Mineral Revenues: Data Management Problems and Reliance on	 
Self-Reported Data for Compliance Efforts Put MMS Royalty	 
Collections at Risk (12-SEP-08, GAO-08-893R).			 
                                                                 
The Department of the Interior's (Interior) Minerals Management  
Service (MMS) collected the equivalent of over $9 billion in oil 
and gas royalties in fiscal year 2007, more than $5 billion of	 
which it deposited in the U.S. Treasury; it dispersed the	 
remaining approximately $4 billion to other federal, state, and  
tribal accounts. These royalties--payments made to the federal	 
government for the right to produce oil and gas from federal	 
lands and waters--represent one of the country's largest nontax  
sources of revenue. The amount of oil and gas royalties MMS	 
collects may increase if the price of energy increases and	 
industry's demand to drill on lands and in waters controlled by  
the federal government continues to trend upward. Companies that 
develop and produce oil and gas resources from federal lands and 
waters do so under leases obtained from and administered by	 
Interior--BLM for onshore leases and MMS's OEMM for offshore	 
leases. Together, BLM and OEMM are responsible for ongoing	 
oversight of oil and gas operations on more than 28,000 producing
leases to help ensure that oil and gas companies comply with	 
applicable laws, regulations, and agency policies. Among other	 
things, BLM (BLM) and OEMM (OEMM) staff inspect leases to verify 
that oil and gas production is accounted for as required by the  
Federal Oil and Gas Royalty Management Act of 1982 and agency	 
regulations and policies. These inspections typically include an 
examination of the meters and their calibration records.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-893R					        
    ACCNO:   A84169						        
  TITLE:     Mineral Revenues: Data Management Problems and Reliance  
on Self-Reported Data for Compliance Efforts Put MMS Royalty	 
Collections at Risk						 
     DATE:   09/12/2008 
  SUBJECT:   Data collection					 
	     Data integrity					 
	     Federal/state relations				 
	     Financial management				 
	     Funds management					 
	     Gas leases 					 
	     Gas resources					 
	     Information management				 
	     Information technology				 
	     Inspection 					 
	     Internal controls					 
	     Mineral resources					 
	     Oil leases 					 
	     Oil resources					 
	     Reporting requirements				 
	     Risk management					 
	     Royalty payments					 
	     Systems conversions				 

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GAO-08-893R

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September 12, 2008: 

Congressional Requesters: 

Subject: Mineral Revenues: Data Management Problems and Reliance on 
Self-Reported Data for Compliance Efforts Put MMS Royalty Collections 
at Risk: 

The Department of the Interior's (Interior) Minerals Management Service 
(MMS) collected the equivalent of over $9 billion in oil and gas 
royalties in fiscal year 2007, more than $5 billion of which it 
deposited in the U.S. Treasury; it dispersed the remaining 
approximately $4 billion to other federal, state, and tribal accounts. 
These royalties--payments made to the federal government for the right 
to produce oil and gas from federal lands and waters--represent one of 
the country's largest nontax sources of revenue. The amount of oil and 
gas royalties MMS collects may increase if the price of energy 
increases and industry's demand to drill on lands and in waters 
controlled by the federal government continues to trend upward. For 
example, the price of West Texas Intermediate--a type of oil commonly 
used as a benchmark--has risen by more than 100 percent since January 
2007 and recently exceeded $140 per barrel, a price that, when adjusted 
for inflation, is at the highest level since 1980. Moreover, 
applications for onshore drilling permits at Interior's Bureau of Land 
Management (BLM) continue to increase, from approximately 4,000 in 2001 
to more than 10,000 in 2007. Similarly, offshore leasing activity 
overseen by MMS's Offshore Energy and Minerals Management (OEMM) has 
also generally increased since 2001. 

Companies that develop and produce oil and gas resources from federal 
lands and waters do so under leases obtained from and administered by 
Interior--BLM for onshore leases and MMS's OEMM for offshore leases. 
Together, BLM and OEMM are responsible for ongoing oversight of oil and 
gas operations on more than 28,000 producing leases to help ensure that 
oil and gas companies comply with applicable laws, regulations, and 
agency policies. Among other things, BLM and OEMM staff inspect leases 
to verify that oil and gas production is accounted for as required by 
the Federal Oil and Gas Royalty Management Act of 1982[Footnote 1] and 
agency regulations and policies. These inspections typically include an 
examination of the meters and their calibration records. Additionally, 
BLM inspectors may review production records, forwarding any 
discrepancies to MMS for resolution. OEMM has a slightly different 
process; after reviewing all production records, its production 
verification team addresses any gas volume discrepancies itself, 
forwarding oil volume discrepancies to MMS. The results of these 
inspections and reviews are recorded in the agencies' management 
databases.[Footnote 2] 

As a condition of producing oil and gas under federal and Indian 
leases, companies are required to file two key monthly reports with 
MMS--one specifying the total production and disposition of oil and gas 
and the other stating the royalties due on that production. However, 
because of various leasing and development arrangements made by 
companies, these two reports are often submitted by different 
companies. The companies physically developing the lease, or the 
operators, are responsible for reporting the production volumes to MMS 
in their monthly production reports.[Footnote 3] The companies with a 
financial interest in that lease, or the payors, are responsible for 
reporting the cash royalty owed on the federal and Indian oil and gas 
production in their monthly royalty reports.[Footnote 4] Each month, 
payors calculate the royalty payment they owe to the federal government 
using the four key variables illustrated in the following equation: 

Royalty payment = (sales volume x sales price - deductions) x the 
royalty rate[Footnote 5] 

Companies enter the monthly production and royalty reports via a Web- 
based portal to MMS's royalty information technology (IT) system and 
may make adjustments to those entries for up to 6 years after the 
initial reporting date.[Footnote 6] In addition to filing the royalty 
report with MMS, payors typically make the actual cash royalty payment 
via an electronic fund transfer to an account at the Department of the 
Treasury (Treasury). Once MMS reconciles the self-reported royalty 
payment data from the monthly royalty reports with the payments 
submitted to Treasury, MMS disburses the royalties from the Treasury 
account to the appropriate federal, state, tribal, and allotted 
accounts.[Footnote 7] All of these transactions are recorded and stored 
in MMS's current royalty IT system, which went on line in 2001. Since 
then, MMS's IT system has experienced several problems but has 
continued to improve. For example, MMS has worked for the past several 
years to enhance the royalty IT system by both refining and increasing 
the number of edit checks designed to prevent companies from entering 
incorrect royalty and production data. 

