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entitled 'Royalty Revenues: Total Revenues Have Not Increased at the 
Same Pace as Rising Oil and Natural Gas Prices due to Decreasing 
Production Sold' which was released on July 21, 2006. 

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June 21, 2006: 

Congressional Requesters: 

Subject: Royalty Revenues: Total Revenues Have Not Increased at the 
Same Pace as Rising Oil and Natural Gas Prices due to Decreasing 
Production Sold: 

In fiscal year 2005, federal and Native American lands supplied about 
35 percent of the oil and 26 percent of the natural gas produced in the 
United States. Companies that lease these lands to produce oil and 
natural gas pay royalties to the Department of the Interior's Minerals 
Management Service (MMS) based on a percentage (the royalty rate) of 
the cash value of the oil and natural gas produced and sold. As an 
alternative to collecting cash royalty payments, MMS has the option to 
take a percentage of the actual oil and natural gas produced (referred 
to as "taking royalties in kind") and selling it themselves or using it 
for other purposes, such as filling the nation's Strategic Petroleum 
Reserve (SPR). MMS reported collecting $7.4 billion in fiscal year 2001 
and $8 billion in fiscal year 2005 in cash royalty payments and in 
revenue from its own royalty-in-kind sales of oil and natural gas. 
While these total royalty revenues increased by about 8 percent from 
2001 to 2005, oil and natural gas prices rose substantially more--about 
90 percent for oil and 30 percent for natural gas. Consequently, you 
asked us why oil and natural gas royalty revenues did not increase at 
the same pace as the increase in oil and natural gas prices. 

In summary, federal and Native American royalty revenues did not 
increase at the same pace as oil and natural gas prices between 2001 
and 2005 principally because the volumes upon which royalties are based 
declined substantially during this time. In assessing changes in 
royalty revenues, it is important to understand the three key variables 
of volume, price, and royalty rate that make up total royalty revenues. 
When reporting and paying royalties to MMS, companies must collect and 
report various data, including the volume of oil or natural gas sold, 
the sales price received less allowable deductions--such as 
transportation--to get the resource to market, and the royalty rate to 
be paid as specified in the oil and natural gas lease. Companies can 
calculate the royalty revenue they owe to the federal government using 
the three key variables illustrated in the following equation: 

Royalty revenue = volume sold x sales price less deductions x royalty 
rate[Footnote 1] 

As summarized in table 1 and table 2, the volume of natural gas and oil 
that was sold decreased significantly between 2001 and 2005, largely 
offsetting the impact of increased sales prices on total royalty 
revenues. 

Table 1: Natural Gas Royalty Statistics for Federal and Native American 
Lands: 

Fiscal Year: 2001; 
Total Volume sold (thousands of cubic feet): 6,912,002,366; 
Average Sales price received (per thousand cubic feet): $5.05; 
Average royalty rate (less deductions): 0.145124; 
Total royalty revenues: $5,062,170,355. 

Fiscal Year: 2005; 
Total Volume sold (thousands of cubic feet): 5,864,705,117; 
Average Sales price received (per thousand cubic feet): $6.59; 
Average royalty rate (less deductions): 0.137267; 
Total royalty revenues: $5,304,520,628. 

Source: MMS. 

[A] Average sale price rounded to nearest cent. 

[End of table] 

Table 2: Oil Royalty Statistics for Federal and Native American Lands: 

Fiscal year: 2001; 
Total volume sold (barrels): 699,346,399; 
Average sales price received (per barrel)[A]: $25.27; 
Average royalty rate (less deductions): 0.134703; 
Total royalty revenues: $2,380,264,986. 

Fiscal year: 2005; 
Total volume sold (barrels): 434,142,391; 
Average sales price received (per barrel)[A]: $47.96; 
Average royalty rate (less deductions): 0.128498; 
Total royalty revenues: $2,675,676,653. 

Source: MMS. 

[A] Average sales price rounded to nearest cent. 

