Mineral Revenues: A More Systematic Evaluation of the Royalty-in-Kind Pilots Is Needed

GAO-03-296 Published: Jan 09, 2003. Publicly Released: Jan 16, 2003.
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Highlights

In fiscal year 2001, the federal government collected $7.5 billion in royalties from the sale of oil and gas produced on federal lands. Although most oil and gas companies pay royalties in cash, the Department of the Interior's Minerals Management Service (MMS) has the option to take a percentage of the oil and gas produced and either transfer this percentage to other federal agencies or to sell this percentage itself--known as "taking royalties in kind." GAO reviewed the extent to which MMS has taken royalties in kind since 1995, the reasons for taking royalties in kind, and MMS's progress in implementing management control over its Royalty-in-Kind Program.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of the Interior To continue the further development of management control for MMS' Royalty-in-Kind Program, the Secretary of the Interior should instruct the appropriate managers within MMS, to clarify the Royalty-in-Kind Program's strategic objectives to explicitly state that goals of the Royalty-in-Kind pilots include obtaining fair market value and collecting at least as much revenue as MMS would have collected in cash royalty payments.
Closed – Implemented
MMS implemented its Five Year Royalty In Kind Program Plan in May 2004. Under Section 4.2 #1 (p. 15) and section 6, MMS clarifies its strategic objectives to state that MMS principles are to guide business activities including meeting or exceeding fair market value benchmarks that are established in accordance with statutory guidelines. Also, the plan states that fair market value benchmarks are developed using commercial fair market value measures and estimates of what a comparable RIV program would yield.
Department of the Interior To continue the further development of management of control for MMS' Royalty-in-Kind Program, the Secretary of the Interior should instruct the appropriate managers within MMS, prior to expanding the Royalty-in-Kind Program, identify and acquire key information needed to monitor and evaluate performance. Such information, as identified by MMS, should include the revenue impacts of all Royalty-in-Kind sales, administrative costs of the Royalty-in-Kind Program, estimates of savings in avoiding potential litigation, and expected savings in auditing revenues.
Closed – Implemented
Minerals Management Service (MMS) implemented its Five Year Royalty In Kind (RIK) Program Plan in May 2004. In the plan (per section 8.3.2 p. 36), MMS plans to develop and implement a revenue performance measurement program during the first year of this plan. Administrative cost comparisons between RIK and RIV will be developed during the first two years of the plan. In February 2005, MMS presented to GAO the summary of its consultant's recommendations for assessing the revenue impacts of RIK sales. GAO was satisfied that these efforts fulfilled part 1 of the recommendation. In October 2005, MMS presented to GAO the results of an internal team that examined RIK costs. Using activity based cost data for FY 2004, MMS was able to quantify the administrative costs of the RIK program and was able to compare the differences in costs between auditing different leases. GAO concluded that these efforts fulfilled parts 2 and 4 of the recommendation. However, MMS concluded that it could not quantify savings in avoiding potential litigation (part 3 of recommendation) and GAO agrees. In discussions with MMS staff, GAO suggested that MMS not claim savings in litigation as a benefit of RIK as it could not be quantified. Therefore, GAO concluded that MMS has implemented this overall recommendation to its fullest ability. Support for the implementation of the recommendation is documented in accomplishment report GAO-06-854A, approved January 2006.

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