As an additional check on the accuracy of both the company-reported 
production and royalty data, MMS conducts either audits or compliance 
reviews on these data within 3 years of their submission. For example, 
during fiscal year 2008, MMS is conducting compliance work on calendar 
year 2005 payments. Audits are an assessment of the accuracy and 
completeness of the self-reported production and royalty data compared 
against third-party documents, such as sales contracts and oil and gas 
sales receipts from pipeline companies. By contrast, compliance reviews 
assess the data's reasonableness--a quicker, more limited check of the 
accuracy and completeness of a company's self-reported data--and they 
do not include a systematic examination of underlying third-party 
documentation. In addition, some states and tribes that receive 
royalties collected by MMS have agreements with MMS authorizing them to 
conduct either audits or compliance reviews on federal and Indian 
producing leases within their jurisdictions.[Footnote 8] Under current 
law, MMS has 7 years in which to make monetary demands on federal 
royalty payors.[Footnote 9] Historically, MMS has annually assessed its 
overall compliance performance on the basis of whether it has conducted 
compliance activities--either full audits or compliance reviews--on 
leases or companies that are responsible for generating a predetermined 
percentage of royalty payments within 3 years after the royalty payment 
is due. This approach resulted in MMS auditing many of the same high 
royalty paying companies and leases year after year, while conducting 
only limited compliance work on other companies during that same time 
period. To ensure greater compliance coverage on both companies and 
leases, MMS is now in the process of implementing a new risk-based 
compliance approach that will assist in selecting companies to audit or 
review based on factors in addition to royalties paid. 

Given the financial importance of royalty management, MMS has been the 
subject of considerable scrutiny through the years by entities such as 
GAO; Interior's Inspector General (IG); and the Royalty Policy 
Committee (RPC), a group empanelled by the Secretary of the Interior 
and charged with providing advice on managing federal and Indian leases 
and revenues. For example, the RPC issued a report in December 2007 
that included more than 100 recommendations to strengthen Interior's 
royalty collections by improving BLM's and OEMM's production 
accountability practices, MMS's compliance efforts, and MMS's and BLM's 
interagency coordination. As part of Interior's response to these 
recommendations, it convened staff from the relevant agencies and 
developed detailed plans for addressing these recommendations, some of 
which it has already implemented. In addition, in March 2008, we 
testified before the House Committee on Natural Resources, Subcommittee 
on Energy and Mineral Resources, on our preliminary findings on 
Interior's royalty collection program. This report follows up on our 
prior work and includes recommendations to strengthen Interior's 
royalty collections program. Specifically, you asked us determine (1) 
whether Interior has adequate assurance that federal oil and gas are 
measured accurately, (2) whether MMS's royalty IT system and royalty 
collection and verification processes provide sufficient assurance that 
all royalties are being collected, and (3) the extent to which MMS's 
compliance efforts provide an adequate check on industry's self- 
reported data. 

To address Interior's oil and gas production measurement accountability 
practices, we reviewed OEMM's and BLM's documentation on policies and 
procedures for conducting production inspections and production 
verification work. In addition, we interviewed MMS inspectors in the 
Gulf of Mexico, Pacific, and Alaska regional offices and toured oil and 
gas production facilities in the Gulf of Mexico. We further interviewed 
BLM state officials in five states with significant federal oil and gas 
production and interviewed BLM officials from five BLM field offices 
selected from a nonprobability sample of the 27 BLM field offices 
overseeing oil and gas production in those five states. The BLM field 
offices were selected based on geographic location, the number of 
violations of regulations, and the number of oil and gas volume errors 
identified during production inspections. We also toured oil and gas 
production facilities in Wyoming and Colorado. To assess MMS's royalty 
IT system and royalty collection and verification processes, we 
reviewed MMS's documentation and processes for collecting royalty and 
production data and examined how that information is stored and 
manipulated in MMS's royalty IT system. We also interviewed MMS staff 
regarding these processes. Finally, to assess MMS's compliance efforts, 
we reviewed MMS's audit and compliance manuals and its newly revised 
procedures, interviewed compliance staff, and attended several 
demonstrations of MMS's compliance IT system. We also sent 
questionnaires addressing production, royalty data, and compliance 
issues to the 11 state and 7 tribal members of the State and Tribal 
Royalty Audit Committee; 9 states and 5 tribes responded. We conducted 
this work from April 2007 to July 2008 in accordance with generally 
accepted government auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

Summary: 

