[Audit Report on Negotiated Royalty Settlements, Minerals Management Service ]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 96-I-1264

Title: Audit Report on Negotiated Royalty Settlements, Minerals Management
       Service 

Date: September 30, 1996

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A printed copy of this report may be obtained by referring to the PDF file or by calling the Office
of Inspector General, Logistical Services Branch at (202) 219-3840.
                  ******************************

United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington, D.C. 20240

TO:            The Secretary

FROM:          Wilma A. Lewis
               Inspector General

SUBJECT SUMMARY:  Final Audit Report for Your Information - "Negotiated
                     Royalty Settlements, Minerals Management Service"

Attached for your information is a copy of the subject final audit report. The
objective of the audit was to determine whether the settlements were conducted in
accordance with the "Minerals Management Service Settlement Negotiation
Procedures."

We found that the results of royalty settlement negotiations were not always
documented in accordance with the "Negotiation Procedures." Specifically, based on
our review of 10 settlements, we found that Service files: (1) did not contain
adequate documentation on the estimated values of the issues to be settled and the
arguments for reducing the values of issues for 6 settlements and (2) did not explain
why the estimated values of 9 issues totaling about $312 million were reduced by
about $94 million at settlement. Service personnel said that documentation was
inadequate because they did not have sufficient personnel to perform this task and
because they were concerned that release of this information under the Freedom of
Information Act could affect future settlement negotiations with other royalty payers.
We also found that the Service did not offer two Indian tribes the options to
negotiate their issues separate from Federal and state issues in one of the
settlements or to participate in the negotiations of their issues for this settlement,
although offering these options was required by the "Negotiation Procedures."

We considered our recommendation relating to Indian tribal participation in the
settlement negotiations resolved and requested that the Service reconsider its
responses to the recommendations regarding documentation and release of
information issues, which were unresolved.

If you have any questions concerning this matter, please contact me at (202) 208-
5745.

Attachment


C-IN-MOA-005-94(D)

United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington, D.C. 20240

AUDIT REPORT

Memorandum

To:       Director, Minerals Management Service

From:  Robert J. Williams
               Acting Assistant Inspector General for Audits     

Subject:  Audit Report on Negotiated Royalty Settlements, Minerals
Management Service  (No. 96-I-1264)

INTRODUCTION

This report presents the results of our review of royalty settlements negotiated by the
Minerals Management Service's Royalty Management Program. The objective of the
review was to determine whether the settlements were conducted in accordance with
the "Minerals Management Service Settlement Negotiation Procedures." Based on
our review of completed settlements, we concluded that the Service had not complied
consistently with the "Negotiation Procedures." As a result, the Service did not
maintain sufficient information to substantiate that the settlements were negotiated
in the best interests of the Government, states, Indian tribes, and Indian allottees.

BACKGROUND

The Minerals Management Service is responsible for managing mineral resources on
the Nation's Outer Continental Shelf and for collecting and distributing lease and
royalty revenues from Outer Continental Shelf, Federal onshore, and Indian lands.
The Service's Royalty Management Program has frequently been involved in
disagreements with states, tribes, individual Indians, and mineral lessees concerning
the amount of royalties owed Federal/state governments, Indian tribes, and individual
Indians.

The Administrative Dispute Resolution Act of 1990 allows the Service to negotiate
settlements of royalty payments without going through extensive and costly
adjudication and litigation processes. The negotiations for royalty settlements are
requested by royalty payers that have appealed bills or orders.  The Office of
Enforcement of the Service's Royalty Management Program has primary
responsibility for overseeing each royalty settlement. This responsibility is carried
out through use of a negotiation team composed of representatives from the
Program divisions, the Office of Enforcement, and other Service and/or Office of the
Solicitor personnel.  If onshore or tribal monies are involved in a settlement,
representatives of affected states or tribes are to be included on the negotiation
team.

From April 1993 through March 1995, the Service negotiated 97 settlements, which
will result in additional royalty payments and interest on late payments of about
$322 million.

SCOPE OF AUDIT

Our review was conducted in accordance with the "Government Auditing Standards,"
issued by the Comptroller General of the United States. Accordingly, our review
included such tests of records and other auditing procedures that were considered
necessary under the circumstances to accomplish the audit objective.

