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Testimony: 

Before the Subcommittee on Energy and Mineral Resources, Committee on 
Natural Resources, House of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Tuesday, March 17, 2009: 

Oil And Gas Leasing: 

Federal Oil and Gas Resource Management and Revenue Collection in Need 
of Comprehensive Reassessment: 

Statement of Frank Rusco, Director:
Natural Resources and Environment: 

GAO-09-506T: 

GAO Highlights: 

Highlights of GAO-09-506T, a testimony before The Subcommittee of 
Energy and Mineral Resources; Committee on Natural Resources; House of 
Representatives. 

Why GAO Did This Study: 

In fiscal 2008, the Department of the Interior (Interior) collected 
over $22 billion in royalties and other fees related to oil and gas. 
Interior’s Bureau of Land Management (BLM) and Minerals Management 
Service (MMS) manage federal onshore and offshore oil and gas leases, 
respectively. Acquiring a federal lease gives the lessee the rights to 
explore for and develop the oil and gas resources under the lease, 
including drilling wells and building pipelines that may lead to oil 
and gas production. 

This statement focuses on findings from a number of recent GAO reports 
on federal oil and gas management. GAO has made numerous 
recommendations to Interior, which the agency generally agreed with and 
is taking steps to address. However, two important issues remain 
unresolved. Specifically, GAO made one recommendation and one matter 
for Congressional consideration that together call for a comprehensive 
re-evaluation of how Interior manages federal oil and gas resources. 
Interior has not undertaken such a comprehensive review and until this 
is done, the public cannot have reasonable assurance that federal oil 
and gas resources are being appropriately managed for the public good. 

What GAO Found: 

In recent years, GAO has conducted numerous evaluations of federal oil 
and gas management and found many material weaknesses. Key among the 
findings in these reports are: 

* Interior does less to encourage development of federal oil and gas 
leases than some state and private landowners. For example, the eight 
states GAO reviewed used more tools to encourage development on their 
oil and gas leases, using increasing rental rates as well as shorter 
lease terms and escalating royalty rates. Some states also do more than 
Interior to structure leases to reflect the likelihood of oil and gas 
production, which may encourage faster development. 

* The annual number of federal oil and gas leases issued and the pace 
of development have generally increased in recent years. Several 
factors influence industry’s decisions to acquire and develop federal 
oil and gas leases, including oil and gas prices; the availability and 
cost of equipment; the geology of the land underlying the lease; and 
regulatory issues, such as limitations on when drilling can occur. 

* Development and production activity in a sample of leases issued from 
1987 through 1996 varied considerably. Development occurred on about 26 
percent of offshore and 6 percent of onshore leases issued, but 
production was less frequent, with about 12 percent of offshore leases 
and 5 percent of onshore leases ultimately achieving production. 
Shorter leases were generally developed more quickly than longer 
leases, but not as frequently. 

* MMS and BLM employ different practices for deciding which federal 
properties to lease and when, and could do more to encourage faster 
development of certain federal oil and gas leases that are relatively 
more likely to have significant oil and gas resources. 

* BLM has encountered persistent problems in hiring and retaining 
sufficient and adequately trained staff to keep up with workload as a 
result of rapid increases in oil and gas operations on federal lands. 

* The federal government receives one of the lowest shares of revenue 
for oil and gas resources compared with other countries and Interior 
has not systematically re-examined how the federal government is 
compensated for extraction of oil and gas for over 25 years. 

In recent reports, GAO has made a number of recommendations to improve 
the accuracy of oil and gas royalty measurement and collections and to 
improve the overall management of federal oil and gas resources. 

View [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-506T] or key 
components. For more information, contact Frank Rusco at (202) 512-3841 
or ruscof@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

We appreciate the opportunity to participate in this hearing to discuss 
the Department of the Interior's management of federal oil and gas 
leases. In fiscal year 2008, the Department of the Interior (Interior) 
collected over $22 billion in royalties for oil and gas produced on 
federal lands and waters, purchase bids for new oil and gas leases, 
annual rents on existing leases, making revenues from federal oil and 
gas one of the largest nontax sources of federal government funds. 
Within Interior, the Bureau of Land Management (BLM) manages onshore 
federal oil and gas leases and the Minerals Management Service (MMS) 
manages offshore leases, while MMS is responsible for collecting 
royalties for all leases. In recent years, GAO and others, including 
Interior's Inspector General have conducted numerous evaluations of 
federal oil and gas management and revenue collection processes and 
practices and have found many material weaknesses. These weaknesses 
place an unknown but significant proportion of royalties and other oil 
and gas revenues at risk and raise questions about whether the federal 
government is collecting an appropriate amount of revenue for the 
rights to explore for, develop, and produce oil and gas on federal 
lands and waters. Specifically, our recent work has found the 
following: 