Neither BLM nor OEMM is meeting statutory obligations or agency targets 
for conducting inspections of certain leases and metering equipment 
used to measure oil and gas production, raising uncertainty about the 
accuracy of oil and gas measurement. Moreover, when these inspections 
have been conducted, BLM and OEMM have at times recorded inspections 
inaccurately in their databases. Specifically, although BLM and OEMM 
are statutorily required to annually inspect leases producing 
"significant quantities of oil or gas" and those with a "history of 
noncompliance," the Secretary has defined these terms for onshore 
leases but not for offshore leases. Understanding the meaning of these 
terms is necessary to implement the act and is critical to the 
agencies' ability to prioritize inspections. Although BLM is able to 
prioritize its inspections, according to BLM officials, they are not 
completing all of the inspections required by law and agency policy, in 
part because their workload has substantially grown because of 
increased onshore drilling. OEMM, on the other hand, is not able to 
prioritize its inspections because the statutory terms have yet to be 
defined by the Secretary. Moreover, OEMM is not meeting its agency 
targets for inspections because, according to OEMM officials, 
inspectors are still conducting cleanup activities in the Gulf of 
Mexico--where almost all of the offshore oil and gas production occurs-
-in the wake of Hurricanes Katrina and Rita in 2005. Finally, although 
it is important that data are recorded accurately, when both BLM and 
OEMM conduct production inspections, neither agency is consistently 
doing so. Officials from both BLM and OEMM told us that some inspection 
and data entry staff are relatively inexperienced and do not always 
record the inspections in their databases as procedures require. 
Accurate data are necessary not only to monitor progress throughout the 
year to determine whether annual goals are achieved, but also to assist 
MMS in its royalty compliance activities. We are making several 
recommendations to the Secretary of the Interior to provide greater 
certainty that oil and gas produced from federal lands and waters are 
measured accurately. 

MMS's royalty IT system and processes for collecting and verifying 
royalty data have improved, but they continue to lack several 
capabilities that would provide greater assurance that royalties are 
being accurately collected. For example, MMS's royalty IT system cannot 
monitor adjustments made to production and royalty data by companies. 
While MMS is working to address this issue, companies may continue to 
adjust their previously self-reported production and royalty data 
without prior MMS approval or review. This includes adjustments made by 
companies to data after MMS completes its compliance work, meaning that 
while the royalties paid were accurate at the close of the audit, they 
may not remain accurate. Furthermore, MMS is unable to identify, in a 
timely manner, instances in which a royalty report has not been 
submitted by a company, and, as a result, MMS cannot be entirely 
confident it is receiving all of the royalties when they are due. 
Finally, MMS lacks a clear process to determine that royalties are 
accurately paid in instances when OEMM or BLM identify volume 
discrepancies during their production inspections and verification 
work. For example, when BLM identifies an over-or under-reporting of 
production volumes, BLM notifies the production reporting section of 
MMS. While MMS staff may work to correct the production numbers, staff 
do not relay this information to the royalty reporting section so that 
staff can check that the appropriate royalties were paid. To provide 
greater assurance that MMS is accurately collecting royalties in a 
timely manner, we are making several recommendations aimed at improving 
its royalty IT system and royalty collection and verification 
processes. 

While MMS continues to strengthen its compliance efforts, MMS's use of 
compliance reviews, which are more limited in scope than audits, has 
led to an inconsistent use of third-party documents to verify that self-
reported industry production and payment data are correct, thereby 
placing royalty collections at risk. MMS has historically relied on 
audits to determine whether a company accurately paid its royalties by 
examining third-party documents that contained information on prices, 
volumes, and deductions. More recently, MMS has transitioned to relying 
heavily on compliance reviews that assess whether the royalties paid by 
a company are reasonable, and do not always include an examination of 
third-party documents. Furthermore, while MMS's compliance reviews of 
offshore leases include a systematic comparison between a company's 
reported production volumes and independent pipeline company documents, 
an analogous process does not exist for onshore leases, in part because 
of the significantly greater numbers of leases and pipelines for which 
data would have to be collected. The absence of a consistent check on 
self-reported data--such as comparing the data with third-party 
documents--when conducting onshore compliance reviews raises questions 
about the accuracy of royalty payments. To address this issue, we are 
recommending that MMS require that third-party documents be reviewed 
when conducting onshore compliance reviews. 

BLM and OEMM Are Not Completing the Required Production Inspections, 
Leaving the Accuracy of Oil and Gas Measurements in Doubt: 

Interior lacks adequate assurance that federal oil and gas volumes are 
being measured accurately because neither BLM nor OEMM is fully 
inspecting leases and metering equipment as required by law and agency 
policies; the agencies also are not always entering accurate inspection 
data into their databases. BLM is charged with inspecting approximately 
20,000 producing onshore leases annually to ensure that oil and gas 
volumes are accurately measured. However, BLM's state inspection and 
enforcement coordinators from Colorado, Montana, New Mexico, Utah, and 
Wyoming, which are responsible for more than 95,000 wells, reported 
that only 8 of the 24 field offices in the five states completed both 
their (1) required annual inspections of leases that are high-producing 
and those that have a history of violations--terms defined by 
Interior's policies for onshore leases so that BLM can implement the 
Federal Oil and Gas Royalty Management Act and (2) inspections every 
third year on all remaining leases as required by BLM policy[Footnote 
10]. According to the BLM state inspection and enforcement 
coordinators, the number of completed production inspections varied 
greatly by field office. For example, while BLM inspectors were able to 
complete all of the production inspections in the Kemmerer, Wyoming, 
field office, inspectors in the Glenwood Springs, Colorado, field 
office were able to complete only about one-quarter of the required 
inspections. Officials in three of the five field offices in which we 
held detailed discussions with inspection staff told us that they had 
not been able to complete the production inspections because of 
competing priorities[Footnote 11]. For example, BLM officials told us 
activities related to drilling, including drilling inspections, take 
priority over completing production inspections. Further, with the 
significant number of wells being drilled, drilling-related activities 
demand much of the inspectors' time. BLM officials also discussed the 
high turnover rate for inspection staff caused by the high-pressure 
work environment, the ability to make more money in the private sector, 
and the high cost of living in many areas where BLM has field offices. 
Importantly, BLM officials from all five field offices told us that 
when they have conducted production inspections, they have identified 
numerous violations. For example, BLM staff in four of the five field 
offices identified errors in the oil and gas production volumes 
reported by operators to MMS by comparing production reports with third-
party source documents. Additionally, BLM staff from one field office 
we visited showed us a bypass built around a gas meter that could allow 
gas to flow around the meter without being measured. BLM staff 
subsequently ordered the operator to remove the bypass but did not fine 
the operator. Staff from another field office told us of a case in 
which BLM had to remove illegal gas lines that routed gas to private 
residences. Finally, in one of the field offices we visited, BLM 
officials told us of an instance in which a company maintained two sets 
of conflicting production data--one used by the company and another 
reported to MMS. In this instance, BLM ordered the company to correct 
and resubmit production data to MMS. 