[End of table] 

In conducting our work, it was not possible with the available data to 
precisely determine how much of the change in total royalty revenues 
was due to a change in any one variable, as all three variables were 
changing over time at varying rates. For example, during any given 
month in which royalties are collected, each of the variables may 
either rise or fall compared to the previous month. For our analysis, 
however, we estimated a variable's contribution to the total dollar 
change in royalty revenues for oil and natural gas by assuming that the 
other two variables changed at a constant rate. Under this assumption, 
the total change in that variable from 2001 to 2005 closely 
approximated the actual change over the period. We also examined the 
effects of specific factors, such as hurricanes, on total volumes sold 
and average royalty rates. We obtained oil and natural gas data from 
MMS's financial system for fiscal years 2001 and 2005 to conduct our 
independent analysis to more fully explain the change in both natural 
gas and oil royalty revenues. We also interviewed MMS officials at 
their Lakewood, Colorado, office to solicit their views on why oil and 
natural gas royalty revenues did not increase at the same rate as 
prices between 2001 and 2005. The comparison of royalty revenues 
between 2001 and 2005 does not include natural gas or oil production 
that is subject to royalty relief. Legislation and regulations exempt 
some production from certain leases in the Gulf of Mexico from 
royalties, and therefore these production volumes do not appear in the 
royalty revenue statistics.[Footnote 2] Although the volumes subject to 
royalty relief were small, they are expected to grow in the future. We 
have ongoing work and plan a future report on royalty-relief policies 
and MMS efforts to estimate the impact of royalty relief on future 
royalty revenues. We coordinated and worked with the Department of the 
Interior's Office of Inspector General on this review. A detailed 
description of our methodology appears in enclosure I. We conducted our 
review from February through April 2006 in accordance with generally 
accepted government auditing standards. 

Falling Natural Gas Production Volumes Have Largely Offset Rising 
Natural Gas Prices: 

As summarized in table 1, decreases in the volume of natural gas 
produced and sold between 2001 and 2005 have largely offset the impact 
of increased sales prices on total royalty revenues. Natural gas 
production volumes from federal and Native American lands decreased 
because of natural declines in older wells. In addition, hurricanes in 
2005 contributed to a decline in natural gas production volumes by 
forcing companies to temporarily suspend natural gas production from 
wells in the Gulf of Mexico. Finally, the volume of gas upon which 
royalties are based in a given year is decreased by the amount of gas 
that is exempt from paying royalties under federal royalty-relief 
provisions. Natural gas volumes subject to royalty relief did grow 
between 2001 and 2005. In 2001, MMS reported about 5 billion cubic feet 
of natural gas were exempt from royalties under royalty-relief 
provisions. In 2005, MMS reported that these volumes increased to over 
246 billion cubic feet of natural gas, with a total estimated royalty 
value of about $226 million. Volumes of natural gas subject to royalty 
relief are expected to grow in the future. We have ongoing work to 
examine royalty-relief policies and efforts to estimate the impact of 
royalty relief on future royalty revenues. 

In addition to reduced production volumes, the average royalty rates on 
natural gas production from federal and Native American lands decreased 
from 2001 to 2005, contributing to the drop in royalty revenues. 
Royalty rates can vary depending on where the natural gas is produced. 
In general, average royalty rates for natural gas have decreased as 
production has declined in areas with higher royalty rates (such as 
shallow waters in the Gulf of Mexico where the royalty rate is 16.67 
percent) and increased in areas with lower royalty rates (such as deep 
waters in the Gulf of Mexico where the royalty rate is 12.5 percent). 
Because the comparison of royalty revenues between years does not 
include production that is subject to royalty relief, the average 
royalty rate is not affected by production that is subject to royalty 
relief. 

