[Evaluation Report on Followup of Offshore Minerals Leasing Activities, Minerals Management Service]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 98-I-385

Title: Evaluation Report on Followup of Offshore Minerals Leasing
       Activities, Minerals Management Service

Date:  March 27, 1998

  
  
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     EVALUATION REPORT

  
     Memorandum
  
     To:  Director, Minerals Management Service
  
     From:  Ronald K. Stith
            Acting Assistant Inspector General for Audits
  
     Subject:  Evaluation Report on Followup of Offshore Minerals
               Leasing Activities, Minerals Management Service (No. 98-I-385)
  
  
     INTRODUCTION
  
     This report presents the results of the followup evaluation of
     our December 1993 audit report "Offshore Minerals Leasing
     Activities, Minerals Management Service" (No. 94-I-179). The
     objective of our evaluation was to determine whether the
     Minerals Management Service had satisfactorily implemented the
     recommendation in our 1993 report and whether any new
     recommendations were warranted. During our review, we noted a
     condition relating to lease rental terms that warranted
     immediate consideration by Service management. Accordingly, we
     are also issuing a quick-reaction evaluation report concerning
     this issue.
  
     BACKGROUND
  
     The Minerals Management Service's mission includes managing the
     Offshore Minerals Leasing Program under the provisions of the
     Outer Continental Shelf Lands Act, as amended. To accomplish
     this part of its mission, the Service prepares oil and gas
     leasing schedules, holds lease sales on offshore tracts (up to
     5,760 acres), and awards leases on offshore Federal lands to the
     highest qualified bidder. For each lease awarded, the Service
     receives revenues in the form of bonus bids, rental fees, and
     royalties if a lessor begins production of oil and gas on the
     leased tracts. Bonus bids are a one-time cash amount paid per
     acre to the Service by the highest qualified bidders to obtain
     leases. Rental fees are annual payments based on a fixed dollar
     amount per acre, which is established at the time the lease is
     issued and paid by a lessor to preserve its rights to the lease.
     Lessors make royalty payments equal to a stated share or
     percentage of the value of the oil or gas produced on a tract.
     During calendar years 1996 and 1997, revenues from the sale of
     Federal offshore oil and gas leases totaled about $8.9 billion,
     which comprised royalties of about $6.5 billion, bonus bids of
     $2.1 billion, and rents of $321 million.
  
     SCOPE OF EVALUATION
  
     The scope of our followup evaluation included a review of actions
     taken by the Service to implement the recommendation made in our
     December 1993 audit report. As part of the evaluation, we
     reviewed documents and records pertaining to the Service's
     offshore oil and gas leasing program for calendar years 1994
     through 1997. We also interviewed Service personnel responsible
     for administering the program. Furthermore, we reviewed the
     Secretary's Annual Statement and Report to the President and the
     Congress for fiscal year 1995, which was required by the Federal
     Managers' Financial Integrity Act, and the Departmental Report
     on Accountability for fiscal year 1996, which includes
     information required by the Act, and determined that no material
     weaknesses were included in the reports which directly related
     to the objective and scope of our evaluation. Our evaluation was
     conducted from December 1997 to February 1998 at the Service's
     Economics Division in Herndon, Virginia.
  
     Our evaluation was made in accordance with the "Quality Standards
     for Inspections," issued by the President's Council on Integrity
     and Efficiency. Accordingly, we included such tests of records
     and other evaluation procedures that were considered necessary
     under the circumstances to accomplish our stated objective.
     Because of the limited scope and objective of our review,
     internal controls were reviewed only to the extent that they
     related to corrective actions taken on the recommendation in our
     prior report.
  
     PRIOR AUDIT COVERAGE
  
     In our December 1993 audit report "Offshore Minerals Leasing
     Activities, Minerals Management Service" (No. 94-I-179), we
     reported that the Service had established a $25 minimum bonus
     bid per acre and a $3 rental fee per acre, which were less than
     the $32.50 bonus bid per acre and the $5.00 rental fee per acre
     recommended in internal studies performed by the Service.
  
     Specifically, our prior audit found that a March 1992 study
     conducted by the Service (the most current study available at
     the time of the prior review) concluded that raising the minimum
     bonus bid would be in accordance with current market conditions
     and would increase Federal revenues. In order to indicate the
     potential for increased bonus bid revenues, we included an
     estimate in the prior report that the Government would have
     received up to $25.5 million in additional revenues from 1988 to
     1992 had the minimum bonus bid rate been set at $32.50 per acre
     (the rate recommended in the March 1992 study) at the beginning
     of 1988.
  