This audit was performed during April through September 1995 at the Service's
Royalty Management Program office in Lakewood, Colorado. We reviewed
10 settlements completed during April 1993 through March 1995 that totaled about
$218 million, or about 68 percent of the total value of settlements completed during
this period. We selected settlements that included multiple (global), single, Federal
onshore and offshore, state, and Indian oil and gas issues, as well as minerals and
geothermal issues.

As part of our review, we evaluated the system of internal controls to the extent we
considered necessary. The internal control weaknesses identified are discussed in the
Results of Audit section of this report. If implemented, the recommendations should
improve the internal controls.

We reviewed the Department of the Interior Annual Statement and Report, required
by the Federal Managers' Financial Integrity Act, for fiscal year 1994 to determine
whether any reported weaknesses were within the objective and scope of our review.
The Department's Annual Statement and Report did not report any weaknesses
related to negotiated royalty settlements.

PRIOR AUDIT COVERAGE

Neither the Office of Inspector General nor the General Accounting Office has
issued any reports that addressed the Service's negotiated royalty settlements.

2

 


RESULTS OF AUDIT

We found that royalty settlement negotiations were not always conducted in
accordance with the "Minerals Management Service Settlement Negotiation
Procedures."  Specifically, for 9 of the 10 settlements reviewed, there was no
documentation for the estimated values of the issues concerning the underpayment
of royalties to be negotiated, the arguments for reducing values of issues, and/or the
reasons why the values of issues were reduced as a result of negotiations. In
addition, for one of the nine settlements, Indian tribes were not given the
opportunity to exclude Indian issues from a global settlement and were not included
in negotiations applicable to their leases.

The "Negotiation Procedures" requires that the Service take the following actions
prior to negotiation: (1) prepare a list of issues to be settled, including leases and
all estimated values and arguments for reducing the values of issues, and
(2) determine whether Indian tribes want to be included in global settlements. After
negotiations have been completed, the "Negotiation Procedures" requires the Service
to prepare a memorandum for each settlement that describes the issues settled, how
the issues were valued, and the reasons why the values of issues were reduced, if
appropriate. In addition, an Indian tribe may have its royalty issues negotiated
separate from Federal and state issues if it desires, and each tribe is authorized to
have a representative participate in the negotiations.

Based on our review of 10 settlements, we found that the Service's files: (1) did not
contain adequate documentation on the estimated values of the issues to be settled
and the arguments for reducing the values of issues for 6 settlements and (2) did not
explain why the estimated values of 9 issues totaling about $312 million were reduced
by about $94 million at settlement. Further, the Service did not offer two tribes an
option to exclude their issues from one of the settlements or include the tribes in
negotiations of their issues for this settlement. For example:

  - Prior to negotiations, one of the Service's Royalty Management Program
divisions estimated the value of a particular issue to be negotiated in a global
settlement to be about $439 million. However, the list of issues and values prepared
by the negotiation team prior to negotiations estimated that the same issue was
valued at $78.6 million, Documentation in the settlement file was insufficient to
explain the $360.4 million difference in the estimated values of this issue.

  - A single issue settlement was negotiated for $4.3 million. Documentation in
the settlement file was insufficient for us to determine the prenegotiation estimated
value for this issue.

3

 
  - A global settlement with an estimated prenegotiation value of $208.1 million
was negotiated for $150 million.  Documentation in the settlement file was
insufficient to explain why issue values were reduced by $58.1 million.

- A global settlement with an estimated prenegotiation value of $58 million was
negotiated for $44 million. Documentation in the settlement file was insufficient to
explain why issue values were reduced by $14 million.

  - In a global settlement, two Indian tribes were not contacted to determine
whether they desired to have their issues excluded and negotiated separately. Also,
these tribes were not offered the opportunity to participate in the negotiation
process.  Subsequent to this settlement, the State and Tribal Royalty Audit
Committee stated, in a March 30, 1995, letter to the Service, that the negotiation
process could be improved by notifying states and tribes immediately when a
company had informed the Service that it wanted to initiate settlement discussions
that involved state and tribal revenues. Also, the Committee stated that the Service
should contact the states and tribes to determine whether their issues should be
excluded from a global settlement. The "Negotiation Procedures" requires that if a
state or tribe decides that its issues are to be included in a settlement, then each
affected state or tribe should participate in settlement negotiations.

Service personnel stated that lists of issues, estimated values of issues to be
negotiated, and arguments for reducing the royalty amounts in negotiations were not
documented before negotiations commenced because the Office of Enforcement did
not have sufficient personnel to document this information. Although the Office of
Enforcement has a staff of only eight people, we believe that this documentation
could be prepared by members of the settlement negotiation team.