* Interior does less to encourage development of federal oil and gas 
leases than some state and private landowners. Interior officials cited 
one lease provision that may encourage development--escalating rental 
rates. For example, the rental rates for 10-year onshore federal leases 
increase from $1.50 per acre per year for the first 5 years to $2 per 
acre per year for the next 5 years. Compared to Interior, the eight 
states we reviewed undertook more efforts to encourage development on 
their oil and gas leases, using increasing rental rates as well as 
shorter lease terms and escalating royalty rates. Some states also do 
more than Interior to structure leases to reflect the likelihood of oil 
and gas production, which may encourage faster development. 
Specifically, while Interior uses varying lengths for offshore leases, 
with deeper waters receiving longer lease terms, this provision is not 
explicitly related to the expected productivity of the lease. On the 
other hand, five of the states that we reviewed--Alaska, Louisiana, 
Montana, New Mexico, and Texas--vary lease lengths or royalty rates to 
reflect the likelihood that the lease will produce. We also found that 
private landowners have used various leasing methods to encourage 
faster development, including lease terms as short as 6 months. 

* The annual number of federal oil and gas leases issued and the pace 
of development have generally increased in recent years. Over the past 
20 years, the total number of oil and gas leases Interior issued has 
varied each year but generally increased in recent years, as has the 
amount of development activity, and industry officials told us that a 
range of factors influence their decisions to acquire and develop 
leases. The number of offshore leases issued annually from 1987 through 
2006 had two large peaks--in 1988 and 1997--and has generally been 
increasing since 1999. Onshore leases peaked in 1988 and then declined 
until about 1992, remaining at these lower levels until about 2003 when 
they increased, coinciding with rising oil and historically higher 
natural gas prices. Drilling and production activity on federal leases 
was higher from 1997 through 2006 than from 1987 through 1996, but the 
increase was more dramatic for onshore leases. Industry officials told 
us that several factors influence their decisions to acquire and 
develop federal oil and gas leases, including oil and gas prices; the 
availability and cost of equipment; the geology of the land underlying 
the lease; and regulatory issues, such as limitations on when drilling 
can occur. 

* Development and production activity in a sample of leases issued from 
1987 through 1996 varied considerably. We reviewed data on about 55,000 
offshore and onshore federal leases issued from 1987 through 1996-- 
those that have exceeded their primary 10-year lease terms. We then 
tracked development activity on that sample of leases through 2007 to 
determine what, if any, development activity occurred, and at what 
point in time. We identified three key findings regarding development. 
First, development occurred at some point during the period 1987-2007 
on about 26 percent of offshore and 6 percent of onshore leases in the 
sample. Production was less frequent, with about 12 percent of offshore 
leases and 5 percent of onshore leases ultimately achieving production. 
Second, shorter leases were generally developed more quickly than 
longer leases, but not as frequently during the term of the lease. 
Finally, for those leases that eventually produced oil or gas, a 
substantial amount of the initial drilling activity--about 25 percent 
onshore--took place after the scheduled expiration of the lease, 
following a lease extension. 

* MMS and BLM employ different practices for deciding which federal 
properties to lease and when, determining the initial length of the 
lease, and determining the price at which the leases are sold. In 
addition, some states and private resource owners use more tools than 
the federal government, including incentives for early development or 
penalties for later development, to encourage rapid development, 
particularly of leases that are deemed to be likely to contain 
significant oil and gas resources. In this regard, we found that 
Interior could do more to encourage faster development of certain 
federal oil and gas leases that are relatively more likely to have 
significant oil and gas resources.[Footnote 1] 

* BLM has encountered persistent problems in hiring and retaining 
sufficient and adequately trained staff to keep up with an increasing 
workload as a result of rapid increases in oil and gas operations on 
federal lands. For example, between 1999 and 2004, when applications 
for permits to drill more than tripled, BLM was unable to keep up with 
the commensurate increase in its workload, in part, as result of an 
ineffective workforce planning process, the lack of key data on 
workload activities, and a lack of resources. As a result of this 
staffing shortfall, BLM was unable to meet its requirements to mitigate 
environmental impacts of oil and gas development.[Footnote 2] More 
recently, we reported that BLM's inability to attract and retain 
sufficient trained staff have kept the agency from meeting requirements 
to inspect drilling and production of oil and gas on federal lands. 
This puts federal revenues at risk because when inspections are made, 
violations have been found, including errors in the volumes of oil and 
gas reported by operators to MMS.[Footnote 3] 

