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entitled 'Oil and Gas Management: Federal Oil and Gas Resource 
Management and Revenue Collection In Need of Stronger Oversight and 
Comprehensive Reassessment' which was released on April 6, 2009. 

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Testimony: 

Before the Subcommittee on Interior, Environment, and Related Agencies, 
Committee on Appropriations, House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 1:30 p.m. EDT: 

Thursday, April 2, 2009: 

Oil and Gas management: 

Federal Oil and Gas Resource Management and Revenue Collection In Need 
of Stronger Oversight and Comprehensive Reassessment: 

Statement of Frank Rusco, Director: 

Natural Resources and Environment: 

GAO-09-556T: 

GAO Highlights: 

Highlights of [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-
556T], a testimony before The Subcommittee on Interior, Environment, 
and Related Agencies, Committee on Appropriations, 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. 
Interiorís 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. Specifically: In 
September 2008, we reported that 

* Neither BLM nor MMS were meeting statutory obligations or agency 
targets for conducting inspections of certain leases and metering 
equipment used to measure oil and gas production. 

* MMSís royalty IT system and processes lacked several important 
capabilities, including monitoring adjustments made by companies to 
their self-reported production and royalty data and identifying missing 
royalty reports in a timely manner. 

* MMSís use of compliance reviews, which are more limited in scope than 
audits, led to an inconsistent use of third-party documents to verify 
that self-reported industry data are correct. 

* MMS's annual reports to the Congress did not fully describe the 
performance of the royalty-in-kind program and, in some instances, may 
have overstated the benefits of the program. 

* 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 October 
2008, we reported that: 

* Some states do more than Interior to structure leases to reflect the 
likelihood of oil and gas production, which may encourage faster 
development. In June 2005, we reported that 

* 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 
and poor workforce planning. In recent reports, GAO has made a number 
of recommendations to improve the accuracy of royalty measurement and 
collections and the overall management of federal oil and gas 
resources. Interior generally agreed with our recommendations and is 
trying to implement them but implementation is ongoing and it is too 
early to assess the effectiveness these efforts. 

View [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-556T] 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, and 
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's (MMS) 
Offshore Energy and Minerals Management (OEMM) 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: 

On September 12, 2008 we reported that[Footnote 1] 

* Neither BLM nor OEMM were meeting statutory obligations or agency 
targets for conducting inspections of certain leases and metering 
equipment used to measure oil and gas production, raising uncertainty 
about the accuracy of oil and gas measurement. Specifically, although 
BLM and OEMM are statutorily required to annually inspect leases 
"producing significant quantities of oil and gas" and those with a 
"history of noncompliance", according to BLM staff, they are not 
completing all the inspections required by law and agency policy, in 
part because their workload has substantially grown because of 
increased onshore drilling. Similarly OEMM is not meeting its agency 
targets for inspections because, according to OEMM staff, inspectors 
are still conducting cleanup activities in the Gulf of Mexico--where 
almost all of the offshore oil and gas production occurs--in the wake 
of Hurricanes Katrina and Rita. Finally, neither BLM nor OEMM were 
consistently and accurately recording data to document the production 
inspections that were completed. 

* MMS's royalty IT system cannot yet monitor adjustments made to 
production and royalty data by companies. While MMS is working to 
address this issue, companies may continue to adjust their previously 
self-reported production and royalty data without prior MMS approval or 
review. This includes adjustments made by companies to data after MMS 
completes audit work, meaning that while the royalties paid were 
accurate at the close of an audit, they may not remain so. Furthermore, 
MMS is unable to identify instances, in a timely manner, in which a 
royalty report has not been submitted by a company and, as a result, 
MMS cannot be entirely confident that it is receiving all the royalties 
when they are due. Finally, MMS lacks a clear process to determine that 
royalties are accurately paid in instances when OEMM or BLM identify 
volume discrepancies during their production inspections and 
verification work. For example, when BLM identifies an over-or 
underreporting of production volumes, BLM notifies the production 
reporting section of MMS. While MMS staff may work to correct the 
production numbers, staff do not relay this information to the royalty 
reporting section so that staff can check that the appropriate 
royalties were paid. 

* While MMS continues to strengthen its compliance efforts, MMS's use 
of compliance reviews, which are more limited in scope than audits, has 
led to an inconsistent use of third-party documents to verify that self-
reported industry production and payment data are correct, thereby 
placing royalty collections at risk. MMS has historically relied on 
audits to determine whether a company accurately paid its royalties by 
examining third-party documents that contained information on prices, 
volumes, and deductions. More recently, MMS has relied more heavily on 
compliance reviews, which assess whether the royalties paid by a 
company are reasonable, and do not always include an examination of 
third-party documents. Furthermore, while MMS's compliance reviews of 
offshore leases include a systematic comparison between a company's 
reported production volumes and independent pipeline company documents, 
an analogous process does not exist for onshore leases. The absence of 
a consistent check on self-reported data--such as comparing the data 
with third party documents--when conducting onshore compliance reviews 
raises questions about the accuracy of royalty payments. 

On September 26, 2008 we reported that[Footnote 2] 

* Under the royalty-in-kind program, MMS's oversight of its natural gas 
production volumes is less robust than its oversight of oil production 
volumes. As a result, MMS does not have the same level of assurance 
that it is collecting the gas royalties it is owed. For instance, for 
oil, MMS compares companies' self-reported oil production data with 
third-party pipeline meter data from OEMM's liquid verification system, 
which records oil volumes flowing through pipeline metering points. 
Using these third-party pipeline statements to verify production 
volumes reported by companies provides a check against companies' self- 
reported statement of royalty payments owed to the federal government. 
While analogous data are available from OEMM's gas verification system, 
MMS does not use these third-party data to verify the company-reported 
production numbers. 

* MMS's annual reports to the Congress do not fully describe the 
performance of the royalty-in-kind program and, in some instances, may 
overstate the benefits of the program. For example, MMS's calculation 
that from fiscal years 2004 to 2006 MMS sold royalty oil and gas for 
$74 million more than it would have received in cash was based on 
assumptions, not actual sales data, about the prices at which royalty 
payors would have sold their oil or gas had they sold it on the open 
market. MMS did not report to the Congress that even small changes in 
these assumptions could result in very different estimates. Also, MMS's 
calculation that the royalty-in-kind program cost about $8 million less 
to administer than the royalty-in-value program over the same period 
did not include certain costs, such as information technology costs 
shared with the royalty-in-value program, that would likely have 
changed the results of MMS's administrative cost analysis. In addition, 
these annual reports lacked important information on the financial 
results of individual oil sales that the Congress could use to more 
broadly assess the performance of the royalty-in-kind program. 

On October 3, 2008 we reported that[Footnote 3] 

* 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. 

On September 3, 2008 we reported that[Footnote 4] 

* 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. 

On June 5, 2008 we reported that[Footnote 5] 

* 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. 

Finally, on June 17, 2005 we reported that[Footnote 6] 

* 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. 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. 

In response to recommendations made by GAO, the Department of the 
Interior's Inspector General, 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. For example, OEMM plans to have 
definitions for leases having "significant production" and a "history 
of non-compliance" by November, 2009. Additionally, MMS is developing a 
system to assist in monitoring adjustments made by companies to 
previously entered self-reported royalty data, and plans to have the 
system finalized in early 2010. However, we remain 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. 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 are 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. 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, Divya Bali, Lee Carroll, Glenn C. Fischer, Jon 
Ludwigson, and Barbara Timmerman. 

[End of section] 

Footnotes: 

[1] 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). 

[2] 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). 

[3] 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). 

[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, 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). 

[End of section] 

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