Service personnel also stated that documentation was not prepared that explained
why values of issues were reduced because the release of this information under the
Freedom of Information Act could affect future settlement negotiations with other
royalty payers. Service personnel stated that royalty payers may obtain information
that reveals the Service's negotiation strategies or its willingness to reduce the values
of issues. Although the Service cited release of negotiation information as a concern,
the Service had not requested an opinion from the Office of the Solicitor to
determine whether such information is required to be released to royalty payers
under the Freedom of Information Act. The Service also had not received any
requests under the Freedom of Information Act to obtain information on why the
values of issues were reduced.

Further, Service personnel stated that Indian tribes were not always given the
opportunity to exclude Indian issues from global settlements and were not always
included in settlement negotiations of their issues in instances in which the Service
obtained 100 percent of the value of Indian issues in global settlements. However,

4

 
Service personnel stated that Indian tribes would be queried prior to future
settlement negotiations to determine whether Indian issues should be negotiated
separately and to determine whether tribes desired to participate in settlement
negotiations of tribal issues.

As a result of the documentation deficiencies cited, there was insufficient information
for us to determine whether the settlements were negotiated in the best interests of
the Government, states, Indian tribes, and Indian allottees. Specifically, we could not
determine whether issues were improperly omitted from negotiations or whether
royalty values were reduced unnecessarily. Without complete prenegotiation and
postnegotiation settlement documentation, the actions taken by settlement
negotiation teams cannot be accounted for.

Recommendations

We recommend that the Director, Minerals Management Service, ensure that
Royalty Management Program personnel:

  1. Document the estimated values of issues to be settled, arguments for
reducing values of royalties before negotiations commence, and reasons why the
values were reduced.

2. Obtain a written opinion from the Office of the Solicitor as to whether the
Service is required to release information on the Service's negotiation strategies to
royalty payers under the Freedom of Information Act that could compromise future
settlement negotiations. If the Office of the Solicitor opines that such information
must be released, the Service should develop alternative procedures to ensure
accountability and that settlements are negotiated in the best interests of the
Government, states, Indian tribes, and Indian allottees.

3. Offer Indian tribes the opportunity to exclude their issues from global
settlements. In addition, tribal representatives should be included in negotiations of
issues applicable to Indian tribes.

Minerals Management Service Response and Office of Inspector General
Reply

The January 30, 1996, response (Appendix 1) to the draft report from the Director,
Minerals Management Service, expressed concurrence with Recommendation 3,
partial concurrence with Recommendation 1, and nonconcurrence with
Recommendation 2.  Based on the response, we consider Recommendation 3
resolved and implemented and Recommendations 1 and 2 unresolved. Accordingly,
the Service is requested to reconsider its responses to the unresolved
recommendations (see Appendix 2).

5

 


Recommendation 1. Partial concurrence.

Service Response. The Service stated that it "does document estimated values
of issues, the arguments for compromising and reasons why compromises should be
accepted" when accurate information is available. However, the Service said it did
not believe that "any purpose is served" by attempting "to estimate the values of
issues when orders to performl are at issue prior to conducting settlement
discussions."  "Without the assistance and data of the payor," according to the
Service, "such estimates [for orders to perform] are highly inaccurate and very costly
to attempt." The Service said that it explains, in a memorandum to the Director, the
reasons for settlement and that before a settlement is approved, the Director may
request additional information. The Service further stated that its settlement process
has "adequate accountability" because it parallels the "accountability in the appeals
process." The Service said that it believes the settlement process is "adequate to
meet all the legitimate goals of this recommendation and does not believe that the
increased complexity recommended is beneficial."

Office of Inspector General Reply. Our review of 10 settlements totaling about
$218 million, or 68 percent of the total value of settlements negotiated by the Service
during April 1993 to March 1995, disclosed that the Service did not always: (l).
adequately document the estimated values of issues to be settled (of which most were
not based on orders to perform) and the arguments for reducing the values of issues
for 6 settlements and (2) explain why the estimated values of 9 issues totaling about
$312 million were reduced by about $94 million at settlement. Accordingly, the
Service's settlement negotiation practices do not meet the standards set forth in its
own "Negotiation Procedures," which requires the preparation of a list of issues to
be settled, including leases and all estimated values and arguments for reducing the
values of issues. We believe that additional documentation for the settlements is still
needed to account for actions taken by the settlement negotiation teams.