From fiscal years 2001 to 2005, total natural gas royalty revenues from 
federal and Native American lands increased by about $242 million (see 
table 1). We estimate that the rise in natural gas prices between 2001 
and 2005 would have increased royalty revenues by $1,392 million. 
Natural gas prices have risen since 2001 because demand for natural gas 
has expanded faster than supply. The domestic gas industry has been 
producing at near capacity, and the nation's ability to increase 
imports has reached its limits. Tight supplies have also made the 
market susceptible to extreme price spikes when either demand or supply 
changes unexpectedly, such as when hurricanes hit the Gulf Coast in 
late 2005. However, we estimate that a decline in the total natural gas 
volume sold resulted in a decrease of about $860 million in potential 
royalty revenues. In addition, a decline in the average royalty rate 
decreased potential royalty revenues by an additional $292 million. The 
relationship between the changes in natural gas royalty revenues due to 
an increase in the price of natural gas, decrease in volumes sold, and 
decrease in average royalty rate is illustrated in figure 1. 

Figure 1: Estimated Effects of Volume, Price, and Royalty Rate on 
Federal and Native American Natural Gas Royalty Revenues, Fiscal Years 
2001 to 2005: 

[See PDF for Image] 

Source: GAO analysis of MMS data. 

Note: Changes attributed to individual variables account for 99 percent 
instead of 100 percent of the actual change in total royalty revenues 
due to limitations in the methodology. See enclosure I for more 
details.  

[End of Figure] 

A significant portion of the $860 million decrease in potential royalty 
revenues associated with declining sales volumes appears to be the 
result of a decrease in natural gas production caused by the normal 
depletion of natural gas wells in shallow waters (i.e., waters less 
than 400 meters deep) of the Gulf of Mexico. MMS's Gulf of Mexico 
Offshore Region reported a precipitous decline in natural gas 
production in shallow waters of the Gulf starting in 1997. This decline 
continued from 2001 to 2005. MMS reported that natural gas production 
from shallow waters dropped from about 4.2 trillion cubic feet in 2001 
to about 2.4 trillion cubic feet in 2005, while production from deep 
waters (i.e., waters over 400 meters deep) remained relatively 
stable.[Footnote 3] However, since companies are reporting the 
discovery of oil and natural gas fields in increasingly deeper water, 
MMS anticipates that production from deep water will increase in the 
future. 

While older natural gas wells onshore also experienced declining 
production, these declines were overshadowed by an increase in natural 
gas production from new onshore wells. Onshore total natural gas 
volumes sold actually increased by about 17 percent from 2001 to 2005, 
according to MMS statistics. Had this onshore increase not occurred, 
the $860 million decrease in potential royalty revenues associated with 
declining sales volumes would have been greater. We have previously 
reported the increase in oil and natural gas activities on federal 
onshore lands managed by the Bureau of Land Management.[Footnote 4] 
Permits issued to drill wells on these lands more than tripled from 
fiscal years 1999 to 2004, with much of the increase occurring in the 
Rocky Mountain states of Montana, Wyoming, Colorado, Utah, and New 
Mexico. 

Hurricanes in the Gulf of Mexico also contributed to the decline in 
natural gas sales volume from 2001 to 2005 by forcing companies to 
temporarily suspend production. MMS reported that, during August and 
September 2005, total cumulative shut-in natural gas production was 
196,481 million cubic feet, or about 5 percent of the annual natural 
gas production in the Gulf of Mexico. We estimate that this production 
could have resulted in royalty revenues of about $208 million, although 
it is unclear what portion of this production was subject to royalties. 

In addition to the declining natural gas sales volumes, a declining 
average royalty rate also reduced total royalty revenues. From 2001 to 
2005, the average royalty rate dropped from about 14.5 percent to about 
13.7 percent, resulting in a decrease of about $292 million in 
potential royalty revenues. This decrease appears to have resulted 
largely from the decline in natural gas production in shallow waters of 
the Gulf of Mexico. Shallow water leases have royalty rates of 16.67 
percent, while deeper water leases carry royalty rates of 12.5 percent. 
The increase in onshore production, where leases also carry a 12.5 
percent royalty rate, has also contributed to the decline in the 
average royalty rate. 

