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GAO: Interior Lax in Measuring Production for Royalty Purposes

The Department of Interior's Minerals Management Service (MMS) and Bureau of Land Management actions fall short of what is required to to ensure the proper measurement of oil and natural gas production for royalty purposes, the Government Accountability Office (GAO) said in a recent report.

Neither the BLM nor the MMS's Offshore Energy and Minerals Management (OEMM) "is meeting statutory obligations or agency targets for conducting inspections of certain leases and metering equipment used to measure oil and gas production, raising uncertainty about the accuracy of oil and gas measurement," the 16-page report said.

Some of the fault appears to lie with the Interior secretary himself. "Although BLM and OEMM are statutorily required to annually inspect leases producing 'significant quantities of oil or gas' and those with a 'history of noncompliance,' the secretary has defined these terms for onshore leases but not for offshore leases. Understanding the meaning of these terms is necessary to implement the act and is critical to the agencies' ability to prioritize inspections," said the GAO, the investigative arm of Congress.

"Although BLM is able to prioritize its inspections, according to BLM officials, they are not completing all of the inspections required by law and agency policy in part because their workload has substantially grown [due to] increased onshore drilling. OEMM, on the other hand, is not able to prioritize its inspections because the statutory terms have yet to be defined by the secretary," the report said.

In addition, "OEMM is not meeting its agency targets for inspections because, according to OEMM officials, inspectors are still conducting cleanup activities in the Gulf of Mexico -- where almost all of the offshore oil and gas production occurs -- in the wake of Hurricanes Katrina and Rita in 2005."

The GAO said that while the MMS's information technology (IT) system and processes for collecting and verifying royalty data have improved, "they continue to lack several capabilities that would provide greater assurance that royalties are being accurately collected." A major problem area is the inability of the agency's IT to monitor adjustments made to production and royalty data by companies.

"While MMS is working to address this issue, companies may continue to adjust their previously self-reported production and royalty data without MMS approval or review. This includes adjustments made by companies to data after MMS completes its compliance work, meaning that while the royalties paid were accurate at the close of the audit, they may not remain accurate."

The collection of "accurate royalties will remain at risk as long as companies [are allowed to] make unverified adjustments to royalty and production data after MMS completes its compliance activities," the GAO report said.

To improve production inspections and measurement, the GAO called on the Interior secretary to:

In the end, "Interior's royalty IT system and policies should provide adequate assurance that the federal government receives appropriate value for oil and gas produced from federal lands and waters. This royalty-collection process 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," the GAO said.

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