[Audit Report on the Inspection and Enforcement Program and Selected Related Activities, Bureau of Land Management]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 96-I-1267

Title: Audit Report on the Inspection and Enforcement Program and
        Selected Related Activities, Bureau of Land Management

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 INSPECTOR GENERAL
         Washington, D.C. 20240

MEMORANDUM           

TO:                 The Secretary

FROM:               Wilma A. Lewis

SUBJECT SUMMARY:    Final Audit Report for Your Information - "Inspection
                    and Enforcement Program and Selected Related
                         Activities, Bureau of Land Management" (No. 96-I-1267)

Attached for your information is a copy of the subject final audit report. The objective of
the audit was to determine whether the Bureau of Land Management's inspection and
enforcement program was in compliance with inspection provisions of the Federal Oil and
Gas Royalty Management Act and whether inactive wells were properly classified and
plugged and their bonding sufficient to protect the Government's interests.

The Bureau generally complied with the requirement of the Act that all Federal and Indian
oil and gas leases that had significant production or a history of regulatory noncompliance
(as defined by the Bureau) should be inspected annually. However, improvements are
needed in the strategy for targeting leases for inspection, in oversight of the conduct of
inspections, in the classification and/or approval of inactive oil and gas wells, and in the
procedures for bonding wells. Specifically, we found that a significant number of
inspections were performed on leases that had minimal or no production, inspections were
performed that were incomplete or inadequate, and some required inspection items had not
been inspected for at least 5 years. In addition, none of the seven field offices we
reviewed had properly classified and/or approved inactive wells, the Bureau's minimum
bond requirements were not sufficient to cover the Government in case of operator default,
and the Bureau routinely approved lease assignments without considering bond adequacy.

The Bureau's proposed corrective actions for our recommendations relating to the
Inspection and Enforcement Program and inactive wells were sufficient for us to consider
all of our recommendations resolved.
        

If you have any questions concerning this matter, please contact me at (202) 208-5745 or
Mr. Robert J. Williams, Acting Assistant Inspector General for Audits, at (202) 208-4252.

Attachment

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

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

Memorandum

To:   Assistant Secretary for Land and Minerals Management

From:Acting Assistant Inspector General for Audits

Subject:  Audit Report on the Inspection  and Enforcement Program and 
Selected Related Activities, Bureau of Land Management (No. 96-I-1267)

This report presents the results of our audit of the Bureau of Land Management's
Inspection and Enforcement Program and selected related activities. This audit is part of
the Office of Inspector General's biennial review of the Federal Royalty Management
System for fiscal years 1994 and 1995. The objective of this review was to determine
whether the Bureau's Inspection and Enforcement Program and selected related activities:
(1) were in compliance with inspection provisions of the Federal Oil and Gas Royalty
Management Act and (2) ensured that inactive wells were properly classified and plugged
and that bonding was sufficient to protect the Government in case a lease operator
defaulted.
Our audit disclosed that, while the Bureau complied with the requirement of the Federal
Oil and Gas Royalty Management Act for inspecting annually all Federal and Indian oil
and gas leases that had significant production or a history of regulatory noncompliance (as
defined by the Bureau), improvements were needed to more effectively accomplish
Program objectives. Specifically, we found that:

- The Bureau inspected leases which had little or no production; over one-half of the
production inspections reviewed were deficient in scope and quality; and five of the seven
offices reviewed did not perform all inspections in a timely manner. These deficiencies
occurred because the Program's strategy required excess numbers of labor-intensive,
detailed production accountability inspections, which limited the ability of Bureau field
offices to utilize resources efficiently and effectively, and five of the seven field offices
reviewed had not adequately implemented the strategy. In addition, the Bureau did not
provide effective Program oversight and training. Consequently, the Inspection and
Enforcement Program did not adequately ensure production accountability for oil and gas
produced or regulatory compliance for well-drilling and well-plugging and for
abandonment operations on Federal and Indian leases.

- None of the seven Bureau field offices reviewed had properly classified and/or
approved inactive oil and gas wells.  In addition, the Bureau's minimum bond
requirements were often not sufficient to protect the Government in case a lease operator
defaulted, and the Bureau routinely approved lease assignments without considering bond
adequacy. These deficiencies occurred because Bureau field offices did not follow
established procedures or meet existing time frames for reviewing inactive wells and
because the Bureau had not raised inadequate bond minimums and individual bonds that
were known to be insufficient. Consequently, since fiscal year 1991, the Government has
plugged 131 orphan wells, at a cost of about $1.6 million, and is currently liable for
plugging over 300 additional orphan wells, at a cost estimated to exceed $3 million. In
addition to the cost, orphan wells may contaminate groundwater and other resources.

Our audit also disclosed that to improve cost effectiveness, the Bureau needs to coordinate
with the Minerals Management Service regarding the type and significance of potential
operator referral errors.

Based on the June 7, 1996, response (Appendix 8) to the draft report from the Director,
Bureau of Land Management, we consider the five recommendations relating to the
inspection and enforcement program and the six recommendations relating to inactive wells
resolved but not implemented. Accordingly, the unimplemented recommendations will be
referred to the Assistant Secretary - Policy Management and Budget for tracking of
implementation, and no further response to the Office of Inspector General is required (see
Appendix 9).

The legislation, as amended, creating the Office of Inspector General requires semiannual
reporting to the Congress of all audit reports issued, the monetary impact of audit findings
(Appendix 1), 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 Bureau personnel in the conduct of our audit.

cc: Director, Bureau of Land Management

 


CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1

BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1
OBJECTIVE AND SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...2
PRIOR REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...3

FINDINGS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . ...6

A. INSPECTION AND ENFORCEMENT PROGRAM . . . . . . . . . . . . . . . . 6
B. INACTIVE WELLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

APPENDICES

1. CLASSIFICATION OF MONETARY AMOUNTS . . . . . . . . . . . . . . . . 19
2. BUREAU OF LAND MANAGEMENT OFFICES
VISITED OR CONTACTED DURING AUDIT . . . . . . . . . . . . . . . . . 20
3. DETAILED PRODUCTION ACCOUNTABILITY
INSPECTIONS PERFORMED ON  LOW-
PRODUCING INSPECTION ITEMS DURING
FISCAL YEAR 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...21
4. PERFORMANCE OF REQUIRED HIGH PRIORITY
DRILLING AND PLUGGING AND ABANDONMENT
INSPECTIONS DURING FISCAL YEAR 1994 . . . . . . . . . . . . . . . . . 22
5. OIL AND GAS PRODUCTION ACCOUNTABILITY PILOT . . . . . . . . 23
6. INCOMPLETE OR INADEQUATE PRODUCTION
INSPECTIONS PERFORMED DURING
FISCAL YEAR 1994 AND FIRST
QUARTER OF FISCAL YEAR 1995 . . . . . . . . . . . . . . . . . . . . . ...25
7. IMPLEMENTATION OF WELL STATUS REVIEW
DURING FISCAL YEAR 1995.. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8. BUREAU OF LAND MANAGEMENT RESPONSE TO
DRAFT REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9. STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . . . . . . . . 32

 
INTRODUCTION

BACKGROUND

The Federal Oil and Gas Royalty Management Act of 1982, in part, and the Mineral
Leasing Act of 1920, as amended, require the Secretary of the Department of the Interior
to: (1) provide a system for inspecting oil and gas leases, including annual inspections for
each lease site that produces or is expected to produce significant quantities of oil or gas
or whose operations have a history of noncompliance with applicable provisions of the law
or regulations; (2) provide training for inspectors in methods and techniques of inspection;
and (3) develop guidelines that specify the coverage and frequency of inspections.
Provisions of the Acts as they relate to Federal onshore and Indian leases are the
responsibility of the Bureau of Land Management as implemented by the Code of Federal
Regulations (43 CFR 3160) and the Onshore Oil and Gas Orders published in the "Federal
Register. "  The Minerals Management Service is responsible for monitoring lease
production on the Outer Continental Shelf and for other requirements under the Federal
Oil and Gas Royalty Management Act of 1982. In addition to production inspections
mandated by the Federal Oil and Gas Royalty Management Act, the Bureau conducts
drilling, abandonment, and other inspections authorized by regulations under the Mineral
Leasing Acts.