* The federal government receives one of the lowest shares of revenue 
for oil and gas resources compared with other countries. For this and 
other reasons, the United States is an attractive country for 
investment in oil and gas development. Specifically, in 2007, the 
revenue share that the federal government collects on oil and gas 
produced in the Gulf of Mexico ranked 93rd lowest of 104 revenue 
collection regimes around the world that were studied. However, despite 
significant changes in the oil and gas industry over the past several 
decades, Interior has not systematically re-examined how the federal 
government is compensated for extraction of oil and gas for over 25 
years. In contrast, some other countries have recently increased their 
shares of revenues as oil and gas prices rose and, as a result, will 
collect between an estimated $118 billion and $400 billion, depending 
on future oil and gas prices.[Footnote 4] 

* In 1995, a time when oil and natural gas prices were significantly 
lower than they are today, Congress passed the Outer Continental Shelf 
Deep Water Royalty Relief Act (DWRRA), which authorized MMS to provide 
"royalty relief" on oil and gas produced in the deep waters of the Gulf 
of Mexico from certain leases issued from 1996 through 2000. This 
"royalty relief" waived or reduced the amount of royalties that 
companies would otherwise be obligated to pay on the initial volumes of 
production from leases, which are referred to as "royalty suspension 
volumes." We recently reported that litigation over this royalty relief 
for deep water leases sold between 1996 and 2000 could cost the public 
in the range of $21 billion to $53 billion in forgone revenue over the 
next 25 years, depending on how much oil and gas is eventually produced 
on these leases and the prices at which the oil and gas is sold. 
[Footnote 5] 

* Interior's verification of federal oil and gas production is 
insufficient. Specifically, we found that Interior is not meeting 
statutory or agency targets for inspections of certain onshore and 
offshore leases and metering equipment for measuring oil and gas 
production, raising questions about the accuracy of company-reported 
oil and gas production figures. In addition, we found that MMS's 
management of cash royalty collection lacks key controls, such as the 
ability to effectively monitor and validate oil and gas company 
adjustments to self-reported royalty data including those made after 
audits have been completed, which could have implications for the 
amount of revenue collected. Further, we found that MMS's royalty 
compliance efforts rely too heavily on self-reported data and that the 
more consistent use of available third-party data as a check on self- 
reported data could provide greater assurance that royalties are 
accurately assessed and paid.[Footnote 6] We have an ongoing engagement 
further examining production verification issues expected to be 
completed later this year. 

* More could be done to verify production levels for Interior's royalty-
in-kind (RIK) program, in which companies provide the federal 
government with oil or gas in lieu of cash royalty payments. 
Specifically, we found that under the RIK program, MMS's oversight of 
natural gas volumes is less robust than its oversight of oil volumes-- 
a finding that raises questions about the accuracy of company-reported 
volumes of natural gas from which MMS must determine whether it is 
receiving its appropriate share of production. In addition, we found 
that MMS's annual reports to Congress do not fully describe the 
performance of the RIK program and, in some instances, may overstate 
the benefits of the program.[Footnote 7] We also have an ongoing 
engagement examining the RIK program expected to be released later this 
year. 

In response to recommendations made by GAO and others, Interior has put 
into place a wide-ranging plan to significantly modify its current 
practices. We acknowledge Interior's efforts to change and improve many 
of its current practices as an important first step to address material 
weaknesses in the existing system. However, we are concerned that 
Interior may lack the resources and skills to simultaneously address 
significant changes in its practices while effectively meeting its 
routine responsibilities. If steps are not taken to effectively manage 
these challenges, the agency may face a decline in staff morale, 
continued employee turnover at its senior levels, and ongoing 
challenges hiring qualified new staff, further putting federal revenues 
at risk. 

More importantly, we believe that Interior needs to fundamentally 
reexamine the way in which federal oil and gas resources are managed. 
Specifically, we recommended that Interior develop a strategy to 
encourage faster development of oil and gas leases on federal lands for 
those leases deemed to be more likely to produce oil and gas.[Footnote 
8] In developing this strategy, Interior could benefit from evaluating 
alternative leasing practices used by some states and private land 
owners, as well as other countries, to determine what changes to 
federal leasing practices and the law is needed to speed up development 
of some specific leases that are likely to be highly productive. While 
Interior generally agreed with our recommendation and is looking at 
some of these issues in a study, we do not believe Interior's study is 
sufficiently comprehensive to meet the needs we identified. As a 
result, we believe this puts at risk the agency's mission to 
effectively manage federal oil and gas resources in the public 
interest. 