Similarly, OEMM, which is responsible for inspecting offshore 
production facilities that include oil and gas meters, did not complete 
inspections of offshore oil and gas royalty meters as required by its 
policy or applicable law in 2007. OEMM officials responsible for 
inspecting royalty meters in the Gulf of Mexico--meters that measure 
oil and gas for determining royalty payments--told us they completed 
about half of the required 2,700 royalty meter inspections in 2007. 
This is far less than required under OEMM's 1994 Gulf of Mexico 
production inspection policy, which requires all oil and gas royalty 
meters be inspected annually. Meter inspections are an important aspect 
of the offshore production verification process because, according to 
OEMM officials, one of the most common violations identified during 
inspections is missing or broken meter seals. These seals are required 
to be kept in place to prevent tampering with measurement equipment. 
When seals are broken, without closer inspection and testing, it is not 
possible to determine whether the meter is correctly measuring oil or 
gas production. OEMM officials explained that one reason OEMM failed to 
complete its required inspections was the continuing cleanup work 
related to Hurricanes Katrina and Rita in 2005. Furthermore, the 
Federal Oil and Gas Royalty Management Act instructed the Secretary of 
the Interior to inspect leases annually that are producing or expected 
to produce significant quantities of oil or gas in any year or that 
have a history of noncompliance with applicable law or regulations. 
While Interior has defined these terms for onshore oil and gas leases, 
it has not yet done so for offshore oil and gas leases. As a result, 
when production inspectors are unable to inspect all royalty meters as 
required by their policy, they lack the criteria for effectively 
prioritizing inspections based on production volumes or concerns about 
noncompliance. Therefore, the Secretary cannot be assured that federal 
oil and gas production is being measured accurately. 

Moreover, when BLM and OEMM do complete production inspections, staff 
are not always accurately recording this work in their databases. For 
example, of the 27 BLM field offices in five states we reviewed, 2 
field offices had fiscal year 2007 production inspection data that 
could not be validated by the state's inspection and enforcement 
coordinator, and 6 field offices had instances of production inspection 
data changing after the end of the fiscal year, in violation of BLM's 
policy. For example, Wyoming's state inspection and enforcement 
coordinator could not validate a field office's inspection numbers 
because the coordinator lacked confidence in that field office's 
ability to correctly identify high production leases. The coordinator 
explained that because of MMS and BLM data transfer issues caused by 
ongoing Indian trust fund litigation, BLM staff may not be able to 
easily or accurately identify high producing leases.[Footnote 12] 
Additionally, 6 field offices revised their completed production 
inspection data after the end of the fiscal year. For example, 
officials in a Montana field office reported that 20 additional 
inspections were entered into the database for fiscal year 2007 because 
staff identified inspections that had been completed and documented in 
paper files but had not been entered into their database. Finally, in a 
number of instances, the inspection priority changed during the year. 
For example, one of the field offices in Montana adjusted the number of 
high-priority inspections downward after staff realized they had 
initially incorrectly identified the high-priority inspections because 
of database shutdowns caused, again, by the ongoing Indian trust fund 
litigation. 

Similarly, according to interviews with OEMM officials, OEMM staff do 
not consistently check the accuracy of the production inspection data 
entered. For example, OEMM data indicated that at one facility no 
meters were available for inspection, yet 16 meter inspections had 
occurred during calendar year 2007, which an OEMM official confirmed 
was an error. An OEMM official explained that one reason for errors may 
be data entry problems (a clerk, not the inspectors themselves, enter 
the data). OEMM officials state they are currently implementing new 
procedures to ensure that valid data are entered into the database. 
Accurate and timely data are critical for monitoring ongoing progress 
and whether annual goals and targets are met. However, because of the 
errors identified in both BLM's and OEMM's data, we cannot report the 
precise number of production inspections completed. 

MMS's Royalty Information Technology System and Processes Are Improving 
but Still Lack Key Functions That Could Provide Greater Assurance on 
the Accuracy of Royalty Collections: 

While MMS continues to improve its current royalty IT system, which 
went online in 2001, and its royalty collection processes, it still 
lacks several key functions and processes that could provide greater 
assurance that royalties are accurately collected, including, (1) the 
ability to maintain the accuracy of production and royalty data entered 
by companies, (2) the ability to identify missing royalty reports in a 
timely manner, and (3) a process to ensure that accurate royalties are 
paid on volume discrepancies identified by OEMM and BLM during their 
production inspections. 