The Bureau's Inspection and Enforcement Program evolved under various operating and
inspecting strategies. In 1993, the Bureau of Land Management issued an interim
manual/handbook detailing its latest Inspection and Enforcement Program strategy. The
handbook established annual requirements for the number and type of production
inspections; prescribed the requirements and procedures for verifying reported production
and for reviewing operators' drilling and plugging and abandonment practices; and
provided guidelines for inspection staffing, program oversight, and inspector training.
The handbook identified two types of production inspections: (1) a detailed production
accountability inspection that requires a review of all production-related activities,
including production records, and (2) an independent measurement/handling inspection that
focuses on a specific component of production accountability (for example, tank gauging).
A detailed production accountability inspection takes an average of 24 staff hours to
complete, and an independent measurement/handling inspection takes about 6 staff hours
to complete.

The Bureau assigns inspection itemsl a high or low inspection priority depending on
production, regulatory compliance history, and other factors such as environmental or
health and safety concerns and legal requirements. The Bureau estimates that it has
20,400 inspection items nationwide. Inspection items that produce or are expected to
produce significant quantities of oil or gas (an average of 12,000 barrels of oil or 120,000

lAn inspection item may consist of a single lease or a group of leases under a unit or
communitization
agreement and include from 1 to over 100 wells and related facilities.

1

 
mcf2of gas per month) or that have a history of noncompliance (six minor or two major
violations within a 2-year period) are classified as high priority and are required by the
Bureau to be inspected annually. The Bureau estimates that about 1,100 of its 20,400
inspection items nationwide are classified as high priority. Inspection items that are not
in the high priority category are classified as low priority and are required by the Bureau
to be inspected every 3 years. The Bureau estimates that about 19,300 of its 20,400
inspection items nationwide are classified as low priority. Either detailed production
accountability inspections or independent measurement/handling inspections can be used
to meet the mandated high or low priority inspection requirements.

For fiscal years 1994 and 1995, the Bureau strategy required field offices to conduct: (1)
detailed production accountability inspections annually on 17 percent of the total inspection
items that had produced in the previous 12 months and (2) independent
measurement/handling inspections on 36 percent of the remaining 83 percent of producing
inspection items. In addition, the Bureau assigns either a high or a low priority inspection
classification to drilling and plugging operations based on the risk of substantial adverse
impacts of the operations to the public health and safety or to the environment. For fiscal
years 1994 and 1995, the Bureau required field offices to inspect 30 percent of all drilling
operations and 25 percent of all plugging operations provided that all high priority drilling
and plugging operations were inspected.

The Bureau's Inspection and Enforcement Program budget was approximately $12.6
million in fiscal year 1994, which, in part, funded 218 full-time equivalent positions at 51
of the Bureau's 232 field offices. The Bureau is responsible for Program duties on more
than 20,400 Federal onshore and Indian inspection items consisting of nearly 78,000 total
wells and 43,000 facilities. The Bureau's inspectors enforce the regulatory requirements
for well-drilling, oil and gas production, and well-plugging and abandonment operations
on Federal onshore and Indian oil and gas leases, which in 1994 paid $635 million in
royalties. During fiscal year 1994, Bureau inspectors identified underreported production
totaling more than 218,000 barrels of oil and 11.5 million mcf of gas; issued more than
7,600 notices of incidents of noncompliance for regulatory violations; and issued more
than $96,000 in assessments or civil penalties on incidents of noncompliance.

Inspection-related data are recorded in the Automated Inspection Record System. This
system is used to track inspections. In this regard, the System's data base identifies the
names and locations of inspection items, the numbers and dates of inspections, incidents
of noncompliance, assessments. average monthly production, and inspection priority
classifications.
OBJECTIVE AND SCOPE

The objective of this audit was to determine whether the Bureau's Inspection and
Enforcement Program: (1) was in compliance with inspection provisions of the Federal Oil

and Gas Royalty Management Act and (2) ensured that inactive wells were


2Mcf is one thousand cubic feet, the standard unit for measuring the volume of natural gas.

properly

2

 
 I

classified and plugged and that bonding was sufficient to protect the Government in case
a lease operator defaulted.

Our review included visits to the following Bureau offices: two state offices, four district
offices, five resource area offices, and one inspection section office (Appendix 2). At 7
of the 12 field offices, we reviewed Bureau inspection reports and associated supporting
documentation, Monthly Reports of Operations (Form 3160-6), and various types of
approval documents and sundry (miscellaneous) notices. These seven offices were
responsible for about 9,200 (45 percent) of the Bureau's 20,400 inspection items
nationwide.

Our audit was made in accordance with the "Government Auditing Standards, " issued by
the Comptroller General of the United States. Accordingly, our audit included such tests
of records and other auditing procedures that were considered necessary under the
circumstances to accomplish the audit objective. As part of our audit, we evaluated the
system of internal controls to the extent we considered necessary. The internal control
weaknesses identified are discussed in the Findings and Recommendations 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. We determined
that the reported weakness of the Bureau of Land Management to effectively inspect and
enforce production accountability for onshore fluid minerals was directly related to our
review. Accordingly, we evaluated the Bureau's corrective actions as necessary. The
results of this evaluation are discussed in Findings A and B in this report.

PRIOR REPORTS

The General Accounting Office and the Office of Inspector General have each issued one
audit report in the past 6 years related to the Bureau's Inspection and Enforcement
Program as follows:

- In June 1990, the General Accounting Office issued the report titled "Shortcomings
in Onshore Federal Oil and Gas Production Verification" (No. GAO/RCED-90-99). The
report concluded that the Bureau's Inspection and Enforcement Program was not ensuring
that oil and gas producers were accurately reporting oil and gas production, Program
oversight was inadequate, and the Bureau's Automated Inspection Record System was
providing unreliable information. The report made nine recommendations, all of which
were subsequently resolved.

- In March 1992, the Office of Inspector General issued a followup report (No. 92-I-
578) to the Office of Inspector General report titled "Inspection and Enforcement Program
and Selected Related Activities, Bureau of Land Management" (No. 90-18), issued in
November 1989. The followup report contained five recommendations for correcting
weaknesses related to: (1) reporting the status of the prior report's recommendations; (2)

3

 
implementing review criteria for gas venting and flaring; (3) using oil and gas program
funds; (4) notifying the Secretary of the Interior that the revised Inspection and
Enforcement strategy for fiscal year 1991 had not been fully implemented; and (5)
allocating needed resources and support to accomplish Program objectives. Based on the
Bureau's responses, we considered all five recommendations resolved and implemented.

Since the issuance of the above audits, the Bureau has conducted at least two studies and
issued two reports and an action plan as follows:

- In response to a finding in our 1989 audit report regarding the potential liability to
the Government for plugging oil and gas wells that the operators did not bond sufficiently,
the Bureau conducted its own study and issued a report in November 1990 titled "Potential
Government Liability for Plugging Oil and Gas Wells. " The study, which the Bureau
designed to statistically quantify conditions identified in the 1989 audit report, resulted in
the following projected conclusions: (1) between 16,344 (24 percent) and 32,688 (48
percent) of the Bureau's recorded 68,100 usable wells were misclassified; (2) 4,422 (67
percent) of the Bureau's recorded 6,600 temporarily abandoned wells3 did not have valid
approvals for temporary abandonment; (3) 2,970 (45 percent) of the Bureau's recorded
6,600 temporarily abandoned wells required plugging; (4) 2,128 (16 percent) of the
Bureau's recorded 13,300 shut-in wells4 required plugging; and (5) the Government was
at least partially liable for plugging as many as 582 orphan wells,5 at a cost of up to $4.8
million.

