------------------------------------------------------------------
    \2\ List of companies holding interests in subject leases as of 
January 2008.
---------------------------------------------------------------------------
    Anadarko-Kerr-McGee Oil & Gas; ATP Oil & Gas Corporation; BHP 
Billiton; Callon Petroleum Operating Company; Challenger Minerals Inc.; 
Chevron U.S.A./Union Oil; Cobalt International Energy, L.P.; Devon 
Energy Production Company; El Paso E&P Company, L.P.; Energy Partners, 
Ltd; Energy Resource Technology; Energy XXI GOM, LLC; Eni Petroleum; 
EOG Resources, Inc.; Explore Louisiana LLC; Exxon Mobil Corporation; 
HE&D Offshore, L.P.; Hess Corporation; LLOG Exploration Offshore; 
Maersk Oil Gulf of Mexico Two LLC; Mariner Energy, Inc.; Marubeni Oil & 
Gas (USA) Inc.; Maxus (U.S.) Exploration; MitEnergy Upstream LLC; 
Murphy Exploration & Production; Newfield; Nexen Petroleum Offshore; 
Nippon Oil Exploration; Noble Drilling Exploration; Noble Energy, Inc.; 
OXY USA Inc.; PALACE EXPLORATION; Petrobras America Inc.; Plains 
Exploration & Production; Red Willow Offshore, LLC; Repsol E&P USA 
Inc.; Samson Offshore Company; Statoil/Hydro; Stephens Production 
Company, LLC; Tana Exploration Company LLC; Teikoku Oil (North America) 
Co., Ltd.; TOTAL E&P USA, INC.; W&T Offshore, Inc.; and Woodside Energy 
(USA) Inc.

    Senator Feinstein. Thank you very much, Senator. The 
rollcall vote has just begun. It will go on for 20 minutes. I 
think we should give Senator Bennett an opportunity, and then 
wrap this up in, say, about----
    Senator Bennett. I will----
    Senator Feinstein [continuing]. 10 minutes.

                             PROCESSING FEE

    Senator Bennett. I will be very quick, Madam Chairman. You 
know, the 2009 budget calls for a $4,150 processing fee for 
each new oil and gas drilling permit application. That sounds 
fairly benign, except that the BLM already passes on to the 
industry the costs of archeological surveys, wildlife studies, 
and preparing third-party NEPA documents.
    So this is an additional cost on--not a new cost in a 
vacuum, but an additional cost on a pile of costs that are 
already there. The budget request directs that the $4,150 fee 
go into ``service charges, deposits, and forfeitures account.''
    My question is how these funds are going to be used. Will 
they be used to increase staff to meet the workloads? In which 
case, I think some people will say, ``Well, as big a problem as 
it is to get things moving more rapidly, we're willing to pay 
it.'' Or will they simply go to the General Fund of the 
Treasury?
    Mr. Allred. If I could, Madam Chairman, Senator Bennett, if 
I could just ask the question of my budget people. I'm not 
familiar with that.
    Senator Bennett. You can supply that for the record, if you 
don't have it currently here.
    Mr. Allred. Okay. Just a quick note she passed me, is they 
do support the processing of the APDs, and I know that within 
the BLM's budget there are some increases in the leasing 
program.
    Senator Bennett. You understand how strongly we hope that 
that is where it goes. Thank you, Madam Chairman.
    Mr. Allred. I might say that we'll shortly deliver to you a 
progress report on the pilot offices, and very happily, I think 
it shows a lot of progress.

                 ROYALTY POLICY SUBCOMMITTEE TRUST FUND

    Senator Feinstein. Thank you very much. If I may quickly, 
the report, as you know, has two recommendations that are of 
particular interest, because they would require legislative 
action.
    One of those is to establish a trust fund for royalty and 
rental receipts, which could earn interest to help offset the 
cost of the Royalty Program. Would you support that Mr. Allred?
    Mr. Allred. Madam Chairman, I would say that that's 
something that we've got to look at. There are a number of 
these items that we've really got to look to see what the 
impact of it is. Not only of the Department of the Interior and 
MMS, but----
    Senator Feinstein. Could you do so----
    Mr. Allred. We will do so.

                    DEBT COLLECTION IMPROVEMENT ACT

    Senator Feinstein [continuing]. And let us know on that 
point? The other one would be the compliance with the Debt 
Collection Improvement Act of 1996. Apparently, the Inspector 
General reported in 2006 that MMS was not in compliance with 
the act, because the agency failed to identify delinquent 
receivables to the Treasury in a timely manner.
    That's of great concern to me. So I would like some 
assurances that the agency is now in compliance with the Law in 
this regard.
    Mr. Luthi. Madam Chairman, if I might--and I apologize for 
sitting here probably more silent than I should, but I wanted 
to take advantage of the honeymoon.
    We are in compliance. If memory serves me correctly, that's 
a pretty short timeframe when once we know the debt has not 
been paid and when we report it, too. I believe it's 90 days. 
And that's one of the things that we have improved through the 
automated process, is being able to identify those earlier and 
turn those over to the Department of the Treasury.
    The 2006 report? I will verify this, but my memory is, 
since I've looked into this, is we are compliant with that.
    Senator Feinstein. If you would, it is the Inspector 
General's report of 2006. If you would please respond to us in 
writing, I would appreciate that very much.
    Mr. Luthi. Absolutely, Madam Chairman.
    [The information follows:]
                    Closure of Audit Recommendations
    As of June 30, 2007, the Minerals Management Service (MMS) has 
implemented Noncompliance C, relating to Debt Referral to Treasury to 
close an audit recommendation. This item relates to the fiscal year 
2006 and fiscal year 2005 audits of the MMS financial statements 
conducted by KPMG and coordinated by the Office of the Inspector 
General (OIG).
    A summary of the finding, recommendation, and the MMS 
implementation follow:
   noncompliance c, finding: debt collection improvement act of 1996
    The MMS did not properly identify delinquent receivables for 
referral to the U.S. Department of the Treasury (Treasury) for 
collection or offset in a timely manner.
                             recommendation
    Establish a process to ensure eligible receivables are referred to 
the Treasury in a timely manner.
                    implementation of recommendation
    To address the recommendation, the MMS established a process 
described as follows:
  --The MMS started mailing Statements of Account (SOA) to all payors. 
        These SOAs listed all open items (royalties, payments, 
        invoices) that were on record for the payor and instructed the 
        payors to cooperate with MMS to clear these open items. SOAs 
        were mailed in April 2006, October 2006, February 2007, and 
        June 2007. The plan is to try to send out SOAs three-four times 
        a year and eventually make them available on-line so that 
        industry could view open items daily.
  --MRM Financial Services employees have been notified each time SOAs 
        will be issued, are given regular progress reports, can see 
        daily statistics in the system, and have performance standards 
        that reflect the need to reduce open balances. By attempting to 
        become current with open items, fewer open items are becoming 
        old enough to have to be referred to Treasury.
  --Part of the SOA effort is a daily status report that is available 
        to all employees. Employees were informed of the new reports, 
        have requested and received additional reports to help them in 
        their work, and they use these reports daily to track their 
        progress. These reports provide a great deal of data including 
        the open items by each employee along with the open items 
        greater than 120 days old and 180 days old. Employees have been 
        repeatedly reminded of the need to reduce open items and refer 
        all debt to Treasury that can not be resolved.
  --Debt Collection steps were streamlined in order to meet the 180 day 
        deadline. Timelines were shortened--the demand to payor letters 
        now go out 15 or 35 days after the receipt of a royalty 
        document or creation of an invoice, respectively; Federal 
        demands to lessees happens 15 days after that; thus the 
        referral to Office of Enforcement (OE) is done early enough to 
        allow OE time to make the referral to Treasury.
  --The MMS continually monitors the progress of this effort and makes 
        adjustments as needed. A recent adjustment was a change to have 
        Supervisors and Managers of Financial Management (FM) certify 
        that debt is ready for referral to Treasury, which eliminated 
        the need for the OE to do several verifications on their own. 
        Since OE is the group that does the actual referral to 
        Treasury, this change speeds up their process and thus helps 
        meet the 180 day timeframe.