In addition, we believe that a comprehensive reassessment of how much 
revenue the federal government collects from oil and gas produced on 
federal lands and waters, and in what manner, is long overdue, and we 
recommended to Interior that it undertake such a reassessment in our 
draft report, Oil and Gas Royalties: The Federal System for Collecting 
Oil and Gas Revenues Needs Comprehensive Reassessment.[Footnote 9] 
However, in commenting on this recommendation, Interior stated that 
such a reassessment would be premature in light of a study the agency 
had under way that was looking at some aspects of these issues. Because 
we believe Interior's ongoing study is too limited in scope and scale, 
in the final report we proposed that Congress consider directing the 
Secretary of the Interior to convene an independent panel to perform a 
comprehensive review of the federal system for collecting oil and gas 
revenue. In the event that the Secretary of the Interior convenes a 
panel, the panel and Interior should utilize available information 
about the share of oil and gas revenues that other resource owners, 
including states and other countries, collect and the ways in which 
they structure these collections to create more stable investment 
environments in their oil and gas industries. Until this comprehensive 
reassessment is undertaken and completed, the federal government will 
not have reasonable assurance that it is collecting an appropriate 
share of revenue from oil and gas produced on federal lands and waters. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other Members of the 
Subcommittee might have. 

GAO Contact and Staff Acknowledgement: 

For further information on this statement, please contact Frank Rusco 
at (202) 512-3841 or ruscof@gao.gov. Contact points for our 
Congressional Relations and Public Affairs offices may be found on the 
last page of this statement. Other staff that made key contributions to 
this testimony include Shea Bader, Glenn C. Fischer, Jon Ludwigson, 
Alison O'Neill, Barbara Timmerman, and Maria Vargas. 

[End of section] 

Footnotes: 

[1] GAO, Oil and Gas Leasing: Interior Could Do More to Encourage 
Diligent Development, [hyperlink, 
http://www.gao.gov/products/GAO-09-74] (Washington, D.C.: Oct. 3, 
2008). 

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

[3] GAO, Mineral Revenues: Data Management Problems and Reliance on 
Self-Reported Data for Compliance Efforts Put MMS Royalty Collections 
at Risk, [hyperlink, http://www.gao.gov/products/GAO-08-893R] 
(Washington, D.C.: Sept. 12, 2008). 

[4] GAO, Oil and Gas Royalties: The Federal System for Collecting Oil 
and Gas Revenues Needs Comprehensive Reassessment, [hyperlink, 
http://www.gao.gov/products/GAO-08-691] (Washington, D.C.: Sept. 3, 
2008). 

[5] GAO, Oil and Gas Royalties: Litigation over Royalty Relief Could 
Cost the Federal Government Billions of Dollars, [hyperlink, 
http://www.gao.gov/products/GAO-08-792R] (Washington, D.C.: June 5, 
2008). The Department of Interior has since lost the case on appeal. 
Kerr-McGee Oil & Gas Corp. v. Dept. of Interior, 554 F. 3d 1082 (5th 
Cir. 2009). 

[6] GAO, Mineral Revenues: Data Management Problems and Reliance on 
Self-Reported Data for Compliance Efforts Put MMS Royalty Collections 
at Risk, [hyperlink, http://www.gao.gov/products/GAO-08-893R] 
(Washington, D.C.: Sept. 12, 2008). 

[7] GAO, Oil and Gas Royalties: MMS's Oversight of Its Royalty-in-Kind 
Program Can Be Improved through Additional Use of Production 
Verification Data and Enhanced Reporting of Financial Benefits and 
Costs, [hyperlink, http://www.gao.gov/products/GAO-08-942R] 
(Washington, D.C.: Sept. 26, 2008). 

[8] GAO, Oil and Gas Leasing: Interior Could Do More to Encourage 
Diligent Development, [hyperlink, 
http://www.gao.gov/products/GAO-09-74] (Washington, D.C.: Oct. 3, 
2008). 

[9] GAO, Oil and Gas Royalties: The Federal System for Collecting Oil 
and Gas Revenues Needs Comprehensive Reassessment, [hyperlink, 
http://www.gao.gov/products/GAO-08-691] (Washington, D.C.: September 3, 
2008). 

[End of section] 

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