- In March 1992, the Bureau issued an action plan (Instruction Memorandum 92-149)
to address Government liability associated with the costs of plugging inactive wells. The
plan included action to: (1) review all inactive wells to determine the accuracy of the
reported status of the wells; (2) obtain justification from the operators for wells in shut-in
or temporarily abandoned status; (3) require operators of unjustified shut-in and
unapproved temporarily abandoned wells either to return the wells to production or to
submit notices of intent to plug and abandon the wells; and (4) determine the adequacy of
existing bond coverage based on the number and condition of unplugged wells, the
operators' financial resources, the operators' histories of noncompliance, and notices of
uncollected royalties issued by the Minerals Management Service. The action plan also
established steps to identify and to establish priorities for plugging orphan wells with
Bureau funds. The action plan was scheduled for completion by October 1, 1994, and was
to be followed by an ongoing review of inactive wells. However, as discussed in Findings
A and B in this report, the effort has not been completed.

3Temporarily abandoned wells are wells that have been determined to be no longer capable of
production and
that are held for future use,

4Shut-in wells are wells from which the lease operator has temporarily stopped producing oil and
gas because
of economic or other considerations but for which production maybe restarted by opening a valve
or turning
on a switch.

4

 


- In March 1995, a Bureau Issue Resolution Team issued the report titled "Bonding
and Unfunded Liability Review," which made 13 recommendations regarding
improvements needed in the Bureau's management of inactive wells and its bonding
program. The recommendations included steps to increase bonding, to continue actions
instituted in Instruction Memorandum 92-149, and to further reduce potential Government
liability associated with the costs of plugging inactive wells. The report made two
recommendations regarding bonding: (1) increase minimums from $10,000 to $20,000 on
individual bonds and from $25,000 to $75,000 on statewide bonds and (2) require
operators of approved temporarily abandoned wells to plug the wells after 2 years and to
either increase the bond by $2 per foot of well depth or pay an annual $100 fee for each
temporarily abandoned well into a Bureauwide fund to plug wells. In addition, the report
recommended that the potential liability of at-risk lease assignments (sales) be reassessed
before the assignments are approved by the Bureau. At the time of our review, the Bureau
said that it was planning to review lease assignments for bond adequacy but was not
intending to implement increased minimum bonds or to initiate a well-plugging fund.

 


FINDINGS AND RECOMMENDATIONS

A. INSPECTION AND ENFORCEMENT PROGRAM

The Bureau of Land Management generally complied with the Federal Oil and Gas
Royalty Management Act requirement for inspecting annually all Federal and Indian oil
and gas leases that had significant production or a history of regulatory noncompliance (as
defined by the Bureau). However, improvements were needed in the operation of the
Inspection and Enforcement Program at five of the seven offices we reviewed.
Specifically, we found that the Bureau inspected operations that had little or no production
and that some of its inspections were not comprehensive, adequately documented, or
timely. These conditions occurred because Bureau field office management believed that
the Bureau's inspection strategy required the field offices to dedicate limited staff to low
priority inspections. In addition, the Bureau did not sufficiently manage the Program to
provide adequate instructions on conducting inspections to field offices, to adequately
oversee the Program to ensure that inspections were conducted in accordance with the
requirements, and to provide employees sufficient training on inspection procedures. As
a result, the Inspection and Enforcement Program did not adequately ensure production
accountability for oil and gas produced or regulatory compliance for well-drilling and
well-plugging and abandonment operations on Federal and Indian leases.

Inspection and Enforcement Strategy

The Inspection and Enforcement Program strategy did not provide for a proper mix of
detailed production accountability inspections and independent measurement/handling
inspections necessary to ensure overall production accountability and compliance with the
regulatory requirements for well drilling, oil and gas production, and well plugging and
abandonment. The strategy required an excess number of labor-intensive, detailed
production accountability inspections on 17 percent of the total inspection items that had
produced in the last 12 months and independent measurement/handling inspections on 36
percent of the remaining 83 percent of the inspection items. The strategy prescribed these
inspection levels without regard to the level of production; without considering the results
from previous inspections; and without considering local conditions at field offices, such
as weather, topography, and resources.

Production Levels. The Bureau has not established a production level below which
detailed inspections would not need to be conducted. We believe that detailed production
accountability inspections should not routinely be performed on inspection items that are
below established minimum production levels except when independent
measurement/handling inspections or other conditions indicate that the inspections are
warranted.  For illustrative purposes, we established a minimum dollar threshold
of $2,000, which, during fiscal year 1994, represented production of 1,000 barrels of oil
per month, 10,000 mcf of gas per month, or any combination of the two with the same
aggregate dollar value. We believe that royalties of $2,000 per month or more are

6

 
 I

significant enough to justify the conduct of detailed production accountability inspections.
We discussed the production levels with Bureau personnel, who agreed that the levels were
reasonable for purposes of our review,

Based on our definition, we found that Bureauwide in fiscal year 1994, 61 percent (908
of 1,482) of the detailed production accountability inspections (averaging 24 staff hours
per inspection) were performed on inspection items that were below the minimum
production levels (Appendix 3) and that in 46 of the 1,482 cases, the Bureau performed
detailed production accountability inspections on inspection items that had no production.
Performing detailed inspections on low-producing inspection items disclosed only minor
underpayments of royalties.  For example, the Platte River Resource Area Office
conducted 21 detailed production accountability inspections on inspection items that were
below minimum production and identified underreported gas production of only $24 in
estimated royalty value. Also, the White River Resource Area Office conducted 56
detailed production accountability inspections on inspection items that were below
minimum production and identified underreported gas production of only $896 in
estimated royalty value. We believe that production accountability could have been
adequately ensured with the less labor-intensive, independent measurement/handling
inspections, which require an average of only 6 staff hours each to complete.

Results of Previous Inspections.  During fiscal years 1992 and 1993, the
Farmington District Office witnessed meter calibration tests on over 500 gas meters and
found no significant discrepancies in the meters. However, in fiscal year 1994, the
District Office continued to witness meter calibrations as a part of detailed production
accountability inspections that, as in the prior 2 years, disclosed no significant
discrepancies. We believe that the number of meter calibration tests witnessed could have
been reduced in 1994 based on the results of the 1992 and 1993 testing.

Local Conditions. The Bureau's Program strategy did not consider local conditions
at field offices, such as weather, topography, and resources, which can adversely impact
the abilities of inspectors to conduct inspections as follows: (1) at field offices with severe
winter climates that reduced the time available to do site inspections, such as in North
Dakota and Wyoming, inspectors were required to perform the same percentage of detailed
production accountability inspections as inspectors in more moderate climates, such as in
New Mexico; (2) at offices such as the Farmington District, topography, such as arroyos
and canyons, required inspectors to sometimes drive 50 miles between wells and related
facilities on one inspection item; and (3) at the White River Resource Area Office in fiscal
year 1994, four inspectors conducted the Office's required 64 detailed production
accountability inspections (a ratio of 1:16) as compared with the Lea County Inspection
Section Office, where only four inspectors conducted its 164 required detailed production
accountability inspections (a ratio of 1:41).

We believe that staff conducting lower priority production inspections should have been
conducting higher priority inspections, such as inspections of well-drilling operations.
These higher priority inspections were not performed because well-drilling and
well-plugging activities take place outside normal working hours and some of the field

7

 


managers did not authorize overtime to inspect these activities. The Bureau's strategy
emphasizes the inspection of drilling and plugging operations, which the Bureau has
designated as high priorities because these operations pose a high risk of substantial
adverse impact to public health and safety and the environment. However, in fiscal year
1994, five of the seven field offices reviewed did not perform 39 percent (463 of 1, 177)
of the Bureau strategy's high priority drilling and plugging and abandonment inspections
(Appendix 4). For example, the Carlsbad Resource Area Office inspectors did not
perform inspections of 110 of the 183 high priority well-drilling operations. Instead,
during this same period, these inspectors performed about 100 labor-intensive, detailed
production accountability inspections on inspection items that had low production levels,
which resulted in the detection of misreported production with a royalty value of only
about $1,500.