    Senator Feinstein. Thank you. Senator, do you have any 
other questions?
    Senator Allard. I have one request, I guess, Madam 
Chairman. We've run out of time here. I have a number of 
questions I'd like to pursue, and I'd like to submit those----
    Senator Feinstein. In writing.
    Senator Allard [contining]. In writing.
    Senator Feinstein. I will, as well. Good.
    Senator Allard. You will, too. Okay. Then, the time 
expected back in response in that, ordinarily in this 
subcommittee, is that--what time do we give those to respond 
back? Ten days?
    Senator Feinstein. Maximum 3 weeks. That's a lot of time.
    Senator Allard. Yeah. I was thinking, the other 
subcommittee had 10, but 3 weeks is, I would think, would be 
enough for you.
    Mr. Allred. It's a pleasure to be here.
    Mr. Luthi. Steve and I thought about sitting here and 
asking each other questions, since you're leaving. We think we 
could answer them, but we probably won't.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Feinstein. In any event, we will submit some 
questions to you in writing. Once again, let me say thank you 
very much for making the effort this morning. It really is 
appreciated. Thank you.
    [The following questions were not asked at the hearing, but 
were subcommittee to the Department for response subsequent to 
the hearing:]
            Questions Submitted by Senator Dianne Feinstein
                     1998-1999 deepwater ocs leases
    Question. It is disappointing that all but six of the companies 
holding leases without price thresholds have declined to pay royalties 
to the United States for the privilege of drilling for oil and gas in 
U.S. waters. I believe these companies are fully aware that their 
profits are costing the United States $10 billion and that they should 
come forward on a voluntary basis. Since the companies are not 
volunteering to do the right thing, I am considering a provision for 
the 2009 appropriation that will bar companies holding the 1998-1999 
leases from bidding on future lease sales unless they pay royalties.
    Mr. Allred you have stated that there likely would be litigation 
brought by these companies that could result in a temporary court-
ordered injunction against lease sales. I find this scenario to be 
somewhat implausible. This would be like killing the goose that laid 
the golden egg.
    Has the Department considered the possibility that preventing those 
companies from bidding on future leases might not make litigation more 
likely and might bring them to the table instead?
    Answer. While the proposal could cause some companies to come to 
the table, it would only take one company to file a lawsuit. We believe 
there would be such a challenge.
    Question. Wouldn't it be in a company's own best long-term interest 
to pay the royalties on the 1998-1999 leases instead of losing out on 
the chance for future leases?
    Answer. Companies may choose to challenge the provision in court, 
and if they prevail, they would be able to retain the money and acquire 
new leases.
    Question. The Kerrey-Garn mineral revenue collection report 
included the recommendation that, ``The Department of the Interior 
should continue its efforts to pursue voluntary royalty payment 
agreements with holders of the 1998 and 1999 leases without price 
thresholds.'' Mr. Allred, you have testified that the lease-holding 
companies are waiting for the outcome of the Kerr-McGee case. You 
further testified that the Department expects the District Court 
decision to be overturned.
    How many companies do you expect to begin paying royalties 
voluntarily when the court rules as you expect it to?
    Answer. We remain open to discussing resolution of this issue with 
the companies that hold Deep Water Royalty Relief Act leases from sales 
held in 1998 and 1999. Given the impact that the District Court's 
ruling on Kerr-McGee could have on the ability of the government to 
impose price thresholds for leases from 1996 through 2000, it is not 
surprising that companies are waiting to see how this is resolved 
before continuing any negotiations on the 1998 and 1999 leases. Indeed, 
if this ruling stands the price-threshold issue for the 1998/1999 
leases becomes moot. It seems doubtful that any additional lessees will 
agree to price thresholds until the Kerr-McGee case is finally 
resolved.
    Question. Are you prepared to sign agreements with those companies 
promptly after the Kerr-McGee case is decided?
    Answer. We are prepared to sign agreements with any company that is 
willing to do so.
                         royalty revenue report
    Question. I would like to follow up on some of recommendations from 
the Kerrey-Garn Report.
    As you mentioned earlier, the MMS budgets in 2008 and 2009 included 
requests for funds to modernize and automate the bureau's reporting and 
verification systems. I support this effort and want assurances that 
the Department is getting these systems in place and online 
expeditiously.
    Does the 2009 budget request include all of the funding necessary 
to complete these systems?
    Answer. Funding requested in the fiscal year 2009 budget request 
addresses two modules of the Minerals Revenue Management Support System 
(MRMSS), which supports MRM collection and compliance business 
processes. The budget request includes $1.7 million to fully fund 
enhancements related the Automated Interest Billing module. It also 
provides $2.0 million to fully fund development and implement a risk-
based automated compliance tool and add four FTE in the audit program.
    Implemented in fiscal year 2002, the MRMSS will continue to require 
ongoing enhancements and upgrades throughout its life cycle to expand 
capabilities as technologies change, ensure its greatest efficiency, 
and address new and changing business requirements.
    Question. Will you please provide for the record a table that shows 
the expected annual costs to develop and implement these systems? 
Please include any past costs and future cost estimates.
    Answer. As stated above, the MRMSS is a comprehensive information 
technology solution that supports all MRM collection, disbursement, and 
compliance business processes. The table below is included in the MRMSS 
capital planning report which is mandated by the Office of Management 
and Budget to track large information technology investments. MRMSS 
fiscal year costs from inception through fiscal year 2007 are actuals; 
fiscal year 2008 through 2013 costs represent estimates and include 
funding for the two modules requested in fiscal year 2009.

                              MINERALS REVENUE MANAGEMENT SUPPORT SYSTEM--SYSTEM DEVELOPMENT LIFECYCLE COSTS BY FISCAL YEAR
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Fiscal year
                                                                  -----------------------------------------------------------------------------   Total
                                                                   1999-2006    2007      2008      2009   2010 \1\    2011     2012     2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Planning.........................................................  .........  ........  ........  .......  ........  .......  .......  .......  ........
Acquisition......................................................     54.014     0.75      1.87      2.8   ........  .......  .......  .......    59.434
Operations & Maintenance.........................................     45.875    15.138    15.138    18.19     18.79    18.19    18.79    18.19   168.301
                                                                  --------------------------------------------------------------------------------------
      Total......................................................     99.889    15.888    17.008    20.99     18.79    18.19    18.79    18.19   227.735
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimates for fiscal year 2010 and beyond are for planning purposes only and do not represent budget decisions.