Declining Oil Sales Have Largely Offset Rising Oil Prices: 

As summarized in table 2, decreases in the volumes of oil produced and 
sold between 2001 and 2005 have largely offset the impact of increased 
sales prices on total royalty revenues. The oil volumes sold from 
federal and Native American lands declined principally because MMS took 
substantial volumes in kind and used these volumes to fill the SPR, 
instead of receiving cash royalty payments or selling the oil and 
collecting revenue from royalty-in-kind sales. As with natural gas, 
hurricanes in 2005 also contributed to a decline in oil production 
volumes by forcing companies to temporarily suspend production from 
wells in the Gulf of Mexico. Also, the volume of oil upon which 
royalties are based in a given year is decreased by the amount of oil 
that is exempt from paying royalties under federal royalty-relief 
provisions. Although the comparison of royalty revenues between 2001 
and 2005 does not include oil production that is subject to royalty 
relief, the volumes subject to royalty relief did grow between 2001 and 
2005. In 2001, MMS reported about 2.6 million barrels of oil were 
exempt from royalties under royalty-relief provisions. In 2005, MMS 
reported that these volumes increased to about 29 million barrels of 
oil, with a total estimated royalty value of about $175 million. The 
oil volumes subject to royalty relief are expected to grow further, and 
we have work currently under way to examine royalty-relief policies and 
estimates of the impact on future royalty revenues. In addition to the 
declining oil sales volumes, a declining average royalty rate for oil 
also contributed to reduced total royalty revenues. 

From fiscal years 2001 to 2005, total oil royalty revenues from federal 
and Native American lands increased by about $295 million (see table 
2). We estimate that the rise in crude oil prices between 2001 and 2005 
increased potential royalty revenues by $1,693 million. Crude oil 
prices rose during this period primarily because the growth in world 
oil demand has not been accompanied by a similar growth in crude oil 
supplies. Demand has increased, particularly in the United States, 
China, and India, while production has been voluntarily restricted by 
members of the Organization of Petroleum Exporting Countries or 
otherwise disrupted by events in Nigeria, Iraq, and Venezuela. In 
addition, hurricanes in the Gulf Coast in late 2005 disrupted the flow 
of oil into the United States and damaged oil facilities, leading to 
increased prices at that time. However, a decline in the total oil 
volume sold during this same period resulted in a decrease of about 
$1,278 million in potential royalty revenues. In addition, a drop in 
the average royalty rate caused another $129 million decrease in 
potential royalty revenues. The relationship between the changes in oil 
royalty revenues due to an increase in the price of crude oil, decrease 
in volumes sold, and decrease in average royalty rate is illustrated in 
figure 2. 

Figure 2: Estimated Effects of Volume, Price, and Royalty Rate on 
Federal and Native American Oil Royalty Revenues, Fiscal Years 2001 to 
2005: 

[See PDF for Image] 

Source: GAO analysis of MMS data. 

Note: Changes attributed to individual variables account for 97 percent 
instead of 100 percent of the actual change in total royalty revenues 
due to limitations in the methodology. See enclosure I for more 
details. 

[End of Figure] 

Most of the $1,278 million decrease in potential royalty revenues 
associated with declining sales volumes appears to be the result of 
transfers of royalty oil to the SPR. The Congress created the SPR to 
provide emergency oil in the event of a disruption in petroleum 
supplies. Managed by the Department of Energy (DOE), the SPR is a 
series of underground salt caverns along the coastline of the Gulf of 
Mexico that can store up to 700 million barrels of oil. MMS assists DOE 
in transferring oil into the SPR. Under royalty in kind, instead of 
receiving cash royalty payments, MMS takes the federal government's 
royalty share in oil. MMS can then sell the oil and collect revenue 
from the royalty-in-kind sales or use it for other purposes. In fact, 
MMS was directed to transfer the oil to the SPR. Since the oil was 
transferred and not sold, no cash royalty revenues were collected from 
a sale. MMS began assisting DOE with the transfer of royalty oil to the 
SPR in April 2002, after having stopped filling the SPR in December 
2000. In 2005, MMS reported that it had assisted in transferring about 
213 million barrels of oil to the SPR. This amount represents about 80 
percent of the decrease in total oil volume sold from 2001 to 2005. 

