GAO urges Interior Department to accelerate installation of automated royalty payment system

The US Department of Interior should move quickly to complete installation of an automated system to assure that it receive accurate and timely oil and gas royalty payments, the Government Accountability Office said in a Sept. 12 report.

The US Department of Interior should move quickly to complete installation of an automated system to assure that it receive accurate and timely oil and gas royalty payments, the Government Accountability Office said in a Sept. 12 report.

It said that while DOI is implementing an action plan to address recommendations by its own royalty policy committee, its inspector general and GAO, many of the department's processes and systems are in flux and the outcome of potential improvements won't be known for some time.

"However, given high oil and gas prices and the increased interest on the part of oil and gas companies in the nation's oil and gas resources, it is important that we have a royalty system going forward that can assure the American people that the government is receiving accurate and timely royalty payments," GAO said.

That makes it critical for the US Bureau of Land Management, which oversees onshore leases, and the US Minerals Management Service, which has jurisdiction over offshore leases, to complete and accurately verify their documentation and inspection work, the congressional government watchdog service said. MMS collects revenues through its Offshore Energy and Minerals Management (OEMM) program.

GAO warned in its report that accurate royalty collections will remain at risk as long as producers may make unverified adjustments to royalty production data after MMS completes its compliance activities. "Increasing this risk is uncertainty regarding the statutory time frames for MMS to collect unpaid royalties, which under one interpretation may leave just one year for MMS to identify an improper adjustment," it said.

Less reliance on producers

The system ultimately should provide adequate assurance that the federal government receives appropriate value for oil and gas produced from federal lands and waters, the report said. "This royalty collection system should also rely less on companies providing accurate information on production and royalties owed, and more on a system with the ability to conduct thorough and independent verification of what is owed to the government, using third-party data where available at reasonable cost, and more systematically examining company source documentation," it suggested.

GAO's report came three days after DOI Inspector General Earl E. Devaney reporting findings to Secretary Dirk A. Kempthorne that there were widespread ethical violations within MMS's royalty-in-kind operation in Denver from 2002 to 2006. But the new report reflected concerns which GAO and others have raised about BLM and MMS royalty reporting practices for several years.

It noted that BLM and OEMM are not completing production inspections which are required under the 1982 Oil and Gas Royalty Management Act, leaving the accuracy of oil and gas measurements in doubt.

"Moreover, when BLM and OEMM do complete production inspections, staff are not always accurately recording this work in their databases. For example, of the 27 BLM field offices in five states we reviewed, two field offices had fiscal 2007 production inspection data that could not be validated by the state's inspection and enforcement coordinator, and six had instances of production inspection data changing after the end of the fiscal year, in violation of BLM policy," it said.

There are similar problems offshore where OEMM staff members do not consistently check the accuracy of production inspection data, according to the report. "For example, OEMM data indicated that at one facility no meters were available for inspection, yet 16 meter inspections had occurred during calendar year 2007, which an OEMM official confirmed was an error. An OEMM official explained that one reason for errors may be data entry problems" such as a clerk, instead of an inspector, entering the information, it said.

Areas for improvement

The report said that while MMS is continuing to improve its royalty information technology system, which went online in 2001, and its royalty collection processes, it still needs to improve the ability to maintain the accuracy of production and royalty data which companies submit, to promptly identify missing royalty reports, and to better ensure that accurate royalties are paid on volume discrepancies which OEMM and BLM identify during their production inspections.

It said that MMS's ability to maintain the accuracy of production and royalty data is hampered because producers can adjust their previously entered information without prior approval. "Companies may legally make changes to both royalty and production data in MMS's royalty IT system for up to six years after the initial reporting month, and these changes may necessitate changes in the royalty payment," it said. Furthermore, such changes do not necessarily trigger a review to determine if they are reasonable or if they affect the royalties which are due, the report continued. They are investigated only if the producer is selected for an audit or compliance review, it said.

MMS's royalty IT system also is not able to automatically detect instances where a producer hasn't submitted a royalty report on time, according to GAO. It said that the agency also lacks a consistent process to ensure that appropriate royalties are paid when either OEMM or BLM identifies volume discrepancies while conducting production inspections and other verification activities.

The report also criticized MMS for not consistently reviewing third-party documents for onshore compliance reviews to verify company-reported royalty and production data. Representatives of states and Indian tribes who are responsible for conducting compliance work under agreements with MMS have expressed concerns about the quality of such data, it said.

It recommended that the Interior secretary report to Congress any year in which BLM and OEMM have not met their legal and agency requirements for completing production inspections, along with the cause and a plan for achieving compliance. The report also said that the secretary should direct both BLM and OEMM to evaluate whether production data they have are complete and accurate and amend relevant policies and procedures as needed.

Contact Nick Snow at nicks@pennwell.com

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