Program Management

Despite some improvements in production verification, further management actions are
needed to develop detailed procedures for conducting production inspections, to ensure
compliance with existing procedures through effective oversight, to provide adequate
training to inspectors, and to maintain an accurate Automated Inspection Records System.

Management Improvements. We found that the Bureau had made progress in
developing general procedures for reviews of production records. For example, in
October 1993, the Bureau issued Instruction Memorandum 94-17, "Establishment of
Interim Manual and Handbook Guidance for the Oil and Gas Inspection and Enforcement
Strategy, " which required reviews of production records on all detailed production
accountability inspections. Many independent measurement/handling inspections included
limited record reviews, which we believe significantly improved the effectiveness of these
inspections. In fiscal year 1994, Bureau field offices reported that reviews of production
records were performed in over 5,600 of the approximately 9,200 production inspections
completed. Other progress made in the Program included the Bureau's obtaining an
additional $5.7 million in annual funding since fiscal year 1990 and an additional 54 full-
time positions. At the time of our review, the Bureau was replacing its Automated
Inspection Record System with a more comprehensive system that should enable
management to monitor inspection activities.

Procedures for Production Record Reviews. The Bureau's procedures for reviews
of production records did not require an adequate number of production months to be
tested. In that regard, we found that, even though the inspection items may not have been
inspected for over 5 years, six of the seven field offices visited generally reviewed no
more than 3 recent months of Monthly Reports of Operations; 1 year of the Monthly
Reports of Operations Averaging Report; and only 1 to 3 recent months of production
records, such as run tickets, gas charts, and valve seal data.  Also, the Bureau's
procedures for verifying the accuracy of reported production were insufficient.
Specifically, the Bureau did not have: (1) examples of typical reporting deficiencies and
anomalies that should be checked; (2) steps that should be followed when analyzing
operator records; (3) materiality thresholds on when to expand a review because of errors

8

 
detected; and (4) steps that should be followed to resolve reporting errors. The seventh
field office, the Farmington District Office, had developed and implemented detailed
review procedures for production records as the result of its fiscal year 1993 Oil and Gas
Production Accountability Pilot (Appendix 5). We believe that these procedures have
merit and should be considered by the Bureau when it develops review procedures
nationwide for detailed production records.

Compliance With Procedures. Production inspections conducted in fiscal year
1994 and the first quarter of fiscal year 1995 were not performed in compliance with
inspection procedures outlined in the strategy. Specifically, our review of official
inspection reports and supporting documentation for 118 inspections at the seven field
offices visited disclosed the following:

  - Inadequate or Incomplete Inspections. The enforcement strategy handbook requires
verification of site security, reviews of valve seals and records, current facility diagrams,
and documentation supporting these inspection activities. However, 65 (55 percent) of the
118 inspections were either incomplete or inadequate (Appendix 6). For example, at the
Carlsbad Resource Area Office, 15 of the 20 inspections reviewed were incomplete and/or
performed inadequately.  Specifically, for 12 inspections, either there was no
documentation of site-security verification, such as identification of facility valve seals and
review of valve seal data, or files contained facility diagrams that were inaccurate. Also,
for six inspections, there was no documentation, such as reports of witnessing meter
calibration tests, to ensure that production measurement systems were being calibrated
properly.  In addition, production record reviews had not been completed on 11
inspections, and these inspections therefore did not ensure that field production was
reported properly.

  - Inspections Not Performed. At the seven field offices reviewed, approximately 700
(8 percent) of the more than 9,200 inspection items had not been inspected for at least 5
years. The Bureau's inspection strategy requires an inspection of all producing items once
every 3 years. At the Farmington District Office, 503 producing inspection items in the
3,632 active inspection item universe had not been inspected for at least 5 years, even
though 30 of the 503 items produced over 1,000 barrels of oil or 10,000 mcf of gas per
month.

Production inspections were not completed in accordance with the inspection strategy and
were not completed timely because field supervisors did not provide sufficient oversight
to detect noncompliance. Although the Bureau required annual supervisory reviews of
inspectors' work, we found that these reviews generally were not performed. For
example, at the Carlsbad Resource Area Office, the supervisor said that the inspectors'
work was not reviewed because the inspectors were all certified and experienced and he
believed the required reviews were not necessary. Bureau inspectors at several locations
also cited insufficient training as a reason for not performing production inspections.
Specifically, the inspectors said that the approximately 4 hours of training on how to
review production records included in the Bureau's 2-week Oil and Gas Orientation

9

 
Course did not provide the inspectors with the skills needed to perform reviews of
production records.

Recommendations

We recommend that the Director, Bureau of Land Management:

  1. Reevaluate and revise the Inspection and Enforcement strategy to use Inspection
and Enforcement Program resources more effectively and efficiently. Specifically, field
offices should determine the mix of detailed production accountability inspections and
independent measurement/handling inspections to be performed based on the offices'
Program needs and priorities.

  2. Establish a minimum production level threshold below which detailed production
accountability inspections are not required unless warranted by documented conditions.

  3. Use existing Inspection and Enforcement Program resources to ensure that all
high priority well-drilling and well-plugging operations are inspected.

  4. Develop detailed procedures for inspectors to use in reviewing production records
and provide training necessary to implement these procedures. These procedures should
specify the minimum number of monthly production records to be reviewed both for
standard production reviews and for reporting anomalies that are detected.

  5. Develop requirements to ensure that the results of the inspections and the
independent supervisory or peer reviews are recorded and documented.

Bureau of Land Management Response and Office of Inspector General
Reply

In the June 7, 1996, response from the Director, Bureau of Land Management (Appendix
8), to the draft report, the Bureau concurred with Recommendations 1-5. Based on the
response, we consider all the recommendations resolved but not implemented (see
Appendix 9).

Additional Comments

Regarding the performance of inspections, the Bureau said that it did "not concur with the
statement [in our report] that the Bureau's field office management believed that the
inspection strategy required field offices to dedicate limited staff to low priority
drilling/abandonment vs. production inspections. " The Bureau also said that the strategy
document "is very clear that high priority drilling and abandonment inspections are to take
precedence over production inspections. "

However, in our report, we actually stated:

10

 
We found that the Bureau inspected operations that had little or no production and
that some of its inspections were not comprehensive, adequately documented, or
timely. These conditions occurred because Bureau field office management
believed that the Bureau's inspection strategy required the field offices to dedicate
limited staff to low priority inspections.

As such, we did not state or intend to imply that the Bureau's inspection strategy directed
field offices to perform low priority drilling/abandonment inspections instead of
production inspections. Our point was that field offices planned individual production
inspections primarily to accomplish numeric goals and did not consider production levels.
As a result, many inspections were performed on low priority (low production) leases,
and many high priority inspections were not performed. For example, in fiscal year 1994,
49 percent (246 of 500) of the high priority drilling inspections and 32 percent (217 of
677) of the high priority plugging and abandonment inspections were not performed.
Further, the Bureau, in responding to Recommendations 1 and 2, stated that the Oil and
Gas I&E (Inspection and Enforcement) Policy/Guidance Team proposed changes to
eliminate percentage requirements when conducting inspections.

Regarding production accountability, the Bureau disagreed  that "`production
accountability could have been adequately ensured with the less labor-intensive
independent measurement/handling inspections.'" The Bureau stated, "The current
independent measurement/handling inspection process will not provide the level of
production accountability to meet the intent of the inspection strategy. "

Again, our statement was based on the fact that the Bureau was conducting detailed
production accountability inspections on leases that had minimal or no production. In
situations where there is minimal or no production, we believe that the less labor-intensive
measurement/handling inspection should provide adequate inspection coverage. As noted
in our report, 908 (61 percent) of 1,482 detailed production accountability inspections
were conducted on leases that had minimal production, including 46 production inspections
of leases that had no production. When there is a valid reason for performing a labor-
intensive inspection, such as reported incidents of noncompliance or production/royalty
reporting deficiencies, a detailed inspection could be justified. However, when the cost
of conducting a detailed production verification inspection is considerably more than the
anticipated benefit to be derived from performing the inspection, we believe that an
independent measurement/handling inspection should be used.

Although the Bureau expressed disagreement with our statement regarding the use of the
less detailed inspection procedures for low-producing wells, the Bureau apparently agrees
that detailed inspections of marginal wells are unnecessary. Indeed, in responding to
Recommendations 1 and 2, the Bureau stated, "A national minimum production level
threshold would eliminate unnecessary inspection of marginal wells. " If the current
independent measurement/handling inspection process is insufficient to adequately ensure
accountability for even the low-producing wells, the process should be modified. In this
regard, the Bureau reported that its Oil and Gas I&E Policy/Guidance Team has proposed
changes to enhance the requirements of the independent measurement/handling inspections.

11

 
 I

Regarding the consideration of field office conditions, such as weather, topography, and
resources, in formulating inspection strategy, the Bureau did not agree with the statement
in our report that its inspection strategy did not consider these factors.

We found that the field offices established inspection goals to accomplish a specified
number of inspections so as to meet the percentages in the Bureau's strategy (17 percent
of all inspection items in the field office were required to have detailed production
verification inspections, and 36 percent of the remaining inspection items were required
to have independent measurement/handling inspections). These inspection requirements
were not adjusted for local conditions. We found that in order to accomplish the requisite
number of inspections, inspection items located in remote areas, items with large numbers
of wells and production facilities, and items with significant production volumes were
inspected less frequently than nearby items, items with one or two wells, items grouped
in a single location, or low producing items.

12

 


   

B. INACTIVE WELLS

The Bureau did not ensure that inactive wells were properly classified, justified, and
approved or that bonds were sufficient to protect the Government in case a lease operator
defaulted.  Furthermore, the Bureau routinely approved lease assignments without
determining whether bond amounts were adequate to fund well-plugging and site
restoration costs. The Code of Federal Regulations requires that: (1) oil and gas wells be
plugged promptly and abandoned when they are no longer capable of producing in paying
quantities unless approval is provided for an alternate use (43 CFR 3162.3-4) and (2)
bonds be submitted in amounts necessary to ensure the complete and timely plugging of
wells and reclamation and restoration of the lease area. However, requirements were not
met because: (1) management had not ensured that field offices had sufficient staff to
comply with procedures for reviewing inactive wells and (2) the Bureau had not provided
guidance for measuring the sufficiency of bonds or had not increased minimum bonding
requirements since 1960. As a result, the Government was not adequately protected if
operators defaulted on these wells. Since fiscal year 1991, the Government has paid $1.6
million to plug 131 orphan wells and has identified a liability of $3 million for plugging

an additional 300 wells.
Status of Wells

Although the Bureau has made some progress in
since our review in fiscal year 1989, we found
inactive wells were properly classified, justified,

addressing the status of inactive wells

that the Bureau had not ensured that

and approved. The Code of Federal

Regulations (43 CFR 3162.3) states that when a well is "no longer capable of producing
in paying quantities, " it will be promptly plugged and abandoned unless the Bureau's
authorized officer approves the use of the well for other purposes. The Code further states
that no well may be temporarily abandoned for more than 30 days without the prior
approval of the authorized officer. The operator classifies well status on the monthly
report of operations and is required by Bureau Instruction Memorandum 92-149, dated
March 6, 1992, to justify all wells in inactive status, such as shut-in or temporarily
abandoned wells. The memorandum further requires the Bureau's authorized officer to
then approve the status based on justification provided by the operator.
  Program Accomplishments. Our 1989 audit of the Bureau's Inspection and
Enforcement Program concluded that the Government was potentially liable for a portion
of the costs of plugging many of the 22,520 reported inactive wells nationwide on Federal
and Indian leases because the Bureau was not ensuring that oil and gas well operators were
in compliance with existing operational and environmental regulations and statutes. As
a result, the Bureau issued an action plan (Instruction Memorandum 92-149) that, when
aggressively implemented, resulted in operators plugging many unneeded wells and in
many other wells being classified and approved properly. Bureau Instruction Memorandum
92-149 requires and provides procedures for correctly classifying and approving a well's
status and for increasing individual operator bond minimums. In addition, the Bureau had
identified over 400 orphan wells and provided funding of over $1.6 million to plug 131
of these wells.

              13

 
Classification and Approval. Proper classification and approval of inactive wells are
essential in obtaining operator compliance for prompt plugging and abandonment of wells
that are no longer capable of producing oil or gas in economic quantities. Some operators
may misreport well status in order to postpone costly well-plugging operations indefinitely.
Orphan wells result when wells that are not economical are allowed to accumulate with an
operator that does not have the financial resources to cover well-plugging costs. For
example, if a large company determines that a particular lease is no longer profitable
because of declining production volumes, the large company may sell the lease to a smaller
local operator, which can operate the wells on a smaller profit margin. This operator will
deplete production well by well until the operator can no longer make a profit. If the
smaller operator has not made sufficient money on the wells to pay for plugging and
abandonment, the wells will be in a shut-in or abandoned status until the Bureau reviews
the status of the wells and requires the wells to be plugged. The operator may then
abandon the lease or file bankruptcy, which may obligate the Government to pay for the
well plugging and the surface restorations. The Government may be able to collect this
operator's $10,000 lease bond, but the cost to plug the wells could range from $150,000
to $200,000. These operators then abandon the leases or file bankruptcy, which changes
the responsibility for the plugging and the surface restoration to the Government. To
ensure the timely plugging of wells that are not economical, Bureau Instruction
Memorandum 92-149 requires that operators formally justify the temporary closure of a
well (shut-in) for future use, demonstrate a well's qualification for approval of temporary
abandonment, return the well to production, or submit plans to plug the well.
Furthermore, the memorandum requires the Bureau to enforce operator compliance with
these procedures for all inactive wells by October 1, 1994. Based on our review of the
Bureau's progress, we found that:

- At the seven field offices visited, 2,877 (54 percent) of the total 5,284 inactive wells
identified as requiring action had not been addressed (Appendix 7),

- At six field offices, only 15 of the 76 approvals for temporary abandonment we
reviewed were current and adequately justified. The remaining 61 approvals contained
only marginal justifications for approval (25) or had expired or contained no justification
(36).

- At four field offices, only 14 of the 40 justifications we reviewed for shut-in status
were current and adequately supported. The remaining 26 justification files contained only
marginal support (6), had expired or contained no justifications (17), or were misclassified
as shut-in wells (3). At the three remaining field offices visited, justifications for well
shut-in were not accepted by the Bureau because inactive wells reviewed were all required
to have approval for temporary abandonment.

Inactive wells were not properly classified, approved, and justified because the Bureau did
not provide the management oversight necessary to ensure that procedures required by the
Bureau's Instruction Memorandum 92-149 were implemented. Specifically, the Bureau
did not require: (1) assigned staff to meet time frames established in the memorandum or
provide additional staff if needed to meet the time frames and (2) operators to submit

14

 
adequate justifications for shut-in well status or for approval of temporary abandonment.
A Carlsbad Resource Area Office petroleum engineer who approved most of the temporary
abandonment requests stated that he approved all requests regardless of the justification
if the well passed a casing integrity test.6

Implementation of Instruction Memorandum 92-149 varied among field offices. While
petroleum engineers were responsible for approving requests for temporary abandonment
and for reviewing justifications for shut-in status at all offices visited, responsibilities for
identifying inactive wells that required action and for handling the correspondence and
communication with the operator to obtain compliance varied. For instance, at the
Carlsbad Resource Area Office and the Lea County Inspection Section Office, operator
identification, correspondence, and communication on inactive wells were handled by the
Inspection and Enforcement staff, at the Buffalo and Platte River Resource Area Offices,
these duties were handled primarily by the petroleum engineers. At the seven offices
reviewed, staff generally attributed the lack of progress on the well status review to other
priorities, such as conducting detailed production accountability inspections on
low-producing wells (see Finding A), and on insufficient staffing.