While we agree that it is difficult to estimate values for orders to perform, we believe
that the Service should attempt to estimate and document such values prior to
settlement negotiations to ensure that the settlement amounts are reasonable and in
the best interests of the lessor. Regarding the estimates, the State and Tribal Audit
Committee, in its March 30, 1995, letter to the Service, stated that states and tribes
may have information that could be useful in estimating the value of issues included
in orders to perform.

Regarding the memorandum to the Director, we found that it contained only general
information about each settlement and did not specify each issue that was settled,

1An order to perform requires a payer to recalculate and pay any additional royalties that may
result
when royalty accounting practices of the payer cause apparent underpayments.

6

 
the estimated value of the issues to be settled and the corresponding settlement
amount, or the reasons for the compromises.

Recommendation 2. Nonconcurrence.

Service Response. The Service stated that it believes that regardless of the
opinion of the Office of the Solicitor, "it is no protection if we are later required by
a court to produce such information. The benefit of knowing that the Solicitor
believes that MMS [Minerals Management Service] could protect information that
reveals the government's negotiation strategies is less detrimental than if the Solicitor
opines that such information is protectable and they are wrong."

  Office of Inspector General Reply. A July 5, 1996, legal review of this matter
by our General Counsel stated:

The Service should not avoid the Procedures ["Negotiation Procedures"]
because the documents produced pursuant to the Procedures may be
releasable under FOIA [Freedom of Information Act]. They should know
whether, in the opinion of the Solicitor's Office, the documents are subject
to FOIA.

If the Solicitor's Office determines the documents would be released under
FOIA then the Service can use the opinion to amend their procedures
regarding documentation if they choose.  If the Solicitor's Office
determines the documents should be withheld pursuant to FOIA, the
Service should not evade the Procedures just because a court may order
them to release the documents, despite the opinion of the Solicitor's
Office. Before a court orders the release of these documents, the court
will have to make a determination that the release will not harm the
Service in future negotiations. Further, prior to the court's determination
to release documents, MMS [Minerals Management Service] would have
the opportunity to present its position as to how release of these
documents would harm future negotiations.

General Comments on Audit Report

Service Response.  The Service disagreed that the failure to follow its
"Negotiation Procedures," which it characterized as "a preliminary set of procedures,"
should form the basis of the conclusions and recommendations that were presented
in the audit report. The Service also said that "we disagree with the OIG's [Office
of Inspector General's] assertion . . . that the Service did not maintain sufficient
information to substantiate that settlements were negotiated in the best interests of
the Government, States, Indian tribes and Indian allottees." In that regard, the
Service stated:

7

 
Our current procedures are consistent with our belief that ADR
[alternative dispute resolution] should have internal controls similar to the
appeals process; i.e., 1) a team is used to assure that all viewpoints are
represented and that no settlement is made if anyone believes that the
agreement is not in the best interests of the lessor(s), and 2) all
settlements must be accompanied by a memorandum to the Director (or
her delegate) explaining why the settlement should be accepted.

The Service stated that the alternative dispute resolution process "is more attractive"
than the appeals process to resolve royalty issues. Specifically, the Service stated that
the appeals process results in "further delays, costs, and risk of decisions inconsistent
with MMS [Minerals Management Service] policy."

In addition, the Service stated that its Office of Policy and Management
Improvement conducted a survey of Service employees, state and tribal
representatives, and royalty payers to examine the effectiveness of the settlement
process. The Service further stated that the results of the survey concluded that
"most individuals are reasonably satisfied with the settlement process and believe the
process to be quite useful in resolving outstanding issues."

Office of Inspector General Reply. The Service's response did not support its
position that use of the alternative dispute resolution process results in the resolution
of disputes consistent with the best interests of the lessors. Furthermore, the July
5, 1996, legal review by our General Counsel stated:

The Administrative Dispute Resolution Act. . . gives general guidance as
to what types of disputes that would normally be litigated, maybe resolved
by alternative means. . . . While the Act requires each agency to adopt a
policy that addresses the use of alternative means of dispute
resolution, there are no formal requirements as to documentation of
settlements. . . .

The Service does state that they feel their current procedures regarding
documentation adequately show settlements are achieved in the best
interests of the Government because their procedures parallel the internal
controls of the "appeals process." . . . These appeals process regulations
regarding documentation are tailored specifically for the appeals process.
They do not discuss nor do they necessarily cover the different
circumstances involved in the settlement negotiation process. . . .