Hurricanes in the Gulf of Mexico also contributed to the decline in oil 
sales volumes from 2001 to 2005 by forcing companies to shut-in wells. 
MMS reported that during August and September 2005, total cumulative 
shut-in oil production was 40,828,134 barrels, or about 15 percent of 
the decline in total oil volumes sold from 2001 to 2005. We estimate 
that this shut-in production could have produced royalty revenues of at 
least $270 million, although it is unclear what portion of this 
production was royalty-bearing and at what price the oil would have 
been sold. In addition, oil volumes sold from onshore federal and 
Native American lands decreased by 8 million barrels, or about 3 
percent of the decrease in total oil volumes sold from 2001 to 2005. 

In addition to the declining oil sales volumes, a declining average 
royalty rate also helped offset the increase in total royalty revenues 
due to increasing crude oil prices. From 2001 to 2005, the average 
royalty rate dropped from about 13.5 percent to about 12.8 percent, 
resulting in a decrease of about $129 million in potential oil royalty 
revenues. As with natural gas, this decrease appears to have resulted 
from an increase in the proportion of oil produced from deep waters in 
the Gulf of Mexico, where royalty rates are lower. 

Agency Comments: 

We provided a draft of this report to the Department of the Interior 
for review and comment. The Minerals Management Service provided 
written comments, which are presented in enclosure II. MMS agreed with 
our observations and emphasized our conclusion that federal oil and gas 
royalty collections from 2001 through 2005 have not kept pace with 
rising oil and natural gas prices because of a decrease in the volumes 
of oil and natural gas sold during this period. MMS also provided 
comments to improve the report's technical accuracy, which we 
incorporated as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report, we plan no further distribution until 30 days from the 
date of this letter. At that time we will send copies of this report to 
appropriate congressional committees, the Secretary of the Interior, 
the Director of MMS, the Director of the Office of Management and 
Budget, and other interested parties. We will also make copies 
available to others upon request. In addition, the report will be 
available at no charge on GAO's Web site at [Hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-3841 or wellsj@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions to 
this letter include Ron Belak, Glenn C. Fischer, Mark Gaffigan, and 
Frank Rusco. 

Signed by: 

Jim Wells: 
Director, Natural Resources and Environment: 

Enclosures: 

List of Addressees: 

The Honorable Jeff Bingaman: 
Ranking Minority Member: 
Committee on Energy and Natural Resources: 
United States Senate: 

The Honorable Norm Coleman: 
Chairman, Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Carl Levin: 
Ranking Minority Member: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Daniel K. Akaka: 
United States Senate: 

The Honorable Maria Cantwell: 
United States Senate: 

The Honorable Thomas R. Carper: 
United States Senate: 

The Honorable Mark Dayton: 
United States Senate: 

The Honorable Byron L. Dorgan: 
United States Senate: 

The Honorable Richard J. Durbin: 
United States Senate: 

The Honorable Russell D. Feingold: 
United States Senate: 

The Honorable Dianne Feinstein: 
United States Senate: 

The Honorable Tim Johnson: 
United States Senate: 

The Honorable John F. Kerry: 
United States Senate: 

The Honorable Frank R. Lautenberg: 
United States Senate: 

The Honorable Robert Menendez: 
United States Senate: 

The Honorable Barbara A. Mikulski: 
United States Senate: 

The Honorable Patty Murray: 
United States Senate: 

The Honorable Barack Obama: 
United States Senate: 

The Honorable Jack Reed: 
United States Senate: 

The Honorable Ken Salazar: 
United States Senate: 

The Honorable Charles E. Schumer: 
United States Senate: 

The Honorable Ron Wyden: 
United States Senate: 

