The US Minerals Management Service could improve oversight of its oil and gas royalty-in-kind program by verifying more production data through third parties and improving reports of benefits and costs, the Government Accountability Office said on Oct. 29.
"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," the congressional government watchdog service added in its report.
It said that with oil tendered as a royalty-in-kind, MMS compares producers' self-reported production data with third-party pipeline meter data from the agency's Offshore Energy and Minerals Management (OEMM) Program, which records 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 statements of royalty payments owed to the federal government," GAO observed.
"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. In December 2007, the Subcommittee on Royalty Management, a panel appointed by the Secretary of the Interior to examine MMS's royalty program, reported that OEMM was not adequately staffed to conduct [a] sufficient review of data from the gas verification system," the report continued.
A growing share
Royalty-in-kind payments make up a growing share of the oil and gas royalties MMS and the US Bureau of Land Management generate, according to GAO. About 58% of the approximately $9.74 billion in royalty payments received in fiscal 2006 were in-value (cash) while 42% were in-kind, it said. MMS takes the oil or gas it receives as an in-kind royalty and sells it on the open market. The agency has said that the program increases revenue, improves efficiency and shortens the compliance cycle.
Before the mid-1990s, MMS's in-kind efforts were generally limited to its small refiners program under which it took in-kind oil and sold it to small refiners that did not have adequate supplies of their own, according to GAO. The agency began to study whether taking oil and gas in kind were in the federal government's best interests in 1995 and began a series of pilot sales in 1998. Based on the pilot sales' results, MMS has expanded the program, the report said.
It noted that in 2003, GAO recommended that MMS develop a more systematic approach to assessing its royalty-in-kind program, and that the agency has made progress in developing metrics for assessing the program's performance. The agency said on Sept. 8 in an annual report to Congress on the royalty-in-kind program that it generated more than $63 million in additional benefits during fiscal 2007.
GAO's new report questioned whether MMS's annual reports to Congress are fully describing the program's performance, and in some cases may be overstating its benefits, however.
Based on assumptions
"For example, MMS's calculation that from fiscal 2004 to 2006 [it] 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 payers would have sold their oil and gas had they sold it on the open market. MMS did not report to Congress that even small changes in these assumptions could result in very different estimates," it said.
The report also said that MMS's calculation that the royalty-in-kind program cost about $8 million to administer than the royalty-in-value program over the same period did not include costs such as information technology expenses that the two programs shared which likely would have changed the results of the agency's administrative cost analysis.
"In addition, these annual reports lack important information on the financial results of individual oil sales that Congress could use to more broadly assess the financial performance of the royalty-in-kind program," GAO said.
It noted that DOI's royalty management programs "have faced increased scrutiny in the last few years, and the [department] is in the process of implementing many recommendations made by GAO, its own inspector general and its Subcommittee on Royalty Management. While the outcome of Interior's implementation of these recommendations will not be known for some time, we believe additional opportunities exist to enhance the oversight of MMS's royalty-in-kind program."
DOI responds
In a Sept. 18 response attached to the report, C. Stephen Allred, assistant Interior secretary for land and minerals management, said that the department agreed with GAO's recommendation to extend the verification system it uses for offshore oil volumes to gas.
He also said that MMS will disclose IT system expenses specifically associated with the royalty-in-kind program beginning with the fiscal 2008 report to Congress. The agency also is re-evaluating the process by which it calculates the time value of money benefit or early payment savings, including interest rates which are used and the comparison methodology to in-value payments, he said.
"While MMS calculates revenue performance metrics by individual property for oil and by pipeline for gas, the results are rolled up into reporting categories in order to protect proprietary information regarding royalty-in-kind sales, particularly contractual arrangements with service providers. The MMS believes reporting revenue performance by individual oil property or gas pipeline has the potential to compromise the actual bid prices that MMS receives for the sale of oil or gas and could affect the competitive nature of the sales," Allred continued.
"Proprietary information includes pricing and sales data. The royalty-in-kind sales contracts include confidentiality clauses that neither party will disclose prices received under the contract. Many RIK service agreements for transportation and/or processing also have confidentiality clauses that neither party will disclose the rates charged or the terms of the agreement. Maintaining the confidentiality of proprietary data is essential to continue to contract for royalty-in-kind," he said.
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