So while the Service's current procedures regarding documentation may
parallel the appeals process in certain instances, that does not mean they
are providing adequate documentation to show they achieved a settlement
in the best interests of the Government. The Service is not currently

8

 
following the Procedures ["Negotiation Procedures"] created by their own
bureau, which are specifically tailored for the settlement negotiation
process. The Procedures also provide for different types of documentation
than the appeals process. They are relying on regulations that do not
directly cover the settlement negotiation process.

Based on the foregoing, we believe that our conclusion and recommendations are
valid.

Regarding the alternative dispute resolution process, we believe that this process can
be a beneficial method for resolving complex royalty matters. However, as previously
stated, we believe that it is important for the Service's "Negotiation Procedures," or
comparable alternate procedures, to be complied with to ensure that the settlement
amounts are reasonable and equitable to all parties and that settlement decisions are
supported by adequate documentation. If, as the Service states, the "Negotiation
Procedures" is simply a "preliminary set of procedures," the Service should develop
more current procedures that provide a basis for ensuring accountability and
ensuring that settlements are negotiated in the best interests of all parties concerned.

Although the Service's report on the survey results concluded that most individuals
were "satisfied" with the settlement process, the report also concluded that there was
"little consistency" in the Service's implementation of the "Negotiation Procedures"
and that the respondents cited "a gap between policy and practice." In addition,
tribes said that they were "not always invited to participate in dollar for dollar
settlements." Further, the report on the survey results recommended that the Office
of Enforcement distribute a modified procedure package as an educational tool to
the organizations affected by the settlement process. In a March 30, 1995, letter to
the Service responding to the survey, the State and Tribal Royalty Committee stated
that the settlement negotiation process should involve states and tribes when state
and tribal revenues are involved.

  Service Response. The Service stated that we should "correct the statement that
`From April 1993 through March 1995, the Service negotiated 97 settlements, which
will result in additional royalty payments of about $322 million.' Actually, the
payments were for royalty and late payment interest (and compensatory royalty)."

Office of Inspector General Reply. We have revised the statement to include
the reference to late payment interest.

Proprietary Data

Service Response. The Service stated that "the specific examples cited in the
report involve matters that contain proprietary information." The Service further

9

 
stated that in each case, "the public will be able to identify the settlements involved"
and "may be able to guess the Service's settlement strategy." The Service requested
that the examples be removed from the report.

Office of Inspector General Reply.  We disagree that the report contains
proprietary data or compromises the Service's settlement strategy. The July 5, 1996,
legal review by our General Counsel stated:

The issuance of statements in 1993 by President Clinton and Attorney
General Janet Reno regarding FOIA [Freedom of Information Act] policy
established a strong new spirit of openness in government under the
FOIA. "Attorney General Reno's FOIA Memorandum articulated the
FOIA's `primary objective' -- that of achieving `maximum responsible
disclosure of government information.'". . .

The information presented in the specific examples in the audit report
does not present proprietary information that would result in competitive
harm for any private party involved in a settlement with MMS [Minerals
Management Service]. Therefore, the information does not meet the
requirements to be withheld pursuant to the FOIA. . . .

The examples do not name any private parties involved or identify what
particular "issue" or "issues" the prenegotiation values or the final
settlement apply to.  Further the "issues" being presented represent
numerous and complex factors including, but not limited to, the amount
and type of minerals involved. None of these factors are included in the
examples and none of those factors can be extrapolated from the
examples

The examples do not expose . . . quantity of the mineral involved, actual
costs, profits, profit margins, losses, labor costs, pricing strategy or
equipment information. The numbers presented are general in nature and
even if they could be associated with a specific party, they do not expose
any information that could lead to competitive harm. . . .

The information presented in the specific examples in the audit report
does not expose MMS's [Minerals Management Service's] settlement
negotiation strategies or decision making processes in reaching a
settlement. Therefore, the information does not meet the requirements
for being withheld pursuant to the FOIA. . . .

Because the circumstances of each settlement differ so greatly, there is no
way to establish a pattern of how MMS reaches a settlement based on the
examples provided in the audit report. The opinions and reasoning of how

10

 
and why a settlement was reached are not exposed by providing the final
settlement amount along with the estimated prenegotiation value regarding
an "issue" or "issues."

Findings

Service Response. In its response, the Service said that it: (1) often could not
accurately estimate the value of issues before engaging in settlement discussions; (2)
did "adequately document" the reasons for resolving disputes through the alternative
dispute resolution process in the memorandum to the Director; and (3) maintained
sufficient documentation for settlements through the alternative dispute resolution
process.

Office of Inspector General Reply. Our comments to these issues are presented
in the "Recommendation 1" and "General Comments" sections of this report.

In accordance with the Departmental Manual (360 DM 5.3), we are requesting a
written response to this report by December 6, 1996. The response should provide
the information requested in Appendix 2.

The legislation, as amended, creating the Office of Inspector General requires
semiannual reporting to the Congress on all audit reports issued, actions taken to
implement audit recommendations, and identification of each significant
recommendation on which corrective action has not been taken.

We appreciate the assistance of Service personnel in the conduct of our audit.

 
Memorandum

"Negotiated Royalty Settlements, Minerals Management Service"

I appreciate the opportunity to respond to this draft report on our royalty settlements
process. We are in general concurrence with two of the three recommendations in the
report. We're sending you our general comments on the audit findings and specific
ones on the recommendations.

Please contact Bettine Montgomery at 208-3976 if you have any further questions.

Attachment

12

 
APPENDIX 1    
Page 2 of 7

MINERALS MANAGEMENT SERVICE RESPONSE TO DRAFT AUDIT REPORT
       "NEGOTIATED ROYALTY SETTLEMENTS
        MINERALS MANAGEMENT SERVICE"

Audit Agency: Office of Inspector General (OIG)

Audit Number: C-IN-MOA-005-94(D)

We appreciate the opportunity to comment on this draft report on the Minerals
Management Service's (MMS) negotiated settlement process. We consider this
process to be a major success in improving our customer service, in decreasing
costs, and in decreasing the time required to collect monies due the United States
and our Indian trust beneficiaries.

In 1992, MMS constituted the Office of Enforcement to coordinate royalty
settlements and promulgated a preliminary set of procedures, These procedures
were put into place before MMS had any substantial experience in conducting a
large-scale program of negotiated settlements. Those procedures have been
studied and revised in form and practice over the past three years as MMS has
gained experience closing large numbers of cases through use of alternative
dispute resolution (ADR) techniques (primarily settlements). Therefore, we
disagree that failure to follow those preliminary procedures should form the basis
of the conclusions and recommendations presented. We believe that looking at
the process from the basis of what is needed, the process used by MMS has
adequate internal controls, and results in the closure of disputes consistent with
the best interest of the lessors.

We disagree with OIG's assertion in the Introduction that "the Service did not
maintain sufficient information to substantiate that the settlements were 
negotiated in the best interests of the Government, States, Indian tribes and Indian
allottees. " Our current procedures are consistent with our belief that ADR should
have internal controls similar to the appeals process; i.e., 1 ) a team is used to
assure that all viewpoints are represented and that no settlement is made if
anyone believes that the agreement is not in the best interests of the lessor(s), and
2) all settlements must be accompanied by a memorandum to the Director (or her
delegate) explaining why the settlement should be accepted.

In addition, prior to your review, the MMS Office of Policy and Management
Improvement (PMI) conducted a survey and review of our internal (employee, state
and tribal) and external (lessee) customers. That survey concluded that, most
individuals are reasonably satisfied with the settlement process and believe the

1

13

 
APPENDIX 1
Page 3 of 7  

process to be quite useful in resolving outstanding issues. In addition, based on
interviews and detailed examination of the process, the reviewers concluded that
the revenues resulting from settlements represent a fair return to the U.S. Treasury
on royalty claims because: 1 ) those most directly involved in the process
expressed satisfaction with results, and 2) organizing settlement teams to
represent all points of view within the Department and constituencies provides the
needed internal controls on revenues received.

OIG should correct the statement that "From April 1993 through March 1995, the
Service negotiated 97 settlements, which will result in additional royalty payments
of about $322 million, " Actually, the payments were for royalty and Iate payment
interest (and compensatory royalty). It is also important to note that no royalties
are owed on Federal leases to State governments. State governments share
through an indefinite appropriation. The leases are the Federal government's 
responsibility and States are delegated certain limited functions regarding audit,
through the Federal Oil and Gas Royalty Management Act. MMS does include the
States in the process because MMS believes in comity.
           .