    Question. Would you please tell me specifically what you plan to do 
to enable the Minerals Management Service and the Bureau of Land 
Management to consistently verify production reported by operators?
    Answer. MMS and BLM plan to ensure the accuracy and completeness of 
production data by:
  --Eliminating the inventory of missing Oil and Gas Operating Report 
        (OGOR) exceptions by the end of 2008,
  --Improving timeliness by making 95 percent of production data 
        available within 3 months of the production month (an 
        improvement from 5 months) by the end of 2009,
  --Reconciling well data maintained by MMS to well data maintained by 
        BLM,
  --Moving from error correction to error prevention by increasing the 
        number of edits or checks, placed at our electronic reporting 
        service provider, that reject inaccurate reports submitted by 
        companies before the reports even get to MMS,
  --Increasing use of Orders and Notices of Non-compliance (NONC's) to 
        enforce compliance,
  --Exploring the possibility of the use of technology for reporting of 
        production (i.e. remote data acquisition), and
  --Continually improving communication between MMS and BLM.
    These steps will enable MMS and BLM to have accurate and timely 
data that can be used to conduct inspections or conduct other 
compliance verification steps.
    Question. The Kerrey-Garn report also recommended that: ``The 
Department of the Interior should continue to explore legislative 
options, which could address the loss of royalties without violating 
legitimately signed contracts.'' You have had almost a year to study my 
provision, which I intend to reintroduce this year, and develop other 
legislative proposals as substitutes or amendments to mine.
    How would you propose to change my amendment so that ensures 
royalties are collected without violating legitimately signed 
contracts?
    Answer. Under your proposed amendment, companies holding DWRRA 
leases without price thresholds that do not renegotiate the terms of 
their signed lease would not be able to participate in new lease sales 
1 year after the enactment of this provision. This would give lessees 
an incentive to litigate. If both the lessees and the government were 
forced to devote considerable time and resources to protracted 
litigation to resolve lessees' challenges to a new statutory provision, 
it could frustrate the goals of increasing domestic energy supply and 
raising additional revenue to the U.S. Treasury from new leasing 
activity. Any legislative proposal that is developed should mitigate 
these potential problems.
    The report recommends that the onshore RIK program be discontinued. 
The Department has been vigorously promoting the RIK program for the 
past several years.
    Question. How would discontinuation of the onshore RIK program 
impact the Department's ability to collect royalties that are due to 
the United States?
    Answer. The RPC only recommended discontinuing the onshore RIK oil 
program. MMS does not believe this will have any impact on the 
Department's ability to collect royalties that are due to the 
Government. In fact, MMS discontinued the onshore oil RIK program 
effective April 1, 2006. Existence of both the royalty-in-value (RIV) 
and RIK options presents the MMS with a unique opportunity to actively 
manage the royalty asset stream and optimize the efficiency and 
effectiveness of its royalty management process. The use of RIK is 
simply an alternate method of collecting royalties and MMS forfeits no 
rights or collection authority if RIK were no longer employed.
    Question. What is the agency's response to the recommendation to 
discontinue the onshore RIK program?
    Answer. As indicated above, MMS discontinued the onshore RIK oil 
program with the last production taken in kind at the end of March 
2006. While we believe this program met our revenue objectives during 
the period it operated, it was determined that switching the onshore 
RIK oil program to RIV (cash) collection at that time was advantageous 
due primarily to decreasing oil production levels and not performance 
of the RIK oil program. The ability to change our mode of collection 
between RIK and RIV as market conditions change--thereby ensuring a 
better return for the public--is a core feature of the MMS asset 
management program.
    Question. The report includes 110 recommendations for mineral 
revenue collection improvements. I recognize that the Department will 
need time to implement all of them, but I need to know that you are 
actively addressing the recommendations. I ask that you send quarterly 
progress reports to the Appropriations Committee so that we may monitor 
agency progress. In the short-term, it is important to know if the 
Department disagrees with any of the recommendations.
    Will you please provide for the record a list of recommendations 
that the Department either or opposes or about which it has serious 
reservations?
    Answer. We are unable at this time to provide you a list of 
recommendations that the Department opposes or has serious reservations 
regarding implementation. The Department has developed a working draft 
of a joint Action Plan to implement the Report's recommendations. The 
plan identifies the responsible Bureau, estimated timeframes for 
completion and status for each of the remaining 94 recommendations. The 
plan identifies the need for any intermediate tasks such as studies to 
determine the feasibility of implementing a particular recommendation. 
The appropriate subject matter experts will be assigned to conduct 
these feasibility studies. Once this important analysis work is 
completed, we will inform you if we have serious reservations about 
implementing any of the remaining recommendations.
    Question. The Subcommittee on Royalty Management report from 
Senators Kerrey and Garn states ``that the MMS is an effective steward 
of the Minerals Revenue Management program and that MMS employees are 
genuinely concerned with fostering continued program improvements''.
    Can you tell us about some of these improvements that MMS has made 
over the years?
    Answer. MRM achieved several key program improvements over the 
years, including:
  --Reengineered business processes and computer systems, resulting in 
        several improvements and efficiencies. One significant result 
        of reengineering was reducing the 6-year compliance cycle to a 
        3-year cycle. More timely audits correspond with ultimate 
        recipients receiving assurance sooner that all revenues due are 
        paid. During this period, MRM focused primarily on revenue 
        coverage--conducting compliance reviews on companies with the 
        highest volumes. MMS is now in the process of expanding to a 
        more dynamic risk-based compliance approach to include coverage 
        of a greater number of companies and properties.
  --Revised oil and gas valuation rules to provide greater certainty 
        and reduce administrative costs to both lessors and lessees, 
        making Federal leases more attractive for development and 
        leasing. Amended valuation rules include: Indian Gas Valuation 
        Rule, published 1999; Federal Oil Valuation Rule, published in 
        2004; Federal Gas Valuation Rule, published in 2005; and Indian 
        Oil Valuation Rule, published in 2007. These rules promoted 
        greater use of market index prices for determining value and 
        clarified what costs could, and could not be taken as 
        deductions.
  --Implemented comprehensive Audit Quality Improvement Action Plan to 
        improve MRM's compliance and audit activities and related 
        internal controls. Following implementation in 2005, an 
        independent CPA firm issued MRM a clean opinion regarding MRM 
        audit functions, with no material weaknesses and no reportable 
        conditions.
  --Redirected and retrained staff resources to build a fully-
        operational Royalty In Kind (RIK) program, resulting in reduced 
        administrative costs, reduced disputes on royalty valuation 
        and, we believe, increased revenues to the Treasury, states, 
        and special purpose funds.
  --Increased electronic reporting of royalty and production report 
        lines significantly--from 79.9 percent electronic at the 
        beginning of fiscal year 2002 to 97 percent electronic by the 