Bonding

Bonds on Federal onshore oil and gas leases were often inadequate to protect the
Government in case a lease operator defaulted, especially regarding well-plugging and
abandonment obligations. Minimum bond requirements are established at $10,000 for an
individual lease; $25,000 for all leases in any one state; or $150,000 to cover all leases
nationwide (43 CFR 3104). The Bureau's authorized officer may increase the amount of
any bond if the estimated costs for plugging and abandonment exceed the bond amount (43
CFR 3104.5(b)). However, bonding was inadequate because: (1) Bureau management had
not increased bond minimums for individual and statewide bonds; (2) field offices did not
recommend individual bond increases because they believed that they did not have specific
criteria to evaluate and identify at-risk leases and that management would not support their
recommendations; and (3) Bureau management did not require an analysis of bond
adequacy as a condition of approving lease assignments.

Although the Bureau recognized these deficiencies, it did not address them effectively.
The Bureau's current minimum bond levels for oil and gas leases were established in 1960.
The March 1995 Bureau report titled "Bonding/Unfunded Liability Review" concluded that
protection provided by a $10,000 individual or a $25,000 statewide bond in 1960 would,
in 1995, require a $54,000 and a $135,000 bond, respectively, for the same level of
protection. While the report's recommendation to raise bond minimums to $20,000 for
individual bonds and to $75,000 for statewide bonds would not achieve these levels, the
increase would be a significant improvement. In addition, the report's recommendations
to plug temporarily abandoned wells on a scheduled basis after 2 years and to either
increase the wells' bond levels or charge an annual fee for temporarily abandoned wells

6A casing integrity test is a test for detecting well-casing leaks during which a well's casing is
pressurized
and monitored for decreases in pressure over a fixed period of time.

15

 
   
 

for the purpose of establishing an orphan well-plugging fund also have merit. However,
the Bureau has not accepted or proposed for implementation either recommendation.
Although the Bureau has proposed for implementation the report's recommendation to
consider the adequacy of bonds before assignments are approved, it has not provided
measurable guidelines by which to identify inadequate bonds. Finally, the Bureau required
a nationwide review of the adequacy of bonds in Instruction Memorandum 92-149, but this
review did not result in a single bond increase in any of the three Bureau state office
jurisdictions covered during our review.

Operators with the highest potential for abandoning leases are small operators that hold
individual or statewide bonds. These operators are at greater financial risk because they
often lease oil and gas wells that have marginal production. These leases often are
purchased from large operators that can no longer operate these leases profitably because
of declining volumes in production.  The Bureau typically approves these lease
assignments without ensuring that bonds being provided are adequate to cover well-
plugging costs. Typically, larger operators, despite not having sufficient bond coverage,
cover the costs of well plugging and abandonment because they have many profitable
producing leases under a nationwide bond that they do not want to jeopardize through
default.

Because the Bureau has not taken sufficient action to minimize Government liability for
the costs of plugging orphan wells, the Government has, since fiscal year 1991, incurred
costs of $1.6 million to plug 131 orphan wells and is liable for plugging over 300 more
orphan wells, estimated to cost more than $3 million. In addition, the Bureau estimates
that there are 6,500 wells classified as temporarily abandoned and over 11,000 wells
classified as shut-in. Many of these wells will require plugging in the near future, and an
unknown number of these wells will likely result in additional Government liability for
well-plugging costs.

Finally, producing wells with ruptured casings that have not been repaired or inactive
wells that have not been plugged properly may also contaminate groundwater or other
resources. Because this often happens below the earth's surface, it is not easily detected,
and the source well is often not readily identifiable. New Mexico State Government
officials and Bureau inspectors from Hobbs, New Mexico, confirmed widespread
contamination of a fresh water aquifer near Hobbs, which is a source of fresh water used
for drinking and agricultural purposes in the area. For example, these officials provided
us information concerning a Federal lease that contained only shallow water wells (38 to
45 feet) but that has produced over 500,000 barrels of crude oil since the 1960s from the
Ogallala Aquifer. Further, these officials said that they believe the oil came from ruptured
well casings. However, the specific wells are unknown and could be Federal, state, or
private wells. State officials estimated that cleanup of this site would cost about $2
million.

16

 


Recommendations

We recommend that the

  1. Provide more

Director, Bureau of Land Management:

effective use of resources in the Inspection and Enforcement

Program, including the use of inspectors to assist in ensuring that all inactive wells are
reviewed annually.

  2. Ensure that operators submit sufficient documented justification annually for all
temporarily abandoned or shut-in wells and require that those wells not justified be
plugged or returned to production.

  3. Implement the recommendation in the Bureau's March 1995 report to increase
bond minimums from $10,000 to $20,000 on individual bonds and from $25,000 to
$75,000 on statewide bonds.

  4. implement the recommendation in the Bureau's March 1995 report to require
operators that have approved temporarily abandoned wells after 2 years to plug the wells
on a schedule acceptable to the field office. Also, for each temporally abandoned well,
the bond in place should be increased by $2 per foot of well depth or a $100 annual fee
should be paid into a Bureauwide orphan well-plugging fund.

5. Develop additional guidelines for reviewing the adequacy of bonds for operators
that have the minimum individual lease and statewide bonds. These new guidelines should
also establish measurable criteria for increasing bond amounts above the established
minimums.

6. Require that bond adequacy be analyzed and, if necessary, increased before lease
assignments are approved.

Bureau of Land Management Response and Office of Inspector General
Reply

In the June 7, 1996, response (Appendix 8) from the Director, Bureau of Land
Management, to the draft report, the Bureau concurred with Recommendations 1-6. Based
on the response, we consider the recommendations resolved but not implemented (see
Appendix 9).

17

 
OTHER MATTERS

At the beginning of our audit, personnel with the Minerals Management Service expressed
concern that the Bureau of Land Management routinely reported insignificant discrepancies
in production to the Service. However, the Service does not require operators to submit
amended Monthly Reports of Operations for these discrepancies. To be cost effective, the
Service established a policy of not pursuing discrepancies in overreported production and
has established minimum production thresholds for pursuing discrepancies in
underreported production.  However, the Bureau policy established in Instruction
Memorandum No. 93-237, Change 1, issued on July 13, 1994, requires all production
reporting discrepancies detected during inspections to be forwarded to the Service
regardless of their significance. This memorandum states that the Service had requested
that only those amended reports for volume differences greater than the Service minimum
production thresholds for pursuing discrepancies per inspection item per month be
submitted to the Service for processing. In addition, the Bureau was aware of the
Service's general policy of not pursuing the correction of overreported production. This
conflict in policies has caused additional work for Bureau resources to develop these
production reporting discrepancies and to handle correspondence to the Service. We
believe that the Bureau should coordinate with the Service to resolve this issue.

18

 
APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS

                 Funds To Be Put
Finding Area              To Better Use

Inactive Wells               $1,600,000

19

 
                      APPENDIX 2
   BUREAU OF LAND MANAGEMENT
OFFICES VISITED OR CONTACTED DURING AUDIT

    Offices

Washington Headquarters*


Colorado State Office* *

White River Resource Area Office


Montana State Office*

Dickinson District Office* *


New Mexico State Office*

Farmington District Office

Roswell District Office**

Carlsbad Resource Area Office

  Lea County Inspection Section Office

Roswell Resource Area Office

Tulsa District Office**

Wyoming State Office**

Casper District Office*

Buffalo Resource Area Office

Platte River Resource Area Office

Location

Washington, D.C.