The Honorable Darrel E. Issa: 
Chairman: 
Subcommittee on Energy and Resources: 
Committee on Government Reform: 
House of Representatives: 

The Honorable Carolyn B. Maloney: 
House of Representatives: 

[End of Section] 

Enclosure I: 

Scope and Methodology: 

To determine why oil and natural gas royalty revenues have not kept 
pace with rising oil and natural gas prices from fiscal years 2001 to 
2005, we first interviewed Minerals Management Service (MMS) officials 
in Lakewood, Colorado. MMS presented their briefing entitled 
"Management of the Nation's Natural Gas Royalty Revenues: The 
Department of the Interior's Response to the NY Times, February 2006." 
MMS issued this document in response to an article published in The New 
York Times on January 23, 2006, that questioned why natural gas royalty 
revenues in 2005 did not increase at the same rate as prices increased. 
We reviewed extensive documentation supporting the information in MMS's 
presentation and agreed with the reasons MMS cited as to why natural 
gas royalty revenues have not kept pace with rising natural gas prices. 
We also generally agreed with MMS's portrayal of the impact these 
reasons had on royalty revenues. We also discussed with MMS officials 
the reasons that oil revenues had not kept pace with rising prices from 
2001 to 2005. 

Because summary royalty data published on MMS's Web site do not solely 
represent transactions that occurred during the reported fiscal year, 
but include transactions from previous years as well, we obtained oil 
and natural gas data from MMS's financial system for fiscal years 2001 
and 2005.[Footnote 5] We obtained data that were posted to the 
appropriate fiscal year, including the sum of sales values, sum of 
sales volumes, and sum of royalty values less allowances for each payor 
aggregated by product type (oil or natural gas) for transactions that 
consisted largely of cash royalty payments, royalty in kind, 
compensatory royalties, transportation allowances, natural gas 
processing allowances, and profitable profit-sharing arrangements. We 
tested these aggregate data for reasonableness because we were aware of 
possible data errors. We corrected a 1.19 trillion cubic-foot error in 
the volume of natural gas sold during fiscal year 2001. However, we did 
not test or validate the estimated 6 million transactions of which the 
2001 and 2005 data are comprised. We have tested individual oil and 
natural gas transactions from MMS's financial database in the past and 
have found that, when transactions were aggregated to lesser levels, 
between 1.9 and 6.0 percent of the data was erroneous or 
missing.[Footnote 6] We found that about 8.5 percent of the aggregated 
data for 2001 and 2005 that we analyzed for this report is anomalous. 
Anomalous data include data that are outside of a reasonable range for 
royalty rates, outside of a reasonable range for expected prices, 
contain negative or missing values for sales volumes or royalties when 
cash royalties are due, and consist of a positive value when allowances 
are reported. We then estimated the financial impact that these 
anomalous data had on royalties reported and sales volumes reported. 
Because only a small number of these anomalies exceeded 0.01 percent of 
the total annual royalty revenues or volumes sold, our analysis 
suggests that these anomalous data did not significantly impact royalty 
statistics reported in table 1 and table 2. We concluded that these 
data are sufficiently reliable for the broad nature of our analysis. 

We decided to pursue an approach that was different from MMS's approach 
in quantifying the individual impact of changes in prices, volumes, and 
royalty rates on total royalty revenues and to assess why total royalty 
revenues had not kept pace with rising prices. MMS estimated the impact 
of these variables by determining what royalties would have been if 
individual variables had not declined or if specific events, like 
hurricanes, had not occurred. While mathematically sound, this 
methodology has some limitations--for instance, it does not consider 
that all the variables are changing over time. In addition, the sum of 
estimated individual changes using this methodology significantly 
exceeds the actual change in total royalty revenues, and this could be 
misinterpreted. In contrast, we estimated the effects of each 
individual variable on total royalty revenues by multiplying the change 
in that variable from 2001 to 2005 by the average values of the other 
variables during that period. This methodology assumes that all the 
variables were changing at a constant rate from 2001 to 2005. We 
examined the raw data and found that this assumption was generally 
reasonable for natural gas volumes sold, average natural gas prices, 
and net natural gas royalty rates, except for the average natural gas 
price in fiscal year 2002. It also appears to be reasonable for net oil 
royalty rates and average oil prices, except for fiscal year 2002. The 
one main exception is that the drop in oil volumes sold was not 
changing at a constant rate--oil volumes sold dropped substantially 
between 2002 and 2003 when the federal government started to transfer 
significant quantities of oil to the SPR. Under our methodology, 
nonetheless, the sum of the estimated individual impacts on total 
royalty revenues was close to the actual total change in royalty 
revenues. 