        end of fiscal year 2007--by publishing regulations requiring 
        electronic reporting and working closely with companies to 
        assist them in making the transition from paper to electronic 
        reporting. Over the same time period, we noted a substantial 
        increase in royalty reporting accuracy--from 86 percent 
        accurate in fiscal year 2002 to 96.3 percent accurate in fiscal 
        year 2007. Accurate reporting increases our timeliness in 
        disbursing funds to State, Tribal, and U.S. Treasury 
        recipients, and we have seen a corresponding increase in 
        disbursement timeliness--from 80 percent timely in fiscal year 
        2002 to 96.3 percent timely in fiscal year 2007. Timeliness is 
        defined by statute as disbursing funds by the last business day 
        of the month following the month when MMS receives the payment 
        and reporting.
  --Established a dedicated Project Management Office (PMO) to ensure 
        the appropriate establishment and tracking of MRM project 
        schedules and to facilitate management oversight of the 
        projects. MRM has proactively pursued the development of 
        critical project management expertise and now has 10 certified 
        Project Management Professionals (PMPs).
  --Initiated and completed a Statistical Reporting Project designed to 
        improve the quality and integrity of the MRM external reporting 
        process related to revenues and disbursements. It is essential 
        that MRM provide the Congress and other external customers with 
        mineral lease and revenue statistics that are meaningful and 
        responsive to their needs. The timely and accurate collection 
        and reporting of this statistical information is mission 
        critical and bears directly on the public image of our program.
  --Implemented improvements and updated procedures for MRM's 
        Alternative Dispute Resolution (ADR). The ADR Act of 1990 and 
        RSFA provide the authority for MMS to negotiate settlements of 
        mineral revenue payments without going through extensive and 
        costly adjudication and litigation processes. The MRM 
        effectively utilizes ADR to resolve certain past period 
        disputes as well as enter into agreements defining 
        methodologies to be used to calculate and pay future royalty 
        payments. Benefits include reduced time necessary to resolve 
        disputes, avoidance of costly litigation, increased certainty 
        both for past and future royalty payments, and a proper return 
        to the Government for its mineral assets.
  --MRM completed an Enterprise-Wide Risk Management initiative in 
        fiscal year 2005 and implemented a follow-up action plan to 
        mitigate risks and enhance internal controls. As part of this 
        initiative, MRM evaluated its processes against the control 
        elements and risk principles of the Council on Sponsoring 
        Organizations of the Treadway Committee, a recognized, leading 
        authority in the internal control and risk management field. 
        Additionally, in response to the annual OMB Circular A-123 
        requirements, Management's Responsibility for Internal Controls 
        and the CFO Councils Implementation Guide, MRM began in fiscal 
        year 2005 to conduct ongoing program-wide evaluations of the 
        internal controls over operations and financial reporting. 
        Based on the results of these evaluations, MMS provided 
        reasonable assurance that the internal controls over program 
        operations were suitably designed and operating effectively as 
        of September 30, 2007. No material weaknesses were found in the 
        design or operation of the internal controls over program 
        operations or financial reporting. During fiscal year 2008, MRM 
        will continue these evaluations and implement changes 
        identified in updated DOI guidance.
  --Consistently received clean audit opinions on the annual Chief 
        Financial Officers audit of MRM custodial statements, performed 
        by an independent auditor(KPMG) under contract to the Office of 
        the Inspector General. It should be noted that in fiscal year 
        2007, the MMS received a clean audit opinion. Furthermore, KPMG 
        reviewed MMS's progress in OMB Circular A-123 compliance and 
        found that MMS had a robust system of internal controls and 
        that MMS provided reasonable assurance that the internal 
        controls over financial reporting were suitably designed and 
        operating effectively.
    Question. Can you tell us whether any of these improvements have 
led to the collection of additional revenues, or addressed ethical 
issues surrounding employees who work directly with the oil/gas 
companies?
    Answer. We believe the Royalty In Kind (RIK) program has resulted 
in increased revenues. Cumulatively, for fiscal year 2004 through 
fiscal year 2006, RIK estimated net return has been $87 million. In 
2006, sales of royalty oil and gas through MMS's RIK program are 
estimated to have increased net return to the government by $31.1 
million above what would have been received if the government had taken 
the oil and gas royalties in value, or as cash payments (RIV). The 2006 
result of $31.1 million is a combined total of the following:
  --$26.2 million increased RIK incremental net revenue (additional 
        revenues that would not have been generated under RIV),
  --$2.6 million incremental time value of money benefit (positive time 
        value of money by collecting RIK revenues within 25 days rather 
        than 30 days for in-value royalties), and
  --$2.3 million cost avoidance by collecting offshore oil and gas 
        royalties in kind (RIK) rather than in value (RIV).
    Results for fiscal year 2007 will be available in early summer 
2008.
    In addition, our audit and compliance review business processes 
have resulted in additional revenues. The total amount collected from 
audits and compliance reviews for fiscal year 2005-2007 was $373.2 
million. However, it is important to note that MMS expects to see a 
general and gradual decline in compliance collections year to year as 
companies increase their voluntary compliance. This is not a reflection 
of reduced rigor of the compliance program, but rather an indication 
that the deterrent effect is working. Some of the major reasons for 
improved compliance are as follows: clearer regulations; Royalty in 
Kind providing greater up-front price certainty; and more effective 
compliance strategies based on the new risk-based compliance approach 
(using both audits and compliance reviews).
    MMS policy requires that all employees receive Ethics Training on 
an annual basis. The training is presented in various formats to 
include written materials and on-line instruction. During 2007 the 
Associate Director for Administration and Budget along with the MMS 
Ethics Staff and representatives from the Procurement and Information 
Technology functions provided on-site, instructor led training at all 
of MMS' primary geographic locations. The training included topics such 
as: Executive Order 12731; Federal Criminal Ethics Laws; Gifts from 
Outside Sources; Outside Work and Activity; Working with Contractors; 
Post Employment Restrictions; and Impartiality Guidelines.
    The MMS Training Plan for 2008 includes the review of the recently 
published Ethics Guide for Department of the Interior Employees. The 
Ethics Guide is presented in the format of a 4 inch by 6 inch in color, 
glossy print, tabbed, pocket guide which is to be used as a convenient 
reference for employees when performing their day to day assignments. 
In addition, a separate training session is being planned for the 
employees of the Royalty in Kind Division. This Ethics training will 
specifically address the RIK Program by providing a greater focus on 
issues that are the most critical to their unique function. These 
topics will include key topics such as: interactions between the public 
and private sector, use of official and/or proprietary data, 
prohibitions concerning the use of public office for private gain and 
the receipt of gifts from prohibited sources. The RIK staff will be 
asked to provide real life examples of the ethical dilemmas which they 
most often face. These examples will be used to develop case scenarios 
to be included as integral part of the training presented to the RIK 
Team.
    Question. Throughout the Subcommittee on Royalty Management's 
report it is stated that as a revenue generator for the U.S. Treasury 
the MMS should be given the resources needed to carry out an effective 
royalty management program. One of the Subcommittee's recommendations 
is to study the feasibility of setting up a ``trust fund'' within the 
Treasury to fund DOI activities.
    Do you see any advantages to this funding approach?
    Answer. We believe this type of funding approach could have 
advantages and disadvantages, so we would need to evaluate it further 
before taking a position. As the RPC Subcommittee report indicates, 
this change would require legislation. We will work with other relevant 
Federal agencies and offices in evaluating these options before we make 
any decision as to how to address this recommendation.
    Question. Do you believe that the MMS currently has adequate 
resources to effectively collect all the royalties that are owed?
    Answer. We do believe that MMS largely has the resources necessary 
to ensure that the agency can effectively collect the royalties that 
are owed to the Government. To address additional needs that have been 
identified, the fiscal year 2009 Budget proposes $3.7 million in 
targeted program increases to facilitate the shift toward a risk-based 
compliance program and to fully automate the interest billing process.
    However, it is also important to recognize that MMS has taken a 
variety of steps to improve the efficiency and effectiveness of its 
royalty collections program in recent years. MMS has gained 
efficiencies through:
  --Revised valuation regulations for Indian gas, Federal oil, and most 
        recently Indian oil. These revisions simplified the 
        complexities of determining the value of production, thereby 
        reducing the workload associated with auditing the payment of 
        royalties.
  --The growth of the Royalty-in-Kind program since 2001 has reduced 
        the compliance workload because significant volumes of 
        production are now taken in kind and sold by MMS. (Hence, most 
        valuation and allowance issues associated with royalty payments 
        are not a factor.)
  --Reengineered compliance processes and more efficient methods to 
        augment the traditional audit approach enabling us to provide 
        broader coverage with fewer resources. The Office of Inspector 
        General concluded in their report that ``Compliance reviews can 
        serve a useful role as part of the Minerals Management 
        Service's Compliance and Asset Management Program. Compliance 
        reviews are a legitimate tool for evaluating the reasonableness 
        of company-reported royalties and allow a broader coverage of 
        royalties while requiring fewer resources than audits.''
    We believe these improvements have allowed MMS to conduct an 
effective royalty program through the years within its available 
resources. MMS was able to confirm reasonable compliance for 71 percent 
of the 2002 mineral revenues in fiscal year 2005, 72 percent of the 
2003 mineral revenues in fiscal year 2006, and 65 percent of the 
mineral revenues in fiscal year 2007. The MMS believes that these 
levels of coverage constitute a significant level of compliance 
coverage over the lease universe and substantially reduces risks of 
underpayment and nonpayment.
    Moving forward, in fiscal year 2007 and 2008, MRM is developing a 
more dynamic risk-based compliance approach as part of the MMS's 
strategic business planning initiative (and consistent with the OIG 
recommendations). This approach will provide coverage of a greater 
number of companies and leases. As recommended in the final report of 
the RPC Subcommittee on Royalty Management, MMS is also exploring 
whether a more flexible approach to audits is feasible. In particular, 
MMS will explore different enforcement approaches ranging from 
compliance checks to limited- or full-scope field audits similar to the 
approach used by the IRS. This analysis will help inform our 
assessments of future resource needs.
    With the fiscal year 2009 request, MMS anticipates beginning 
implementation of the risk-based approach that will improve our 
capabilities in identifying when audits or compliance reviews of leases 
or companies are warranted and whether additional resources are 
required. Increasing the audit staff in fiscal year 2009 will provide 
the initial necessary manpower to perform increased company and lease 
audits, focusing primarily toward onshore Federal properties, where 
most of the higher risk companies and leases exist, while maintaining 
appropriate revenue coverage levels. We anticipate using the results of 
the risk-based strategy each year and will identify and request 
additional resources as needed.
    Question. The subcommittee report recognizes many advantages 
associated with Royalty in Kind (RIK) collection compared to the 
Royalty in value approach. Under RIK the government takes its royalty 
in the form of oil rather than in cash. It also stated that ``MMS 
should immediately take steps to ensure that the RIK program has 
sufficient personnel depth to maintain an expanding trading operation 
and to ensure that RIK staff have a solid understanding of ethics 
guidelines''.
    Can you tell us what the major advantages of the Royalty in Kind 
program are compared to the traditional Royalty in Value approach?
    Answer. The benefits of the RIK program include conflict avoidance, 
increased certainty and decreased administrative costs for the public 
and industry, earlier receipt of royalty revenues, and potential 
revenue enhancement for the Treasury. In addition to intangible 
benefits like conflict avoidance, MMS outlines three separate areas of 
quantifiable benefit as outlined in the RIK Annual Report to Congress:
  --Administrative Savings.--MMS performs an annual comprehensive 
        comparative analysis between administering the RIK and RIV 
        programs. The costs associated with administering the RIV 
        program are typically higher than those costs related with the 
        RIK program. Royalties taken in kind are sold under explicit 
        commercial contract terms. These standard industry contracts 
        provide a level of transparency in the valuation and 
        transportation of royalty oil and gas which, we believe, lead 
        to a more efficient process with decreased audit costs.
  --Time Value of Money.--Revenue Collection Time (RCT) is a measure of 
        the number of days after each production month that MMS takes 
        to collect outstanding receivables for each month of 
        production. Payments in the RIK program are received on average 
        5 and 10 days before the end of the month following production 
        for gas and oil respectively.
      Conversely, RIV payments are due at the end of the month 
        following the month of production. The difference in Revenue 
        Collection Time between RIK and RIV provides a time value of 
        money component for payments received in the RIK program. 
        Because these payments are received five to ten days earlier 
        than they would have otherwise been received in the RIV 
        program, a time value of money is calculated on RIK payments 
        using the number of days for which early payment was made at an 
        annual interest rate of three percent.
  --Revenue Performance.--The RIK program can leverage its position in 
        many markets to realize higher royalty revenue than MMS would 
        expect to earn through RIV. These higher revenues come from 
        more favorable natural gas processing contracts, and, to a 
        lesser extent, transportation contracts, as well as increased 
        competition, and aggregated production. RIK has a well-defined 
        process using economic modeling to measure and record overall 
        RIK revenue performance.
    Question. Have you been able to quantify whether the government has 
gotten a better return when using the RIK approach versus Royalty in 
Value? If so, how much additional money has MMS collected by virtue of 
using RIK?
    Answer. MMS began formally calculating RIK revenue ``uplift''--the 
incremental revenue benefits we believe are achieved through the RIK 
program--beginning with fiscal year 2004. The results, using the three 
categories detailed above are summarized in this table:

----------------------------------------------------------------------------------------------------------------
                                                                    Fiscal year
                    Category                     ------------------------------------------------      Total
                                                       2004            2005            2006
----------------------------------------------------------------------------------------------------------------
Admin. Savings..................................      $1,600,000      $3,740,000      $2,300,000      $7,640,000
Time Value of Money.............................         892,875       1,528,550       2,633,470       5,054,895
Revenue Perf....................................      17,242,415      30,790,483      26,254,845      74,287,743
                                                 ---------------------------------------------------------------
      Total.....................................      19,735,290      36,059,033      31,188,315      86,982,638
----------------------------------------------------------------------------------------------------------------

    The fiscal year 2007 calculations are being prepared at this time. 
They will be released in the next Annual Report to Congress due early 
summer 2008 this spring.
    Question. Please tell us what steps are being taken to implement 
the Report's recommendation regarding the RIK trading operation and 
ethics guidelines?
    Answer. Vacancy announcements are in process for oil and gas asset 
managers as well as back office personnel in order to ensure sufficient 
depth. A tentative offer has been issued to a prospective Gas Front 
Office Manager with extensive industry experience. RIK will develop and 
implement a Personnel Plan to address flexibility in hiring, 
compensation, and specialized ethics training by July 2008. To date, 
RIK has had success attracting personnel with industry expertise.
               1998-1999 oil/gas leases/kerr-mc gee case
    Question. With respect to the status of the 1998 and 1999 leases 
without price thresholds, the Department has signed agreements with six 
of the oil companies.
    Can you tell us who these companies are and what portion of 
production from all the 1998-1999 leases that they represent?
    Answer. The six companies that have signed agreements are British 
Petroleum (BP), Conoco Phillips, Marathon, Shell, Walter Oil & Gas and 
Walter Hydrocarbon Inc. In an attempt to address the missing price 
thresholds, we remain open to negotiating with companies to obtain 
agreements to apply price thresholds to the deep water leases issued in 
1998-1999. We are focused on obtaining the much larger royalty amounts 
to be realized from future production, estimated to range between $5.3 
billion to $7.8 billion. To date our progress has included agreements 
reached with six companies and they have been paying royalties 
consistent with the terms of the agreements. These agreements represent 
approximately 12 percent of the future production from all 1998-1999 
leases.
    Question. Have they been paying the royalties as agreed?
    Answer. All six companies with signed agreements have continued to 
pay royalties consistent with the terms of the agreement.
    Question. Is there any indication that the Kerr-McGee case will 
change their decision on whether to continue to pay?
    Answer. If there is a final non-appealable judgment in which the 
court finds price thresholds are illegal, then the companies have the 
right to terminate the agreements.
                            kerr-mc gee case
    Question. Last October, in the Kerr-McGee litigation, the district 
court held that price thresholds are not permitted in any leases under 
the Deepwater Royalty Relief Act (DWRRA).
    While this case is being appealed, is there really anything that 
the Department can do to encourage more companies to come to the table 
and pay royalties on the 1998-1999 leases?
    Answer. While we remain open and willing to discuss agreements with 
the remaining companies holding DWRRA leases without price thresholds, 
we do not believe that any additional lessees will agree to price 
thresholds until they see the outcome of the Kerr-McGee case.
    Question. What is happening with respect to royalty collection from 
companies holding leases from 1996, 1997, and 2000? Have any of them 
indicated that they will not continue to pay?
    Answer. Companies holding 1996, 1997 and 2000 DWRRA leases have 
either been paying royalties consistent with the terms of their lease 
or have appealed orders to make such payments. The recent Federal 
District ruling in the Kerr-McGee case has called into question MMS's 
authority to establish price thresholds under the authority of the 
DWRRA. If the ruling is upheld, companies holding 1996, 1997 and 2000 
DWRRA leases would be entitled to recoup prior year payments and would 
not be required to make future payments.
    Question. As you know, there have been legislative efforts to force 
the oil companies with these leases to renegotiate their contracts. Can 
you give us a better idea of what the impact of any future legislative 
efforts like these would have while the Kerr-McGee case remains on 
appeal?
    Answer. If Kerr-McGee is successful in their lawsuit, we estimate 
that the total royalties at stake could range from about $23 billion to 
$32 billion. The legislation to address this situation that was passed 
by the House had a high potential for causing litigation by modifying 
existing contracts. We believe that efforts to recoup these moneys 
should not jeopardize our nation's energy security or the future 
revenues from upcoming OCS sales. Applying fixes that could result in 
litigation could easily cost the United States billions over the next 
decade and result in reduced annual production levels. We still remain 
committed to the sanctity of our contracts; companies need to know that 
the United States negotiates in good faith. We are also still committed 
to working with Congress to try to resolve this issue as long as any 
effort to recoup royalties is fully thought through and protects the 
integrity of the government and energy security for the American 
people.
    Question. If the Kerr-McGee case is upheld on appeal, what is the 
potential loss to the Treasury?
    Answer. Our original estimate, reported by GAO, was $60 billion. 
Since that time we have updated that work and have reported the updated 
estimates to Congress in two installments.
    The first installment applied only to those DWRRA leases sold in 
1998 and 1999, and was reported in June 2007. This work indicates that 
the future royalty potential, as of January 1, 2007, from the 1998-1999 
DWRRA leases ranges from $5.3 billion to $7.8 billion.
    The second installment, reported in February 2008, applied only to 
those DWRRA leases sold in 1996, 1997, and 2000. This work indicates 
that the future royalty potential, as of October 1, 2007, from the 
1996, 1997, and 2000 DWRRA leases ranges from $15.7 billion to $21.2 
billion.
    Looking backward, as of the end of fiscal year 2007, we estimate 
that $1.37 billion would have been paid on DWRRA leases issued in 1998 
and 1999 had price thresholds been in place. In addition, over $1.1 
billion in royalties have already been paid on DWRRA leases issued in 
1996, 1997, and 2000. For all Deep Water Royalty Relief leases from 
these 5 years, we estimate the total amount at risk to be $23 billion 
to $32 billion.
    Question. Do you have any recommendations for what Congress should 
do if the government loses the case on appeal?
    Answer. Recent legislative proposals we have seen would have given 
lessees an incentive to litigate. If both the lessees and the 
government were forced to devote considerable time and resources to 
protracted litigation to resolve lessees' challenges to a new statutory 
provision, it could frustrate the goals of increasing domestic energy 
supply and raising additional revenue to the U.S. Treasury from new 
leasing activity. Any legislative proposal that is developed should 
mitigate these potential problems.
    Question. As you know, the Inspector General (IG) issued a 
memorandum to you in September that accompanied an investigation he had 
done with respect to the royalty collection program. It raised a number 
of troubling issues.
    The IG indicated that the MMS does not have an adequate computer 
system to accurately calculate interest owed by the oil companies on 
underpaid or late royalty payments. Is this the case?
    Answer. No. The MMS system is capable of accurately calculating 
interest owed by oil companies. However, before invoices are finalized, 
automated draft invoices are manually verified and updated based on 
unique exceptions not programmed into the MRMSS system. This is a 
cumbersome, time-consuming process.
    Question. If so, what is the Department doing to remedy this 
situation?
    Answer. In fiscal year 2007, MMS redirected staff to reduce 
interest billing backlogs, and implemented performance tuning of the 
interest billing module to increase processing capacity. The interest 
backlog was eliminated as of 09/30/07. As part of the President's 
fiscal year 2009 budget request, MMS is requesting funding to provide 
for enhancements to more fully automate the interest billing module 
within MRM's Support System to significantly reduce manual intervention 
requirements and greatly increase processing efficiencies. This 
initiative will fund the final phase of an improvement initiative begun 
within base funding in fiscal year 2007, with the objective of 
transitioning from an extremely labor intensive process to a highly 
effective and efficient business process.
    Question. The IG has stated that with respect to official and even 
proprietary information submitted by the oil companies that there were 
``vague policies and rules and poor overall document control''.
    Is this true? If so, what is the Department doing to put better 
controls in place?
    Answer. No. The Minerals Revenue Management (MRM) has issued 
numerous guidance and policy memos to all MRM employees and contractor 
staff for how to handle and protect proprietary information. These 
guidance memos clearly stated that proprietary information must be 
protected from unauthorized disclosure and provided specific 
instructions for handling proprietary and confidential business 
information obtained from oil, gas, and solid minerals companies. Some 
of the more pertinent memos are listed below:
  --June 14, 1989, Memo from the Associate Director for Royalty 
        Management titled, ``Protection of Privileged and Proprietary 
        or Confidential Information.''
  --October 7, 1991, Memo from the Associate Director for Royalty 
        Management titled, ``Physical Security Over Proprietary Data.''
  --October 30, 1991, Memo from the Associate Director for Royalty 
        Management titled, ``Guidance and Procedures for Handling 
        Requests for RMP Information and Records.''
  --February 24, 1993, Memo from the Associate Director for Royalty 
        Management titled, ``Priority Processing of Freedom of 
        Information Act Requests.''
  --February 27, 1995, Memo from the Associate Director for Royalty 
        Management titled, ``Guidance and Procedures for Handling 
        Requests for Royalty Management Program Proprietary Data/
        Records.''
  --August 22, 2007, Memo from the Associate Director for Minerals 
        Revenue Management titled, ``Updated Guidance and Procedures 
        for Handling Requests for Minerals Revenue Management 
        Proprietary and Other Information/Data/Records.''
    The most recent memorandum codified new controls that proprietary 
data sent to an external recipient be encrypted.
    In addition, we have required mandatory annual Freedom of 
Information Act (FOIA) training since 1995. The FOIA training includes 
guidance on how to process FOIA requests and how to handle and protect 
proprietary information. The FOIA training has been provided via a 
Computer Based Training Module for the past several years and is 
required and available for all employees and contractor staff. Also, in 
2004, MRM developed and presented to all Compliance and Asset 
Management staff and State and Tribal audit staff training titled, 
``Safeguarding Proprietary Data.''
    Additional guidance was included in published documents such as the 
``Guide to Royalty Information'' first published August 17, 1998, and 
last updated September 24, 2001, and Attachment D to the Tripartite 
Memorandum of Understanding titled, ``Treatment of Proprietary/
Confidential Data,'' dated August 15, 1991.
    More recently, the MRM FOIA staff provided handouts and made a 
presentation titled, ``Proprietary Data Guidance,'' to the State and 
Tribal auditors at the MMS/State and Tribal National meeting on 
September 11, 2007. The MRM FOIA staff is also developing formal 
classroom FOIA and Proprietary Data training to be presented to all MRM 
and contractor staff later this fiscal year.
    Question. The IG stated in his memo to you of September, 2007 that 
``we discovered a number of other significant issues worthy of separate 
investigation, including ethics lapses, program mismanagement and 
process failures.'' I recognize that you can't comment on the specific 
aspects of any ongoing investigations by the IG, but this is a very 
disturbing statement.
    The IG's statement suggests very wide ranging problems within the 
royalty collection program. Do you think this is a fair 
characterization?
    Answer. No, we do not believe this to be a fair characterization of 
the Minerals Revenue Management Program. MMS has been the subject in 
recent years of numerous reviews, audits and investigations conducted 
by the DOI Office of Inspector General, the Government Accountability 
Office, Congressional Committees and our own internal reviews. To 
provide greater assurance on the integrity of financial operations and 
the accuracy of financial data, MMS undergoes annual Financial 
Statement audits, including a thorough review of mineral revenue 
custodial accounts. For the past 5 years, as part of this annual CFO 
audit, MMS consistently has received a clean audit opinion from the 
Office of Inspector General's contracted independent auditing firm.
    To date, the various audits, investigations and reviews have made 
recommendations to strengthen procedures, improve training, and enhance 
tracking and documentation. We have taken these recommendations 
seriously and have developed corrective action plans to address every 
recommendation.
    To date, the various audits, investigations and reviews have made 
recommendations to strengthen procedures, improve training, and enhance 
tracking and documentation. We have taken these recommendations 
seriously and have developed corrective action plans to address every 
recommendation.
    The MRM also utilizes 3 proactive internal evaluation tools to 
ensure (1) internal controls and related policies and procedures are 
properly designed to address risk and provide reasonable assurance of 
the effectiveness and efficiency of program activities and operations; 
(2) reliable, complete, and timely data is maintained; (3) compliance 
with applicable laws, regulations and standards; and (4) programs and 
resources are protected from fraud, waste, and mismanagement. The first 
tool is Internal Quality Control Reviews to evaluate audits performed 
on Federal, State, and Tribal lands to determine compliance with 
Government Auditing Standards and MRM policies and procedures. In 2005, 
an independent CPA firm issued MRM a clean opinion regarding MRM audit 
functions, with no material weaknesses and no reportable conditions. 
The second tool is Alternative Internal Control Reviews to evaluate 
internal controls over program offices, operations, and financial 
reporting. MRM submits a 3-year plan to the Department identifying 
planned reviews and a risk based component inventory. Finally, OMB 
Circular A-123, Management's Responsibility for Internal Control, 
evaluates MRM's overall risks, internal controls, and documentation 
over program offices and financial reporting processes to facilitate 
accurate and timely assurance statements to the Department. In fiscal 
year 2007, KPMG, the DOI OIG's independent auditor examined MMS's 
progress in OMB Circular A-123 compliance and found that MMS had an 
adequate system of internal controls and that MMS provided reasonable 
assurance that the internal controls over financial reporting were 
suitably designed and operating effectively.
    The December 17, 2007, Royalty Management Subcommittee Report on 
``Mineral Revenue Collection from Federal and Indian Lands and the 
Outer Continental Shelf'' concluded that the Minerals Management 
Service is an effective steward of the Minerals Revenue Management 
Program and that MMS employees are generally concerned with fostering 
continued program improvements. The Subcommittee members unanimously 
agreed that MMS is the best agency suited to fulfill the stewardship 
responsibilities for Federal and Indian leases.
    In reference to the statement regarding ethical lapses, it is 
important to note that MMS first contacted the Office of Inspector 
General and requested that they look into some of these issues 2 years 
ago when MMS management first became aware of concerns. We temporarily 
reassigned some employees pending the outcome of the IG investigation. 
In the meantime we strengthened many of our internal controls and 
processes. We strengthened our ethics training to ensure our employees 
fully understand their ethical responsibilities as federal employees.
    Question. Do you believe the recommendations that you are 
implementing with respect to the Kerrey/Garn report will effectively 
deal with this criticism by the IG?
    Answer. Yes. Many of the recommendations in the Kerrey/Garn report 
are similar to recommendations made by the Office of the Inspector 
General. We agree with the statement of Senators Kerrey and Garn that 
implementing the recommendations in their report will greatly 
strengthen the management of the program, will restore public 
confidence, and will ensure maximum value for the U.S. taxpayer.
                        naval oil shale reserve
    Question. I have a parochial matter I hope that you could address 
and that involves the Naval Oil Shale Reserve (NOSR) in Colorado. The 
President's budget request contains a proposal to cancel $24.7 million 
of the balances in the Naval Oil Shale Reserve Site Restoration Fund 
account that exceed the estimated funding needed to cover site cleanup 
costs. Obviously, I oppose this. In my view, those funds belong to the 
State of Colorado.
    This account is growing, and royalties are not being paid to the 
State of Colorado only because of the failure of the Department of the 
Interior to certify the clean up of the site. I believe that everyone 
