[Audit Report on the Drainage Protection Program, Bureau of Land Management]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-i-358

Title: Audit Report on the Drainage Protection Program, Bureau of
       Land Management

Date:  March 26,1999



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U.S. Department of the Interior
Office of Inspector General





AUDIT REPORT


DRAINAGE PROTECTION PROGRAM,
BUREAU OF LAND MANAGEMENT


REPORT NO. 99-I-358

MARCH 1999






MEMORANDUM

TO:                The Secretary

FROM:              Robert J. Williams
                   Acting Inspector General

SUBJECT SUMMARY:   Final Audit Report -
                   "Drainage Protection Program, Bureau of
                   Land Management" (No. 99-i-358)


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, which is responsible for
managing the drainage protection program, identified all
potential drainage situations and required lessees to drill wells
and produce the oil or gas necessary to prevent drainage or pay
compensatory royalties for the drained resource.

We found that the Bureau generally managed its drainage
protection program effectively.  We also found that potential
drainage situations were effectively identified and evaluated and
that corrective measures were implemented. As a result, revenues
estimated at $36 million were generated by the program during
fiscal years 1995 to 1998 (through April 1998).  However, when
coal bed methane drilling activity increased significantly in the
Farmington, New Mexico, area, the Bureau did not allocate
sufficient resources to effectively manage the increased work
load, and a backlog of drainage cases developed that was
approaching the 6-year limit.  Consequently, the Farmington Field
Office entered into drainage settlement agreements to accelerate
the royalty collection process and prevent the complete loss of
royalties.  While this procedure did result in royalties and
interest of $242,000 being collected, royalty revenues of $24,530
were not collected because of  the statute of limitations.
Furthermore, interest on royalties estimated at $83,000 was not
collected, and at least 23 Indian drainage cases had not been
processed timely.

In its response, the Bureau agreed with the report's four
recommendations to address the deficiencies.  Based on the
response, we considered all four recommendations resolved.

If you have any questions concerning this matter, please contact
me at (202) 208-4252.


Attachment




MARCH 1999                    C-IN-BLM-002-98-D



AUDIT REPORT

Memorandum

     To:  Director, Bureau of Land Management

   From:  Robert J. Williams
          Assistant Inspector General for Audits

Subject:  Audit Report on the Drainage Protection Program, Bureau
          of Land Management (No. 99-i-358)


INTRODUCTION

This  report presents the results of our review of the Bureau of
Land Management's drainage protection program.  The audit
objective was to determine whether the Bureau, which is
responsible for managing the program, identified all potential
drainage situations and required lessees to drill wells and
produce the oil or gas necessary to prevent drainage or pay
compensatory royalties for the drained resource.

BACKGROUND

Drainage is the gradual removal of oil and gas from beneath a
specified property by a producing well on an adjoining property.
Oil and gas are found in subsurface reservoirs and tend to flow
to areas of reduced pressure that surround a producing well, thus
enabling the oil and gas to be removed and drainage to occur.
The rule of capture established by court decisions protects the
producer that removes oil and gas which have migrated across
property lines from any liability as long as the well itself does
not trespass.  Furthermore, the owner of a tract of land acquires
title to all oil and gas produced from that tract of land
regardless of whether such oil and gas migrated from adjoining
lands.

The Code of Federal Regulations (25 CFR 211 and 212 and 43 CFR
3100) requires the Bureau to ensure that Federal and Indian
leases are protected from drainage of oil and gas and to obtain
compensation from the lessees for drainage losses.  Specifically,
the Bureau can require a lessee of Federal or Indian lands to
drill a protective well and produce oil or gas to protect leased
lands from drainage and to pay compensatory royalties for lost
oil or gas from the time drainage was known until protective
measures are implemented.  Any royalty revenues related to the
unleased lands are lost until the lands are leased.  The standard
Federal and Indian lease agreements provide for drainage
protection and require compensation from the lessees for drainage
losses.

Bureau Instruction Memorandum 93-287, "Application
of the Statute of Limitations to Oil and Gas
Drainage Cases," requires the Bureau to initiate
collection action on compensatory royalties related
to drainage of leased lands within 6 years of the
Bureau's becoming aware of the drainage to prevent
the Bureau from losing the royalties because of the
statute of limitations.[1]  The Bureau's drainage
protection program procedures are described in
Appendix 1.  During October 1992 through April 1998,
the Minerals Management Service collected
compensatory royalties of $7.4 million that were
specifically attributable to the program.

The funds to manage the program are included in the
Bureau's Oil and Gas Management subactivity, which
is within the Energy and Minerals Management
activity.  The fiscal year 1997 budget for the
subactivity was $52.1 million and included funding
for 810 full-time-equivalent positions.  The program
has no separate budget or accounting line item, and
many of the program staff also have other duties.
Consequently, the Bureau could not account for, and
we could not identify, specific program
expenditures.

SCOPE OF AUDIT

This review was conducted in accordance with the
"Government Auditing Standards," issued by the
Comptroller General of the United States.
Accordingly, we included such tests of records and
other auditing procedures that were considered
necessary under the circumstances.  We reviewed the
Departmental Report on Accountability for fiscal
year 1996, which includes information required by
the Federal Managers' Financial Integrity Act, and
the Bureau's annual assurance statement on
management controls for fiscal year 1997 and
determined that no material weaknesses were included
in the reports which directly related to the
objective and scope of our review.

Our review, which consisted of auditing data from
October 1993 through August 1998  and other years as
appropriate, was performed during May through
September 1998 at the Bureau offices in Lakewood and
Durango, Colorado; Farmington, New Mexico; and
Casper, Wyoming.  October 1993 was selected for
review because it was the beginning of the last
fiscal year for which cases could be opened and
still be within the 6-year statute of limitations.
We interviewed Bureau personnel responsible for
administering the program and conducted telephone
interviews with various other Bureau offices (see
Appendix 2).  We obtained, analyzed, and evaluated
program statistical data from the 14 Bureau offices
that had drainage protection responsibilities for
October 1993 through August 1998 (see Appendix 3).

PRIOR AUDIT COVERAGE

During the past 5 years, the General Accounting
Office has not issued any reports concerning the
Bureau's drainage protection program.  However, the
Office of Inspector General issued the September
1993 report "Followup of Recommendations Pertaining
to the Drainage Protection Program, Bureau of Land
Management" (No. 93-I-1642), which was a followup
review of the seven recommendations contained in the
September 1990 report "Drainage Protection Program,
Bureau of Land Management" (No. 90-100).  The
followup report stated that the Bureau had
satisfactorily implemented six of the seven
recommendations and had kept the Department of the
Interior informed on the progress of its
implementation of the remaining recommendation.  The
unimplemented recommendation required the Bureau to
revise the drainage regulations in the Code of
Federal Regulations (43 CFR 3100) to change drainage
protection responsibility from the operating rights
owner to the lessee.  Transfer of responsibility
from the operating rights owner to the lessee will
enable the Bureau to effectively track
responsibility for drainage requirements, since
operating rights are easily and frequently
transferred, making enforcement of the drainage
requirements difficult.  The proposed rule making
was expected to be published in the "Federal
Register" in October 1993 but was not published
until January 1998.

RESULTS OF AUDIT

We found that the Bureau of Land Management
generally managed its drainage protection program
effectively.  Specifically, in fiscal year 1990, the
Bureau had an estimated backlog of 25,000 unresolved
drainage cases at the 16 offices[2] that had
drainage protection programs.  To address the
backlog, the Bureau issued new guidance for the
program in November 1992 and increased the resources
for the program.  Consequently, the Bureau reduced
the backlog of unresolved drainage cases to 3,200
cases by September 30, 1994, and to 1,700 cases as
of March 31, 1998 (see Appendix 3).  We also found
that potential drainage situations were effectively
identified and evaluated and that corrective
measures were implemented. As a result, revenues
estimated at $36 million were generated by the
program during fiscal years 1995 to 1998 (through
April 1998).  However, we found that the Farmington
(New Mexico) Field Office did not collect all
compensatory royalties or  interest related to its
drainage program and that it reduced the priority of
drainage cases on Indian lands.  Bureau Instruction
Memorandum 93-287 requires that collection action
begin within a 6-year time period from the
determination of drainage to preclude compensatory
royalties from being lost because of the statute of
limitations.  In addition, Bureau Instruction
Memorandum 96-180, "Bureauwide Interim Guidance
Replacing the Oil and Gas Manual 3160-2 - Drainage
Protection After August 23, 1996," requires the
field offices to submit drainage data to the
Minerals Management Service for the Service's
determination of royalties and interest owed.
Further, Bureau guidance requires that drainage
cases related to Indian lands be given high priority
within the drainage program.  However, when coal bed
methane drilling activity increased significantly in
the Farmington area, the only area within the Bureau
where extraction of coal bed methane is a
significant activity, the Bureau did not allocate
sufficient resources to effectively manage the work
load, and a backlog of drainage cases developed that
was approaching the 6-year limit.  Farmington Office
officials said that they realized that the normal
process would not allow the timely processing of the
drainage cases.  Therefore, to accelerate the
royalty collection process and prevent the complete
loss of compensatory royalties, the Field Office
entered into drainage settlement agreements,[3]
which were not in compliance with the Bureau's
normal procedures to have the Minerals Management
Service determine and collect the royalties owed.
While this procedure did result in royalties and
interest of $242,000 being collected, royalty
revenues of $24,530 were not collected because of
the statute of limitations.  Furthermore, interest
on royalties estimated at $83,000 on the three
settlement agreements we reviewed was not collected
because the Farmington Office did not pursue the
collection of interest owed, and at least 23 Indian
drainage cases had not been processed timely.

Settlement Agreements

Farmington Office officials said that they used
settlement agreements because Federal income tax
incentives associated with drilling wells for the
extraction of coal bed methane gas deposits in the
Farmington area caused the number of drainage cases
to increase.  Specifically, the Crude Oil Windfall
Profit Tax Act of 1980 (26 U.S.C. 29) provided a tax
credit for production of nonconventional fuels,
which include coal bed methane gas.  The tax credits
were due to expire in December 1992.  Consequently,
there was significant activity up to that time, and
the resultant production from those wells created
the Farmington Office's backlog.  For example, the
Farmington Office's drainage work load increased
from 279 cases in 1994 to 423 cases[4] in August
1998.  Of the 423 drainage cases, an estimated 133
drainage cases were approaching the end of the
6-year period for initiating collection action.  The
ability of the Farmington Office to manage this
increased work load was affected by two factors.
First, because there was no uniform industry process
for precisely determining the extent of coal bed
methane deposits, development of a process by
Farmington Office engineers was time consuming.
Second, Farmington officials told us that because of
budgetary constraints, they were not able to hire
the additional staff necessary to manage the
backlog.[5]  Accordingly, the Farmington Office
implemented the drainage settlement agreement
process to expedite the processing of these older
cases.  The settlement agreements eliminated
forwarding the cases to the Minerals Management
Service for calculation of royalties and interest
due by the lessee, which a Farmington Office
official stated would take 2 or more years to
process and that the statute of limitations would
have expired[6] during this time period.

During January through July 1998, the Field Office
entered into three settlement agreements involving
16 drainage cases.  While the settlement process
prevented the complete loss of royalties, we found
that it did not ensure that all revenues were
collected.  Specifically, although the Farmington
Office collected revenues of $242,000 (royalties of
$206,016 and partial interest of $35,984[7] on the
royalties) on these three settlement agreements, one
settlement agreement did not include estimated
royalties of $24,530 because the statute of
limitations had expired.  In addition, the three
settlements excluded estimated interest of $83,000
on the royalties for drainage that occurred
during1987 through 1996.

The Farmington Field Office drainage protection
program petroleum engineer stated that the
determination of coal bed methane reservoirs is "a
new technology which few engineers understand" and
that only one individual in the Farmington Office
had the knowledge and expertise to reasonably
estimate coal bed methane drainage.  The engineer
further stated that he had developed the procedures
and data used for determining drainage for coal bed
methane which were not reviewed and approved by
Bureau management.  Consequently, when the
Farmington Office entered into the agreements, the
amounts did not include all interest owed on the
compensatory royalties.  According to Farmington
Office officials, the full amount was not requested
to make the agreements more favorable to the lessee,
which would reduce the possibility of appeal and
facilitate an expeditious settlement.

We found that only one employee, a petroleum
engineer, was responsible for all aspects of the
settlement, including identifying the drainage
amounts, estimating the royalties due, and
negotiating with the lessee the final amount to be
paid.  Regarding technical reviews of drainage
cases, the Bureau's Instruction Memorandum No.
96-180 states that "a sufficient number of Quality
Control Reviews must be conducted to ensure that
program objectives are being met."   The memorandum
further provides that these reviews may be performed
by peers who have the expertise in "petroleum
evaluations as applied to the Reservoir Management
Program."  However, the engineer's work on the three
settlement agreements we reviewed, including the
technical determinations related to the drainage
amounts, had not been reviewed.  According to
Farmington Office officials, the work was not
reviewed because of the lack of resources and of
individuals who had the expertise to perform the
reviews and because of time constraints.  Farmington
Office officials said that they were aware of the
lack of separation of duties but that they wanted to
complete the settlements before the statute of
limitations expired and all of the revenues were
lost.  In our opinion, the lack of a technical
review of the engineering estimates used to
calculate the royalty amounts and the lack of
separation of duties with regard to the preparation
and negotiation of the agreements did not provide
adequate assurance that the amounts of drainage and
related royalties were determined adequately.  In
addition, the petroleum engineer stated that there
would be increased activity in the development of
coal bed methane gas in other areas of the country.
In that regard, we believe that the personal
knowledge of the program's petroleum engineer
relating to determining coal bed methane drainage
should be documented.  Documenting this process
would allow the Farmington Office to train other
engineers in the process, thereby providing
additional resources to its backlog and minimizing
the recurrence of backlogs in other Bureau offices.

Furthermore, the policies and procedures followed by
the Farmington Office in negotiating the settlement
agreements, including the decision to forego
interest, were not documented and, as such, had not
been reviewed and approved by Bureau management or
the Solicitor's Office.  According to Farmington
Office officials, the Farmington Office will need to
continue to use settlement agreements until the
backlog is reduced to a maintenance level.  After
the Farmington Office documents the coal bed methane
agreement policies and procedures, we believe that
the Bureau should review these policies and
procedures and make the changes necessary to ensure
that all potential revenues are collected through
the settlement process.

Indian Lands Drainage Cases

The Farmington Office did not effectively process
cases related to drainage from  Indian lands.
Specifically, we found that the Indian lands'
drainage cases were not assigned a high priority in
the Farmington Office, as was required by Bureau
procedures.  Procedural Note 5 of the Bureau's
Instruction Memorandum No. 93-287 states that "all
Indian drainage cases are to be pursued regardless
of their financial 'significance,' and  Indian
drainage cases normally will continue to receive top
priority over Federal cases."  Also, Instruction
Memorandum No. 96-180 requires that the Bureau of
Land Management (1) establish a priority
classification method which would "ensure that
royalty is not permanently lost, due to, for
example, unleased lands" and (2) notify the Bureau
of Indian Affairs to initiate leasing or negotiate
an agreement that would afford protection for the
lease "if the administrative and technical reviews
indicate unleased Indian tribal or allotted lands
are subject to drainage." (Emphasis added.)  Bureau
of Land Management officials stated that because the
statute of limitations does not apply to Indian
lands, royalties associated with leased lands are
never completely lost.

However, we concluded that the Farmington Office was
not timely performing all of the technical reviews
necessary to ensure that drainage on Indian lands
was properly identified and that drainage protection
was pursued.  Specifically, of the 56 active
drainage cases for Indian lands, 23 cases were
established before or during fiscal year 1994.  Of
the 23 cases, 13 related to leased lands and 10
related to unleased lands as follows:

- Leased Lands.  Of the 13 cases related to
leased lands, we reviewed 11 and found that at
the time of our review, there was no
documentation in the files to support that
preliminary technical reviews to determine
whether drainage was occurring had been
performed for 9 cases.  However, documentation
supported that the required reviews  had been
performed for two cases.

- Unleased Lands.  Of the 10 cases related to
unleased lands, we reviewed 8 cases and found
that at the time of our review, there was no
documentation in the files to support that
preliminary technical reviews to determine
whether drainage was occurring had been
performed for 7 cases.  However, documentation
supported that the required reviews had been
performed for one case.

As a result of the delays in processing the Indian
drainage cases, the Farmington Office did not timely
assess and collect  revenues associated with
drainage from leased Indian lands and did not
recover compensatory royalties for drainage
occurring on unleased Indian lands prior to the
lands being leased and protective wells being
drilled.

Farmington Office officials said that the priority
on Indian lands was lowered because  drainage from
the Indian lands was marginal, the Indian entities
had not responded to the Office's initial drainage
notifications, the Indian entities did not always
inform the Bureau when associated lands had been
leased, and the Farmington Office was using its
limited resources to process high-revenue cases.

Recommendations

We recommend that the Director, Bureau of Land
Management, ensure that the New Mexico State
Director:

1.  Documents the settlement agreement process
and has it reviewed by Bureau management and the
Solicitor's Office.

2.  Develops and implements internal controls to
provide technical quality assurance for drainage
calculations and to provide for the separation of
duties for the Farmington Field Office's drainage
settlement process.

3.  Develops and provides coal bed methane
drainage training to other petroleum engineers at
the Farmington Field Office to ensure that more
than one individual has expertise in this area.

4.  Develops and implements a plan to eliminate
the Farmington Field Office's current backlog of
Indian drainage cases, as well as the backlog of
Federal cases.  This plan should include
provisions to maintain the drainage program at a
maintenance level after the current backlog has
been eliminated.

Bureau of Land Management Response and Office of
Inspector General Reply

In the February 24, 1999, response (Appendix 4) to
the draft report from the Acting Director, Bureau of
Land Management, the Bureau concurred with all four
recommendations but did not present sufficient
information for us to consider the recommendations
resolved.  However, subsequent to the response, the
Bureau provided additional information regarding
Recommendations 1 and 3.   Based on the response and
the additional information, we consider
Recommendations 1, 2, and 4 resolved but not
implemented.  Accordingly, these recommendations
will be referred to the Assistant Secretary for
Policy, Management and Budget for tracking of
implementation.  Also based on the response and the
additional information, we consider Recommendation 3
resolved and implemented (see Appendix 5).

Regarding Recommendation 1, Bureau officials told us
subsequent to the response that  the Bureau's
Washington Office will issue an instruction
memorandum by June 1, 1999, regarding the settlement
agreement process and that instruction memoranda are
routinely reviewed by the Solicitor's Office.
According to Bureau officials, the Assistant
Director, Minerals, Realty, and Resource Protection,
is responsible for implementation of this
recommendation.

Regarding Recommendation 3, Bureau officials stated
subsequent to the response that the coal bed methane
training had been provided to Farmington Field
Office staff.

Additional Comments on Audit Report

The Bureau also provided additional comments on our
audit report.  The Bureau's comments and our
responses are as follows:

- The Bureau stated that two Farmington
officials, rather than one individual as stated
in our report, had the expertise to evaluate coal
bed methane drainage cases.  However, the data we
reviewed and the information obtained during our
review in the Farmington Office indicated that
only one official was involved in making coal bed
determinations for the drainage program.
Furthermore, Farmington Office officials stated
that an additional petroleum engineer was needed
for the program to assist with the backlog and
that the State Office had begun to recruit for
such an individual.  If the Farmington Office had
other officials capable of performing these
evaluations and eliminating the backlog, they
were not assigned to these duties.

- The Bureau disagreed that the settlement
process eliminated the forwarding of the drainage
cases to the Service for calculation of royalties
and interest due by the lessee.  The Bureau
stated that Minerals Management was an "active
participant" in the settlement process.  However,
the Bureau also said that there was no
documentation in the files to support that
statement.  The statement in the report referred
to the Bureau's procedures for processing
drainage cases as required by Bureau Instruction
Memorandum No.90-180, which requires that the
Service calculate the royalties due and send a
bill for collection to the lessee for the amount
calculated (see Appendix 1).  We concluded that
the settlement process was created primarily to
bypass this portion of the program's procedures
because, according to Bureau officials, involving
the Service would result in more time being
expended and therefore more royalties and
interest being lost because of  the statute of
limitations.

- The Bureau stated that the report indicated
that the settlement process had not been reviewed
and approved by Bureau management.  The Bureau
further stated that the Farmington Field Office
Manager had the authority to approve such
agreements and that the agreements were approved
by the Manager.  Our concern regarding approval
was that the settlement process was not
documented and, as such, could not be reviewed by
Bureau Headquarters to ensure that the process
adequately protected the Government's interests.
We did not question that the Farmington Field
Office Manager had the authority to enter into
such agreements.

- The Bureau stated that our report indicated
that the Farmington Field Office did not recover
compensatory royalties for drainage occurring on
unleased Indian lands.  The Bureau further stated
that the Field Office, in accordance with Bureau
guidelines, properly notified the Bureau of
Indian Affairs of potential drainage situations
and that, as such, the Bureau of Land Management
was not required to take further action until the
lands were leased.

Bureau of Land Management guidelines require that
the Bureau of Indian Affairs be notified of
potential drainage situations after the
administrative and technical reviews have been
completed.  Our review of the drainage files
indicated that the Bureau of Indian Affairs was
being notified before a technical review was
completed.  Consequently, the Bureau of Indian
Affairs was being tasked with leasing lands that may
not have had potential drainage situations.
Accordingly, we believe that the Bureau of Land
Management needs to take additional actions to
provide the Bureau of Indian Affairs with more
information on drainage situations that is based on
completed technical reviews.

Since the report's recommendations are considered
resolved, no further response to the Office of
Inspector General is required (see Appendix 5).

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

We appreciate the assistance of Bureau of Land
Management personnel in the conduct of our audit.



**FOOTNOTES**

[1]:Instruction Memorandum 93-287 expired on
September 30, 1996.  However, Bureau officials said
that the Bureau continues to follow the
requirements.

[2]:As of September 1998, the Bureau had 14
offices that had drainage protection
responsibilities. The responsibility for the
Bureau's Wyoming drainage protection program,
which was previously delegated to individual field
offices, was consolidated as a Wyoming State
Office function at the Wyoming Reservoir
Management Group in Casper during 1993.

[3]: Drainage settlement agreements are negotiated
between the Farmington Field Office and the lessee
for a fixed amount that generally covers all
compensatory royalties due up to the time the
lessee drills protective wells.

[4]: Of the 423 cases, 354 cases involved
potential coal bed methane drainage.

[5]:We did confirm that in August 1998 the New
Mexico State Office advertised for a petroleum
engineer for the Farmington Office, and State
Office officials said that the individual hired
would be assigned to the drainage program.

[6]: We reviewed the only three coal bed methane
assessments that were sent by the Farmington
Office to the Service in October 1995 and
determined that the Service took more than 2 years
to process and collect one assessment and  had not
processed the other two assessments as of August
1998.

[7]:The Farmington Office used an average annual
interest rate of 8 percent when it calculated the
interest owed on the royalty amount.




APPENDIX 1

BUREAU DRAINAGE PROTECTION PROCEDURES

The Bureau of Land Management's drainage protection
procedures for addressing potential drainage
situations as required by Bureau Instruction
Memorandum No. 96-180, "Bureauwide Interim Guidance
Replacing the Oil and Gas Manual 3160-2 - Drainage
Protection After August 23, 1996," are as follows:

1.  To identify potential drainage situations,
the responsible Bureau office performs an initial
well and administrative review of well activity
to identify any well that, because of its
proximity to Federal or Indian lands and level of
production, may present a potential drainage
situation.  Once a potential drainage situation
has been determined, the Bureau establishes a
drainage case and notifies the offended Federal
or Indian lessee of the potential drainage
situation and drainage protection obligations and
requests protective action or technical data
regarding the lessee's evaluation of the drainage
situation.

2.  The drainage case is subjected to
technical--geologic and engineering--reviews to
determine the nature and extent of the drainage.
When these reviews indicate that drainage may be
affecting unleased land, the Bureau of Land
Management takes action to initiate leasing
activity for Federal lands or notifies the Bureau
of Indian Affairs for Indian lands that the land
is subject to drainage and recommends that
protective measures be taken. When these
technical reviews indicate that drainage may be
affecting Federal or Indian leased lands, the
Bureau of Land Management issues a demand letter
that informs the lessee of the lessee's
responsibilities to protect the lease from
drainage, defines the lessee's options that will
resolve the drainage situation, and requires the
lessee to submit a plan for protecting the lease
from drainage.  At this time, the lessee may
disagree as to whether the drainage is occurring
or that an economic protective well could have
been drilled and may also disagree on the extent
to which the drainage is occurring.

3.  The Bureau then performs final technical
analyses--geologic and reservoir
engineering/economic--to compare the Bureau's
data with the lessee's submitted data.
Consequently, there may be technical-related
negotiations with the lessee to arrive at a
mutually agreeable amount of drainage.
Thereafter, a quality control technical review is
conducted, and a decision letter is sent to the
lessee that informs the lessee  of drainage
protective actions, if any, that are required.