MMS's ability to maintain the accuracy of production and royalty data 
is hampered because companies can make adjustments to their previously 
entered data without prior approval. Companies may legally make changes 
to both royalty and production data in MMS's royalty IT system for up 
to 6 years after the initial reporting month, and these changes may 
necessitate changes in the royalty payment.[Footnote 13] According to 
MMS, most adjustments are made within the first several years after 
initial reporting. For example, MMS's analysis of adjustments made to 
royalty reports in fiscal year 2007 show that 75 percent of all 
accepted adjustment lines were reported within 3 years of their 
corresponding sales month. However, MMS's royalty IT system currently 
allows companies to make adjustments to their data beyond the allowed 6-
year time frame. MMS examined data from September 2002 through July 
2007 to determine the number of adjustments made outside the 6-year 
time frame. The results of this analysis suggested that more than 
81,000 adjustments were made to data outside the time frame, though 
according to MMS officials, some of these adjustments were 
retroactively approved. As a result of the companies' ability to make 
these retroactive changes, within or outside of the 6-year time frame, 
the production data and required royalty payments can change over time, 
complicating efforts by agency officials to reconcile production data 
and ensure that the proper royalties were paid. Furthermore, changes 
made to the data do not necessarily trigger a review to determine their 
reasonableness or whether the adjustments impact the royalties due. 
According to agency officials, these adjustments are investigated by 
staff only if the company or lease is selected for an audit or 
compliance review. This is problematic for several reasons. First, 
current law is that companies may make adjustments to their federal 
royalty payment data up to 6 years after the production reporting 
month.[Footnote 14] MMS issues monetary demands for unpaid royalties up 
to 7 years after the last adjustment made by a company. However, the 
law, which provides that a demand be made within 7 years from the date 
an obligation becomes due, could be interpreted as giving MMS only 7 
years from the initial month of the production reporting date.[Footnote 
15] This interpretation would, in some cases, allow MMS only 1 year to 
identify any erroneous adjustments and issue a monetary demand for any 
additional royalties due. Second, companies may change production and 
royalty data after an audit or compliance review has been completed, 
making it unclear whether these audited royalty payments remain 
accurate after they have been reviewed. MMS typically conducts 
compliance work approximately 3 years after companies initially report 
the data, at which point, according to MMS officials, companies have 
made the majority of their adjustments. However, companies have several 
additional years after MMS typically completes its compliance work to 
adjust their royalty data, and current MMS policies do not require that 
all subsequent postcompliance work adjustments be reviewed. MMS is 
aware of these issues and is in the process of addressing the issues 
over which it has authority. Specifically, MMS is developing 
requirements to modify its royalty IT system to monitor adjustments. 
The stated goal is for the royalty IT system to automatically identify 
adjustments that have been made to data outside of the allowable 6-year 
time frame and to monitor adjustments made within the allowable time 
frame after MMS closes an audit or compliance review. 

Further, MMS's royalty IT system is unable to automatically detect 
instances when a royalty payor fails to submit the required royalty 
report in a timely manner. MMS relies on two critical pieces of data in 
verifying the accuracy of royalty payments: the production report, 
which operators submit to document the total oil and gas production 
from a particular lease or several combined leases, and the royalty 
report, payors submit to document the royalty paid on oil and gas 
production. With few exceptions, MMS should receive a corresponding 
royalty report or reports for each production report it receives. When 
MMS's current royalty IT system went online in 2001, it was not able to 
reliably detect either missing production or royalty data. In 2004, MMS 
modified its royalty IT system to automatically detect missing 
production data. As a result, MMS has identified a backlog of 
approximately 300,000 missing production data records, which includes 
both entire production reports and missing wells on those production 
reports. MMS subsequently established teams to research the missing 
records and told us that the goal was to resolve all missing record 
issues older than 90 days by the end of 2008. More recently, however, 
MMS has revised its goal downward to address 80 percent of the missing 
records by the end of 2008. Preliminary results, according to agency 
staff, suggest that many of the issues can be explained by BLM staff 
delays in entering well and production reference data and sharing that 
data with MMS, and not necessarily by a company's failure to submit the 
required report. However, MMS's royalty IT system continues to lack the 
ability to automatically detect cases in which an expected royalty 
report has not been filed in a timely manner. As a result, cases in 
which a company stops filing royalty reports and stops paying royalties 
may not be detected until more than two years after the initial 
reporting date, when MMS's royalty IT system completes a reconciliation 
of volumes reported on the production reports with the volumes on their 
associated royalty reports. Therefore, it remains possible under MMS's 
current strategy that the royalty IT system may not identify instances 
in which a payor stops reporting until several years after the report 
is due. This creates an unnecessary risk that MMS may not be collecting 
accurate royalties in a timely manner. 

Finally, MMS lacks a consistent process to ensure that the appropriate 
royalties are paid when either OEMM or BLM identifies volume 
discrepancies while conducting production inspections and other 
production verification activities. To verify that oil and gas 
production is accurately reported to MMS, BLM sometimes and OEMM always 
compares the volumes reported on the production report to other third- 
party documents that contain production information, such as a pipeline 
statement. When they find discrepancies between these two documents, 
they typically forward the information to MMS, which then takes steps 
to reconcile and correct the discrepancies. For example, BLM's policy 
is for staff to forward all volume discrepancies to MMS's royalty 
reporting section, which then attempts to correct the volume error by 
talking to operators. In some instances, MMS may request that the 
operator submit a corrected production report. However, MMS staff in 
the production reporting section do not automatically notify the 
royalty reporting staff so that they may check to ensure that the 
correct royalties were paid. In other words, these newly reconciled 
data are not automatically and systematically compared in a timely 
manner with the reported sales volume in the royalty report previously 
entered into the royalty IT system. While a comparison between these 
revised production data and the production data included in the royalty 
report may occur several years later via MMS's production and royalty 
report volume reconciliation process, or if the royalty payor's 
property has been selected for an audit or compliance review, without a 
timely systematic comparison of all such records, MMS cannot ensure 
that the initial royalty payment is accurate. 

MMS Does Not Consistently Review Third-Party Documents for Onshore 
Compliance Reviews to Verify Company-Reported Royalty and Production 
Data Are Accurate: 

While MMS is currently strengthening its process for selecting 
companies or leases to review, its increased use of compliance reviews-
-which are more limited in scope than audits--has led to an 
inconsistent use of third-party documents to verify that self-reported 
royalty data are correct, putting accurate royalty collections at risk. 
According to MMS, compliance reviews can be conducted much more quickly 
and require fewer resources than audits, largely because they represent 
a more limited reasonableness check of the accuracy and completeness of 
a company's self-reported data and do not include a systematic 
examination of underlying third-party documentation. Audits, on the 
other hand, are more time-and resource-intensive, and they include the 
review of third-party documents, such as sales revenue data, 
transportation and gas processing costs, and production volumes, to 
verify whether company-reported data are accurate and complete. 
Finally, a 2006 Interior IG audit found that MMS's data tracking the 
number of completed audits and compliance reviews were inaccurate, and 
as such, we are unable to provide this information. 