[End of Section] 

Enclosure II: 

Comments from the Department of the Interior: 

United States Department of the Interior: 
Minerals Management Service: 
Washington, DC 20240:  

Jun 02 2006:

Mr. Jim Wells  
Director, Natural Resources and Environment: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Wells: 

Thank you for the opportunity to comment on the draft report entitled 
"Royalty Revenues: Total Revenues Have Not Increased at the Same Pace 
as Rising Oil and Natural Gas Prices due to Decreasing Production 
Sold," (GAO-06-786R). The Minerals Management Service (MMS) appreciates 
the continuing dialogue and assistance from GAO to ensure the quality 
and continuous improvement of our revenue management program. 

The services the MMS provides have a major economic benefit to 
taxpayers, states, and the American Indian community. Therefore, we are 
dedicated to ensuring all revenues from Federal and Indian mineral 
leases are accurately collected and disbursed to the appropriate 
recipients in a timely manner. 

We appreciate the thoroughness of the draft report and, while we took a 
different approach to this issue, are in concurrence with your 
conclusion: an overall decrease in volume between 2001 and 2005 offset 
the impact of rising prices on total royalty revenues. 

If you have any questions regarding this response, please contact Mr. 
James Witkop, MMS's Audit Liaison Officer, at (202) 208-3236. 

Sincerely, 

Signed by:  

R. M. "Johnnie" Burton Director: 

Enclosure: 

[End of Section]

(360676): 

FOOTNOTES 

[1] Companies report to MMS on Form MMS-2014 the volume sold (sales 
volume), the amount of revenue received from this sale (sales value), 
and the royalty revenue due to MMS (royalty value less allowances). The 
average sales price is calculated by dividing sales value by sales 
volume. The average royalty rate net of allowances is calculated by 
dividing royalty value less allowances by sales value. 

[2] Certain leases issued in 1998 and 1999 did not contain price 
thresholds, resulting in additional royalty-free volumes which do not 
appear in the royalty revenue statistics. 

[3] Not all volumes produced are subject to royalties. The Outer 
Continental Shelf Deep Water Royalty Relief Act of 1995 exempts certain 
volumes from royalties. Hence, total volumes sold reported in tables 1 
and 2 reflect volumes on which royalties wee paid, and as a result are 
less than total volumes actually produced for a given year. 

[4] GAO, Oil and Gas Development: Increased Permitting Activity Has 
Lessened BLM's Ability to Meet Its Environmental Protection 
Responsibilities, GAO-05-418 (Washington, D.C.: June 17, 2005). 

[5] Transactions from previous fiscal years are called adjustments, and 
they are a standard industry practice caused by, among other things, 
rebalancing of volumes sold and corrections to unit allocations. Fiscal 
years 2001 and 2005 contain adjustments only for their respective years 
that are current as of January 6, 2006, and exclude reported sales of 
nitrogen. 

[6] GAO, Mineral Revenues: Cost and Revenue Information Needed to 
Compare Different Approaches for Collecting Federal Oil and Gas 
Royalties, GAO-04-448 (Washington, D.C.: Apr. 16, 2004), app. I.

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U.S. Government Accountability Office, 

441 G Street NW, Room 7149 

Washington, D.C. 20548: