Report faults MMS royalty system; lawmakers urge change

Dec. 7, 2006
The US Minerals Management Service has come under new criticism for its management of royalties paid on oil and gas produced under federal offshore leases.

Nick Snow
Washington Correspondent

WASHINGTON, DC, Dec. 7 -- The US Minerals Management Service has come under new criticism for its management of royalties paid on oil and gas produced under federal offshore leases.

A Department of Interior inspector general's (IG) report faulting the agency's procedures elicited calls from Congress for new investigations and possibly a revamp of the system.

Congress has been investigating Interior and its MMS unit since the disclosure last January that deepwater Gulf of Mexico leases awarded in 1998 and 1999 lacked price thresholds designed to limit royalty relief when oil and gas prices are high.

The new IG report says MMS might not be detecting royalty underpayments and shouldn't rely on compliance reviews as substitutes for audits.

Compliance reviews, which MMS initiated in the late 1990s as a less intensive alternative to full audits, are a legitimate tool in determining whether company-reported royalties are reasonable, IG Earl E. Devaney said in a Dec. 5 cover letter to his office's review of the process.

"However, our audit disclosed weaknesses related to management [of] information, the compliance review process, and in the related performance measures," he told C. Stephen Allred, DOI's assistant secretary for land and minerals management.

Compliance reviews allow a broader coverage of royalties with fewer resources than full audits do but do not provide the same level of assurance, according to the report. Consequently, they should be used only in conjunction with audits "in a coordinated compliance strategy."

Lawmakers react
Four House Democrats said Devaney's report revealed serious shortcomings at MMS and urged Congress to enact legislation forcing the agency to collect oil and gas royalties more aggressively.

Reps. Edward J. Markey (D-Mass.), Rahm Emanuel (D-Ill.), Carolyn Maloney (D-NY), and Maurice Hinchey (D-NY) want to bar oil companies with deepwater leases issued without price thresholds from future acquiring future leases unless they renegotiate terms.

Maloney said: "This report makes it pretty clear that the Bush administration is leaking a steady stream of money that is owed to the taxpayers. Instead of doing real audits, the government basically moves paper around in these 'compliance reviews.' They don't even bother doing basic work to make sure adequate royalties are being paid, but I know there will be greater oversight in the new Congress."

Two Republican leaders on the House Government Reform Committee said the IG report confirms that the MMS's oil and gas royalty collection system isn't working. Chairman Tom Davis of Virginia and Darrell Issa of California, who chairs the committee's Energy and Resources Subcommittee, called for a full review of the process.

"It may be that the only way for the royalty system to be fixed is to analyze all of its shortcomings from cradle to grave and then build a new system with new management," Issa said.

Davis said, "It is time for a bipartisan congressional effort to fix the problem once and for all, hopefully with the cooperation of Interior."

Contact Nick Snow at [email protected].