     In addition, our prior audit found that the annual rental fee
     should be increased because the $3 per acre fee, which was
     established before 1954, represented only a small percentage of
     the total costs involved in oil and gas exploration and that
     therefore an increase in the fee would not impact the Service's
     ability to lease tracts. In order to indicate the potential for
     increased rental fee revenues, we included estimates in the
     prior report that a $5 per acre rental fee (the $3 fee
     established in 1954 and a $2 increase, the optimal amount
     recommended by the Service's March 1992 study) for the period of
     1988 to 1992 would have increased rental fee revenues by $120.6
     million and that the additional revenues from 1993 to 1996 for
     leases issued during 1988 to 1992 would have added about $35
     million to revenues. In addition, we concluded that higher
     minimum bonus bids and higher rental fees may encourage
     companies to begin production or relinquish tracts in a more
     timely manner, with a potential increase in bonus bid revenues
     from the resale of relinquished tracts.          
     RESULTS OF EVALUATION
  
     Our December 1993 audit report (No. 94-I-179) contained the
     following recommendation:
  
     We recommend that the Director, Minerals Management Service,
     establish a procedure that requires that the adequacy of the
     minimum bonus bid and annual rental fee charges be evaluated
     before each sale and that appropriate adjustments be made if
     necessary to ensure that the Government receives optimum value
     for offshore oil and gas leases.
  
     The Acting Director concurred with the recommendation, stating
     that he believed that "periodic evaluation of the effects of
     minimum bids and rental rates on Government receipts as well as
     other leasing objectives is clearly in the public interest."
     Based on our followup evaluation, we found that the Minerals
     Management Service had taken quick action to fully implement
     this recommendation and had increased rental fee rates per acre,
     which generated an estimated $141 million (Appendix 1) in
     increased lease revenues between September 1993 and August 1997.
     Specifically, we found that 11 lease sales were conducted from
     September 1993 to August 1997, which resulted in the leasing of
     4,861 tracts totaling about 26 million acres, and that the
     Service had evaluated the total effect on revenues of raising
     the minimum bonus bids and rental fees per acre for each of
     these sales. Before each lease sale, the Service prepared a
     Decision Memorandum for the Assistant Secretary for Land and
     Minerals Management that set forth the terms and conditions for
     the Final Notice of Sale to be published in the "Federal
     Register." For example, for Lease Sale No. 168, the Decision
     Memorandum stated that the Service had considered increases in
     the minimum bid up to a level of $50 per acre and rental fees up
     to $10 and concluded that maintaining the minimum bonus bid
     level at $25 but increasing rental fees would increase Federal
     revenues and encourage oil and gas exploration and development
     of the leased tracts.
  
     Based on its analyses, the Service raised the per acre rental fee
     for leased tracts in water depths of less than 200 meters from
     $3 to $5, beginning with Sale No. 143 in September 1993, and
     increased per acre rental fees for tracts of property in water
     depths of greater than 200 meters from $3 to $7.50, beginning
     with Sale No. 157 in April 1996. The Service stated that one
     factor considered in deciding to increase fees for tracts in
     water depths of 200 meters or more was a November 1995 amendment
     to the Outer Continental Shelf Lands Act (Title III of Public
     Law 104-58) which suspends royalties on a specified amount of
     oil or gas where production is in water exceeding 200 meters.
     The Service stated that the increased fees for these tracts
     "would be expected to speed the rates of exploration and
     development of productive tracts and relinquishment of leased
     marginal tracts."
  
     The Service said that it expects that leasing activities for
     tracts in water depths of more than 200 meters will continue to
     increase for at least the next several years. Because of the
     corresponding increase in rental rates for those tracts, the
     increase in future revenues as a result of the implementation of
     the prior report's recommendation is expected to continue. We
     estimated that the leases issued between September 1993 and
     August 1997 (Lease Sales Nos. 143 through 168) will generate an
     estimated $194 million in increased lease revenues between 1998
     and 2001, as shown in Appendix 2.
  
     Since this report does not contain any recommendations, a
     response is not required.
  