Currently, OEMM requires that companies submit pipeline production data 
for oil and gas produced offshore. MMS then uses the data when 
conducting compliance reviews for offshore properties. Additionally, 
MMS recently assessed the effectiveness of its offshore compliance 
reviews. For calendar year 2002, MMS compared the results of 100 out of 
about 700 compliance reviews of offshore leases and companies with the 
results of audits conducted on those same leases or companies. As a 
result of this evaluation, MMS now plans to improve its compliance 
review process by, for example, ensuring that it includes a step to 
check that royalties are paid on all royalty-bearing products, 
including other petroleum-based products such as retrograde--a liquid 
product that condenses out of natural gas. 

In contrast, because of the significantly greater number of onshore 
leases and pipelines, BLM collects only a limited amount of pipeline 
and other third-party data for onshore production. Furthermore, because 
MMS itself does not routinely request these data from the companies, it 
does not systematically use third-party data when conducting onshore 
compliance reviews. In 2006, Interior's IG reviewed MMS's compliance 
process and made a number of recommendations to strengthen it. The IG 
recommended, among other things, that MMS examine 1 month of third- 
party documentation as part of each compliance review to provide 
greater assurance that both the production and allowance data are 
accurate. To address this recommendation, MMS revised its compliance 
review guidance to include suggested steps for reviewing third-party 
source production data, when available, for both offshore and onshore 
oil and gas. However, the revised guidance falls short of making these 
steps a requirement for onshore compliance reviews. And while MMS 
completed a study comparing the results of compliance reviews with 
those of audits for offshore properties and leases, MMS could not 
provide us with a similar study for onshore properties and leases. 

Moreover, as noted above, as of 2001, MMS began using compliance 
reviews in addition to audits to meet its performance goal of 
completing compliance activities on a specified percentage of royalty 
payments within 3 years of the initial royalty payment. For example, in 
2006, MMS reported that it had achieved its goal by confirming 
reasonable compliance on 72.5 percent of all calendar year 2003 
royalties.[Footnote 16] However, Interior's IG found in a 2006 audit 
that MMS did not track the extent to which it achieved its performance 
goal through audits that systematically rely on third-party documents, 
as opposed to compliance reviews that do not. Additionally, the IG 
found that MMS's data on completed audits and compliance reviews were 
inaccurate and incomplete. When we examined MMS's compliance program in 
2007, MMS did not yet have reliable data on either the numbers of 
audits and compliance reviews completed or their respective 
contribution to the annual performance goal. MMS is now in the process 
of implementing Interior's IG recommendation and should have these data 
available for reporting purposes in 2009. During the same audit, 
Interior's IG also found that to help meet its performance goal, MMS 
had historically conducted compliance reviews or audits on the leases 
and companies that generated the most royalties, with the result that 
the same leases and companies were reviewed year after year. 
Accordingly, many leases and companies have gone years without having 
been audited, though some were subject to a more limited review. To 
address this compliance gap, Interior's IG recommended that MMS develop 
risk criteria for selecting leases and companies to conduct either 
compliance reviews or audits. MMS responded by working with a 
contractor to identify the necessary criteria for developing a risk- 
based approach for selecting companies and leases for either audits or 
compliance reviews. MMS is now implementing a pilot project, after 
which it will assess the results to further refine its new compliance 
approach. 

Finally, representatives from the states and tribes who are responsible 
for conducting compliance work under agreements with MMS have expressed 
concerns about the quality of self-reported production and royalty data 
they use in their reviews. As part of our work, we sent questionnaires 
to all 11 states and 7 tribes that conducted compliance work for MMS in 
fiscal year 2007. Of the 9 state and 5 tribal representatives who 
responded, 7 reported that they lack confidence in the accuracy of the 
royalty data. For example, several representatives reported that 
because of concerns with MMS's production and royalty data, they 
routinely look to other sources of corroborating data, such as 
production data from state oil and gas agencies and tax agencies. 
Finally, several respondents noted that companies frequently report 
production volumes to the wrong leases and that they must then devote 
their limited resources to correcting these reporting problems before 
beginning their compliance reviews and audits. 

Conclusions: 

Interior has been subject to significant examination and oversight of 
its royalty management programs over the years, which has resulted in 
GAO, Interior's Inspector General, and the Royalty Policy Committee 
issuing numerous recommendations to improve royalty collections. So 
far, Interior has been responsive to these recommendations and, as an 
example, is currently implementing an action plan to address the 
Royalty Policy Committee's recently issued recommendations. As a 
result, many of Interior's processes and systems are in flux, and the 
outcome of these potential improvements will not be known for some 
time. However, given high oil and gas prices and the increased interest 
on the part of oil and gas companies in the nation's oil and gas 
resources, it is important that we have a royalty collection system 
going forward that can assure the American public that the government 
is receiving accurate and timely royalty payments. Critical to this is 
that both BLM and OEMM complete and accurately document their 
production inspection and verification work. Furthermore, collections 
of accurate royalties will remain at risk as long as companies may make 
unverified adjustments to royalty and production data after MMS 
completes its compliance activities. Increasing this risk is 
uncertainty regarding the statutory time frames for MMS to collect 
unpaid royalties, which under one interpretation may leave just 1 year 
for MMS to identify an improper adjustment. Ultimately, Interior's 
royalty IT system and policies should provide adequate assurance that 
the federal government receives appropriate value for oil and gas 
produced from federal lands and waters. This royalty collection process 
should also rely less on companies providing accurate information on 
production and royalties owed, and more on a system with the ability to 
conduct thorough and independent verification of what is owed to the 
government, using third-party data where available at reasonable cost, 
and more systematically examining company source documentation. 

Recommendations for Executive Action: 

To help provide greater assurance that federal oil and gas is being 
measured accurately, we recommend the Secretary of the Interior take 
the following three actions: 

* Report to Congress any year in which OEMM and BLM have not met their 
legal and agency requirements for completing production inspections, 
along with the cause and a plan for achieving compliance. 

* Define the terms "lease sites producing or expected to produce 
significant quantities of oil or gas in any year" and "lease sites 
which have a history of noncompliance with applicable provisions of law 
or regulations" for offshore oil and natural gas leases. 

* Direct BLM and OEMM to evaluate both the accuracy and completeness of 
production inspection data in their databases, including the timeliness 
of data entry, and amend relevant policies and procedures as necessary. 

In addition, we recommend that the Secretary of the Interior direct MMS 
to take the following three actions to improve its royalty IT system 
and royalty collection and verification processes: 

* Conduct a study on the Federal Oil and Gas Royalty Simplification and 
Fairness Act's effect on MMS's capacity to efficiently and accurately 
collect federal royalties due by analyzing both the (1) 6-year 
timeframe for allowing companies to make adjustments to their federal 
royalty data and (2) MMS's 7-year time frame for issuing monetary 
demands for additional royalties. This study should identify an 
appropriate time period cutoff for allowing companies to make 
adjustments without MMS's prior approval to their royalty and 
production data and related payments, address the need for 
clarification on when the 7-year time period begins for issuing a 
monetary demand, and report the findings to Congress. 

* Finalize the adjustment line monitoring specifications for modifying 
its royalty IT system and fully implement the IT system so that MMS can 
monitor adjustments made outside the legal 6-year time frame, and 
ensure that any adjustments made to production and royalty data after 
compliance work has been completed are reviewed by appropriate staff. 

* Develop processes and procedures by which MMS can automatically 
identify when an expected royalty report has not been filed in a timely 
manner, and contact the company to ensure it is complying with both 
applicable laws and agency policies. 

Finally, to improve its compliance program, we recommend that the 
Secretary of the Interior direct MMS to require that the onshore 
compliance review process include the review of a sample of third-party 
documentation in instances when BLM has not already collected this 
information to provide additional assurance that self-reported data are 
correct. 

Agency Comments and our Evaluation: 

We provided a draft of this report to the Department of the Interior 
for review and comment. The Department of the Interior provided written 
comments that are presented in Enclosure I. DOI generally agreed with 
our findings and conclusions. In addition, they concurred with six of 
the seven recommendations, and partially concurred with the other 
recommendation. For the recommendation on which they partially 
concurred regarding reporting to Congress on production inspections 
annually, DOI agreed with the need to report to Congress when 
production inspections were not completed as required, but disagreed on 
the nature of the reporting we recommended in our draft report. 
Specifically, Interior commented that it would be more useful to 
provide Congress with a report only in years in which they fail to meet 
their inspection requirements rather than providing Congress with an 
annual report on whether production inspections were completed along 
with an explanation as to the why the inspections were not completed. 
We modified the recommendation in response to this comment. 

We are sending copies of this report to the Secretary of the Interior, 
appropriate congressional committees, and other interested parties. We 
will also make copies available to others on request. In addition, this 
report will be available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact either Frank Rusco at (202) 512-3841 or [email protected], or 
Jeanette Franzel at (202) 512-9471 or [email protected]. Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this report. Contributors to this report 
include Jon Ludwigson (Assistant Director), Paul Kinney (Assistant 
Director), Ron Belak, Ben Bolitzer, Lisa Brownson, Melinda L. Cordero, 
Nancy Crothers, Glenn C. Fischer, Cindy Gilbert, Tom Hackney, Barbara 
Kelly, Sandra Kerr, Jennifer Leone, Barbara Timmerman, and Mary Welch. 

Signed by: 

Frank Rusco: 

Acting Director, Natural Resources and Environment: 

Signed by: 

Jeanette Franzel: 

Director, Financial Management and Assurance: 

List of Requesters: 

The Honorable Jeff Bingaman: 
Chairman: 
Committee on Energy and Natural Resources: 
United States Senate: 

The Honorable Nick J. Rahall, II: 
Chairman: 
Committee on Natural Resources: 
House of Representatives: 

The Honorable Tom Davis: 
Ranking Member: 
Committee on Oversight and Government Reform: 
House of Representatives: 

The Honorable Darrell Issa: 
Ranking Member: 
Subcommittee on Domestic Policy: 
Committee on Oversight and Government Reform: 
House of Representatives: 

The Honorable Carolyn Maloney: 
House of Representatives: 


[End of section] 

Enclosure I: 

United States Department of the Interior: 
Office Of The Secretary: 
Washington, DC 20240: 

August 28, 2008: 

Mr. Frank Rusco: 
Acting Director, Natural Resources and Environment: 
Government Accountability Office: 
441 G. Street, NW: 
Washington, D.C. 20548: 

Dear Mr. Rusco: 

Thank you for the opportunity to review and comment on the Government 
Accountability Office draft report entitled, "Mineral Revenues: Data 
Management Problems and Reliance on Self-Reported Data for Compliance 
Efforts Put Royalty Collections at Risk" (GAO-08-893R), which follows 
up on prior GAO work. We generally agree with your findings and concur 
with six of the seven recommendations in the draft report. We partially 
concur with the report's first recommendation to report annually to the 
Congress the extent to which we have met legal and agency requirements 
for completing production inspections. Reporting on exceptions rather 
than instituting an additional annual report as recommended by the GAO 
provides more relevant information to the Congress. Exception reporting 
(such as when a goal is missed in the event that yearly production 
inspection requirements are not met) highlights the exception making 
the report more relevant and useful. The MMS already provides annual 
reports to the Congress on minerals revenue management. Therefore, 
instead of an additional annual report to the Congress, a report will 
be sent to the Congress with an explanation of the circumstances 
contributing to missed goals. We would be happy to provide any report 
requested by Congress. 

General Comments: 

As noted in your draft report, the Department of the Interior's 
Minerals Management Service and Bureau of Land Management are 
responsible for the administration and oversight of oil and gas 
operations, including revenue collection from more than 28,000 
producing Federal leases onshore and offshore. The MMS and the BLM work 
together to ensure that oil and gas companies comply with applicable 
laws and pay their correct royalty on Federal oil and gas leases. 

