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DOI officials dispute calls to change royalties program

Nick Snow
Washington Editor

WASHINGTON, DC, Mar. 12 -- US Department of Interior officials told a House of Representatives subcommittee that they disagree with allegations that the federal oil and gas royalties program needs to be drastically reformed. "Overall, we concluded that the department's royalty management program is not broken but needs a major tune-up," said David T. Deal, vice-chairman of DOI's Royalty Policy Committee, following an investigation of the program thatInterior Secretary Dirk A. Kempthorne ordered last year.

DOI has begun to address the 110 recommendations that emerged from the investigation by an RPC subcommittee and has already satisfied some of the simpler ones, he told the House Natural Resources Committee's Energy and Mineral Resources Subcommittee Mar. 11. C. Stephen Allred, assistant Interior secretary for land and minerals management, and US Minerals Management Service Director Randall B. Luthi made similar statements when they testified later in the hearing.

The House subcommittee's chairman, Rep. Jim Costa (D-Calif.), disagreed. "The past few years have seen one revelation after another about the sorry state of our royalty collection," he said in his opening statement. He noted that DOI Inspector General Earl E. Devaney said in his written testimony that "the history here is rich and disconcerting," while the Government Accountability Office said the current royalties program "is more of an honor system than we are comfortable with."

Costa said that Devaney's three investigations of the royalties program over 15 months "detailed serious shortcomings in the Minerals Management Service." Devaney said the inquiries led the IG's office to conclude that it needs to develop a royalty oversight unit. The 2008 Omnibus Spending Bill instructed it to do that, and four of the six budgeted employees already are at work in the Denver-based division, he told the subcommittee.

Expanded oversight
"In the longer term, we intend to develop the capacity to oversee all minerals-related activities managed by DOI from initial leasing of federal and Indian lands to the final termination of those leases, which would include the management of those leases and the collection of royalty payments. Ultimately, we would like to expand our oversight coverage beyond MMS to the energy and minerals programs at the Bureaus of Land Management and Indian Affairs, including oil, gas, and solid minerals," Devaney said.

"Of course, to this vision is attached the very real need for continued funding to keep this unit operating and to expand its capacity as it develops. I am quite confident, however, that the results which will be derived from this unit will more than pay for any increase in appropriations that we receive," he added.

In his testimony, however, Franklin Rusco, acting director of GAO's natural resources and environment program, said that data management problems and reliance on data reported by the lessees themselves has put MMS royalty collections at risk. Financial management systems are inadequate and lack key internal controls, he said, while compliance efforts do not consistently examine data from third parties to verify whether self-reported royalty-in-value payments are complete and accurate.

Luthi told reporters at a briefing at MMS headquarters following the hearing that he was troubled by these assertions. "I'm encouraged that what we saw today is only a draft, which means that they are still working on it and will contact us again. We're ready to work with them," he said.

Lessees' data verified
Lessees' data are verified by both operations and royalty reports at the wellhead, measurements by frequently inspected and calibrated meters, and volume reports from pipelines which take the oil and gas, Luthi continued. "There are quite a few places we can check or verify the information. Many of these are from third parties. That's where compliance reviews and audits can kick in," he said.

"When GAO comes back to us and asks us to provide comments, you'll see these issues better explained," said Allred, who also participated at the post-hearing briefing. "Can we do better onshore? We certainly can. I would suspect that some smaller leases don't have the kind of data GAO was talking about. It's an area we need to look at more carefully, which the Royalty Policy Committee's subcommittee recommended in its investigation."

Other witnesses at the hearing said royalties collections must become electronic to better assure accuracy. "Right now, about 99% of the reports and 98% of the payments are electronic. Some mom-and-pop operators still like the comfort of a canceled check, but they're getting use to the idea," Luthi said at the briefing.

He noted that both GAO and DOI's Royalty Policy Committee recommended that MMS develop a risk-based audit strategy. The agency has completed its pilot program and is implementing a broader effort which will let it examine small as well as large operators, he said. "It will be based on the company's history, location of the leases, and other factors beyond the amount of money involved," he said.

Learn from IRS
Lawrence Finfer, deputy director of DOI's policy analysis office, told the subcommittee that RPC recommended that MMS "foster a relationship" with the US Internal Revenue Service, which has extensive risk-based auditing experience, and initial contacts already have been made. Acting IRS Commissioner Linda Stiff said the Department of the Treasury division attempts to balance enforcement with education, and that transparency and third-party verification of information are essential.

In testimony distributed at the hearing, which Costa made a part of the record, Danielle Brian, executive director of the Project on Government Oversight, an independent federal government watchdog group, said the RPC-recommended reforms fell seriously short. "While they may have discovered 110 ways to improve these systems, avoiding reforms that target larger systemic problems will only lead to continued skepticism of [MMS's] ability to effectively steward the program," she said.

Her recommendations included moving the compliance and audit function out of MMS to improve the agency's independence from oil and gas producers and reduce conflicts of interest within the agency. Others disagreed.

"There really weren't any show-stoppers with regard to royalty management," Allred said following the hearing. "There are a lot of opportunities to improve, and there always will be because royalty management is a dynamic, changing program. We were gratified to the apparently positive reaction to the RPC subcommittee's report and reforms which are being implemented. Some will require additional funding, which we will seek in 2009."

Contact Nick Snow at nicks@pennwell.com.


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