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MMS, BLM Need 'Fundamental Reform,' Says GAO

U.S. natural gas and oil activity has increased in the past 20 years, but the Department of Interior (DOI) has -- at times -- been unable to meet its oversight obligations and is "in need of fundamental reform," the director of Natural Resources and Environment for the Government Accountability Office (GAO) told Congress.

Frank Rusco, in testimony earlier this month before the House Natural Resources Committee, said GAO's numerous evaluations of federal gas and oil management have identified five key areas where Interior could provide more oversight in the Minerals Management Service (MMS), which oversees public offshore drilling, and at the Bureau of Land Management (BLM), which is responsible for onshore drilling on public lands.

Based primarily on findings from past GAO audits and preliminary findings from ongoing work, the federal agency has uncovered "many material weaknesses" in federal oil and gas management and revenue collection practices, said Rusco.

MMS uses a five-year strategic plan to identify both a leasing schedule and the areas it would lease. In contrast, BLM relies on industry and others to nominate areas for leasing, then selects lands to lease from these nominations as well as areas it had identified, noted Rusco. In addition, he said MMS independently assesses the value of the lease and reserves the right to reject low bids, while BLM relies exclusively on the results of its bid auctions to determine the lease's market value.

However, because energy development has increased on- and offshore over the past 20 years, "Interior has at times been unable to meet its legal and agency-mandated oversight obligations for completing required environmental inspections, verifying oil and gas production, using categorical exclusions to streamline environmental analyses required for certain oil and gas activities and performing environmental monitoring in accordance with land use plans," the GAO director said.

Compared to other countries, the United States receives one of the lowest shares of revenue from oil and gas, according to the GAO. In addition, Interior's royalty rate, which does not change to reflect changing prices and market conditions, has at times led to pressure on Interior and Congress to periodically change royalty rates in response to market conditions. Interior also has done less than some states and private landowners to encourage lease development and may be missing opportunities to increase production and, subsequently, revenues, Rusco said.

Past audits by GAO have found that MMS is hampered in maintaining the accuracy of oil and gas production and royalty data in its information technology (IT) systems because the systems did not limit companies' ability to adjust self-reported data after MMS had audited them, and it did not identify missing royalty reports. Preliminary GAO findings also have identified technical problems within BLM's IT systems and their compatibility with the MMS IT systems, Rusco said.

Rusco also pointed to problems with DOI's royalty-in-kind program, which is being terminated (see related story).

Acknowledging the potential differences among federal, state and private leases, GAO has recommended that DOI "develop a strategy to evaluate options to encourage faster development of oil and gas leases on federal lands," said Rusco. GAO also recommended using methods to differentiate among leases according to the likelihood of finding economic quantities of oil and gas and implementing methods used by states that have been effective.

Congress, said Rusco, also should consider directing DOI to:

"If steps are not taken to effectively manage these challenges, we remain concerned about the agency's ability to manage the nation's oil and gas and provide reasonable assurance that the U.S. government is collecting an appropriate amount of revenue for the extraction and use of these scarce resources," Rusco said.

The testimony is available at www.gao.gov/new.items/d091014t.pdf.

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