In the legislative history of the Administrative Dispute Resolution Act of 1990 (P.L.
101-552), the House Report accompanying H.R. 2497 states as background:

  The purpose of ADR [(alternative dispute resolution)] is to produce
  better decisions at less cost, Because ADR techniques encourage
  compromise and settlement, they tend to recognize and address the
  valid concerns of all parties to a dispute, And, for the same reason,
  they can dramatically reduce "transaction" costs. Such costs
  [include] . . . discovery costs . . . . In addition, the use of ADR can
  help change the `culture' of agency decisionmaking from one in which
  there are only "winners" and "losers" to one in which the best and
                         (June 1, 1990)

The MMS enforcement process involves multiple steps and multiple stages of
review, An order is first given by an operating division. It may require the
payment of a billed amount or may require performance of other compliance steps
such as submitting revised royalty or production reports. If the order requires
performance, payment may be owed at the completion of compliance. A payor
may choose to comply with the order or it may appeal the order, in which case the
order is stayed pending appeal, under the regulations at 30 C.F.R. _ 243.2.

If the order is appealed, traditionally MMS resolved the dispute through the
appeals process, which is considered to be an informal adjudication according to

                 2


                    14

 
APPENDIX 1    
Page 4 of 7

the Administrative Procedure Act (APA) (5 U.S.C. _ 551(7)). NO hearing is
required, and a review of the record is performed by the Appeals Division. The
reasons for the decisions are contained in the written decision. The internal
controls on the formal process are the written decision and the surname process.
While decisions by the Director or officials delegated the authority to decide on
behalf of the Director often resolve disputes, these decisions are costly to prepare
and often require several years or more to complete. Additionally, 15 percent or
more of these decisions are further appealed to the Interior Board of Land Appeals
(IBLA), and some IBLA decisions are further appealed to Federal court, resulting in
further delays, costs, and risks of decisions inconsistent with MMS policy.

Three years ago, MMS codified the ADR program. For several reasons, this
approach has been successful at resolving complex matters that were not easily
resolved through the appeals process. The ADR process allows MMS and the
payor to jointly determine a reasonable basis or methodology for estimating
additional royalties that will be paid. ADR is more attractive for several reasons:

o   The appeals process cannot determine how much a payor owes when a
  payor appeals an order such as to retroactively correct a systemic reporting
  error. (Such orders are issued when the MMS has evidence that a payor
  has not complied with the regulations, but has insufficient information to
  accurately estimate the amount owed. ) MMS will only have a basis for
  determining the amount of the underpayment if the payor is ordered to
  comply and does so without further appeal. And even in that case, MMS
  must perform tests to verify compliance.

o   While additional royalties may be owed, they may be owed for slightly
  different reasons than the original order enunciated. When the Appeals
  Division decides such a case, it remands the case to the issuing division.
  Obviously, even if an estimate of additional royalties had been made, it will
  not be correct if the basis for the order were incorrect.

o   Many large companies have received orders that have more or less merit.
  Decisions in the formal appeals process are win - lose decisions. Often the
  parties in the ADR process are able to trade off losers for winners when
  many issues are to be resolved at once. This is helpful in situations where
  the agency and lessees do not need a clean decision to establish precedent
  for future action.

         .    .

The specific examples cited in the report involve matters that contain proprietary
information and that can be identified by the parties. They should not be

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APPENDIX 1  I
Page 5 of 7

published in a report available to the public. In each case, members of the public
will be able to identify the settlements involved and may be able to guess at
MMS's settlement strategy, As they should be removed from the report, we will
not comment on the specific examples.

The Report has three findings, 1 ) the MMS official settlement files did not always
contain adequate documentation on the estimated values of the issues to be
settled and arguments for reducing the values, 2) and those files did not explain
why certain issues had their estimated values reduced; and 3) in one global
settlement Indian tribal issues were resolved (with payment in full to the tribes),
but without prior consultation.

The first finding deals with a lack of documentation (in the official settlement files)
concerning the value of issues before and after settlement. MMS often cannot
accurately estimate the value of issues prior to engaging in settlement discussions.
The entire point of an order compelling a payor to perform recalculations is for the
payor, rather than MMS to perform the accounting effort. In such instances, MMS
is usually unable to accurately perform the estimation without going through the
settlement process. While MMS is currently studying the use of statistical
procedures to estimate underpay merits, that project is not completed,

Documentation of the reasons for resolving disputes through the ADR process are
included in the memorandum to the Director. Every settlement is signed only after
such a memo is prepared, surnamed by appropriate parties, and found acceptable
by them and the Director. This process is no different in principle from the appeals
process. We do not believe any additional documentation is needed. The ADR
process documents estimates, where applicable, and reasons for litigation risk.
The appeals process documents legal reasoning.