Denver, Colorado

Meeker, Colorado


Billings, Montana

Dickinson, North Dakota


Santa Fe, New Mexico

Farmington, New Mexico

Roswell, New Mexico

Carlsbad, New Mexico

Hobbs, New Mexico

Roswell, New Mexico

Tulsa, Oklahoma

Cheyenne, Wyoming

Casper, Wyoming

Buffalo, Wyoming

Mills, Wyoming

*Contacted by telephone only.
**Visited during survey only.

20

 
                           APPENDIX 3


DETAILED PRODUCTION ACCOUNTABILITY INSPECTIONS
PERFORMED ON LOW-PRODUCING INSPECTION ITEMS

DURING FISCAL YEAR 1994

State Offices

Alaska State Office

California State Office

Colorado State Office

Eastern States Office

Montana State Office

New Mexico State Office

Nevada State Office

Utah State Office

Wyoming State Office

   Total

Total
Inspections
Performed

3

80

310

62

229

308
**

119

371

1.482

Monthly Production Levels*

100 Units
or Fewer

0

4

64

17

89

83

  0

  5

500 Units
or Fewer

  0

  19

159

  34

141

196

  4

  35

*For reporting purposes, we defined a unit as a fixed amount of oil and gas totaling 1 barrel of oil,
10 mcf of gas, or any
combination of the two with the same aggregate volume.

**The total number of inspections performed in Nevada was not provided by the Bureau.

21

 
State Offices and
Inspection Offices

Colorado State Office

PERFORMANCE OF REQUIRED HIGH PRIORITY DRILLING AND
   PLUGGING AND ABANDONMENT INSPECTIONS
       DURING FISCAL YEAR 1994

White River Resource Area Office

  New Mexico State Office
   Carlsbad Resource Area Office

Lea County Inspection Section Office

Roswell Resource Area Office

Farmington District Office

Wyoming State Office
Buffalo Resource Area Office
Platte River Resource Area Office
    Total

       Drilling                Plugging and Abandonment
Inspections   Inspections   Inspections     Inspections   Inspections   Inspections
Required    Performed   Not Performed     Required   Performed   Not Performed

68       68      0         67      65      2

183
169
0
12

73
36
0
12

110
133
0
0

64
127
2
196

64

43

2

196

0
84
0
0

I

 
APPENDIX 5
Page 1 of 2

OIL AND GAS PRODUCTION ACCOUNTABILITY PILOT

During fiscal year 1993, the New Mexico State Office and the Farmington and Tulsa District
Offices initiated the Oil and Gas Production Accountability Pilot for detecting volume
discrepancies reported on the Monthly Reports of Operations. Inspectors and managers in
these offices said that they believed the Inspection and Enforcement strategy placed too
much emphasis on labor-intensive, detailed production accountability inspections and that
anew approach might provide more effective detection of misreporting of production. The
Pilot involved developing detailed procedures for reviewing production records, which
included guidance for identifying possible operator misreporting of oil and gas production
quantities.

To implement the Pilot, the Farmington District Office redesignated four of its inspectors as
production accountability specialists. A primary responsibility of these specialists is to
review and compare production records so that misreported production is identified on the
Monthly Reports of Operations. Detailed written procedures, which were developed by the
Farmington District Office and implemented in March 1995, require that Monthly Reports
of Operations be reviewed initially to identify any reporting anomalies which may warrant
further review. These procedures provide guidance for identifying anomalies, including
instances where the Monthly Reports of Operations showed the following:

- No gas production with some oil or water production from a gas well.

- No oil production with some gas or water production from an oil well.

- No production when 1 or more production days are reported.

- Extreme variations in production levels when the number of days of production
remains constant for flowing wells.

- Unusual or extended well shut-in status.

- Witnessing production from a well reported as shut-in.

- Discrepancies between reported well status, production volumes, first production
dates, and information provided in the first production memorandum.

- Irregularities with production disposed of in the "other" (disposition of production)
field on the report for the reporting of large volumes of oil or gas.

The Farmington District Office has been very successful in identifying reporting anomalies.

As a result, reporting has been
Monthly Reports of Operations.

improved; that is, operators have been filing
Also, additional royalties have been collected.

amended

23

 
APPENDIX 5
Page 2 of 2

Specifically, we reviewed six cases of underreported production volume that were detected
by the production accountability specialists and verified information with royalty payment
records from the Minerals Management Service. We found that four cases resulted in the
reporting of almost 3 million mcf of gas production being amended and in additional
royalties of almost $380,000 being billed. The other two cases had not been resolved at the
time of our review.

24

 
INCOMPLETE OR INADEQUATE PRODUCTION INSPECTIONS
PERFORMED DURING FISCAL YEAR 1994 AND FIRST QUARTER

OF FISCAL YEAR 1995

            Inspection Activity Deficiencies

          Production
State Offices and     Inspections
Inspection Offices     Reviewed

Colorado State Office

White River Resource Area Office   14

New Mexico State Office

Carlsbad Resource Area Office    20

Lea County Inspection Section Office 12

Roswell Resource Area Office    12
Farmington District Office     34

Wyoming State Office

Buffalo Resource Area Office    13

Platte River Resource Area Office
  Total          118

Incomplete
or
Inadequate
Inspections

3

15
10
9
17

Meter   Measurement
Bypass  Method/Volume
Not Verified  Not Verified

3

5      6
0      3
5      5
5

Site
Security
Not Verified

3

12
8
8
8

*Sixty-five inspections reviewed were incomplete or inadequate. The difference of 112 results from
inspections determined

Production
Records    Inspection    Total
Not Reviewed  Not Documented  Deficiencies

2       2      11

11       9     43
10       8     29
6       8     32
3      17     41

2       3      10
             11
39       49     177*

to have multiple deficiencies.

 
State Offices and
Inspection Offices

Colorado State Office

IMPLEMENTATION OF WELL STATUS REVIEW
    DURING FISCAL YEAR 1995

White River Resource Area Office     June 1995
New Mexico State Office

                         Wells    Wells    Wells
Well Status    Wells     Wells     Wells    Approved for   Justified   Needing
Review    Identified   Plugged and   Returned to   Temporary    for   Additional
Date    for Action   Abandoned   Production   Abandonment   Shut-in   Action

Carlsbad Resource Area Office      October 1994
Lea County Inspection Section Office    October 1994
Roswell Resource Area Office      October 1994

Farmington District Office       March 1995
Wyoming State Office

Buffalo Resource Area Office      April 1995
Platte River Resource Area Office     April 1995
Total

427

1,046

536
500
400

133

89

91
4

150

96



-

24

79

65
21

90

57

190
118
25

20

56

0

0
0
130

157

688
262
450
10

 
APPENDIX 8

                          Page 1 of 5
United States Department of the interior

     BUREAU OF LAND MANAGEMENT
         Washington, D.C. 20240

In Reply Refer To:
1245 (W0310, W0850)

Memorandum

To:

Assistant Inspector General for Audits.

Subject:   Response to Draft Audit Report on the Inspection and
    Enforcement Program and Selected Related Activities,
    Bureau of Land Management (Assignment No. C-IN-MOA-005-94 (B))

Thank you for the opportunity to respond to the subject draft audit report. We offer the
following comments and responses to the recommendations presented in the report:

We do not concur with the statement made on page 10, beginning with the fourth sentence,
which states that the Bureau's field office management believed that the inspection strategy
required field offices to dedicate limited staff to low priority drilling/abandonment vs.
production inspections. From reading the report, this statement stems from your findings that
field offices are not conducting high priority drilling and abandonment inspections. The
strategy document is very clear that high priority drilling and abandonment inspections are to
take precedence over production inspections.