4.  When the decision involves assessment of
compensatory royalties, a copy of the decision
letter is sent to the Minerals Management
Service's Royalty Compliance Division, which then
calculates the royalties due from the lessee and
sends a bill for collection to the lessee for the
royalty amount calculated.  When the Service
receives payment of the compensatory royalties,
it calculates the late payment interest due from
the lessee and sends a bill for collection to the
lessee for the amount of interest calculated.




APPENDIX 2


BUREAU OFFICES VISITED OR CONTACTED

- - - - - - - - - - - - - - - - - - - - - - - - - -
        OFFICE                    LOCATION

- - - - - - - - - - - - - - - - - - - - - - - - -.-
Headquarters*                      Washington, D.C.

Alaska State*                      Anchorage,Alaska

California State*             Sacramento,California

Colorado State                   Lakewood, Colorado
San Juan Resource Area            Durango, Colorado
Montrose District *               Montrose,Colorado

Eastern States*              Minneapolis, Minnesota

Jackson Field*                 Jackson, Mississippi

Milwaukee Field*               Milwaukee, Wisconsin

Montana State*                    Billings, Montana

Dickinson Field*            Dickinson, North Dakota

New Mexico State*              Santa Fe, New Mexico
Farmington Field             Farmington, New Mexico
Roswell Field*                  Roswell, New Mexico

Tulsa Field*                        Tulsa, Oklahoma

Utah State*                    Salt Lake City, Utah

Wyoming State*                    Cheyenne, Wyoming
Wyoming Reservoir Management Group   Casper,Wyoming

*Contacted only.




APPENDIX 3


DRAINAGE PROTECTION PROGRAM CASE WORK LOAD
AT OFFICES THAT HAVE PROGRAM RESPONSIBILITIES

Decrease/Increase From

Office/Location          1990     1994     1998      1990 to 1998
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Alaska State              **        7         7            **
  Anchorage, Alaska

Bakersfield            10,000      184       81           99%
  Bakersfield, California

Colorado State            859       59       36            40
  Denver, Colorado

Dickinson Field           587      257       96           84%
  Dickinson, North Dakota

Farmington Field          974      279      423           57%
  Farmington, New Mexico

Jackson Field              67        0        0          100%
  Jackson, Mississippi

Lewistown Field            806      162      99           88%
  Lewiston, Montana

Miles City Field           215       62      51           76%
  Miles City, Montana

Milwaukee Field            488      414      520          7%*
  Milwaukee, Wisconsin

Roswell Field            3,000      126       33         99%
  Roswell, New Mexico

San Juan Resource Area     383      222       63         84%
  Durango,Colorado

Tulsa Field              3,105    1,073      168         95%
  Tulsa, Oklahoma

Utah State                 573        0        0        100%
  Salt Lake City, Utah

Wyoming Reservoir Man-   4,580      349       84          8%
agement Group
  Casper, Wyoming

Total                   24,837    3,171    1,665         93%


_______________________

*Denotes increase in percentage.
**Work load data for Alaska were not available for 1990.




APPENDIX 5


STATUS OF AUDIT REPORT RECOMMENDATIONS

- - - - - - - - - - - - - - - - - - - - - - - - -
 Finding/
Recommendation
Reference         Status          Action Required

- - - - - - - - - - - - - - - - - - - - - - - - -
1, 2, and 4       Implemented.
3 Resolved;.......Not implemented.

- - - - - - - - - - - - - - - - - - - - - - - - -


No further response to the Office of Inspector
General is required.  The recommendations will be
referred to the Assistant Secretary for Policy,
Management and Budget for tracking of
implementation.

No further action is required.

- - - - - - - - - - - - - - - - - - - - - - - - -





ILLEGAL OR WASTEFUL ACTIVITIES SHOULD BE REPORTED

TO THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:



Within the Continental United States

U.S. Department of the Interior
Office of Inspector General
1849 C Street,N.W.
Mail Stop 5341
Washington, D.C. 20240

Calling:

Our 24 hour
Telephone HOTLINE
1-800-424-5081 or
(202) 208-5300

TDD for hearing impaired
(202) 208-2420 or
1-800-354-0996



Outside the Continental United States


Caribbean Region

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

Calling:
(703) 235-9221


North Pacific Region

U.S. Department of the Interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. F'lores Street
Suite 807, PDN Building
Agana, Guam 96910


Calling:
(700) 550-7428 or
COMM 9-011-671-472-7279