The MMS is firmly committed to a government to government relationship with the
Indian tribes whose minerals royalties we collect and manage. Normally when an
order is decided in the appeals process, no tribal assent is required. In two early
global settlements, when there was no compromise of the estimated amount of
Indian royalties we determined that it was equitable and more efficient to collect
disputed amounts through the settlement process even though tribes were not
informed until later. While this process may be more efficient, MMS policy is now
to consult with tribes prior to undertaking a global settlement that we believe
includes their leases, or to exclude tribal leases from the settlement if that is not
possible. MMS recognizes the importance of process and has adjusted its process
to accommodate the tribal interest. On the other hand, it is worthwhile to note
that none of the tribes involved complained about the amount of royalties and

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APPENDIX 1 
Page 6 of 7    

interest that was collected in the settlement agreements that were criticized for
failure to include them.

1. Document the estimated values of issues to be settled, arguments for reducing
values of royalties before negotiations commence, and reasons why the values
were reduced.

AGREE IN PART. MMS does document estimated values of issues, the arguments
for compromising and reasons why compromises should be accepted currently
when such information is accurate and available. However, MMS does not believe
that any purpose is served by MMS attempting to estimate values of issues when
orders to perform are at issue prior to conducting settlement discussions. Without
the assistance and data of the payor, such estimates are highly inaccurate and
very costly to attempt. The MMS does make estimates on all other orders, and
each division whose issue is at issue has ownership of those estimates. In all
cases RMP explains in a memorandum to the Director, generally surnamed by the
Associate Solicitor for Energy and Resources, the reasons for the settlement.
Depending on the issues involved, that explanation may be more or less detailed.
At that time, the Director may request additional information if she deems it
necessary to enter into an agreement. MMS believes that this process is adequate
to meet all the legitimate goals of this recommendation and does not believe the
increasing complexity recommended is beneficial.

2. Obtain a written opinion from the Office of the Solicitor on whether the Service
is required to release information on the Service's negotiation strategies to royalty
payers under the Freedom of Information Act that could compromise future
settlement negotiations. If the Office of the Solicitor opines that such information
must be released, then the Service should develop alternative procedures to
ensure accountability and assure that settlements are negotiated in the best
interests of the Government, States, Indian tribes, and Indian allottees.

DISAGREE. Once again, MMS believes it has adequate accountability for ADR as
it parallels the accountability in the appeals system. In addition, regardless of
what the Solicitor opines, it is no protection if we are later required by a court to
produce such information. The benefit of knowing that the Solicitor believes that
MMS could protect information that reveals the government's negotiation
strategies is less detrimental than if the Solicitor opines that such information is
protectable and they are wrong.

3. Offer Indian tribes the opportunity to exclude their issues from global
settlements. In addition, tribal representatives should be included in negotiations

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of issues applicable to Indian tribes.

AGREE. This recommendation is consistent with our practices and longstanding
policy. Since the two early global settlements mentioned, MMS has consistently
included tribal representatives in all cases, or excluded their issues, if that was
their desire. MMS will continue that practice; no change is needed.

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                       APPENDIX 2

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
  Reference        Status       Action Required

1 and 2      Unresolved     Reconsider each
                 recommendation, and
                 provide action plans that
                 include target dates and
                 titles of officials
                 responsible for
                 implementation.

3

Implemented

No further action is
required.

19

 
ILLEGAL OR WASTEFUL ACTIVITIES
   SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:             Calling:

Within the Continental United States

U.S. Department of the Interior         Our 24-hour
Office of Inspector General           Telephone HOTLINE
1550 Wilson Boulevard             1-800-424-5081 or
Suite 402                  (703) 235-9399
Arlington, Virginia 22210

TDD for hearing impaired
(703) 235-9403 or
1-800-354-0996

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior         (703) 235-9221
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

North Pacific Region

U.S. Department of the Interior         (700) 550-7279 or
Office of Inspector General           COMM 9-011-671-472-7279
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910



 
Toll Free Numbers:
1-800-424-5081
TDD 1-800-354-0996

FTS/Commercial Numbers:
(703) 235-9399
TDD (703) 235-9403

HOTLINE

1550 Wilson Boulevard
Suite 402