We do not concur with the statement made on page 12, first paragraph, last sentence, that
states "We believe that production accountability could have been adequately ensured with the
less labor-intensive, independent measurement/handling inspections, which require an average
of only 6 staff hours to complete. " The current independent measurement/handling inspection
process will not provide the level of production accountability to meet the intent of the
inspection strategy. It was designed as a spot-check of activities ongoing in the field to
determine where problem areas may be. It appears that the method used to measure the
effectiveness. of the detailed production accountability inspection centered around whether or
not it resulted in volume discrepancy. The purpose of the detailed production accountability
inspection is to determine not only if the production is properly reported, but also if
operations in the field are in compliance and if equipment is installed and operating properly.

"2'7

 
APPENDIX 8        
Page 2 of 5

In May 1995, a team consisting of the Bureau of Land Management's Washington and State
Office representatives met in Denver, Colorado, to look at on-the-ground issues relating to the
Inspection and Enforcement (I&E) Program. The team developed a revised independent
measurement/handling inspection process that would be used to determine if a detailed
production accountability inspection was required. The new process would require a more in-
depth review of field operations and production records, although not to the extent required
under a detailed production accountability inspection. However, the time required to
complete the revised independent measurement/handling inspection will increase.

We do not concur with the statement on page 13, paragraph beginning with "Local
Conditions," that indicated that the BLM's I&E Strategy does not take local field office
conditions, such as weather, topography, and resources, into account. When a field office
develops its inspection plan matrix, consideration is given to these conditions through the
amount of time necessary to complete the inspection. Field offices are required to document
in the Automated Inspection Record System the amount of inspection time, office time, and
travel time it took to complete an inspection. This information is then used in preparing the
inspection plan matrix. In addition, during times when weather conditions do not allow
personnel to travel to conduct inspections, the I&E staff perform the records review portion of
inspections, and conduct file research of future inspections.

Our responses to the following recommendations follow:

A. Inspection and Enforcement

Recommendations 1 and 2

(1) Reevaluate and revise the Inspection and Enforcement strategy to use Inspection and
Enforcement Program resources more effectively and efficiently. Specifically, field offices
should determine the mix of detailed production accountability inspections and independent
measurement/handling inspections to be performed based on the offices' Program needs and
priorities.

(2) Establish a minimum production level threshold below which detailed production
accountability inspections are not required unless warranted by documented conditions.

Response: We support reevaluating the I&E Strategy to use program resources more
effectively and efficiently and to establish minimum production levels below which a detailed
production accountability inspection will not be performed (Recommendations 1 and 2).

We agree that a national minimum production level threshold would eliminate unnecessary
inspection of marginal wells. The Oil and Gas I&E Policy/Guidance Team that met in
Denver, Colorado, in May 1995, proposed changes to enhance the requirements of the
independent measurement/handling inspections and to eliminate percentage requirements for
conducting inspections. These changes were sent to the field in draft in August 1995. Field

 
APPENDIX 8
Page 3 of 5

offices were given the option of implementing the draft policy or continue under the fiscal
year (FY) 1995 requirements for FY 1996. At the end of FY 1996, we will evaluate the
results of these inspections, then determine if additional changes need to be made to the
process.

Recommendation 3

Use existing I&E Program resources to ensure that all priority well-drilling and -plugging
operations are inspected.

Response: We concur that existing I&E Program resources are to be used to ensure that all
high priority drilling and plugging operations are inspected. The I&E Strategy is very clear
on this matter. High priority drilling and abandonment inspections are to take precedence
over production inspections. The BLM Washington Office will issue an Information Bulletin
by August 30, 1996, to the field that presents the importance of conducting these inspections.

Recommendation 4

Develop detailed procedures for inspectors to use in reviewing production records and provide
training necessary to implement these procedures. These procedures should specify the
minimum number of monthly production records to be reviewed both for standard production
reviews and for reporting anomalies that are detected.

Response: We concur that there is a lack of detailed procedures for production record
reviews and training. The review process of production records has been a learning process
for all offices. Our field offices have developed in-house procedures and guidance for
production record reviews. We will incorporate the various versions of these procedures into
one document by December 31, 1996. We are also looking at the possibilities of using
distance learning to train our personnel.

Recommendation 5

Develop requirements to ensure that the results of inspections and the independent supervisory
or peer reviews are recorded and documented.

Response: We concur that there is a need for inspection documentation requirements. The
BLM Washington Office circulated for field comment draft instructions titled Clarification of
Oil and Gas Inspection Documentation. We are in the process of reviewing and developing
additional procedures based on the comments and plan to issue the final procedures by
October 1.1996.

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APPENDIX 8
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B. Inactive Wells

Recommendation 1

Provide more effective use of resources in the Inspection and Enforcement Program, including
the use of inspectors to assist in ensuring that all inactive wells are reviewed annually.

Response: The BLM Instruction Memorandum (IM) No. 92-149 requires ". . . an ongoing
review of all SI/TA wells every 12 months. " The 1997 I&E Strategy will encourage the more
effective use of inspectors, for both office record review and on-site inspections, in ensuring
that this mandate is met.

Recommendations 2, 5 and 6

(2) Ensure that operators submit sufficient documented justification annually for all
temporarily abandoned or shut-in wells and require that those wells not justified be plugged
or returned to production.

(5) Develop additional guidelines for reviewing the adequacy of bonds for operators who
have the minimum lease and statewide bonds. These new guidelines should also establish
measurable criteria for increasing bonds amounts above the established minimums.

(6) Require that bond adequacy be analyzed and increased, if necessary, before lease
assignments are approved.

Response: The BLM will re-issue, by August 30, 1996, the requirements contained in IM
No. 92-149 that field offices are to heed for the review of inactive wells and lease bonds
(Recommendation 2). Also, by August 30, additional guidelines will be issued regarding the
review of all oil and gas bonds (Recommendation 5) including the requirement that bond
adequacy be analyzed before lease assignments are approved (Recommendation 6).

Recommendations 3 and 4

(3) Implement the recommendation in the Bureau's March 1995 report to increase bond
minimums from $10,000 to $20,000 on individual bonds and from $25,000 to $75,000 on
statewide bonds.

(4) Implement the recommendation in the Bureau's March 1995 report to require operators
that have approved temporarily abandoned wells after 2 years to plug the wells on a schedule
acceptable to the field office. Also, the bond in place should be increased by $2 per foot of
well depth or a $100 annual fee should be paid into a Bureauwide orphan well-plugging fund
for each temporarily abandoned well.

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APPENDIX 8
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Response: The BLM agrees in principle on raising the minimum bond amounts on both
individual and statewide bonds (Recommendation 3) and after two years to require operators
who have approved abandoned wells to plug the wells on a schedule acceptable to the field
office (Recommendation 4). Also, the BLM supports the recommendation that the bond in
place be increased for each temporarily abandoned well (Recommendation 4). However, the
BLM has not yet had the opportunity to decide on the specific amounts for the increases.
The BLM will start a review of the appropriateness of the specific bond amounts as
recommended by the BLM's Bonding/Unfunded Liability Review Team. We will complete
the necessary changes in regulations to raise the rninimun bond and issue guidance for
increasing the bond amount for temporarily abandoned wells by September 30, 1997.

The Responsible Official for the implementation of all recommendations is Herd Tipton,
Assistant Director, Resource Use and Protection.

The point of contact for the I&E Program is Lenny Bagley, Montana State Office
(MT-920), 406-255-2847 and for inactive Wells is Rudy Baier, Fluids Group (WO-310),
202-452-5024. For general information, contact the BLM's Audit Liaison Officer, Gwen
Midgette, 202-452-7739.

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APPENDIX 9

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
  Reference        Status           Action Required

A.1-A.5 and B.1-B.6     Resolved; not     No further response to the Office
           Implemented     of Inspector General is required.
                    The recommendations will be
                    referred to the Assistant
                    Secretary for Policy,
                    Management and Budget for
                    tracking of implementation.

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