     We appreciate the assistance of Minerals Management Service
     personnel during the conduct of our evaluation. We also commend
     the Director, Minerals Management Service, for the quick
     implementation of our prior report's recommendation, which has
     resulted in significant increased revenues and future revenues
     cited in this report.
  
     cc: Assistant Secretary for Land and Minerals Management                  
     

     ADDITIONAL RENTAL REVENUES FOR CALENDAR YEARS
     1993 TO 1997 FROM TRACTS LEASED FROM 1993 TO 1997                            
  
     Sale Number Acres* Rate Increased by 1993 1994 1995 1996 1997
     Total 1993 through 1997
  
     143 807,882 $2.00 $1,615,764 44 $1,454,188 $1,308,769 $1,177,892
     $1,060,103 $6,616,716
  
     147 1,749,520 2.00
  
     3,499,040 3,149,136 2,834,222 2,550,800 12,033,198
  
     150 1,025,550 2.00
  
     2,051,100 1,845,990 1,661,391 1,495,252 7,053,733
  
     152 2,896,478 2.00
  
     5,792,956 5,213,660 4,692,294 15,698,910
  
     155 1,445,251 2.00
  
     2,890,502 2,601,452 2,341,307 7,833,261
  
     157 2,050,808 2.00
  
     4,101,616 3,691,454 7,793,070
  
     157 2,590,544 4.50
  
     11,657,448 10,491,703 22,149,151
  
     144 105,274 2.00
  
     210,548 189,493 400,041
  
     161 944,299 2.00
  
     1,888,598 1,699,738 3,588,336
  
     161 2,463,117 4.50
  
     11,084,026 9,975,624 21,059,650
  
     166 1,835,567 2.00
  
     3,671,134 3,671,134
  
     166 3,399,393 4.50
  
     15,297,268 15,297,268
  
     149 10,263.5 2.00
  
     20,527 20,527
  
     168 655,720 2.00
  
     1,311,440 1,311,440
  
     168 3,736,808 4.50
  
     16,815,636 16,815,636
  
     Totals 25,716,475
  
  
  
     $141,342,071
  
          
  
  
  
  
  
     *Explanatory note: Similar to the Mineral Management Service's
     in-house studies, we assumed a 10 percent annual lease
     relinquishment rate. In addition, we assumed that none of the
     relinquished tracts would be acquired by another company in a
     subsequent lease sale and that the amount of increased revenues
     would therefore be greater than the amount estimated. Also, for
     purposes of calculating total rent, the Service treats each
     fraction of an acre as a full acre.
  
     
  
           POTENTIAL ADDITIONAL RENTAL REVENUES         FOR CALENDAR
     YEARS 1998 TO 2001       FROM TRACTS LEASED FROM 1993 TO 1997
  
  
     Sale
  
     Rate
  
  
     Total 1998
  
     Number Acres* Increased by 1998 1999 2000 2001 through 2001
  
     147 1,147,860 2.00 $2,295,720
  
     $2,295,720
  
     150 672,863 2.00 1,345,726
  
     1,345,726
  
     152 2,111,532 2.00 4,223,064 $3,800,757
  
     8,023,821
  
     155 1,053,587.5 2.00 2,107,175 1,896,457
  
     4,003,632
  
     157 1,661,154 2.00 3,322,308 2,990,077 $2,691,069
  
     9,003,454
  
     157 2,098,341 4.50 9,442,532 8,498,278 7,648,450
  
     25,589,260
  
     144 85271.5 2.00 170,543 153,488 138,139
  
     462,170
  
     161 764,882 2.00 1,529,764 1,376,787 1,239,108
  
     4,145,659
  
     161 1,995,124.65 4.50 8,978,061 8,080,254 7,272,228
  
     24,330,543
  
     166 1,652,010 2.00 3,304,020 2,973,618 2,676,256 $2,408,630 11,362,524
  
     166 3,059,453.6 4.50 13,767,541 12,390,786 11,151,707 10,036,536
     47,346,570
  
     149 9,237 2.00 18,474 16,627 14,964 13,468 63,533
  
     168 590,148 2.00 1,180,296 1,062,266 956,040 860,436 4,059,038
  
     168 3,363,127 4.50 15,134,072 13,620,664 12,258,597 11,032,737 52,046,070
  
     Totals 20,264,590.7
  
  
  
     $194,077,720
  
  
  
  
  
  
     *Explanatory note: Similar to the Mineral Management Service's
     in-house studies, we assumed a 10 percent annual lease
     relinquishment rate. In addition, we assumed that none of the
     relinquished tracts would be acquired by another company in a
     subsequent lease sale and that the amount of increased revenues
     would therefore be greater than the amount estimated. Also, for
     purposes of calculating total rent, the Service treats each
     fraction of an acre as a full acre.
  
     
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