acknowledges that there are sufficient funds in the account to do this. 
If I have any say about it, this proposal will not be a part of this 
year's Interior bill and instead Colorado's rightful share of these 
funds should be given to the State, not put in the Federal Treasury.
    I have been working with Secretary Kempthorne to have this 
certification issued as soon as possible so that Colorado can start 
collecting its fair share of the royalties being generated at NO SR. 
Can I get your assurance that the Department will continue working with 
me on this issue so that we can get it resolved as soon as possible?
    Answer. You have our assurance to continue to work with you and the 
rest of the Colorado delegation. On January 23, 2008, the Colorado 
Department of Public Health and Environment provided its concurrence 
with the BLM's 100 percent Design Report for the clean-up at the Anvil 
Point Facility. This is a major milestone that allows the BLM to begin 
working toward awarding a clean-up contract by early June. Once the 
Department has obligated funds for the cleanup contract, one of a 
number of steps that has to be completed to comply with the law, we can 
begin to work toward certification.
                 administrative fees on onshore leases
    Question. I The fiscal year 2008 Interior bill authorized the 
Bureau of Land Management to charge a fee this year of $4,000 on 
Applications for Permits to Drill. It is my understanding that the 
Administration is proposing an amendment to the Energy Policy Act of 
2005 that would authorize the Department to issue a rule making these 
fees permanent and also to raise them. This concerns me if it creates a 
disincentive for increased domestic production and does not take into 
account differences in the costs of production in different states.
    In Colorado, the costs of production are very high. Will this rule 
take into account the differences among the states in terms of the cost 
of production when setting fees?
    Answer. At this time, we do not anticipate the rule taking into 
account the differences among the states in terms of the cost of 
production when setting the fee. The proposal is for a cost recovery 
fee that takes into account the BLM's cost to process an application 
for permit to drill (APD). If it is determined that the costs for 
processing an APD vary from state to state, then the final cost 
recovery fee may, likewise, vary from state to state. The proposed 
interim fee represents a very small fraction of the development and 
production costs for any new well, and as such, we do not believe it 
will be a disincentive to producers interested in developing new wells.
    Question. Won't charging higher fees upfront to process these 
applications hurt smaller producers?
    Answer. The proposed fee represents a small fraction of the 
development and production costs for any new well, and the fee is 
proportional. Small producers will request fewer APDs and will 
therefore pay less in fees than larger producers submitting many APDs. 
The fee may also encourage operators to do more pre-planning before 
submitting an APD, to ensure that their submitted applications are 
those that have a greater degree of probability of being drilled. This, 
in turn, reduces the BLM APD workload, which should help to ensure that 
all APDs can be processed in a more timely manner.
    Question. How long will it take the BLM to issue this rulemaking?
    Answer. At the latest, we expect to release the final rulemaking by 
the end of calendar year 2009. To avert any shortfall in funding for 
APD processing, in the event that the cost recovery rulemaking has not 
been implemented for all of fiscal year 2009, the legislation submitted 
by the administration will impose, by statute, an interim fee of 
$4,150, to ensure the estimated $34.0 million in fees are collected.
    Question. How much in fees does the agency plan to collect if it is 
implemented?
    Answer. As noted in the preceding response, we estimate that we 
will collect $34 million in fiscal year 2009, either solely through 
cost recoveries, or through some combination of cost recoveries and a 
statutory interim processing fee.
    Question. In the last two Interior bills language was considered 
but never passed, that would bar companies that hold OCS leases issued 
in 1998-1999 that are not subject to price thresholds from bidding in 
future leases sales. I am told that if that provision became law, there 
would be some companies that bid in the October 3, 2007 Gulf of Mexico 
lease sale would not be able to participate in future lease sales. In 
that sale alone, the government received $2.9 billion in high bids. I 
know Secretary Allred has testified at previous hearings of the 
potential loss to the government if a producer were to challenge the 
statute and a court were to enjoin future leases.
    My question today is does the MMS have an estimate of what the 
government could lose in reduced bonuses if the companies subject to 
the leasing bar were not able to participate in future lease sales?
    Answer. Although there is considerable uncertainty in trying to 
predict bidder behavior, as evidenced by the unexpectedly large bonus 
bids received in recent lease sales, the government's losses from 
barring certain companies from bidding in future sales could be 
substantial. If realized, the proportional losses would likely vary 
through time and across OCS regions.
    The composition of the barred companies will change over the next 
few years as leases expire upon reaching the end of their 10-year 
primary terms in 2008 and 2009. A recent count identified 44 companies 
that could be subject to being barred. We estimate this number would be 
reduced to about 28 companies by the time all of the 1998 and 1999 
leases reach the end of their primary terms, around the beginning of 
fiscal year 2010, leaving only leases in development or in production 
still active.
    We analyzed the results of central Gulf of Mexico Sale 205, held in 
October, 2007, under two scenarios to obtain a future baseline. The 
first scenario assumed that the 44 companies noted above were barred 
from bidding, while the second scenario assumed that the reduced set of 
28 companies was barred. In both cases, we stipulated that (1) bidding 
by other companies would not have changed in the presence of certain 
companies being barred, (2) in the case of a multiple bid tract with 
the high bid submitted by a barred company, the revised hypothetical 
high bid would be the next highest bid submitted by a non-barred 
company, and (3) in the case of a joint high bid involving one or more 
barred companies, the high winning bid would have remained the same as 
long as the barred companies' share of the joint bid was less than 50 
percent; otherwise, the bid would not have been made.
    We found that under these assumptions, the sum of the resulting 
high bids in Sale 205 would have fallen by 5 1.5 percent if the 44 
companies had been barred and by 29.6 percent if the identified reduced 
set of 28 companies had been barred. We then applied the proportional 
losses in high bids for the 44 company case to the next three Gulf of 
Mexico sales beginning with the western Gulf of Mexico sale in August 
2008, and applied the proportional losses in high bids for the 28 
company case to the subsequent six Gulf of Mexico sales ending with the 
western Gulf of Mexico sale in August 2012.
    We previously estimated for the President's budget that absent any 
Congressional action to bar companies, the sum of the high bids in 
these 9 sales would amount to $2.7 billion. Our analysis showed that in 
the presence of Congressional action barring certain companies from 
bidding in future sales, the sum of the high bids would be reduced by 
$1.1 billion, equal to 40 percent.
    In contrast, barring the same set of companies from offshore sales 
in Alaska would appear to have a far more modest effect on bidding 
results. For example, in the Chukchi sale 193, which had high bids of 
$2.6 billion, the direct losses from barring the same set of 44 
companies would only have been $30 million, or slightly more than one 
percent of the high bids.
    It is reasonable to think that the effects on bonus bids from 
barring companies could be even greater than estimated here. For one 
thing, the remaining bidders may well lower their bids in the 
expectation of less competition. For another, when we analyze the four 
Gulf of Mexico sales held prior to Sale 205 in the scenario where 44 
companies are barred, the results show losses of about 60 percent, 
instead of losses around 50 percent (actually, 5 1.5 percent) that we 
found in Sale 205. Finally, the specification of the 28 company case 
reflects a limited assessment of leases that will be held beyond their 
primary terms--more leases will likely be held, but their identity and 
the lease owners cannot be currently determined. So, for those reasons, 
we believe the one billion dollar loss over the next 5 years calculated 
here is a conservative estimate of the adverse fiscal effects from 
Congressional restrictions on bidding and competition in future OCS 
sales.

                         CONCLUSION OF HEARING

    Senator Feinstein. The hearing is recessed. Thank you.
    [Whereupon, at 10:19 a.m., Tuesday, February 26, the 
hearing was concluded, and the subcommittee was recessed, to 
reconvene subject to the call of the Chair.]

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