The draft report notes that the MMS royalty information technology 
system and processes continue to improve. At the same time, the MMS 
continues to strengthen its compliance efforts. Recently, the MMS 
developed and deployed a risk-based analysis tool to focus its 
resources on auditing and reviewing companies and properties with the 
greatest risk of underreporting oil and gas production and the 
resulting royalties due to the Federal Government. 

As you noted, the Department has been responsive to recommendations 
made by various oversight groups. For example, the draft report notes 
that Secretary of the Interior Kempthorne appointed the Royalty Policy 
Committee, Subcommittee on Royalty Management, to conduct an 
independent, bipartisan examination of the minerals revenue management 
program. The Subcommittee, co-chaired by former Senators Bob Kerrey (D-
NE) and Jake Gam (R-UT), developed a report with more than 100 
recommendations to improve the Department's mineral royalty program. 
The Department is aggressively implementing the Subcommittee's 
recommendations and has already taken steps to enhance the 
recommendations related to production accountability and collections. 

The draft report recognizes that the MMS and the BLM collect third-
party and source documentation to validate the accuracy of the royalty 
and production data reported by Federal and Indian oil and gas lessees. 
However, both agencies can enhance the use and timeliness of this 
information to provide greater assurance that royalties are being 
accurately collected. 

Conclusion: 

We are committed to securing America's energy future and quality of 
life while protecting the environment. The DOI promotes energy, the 
economy. and the environment. We look forward to continuing to work 
with you to improve the accuracy of royalty data collections. and we 
will provide any reports that Congress requests. If you have any 
questions about this response. please contact Andrea Nygren, MMS Audit 
Liaison Officer, at (2021208-4343. 

Sincerely,

Signed by: 

C. Stephen Allred: 
Assistant Secretary: 
Land and Minerals Management: 

[End of section] 

Footnotes: 

[1] Pub. L. No. 97-451, ï¿½ 101 (1983). 

[2] BLM records inspection information in its Automated Fluid Minerals 
Support System, while OEMM records its inspection information in its 
Technical Information Management System. 

[3] Companies are required to self-report monthly production volumes to 
MMS on an Oil and Gas Operations Report (OGOR) form. 

[4] Companies are required to self-report monthly royalty payments to 
MMS on the Report of Sales and Royalty Remittance Form, Form 2014. 

[5] The royalty rate varies somewhat but is typically in the range of 
12.5 percent to 18.75 percent. In other words, the federal government 
typically receives between 12.5 percent and 18.75 percent of revenue 
less allowable deductions, for oil and gas produced on federal lands 
and waters. Allowable deductions include payments to pipeline companies 
and other shipping costs required to transport the commodity to a 
market center, as well as adjustments made for the costs of processing 
natural gas. 

[6] This system, also known as the Minerals Revenue Management Support 
System, is designed to store and support the collection, verification, 
and disbursement of royalty revenues from federal and Indian mineral 
leases. Indian leases do not have time restrictions on making 
adjustments. 

[7] An allotted account is an account set up to receive royalties for 
any land held in trust or restricted status by the Secretary of the 
Interior, on behalf of one or more Indians. 

[8] Eleven states (Alaska, California, Colorado, Louisiana, Montana, 
New Mexico, North Dakota, Oklahoma, Texas, Utah, and Wyoming) and seven 
tribes (Blackfeet Nation, Jicarilla Apache Tribe, Navajo Nation, 
Shoshone and Arapaho Tribes, Southern Ute Indian Tribe, Ute Mountain 
Ute Tribe, and the Ute Indian Tribe) conducted compliance work under 
cooperative agreements with MMS in fiscal year 2007. 

[9] Indian leases are not subject to the same 7-year time restriction 
for making monetary demands. 

[10] Although we considered the production inspection results from all 
27 BLM field offices in these five states, we excluded production 
inspection results from two BLM field offices where BLM state 
inspection and enforcement coordinators could not validate production 
inspection numbers because they felt that the data in BLM's Automated 
Fluid Minerals Support System--the database used to track production 
inspections--were unreliable. We excluded one additional BLM field 
office because it is implementing a pilot project inspection program 
using different selection and prioritization criteria; therefore, it is 
not comparable with the other BLM field offices. 

[11] To gain a balance of perspectives of how BLM field offices conduct 
production inspections, we chose a nonprobability sample of five field 
office locations--Meeker, Colorado; Vernal, Utah; Farmington, New 
Mexico; Pinedale, Wyoming; and Buffalo, Wyoming. In choosing these 
field offices we sought to ensure we visited BLM field offices that 
represent a range of BLM state office jurisdictional policies. While 
this nonprobability sample allowed us to learn about many important 
aspects of production inspections, it was not designed to be 
representative of all inspection activities at BLM field offices. As 
such, the findings cannot be generalized to sites we did not visit. 

[12] In the Cobell v. Norton litigation--now Cobell v. Kempthorne-- 
concerning the government's management of Native American trust funds, 
a U.S. District Court judge, on December 5, 2001, ordered the 
Department of the Interior to disconnect from the Internet all 
information technology systems that house or provide access to 
individual Indian trust data. The last of the systems was allowed to 
reconnect to the Internet in May of this year. 

[13] The Federal Oil and Gas Royalty Simplification and Fairness Act of 
1996, Pub. L. No. 104-185, ï¿½ 5(a) (1996), provides a 6-year adjustment 
window. 

[14] 30 U.S.C. ï¿½ 1721a. 

[15] 30 U.S.C. ï¿½ 1724(b). 

[16] MMS conducts other types of compliance work, such as limited scope 
compliance reviews, which examine, among other things, one or more of 
the variables--sales price, sales volume, and royalty rate--of the 
royalty equation. MMS did not count these reviews towards its 
performance goal.

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