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GAO Agrees to Examine MMS Royalty Collection System

The Government Accountability Office (GAO) has accepted a request by House members to examine the accuracy and effectiveness of the royalty collection system of the Interior Department's Minerals Management Services (MMS). The examination is part of a growing investigation into missing price thresholds on Gulf of Mexico (GOM) offshore leases in 1998 and 1999.

An eight-month investigation by the House Energy and Resources Subcommittee found the flawed offshore leases were the result of gross mismanagement and a failure of accountability on the part of Interior and the MMS (see Daily GPI, March 6; Feb. 21; Jan. 27). A review of the matter by Interior Inspector General Earl Devaney confirmed that the omission of the lease price thresholds was first detected in 2000 but then was covered up (see Daily GPI, Sept. 14).

Johnnie Burton, director of the MMS, said in September the agency would forego efforts to collect the lost royalties, pegged by the GAO to be at least $2 billion, and instead would concentrate on recovering revenues on future production from the flawed leases (see Daily GPI, Sept. 25). However, three weeks later, Interior Secretary Dirk Kempthorne said the department would review the negotiations and try to "reach a fair and equitable resolution" with the producers and Congress over the royalties owed (see Daily GPI, Oct. 19).

Rep. Tom Davis (R-VA), chair of the House Government Reform Committee, and Rep. Darrell Issa (R-CA), chair of the Subcommittee on Energy and Resources, in October requested GAO Comptroller General David Walker analyze the accuracy of royalties collected on oil, condensate and natural gas produced under leases of federal and Indian lands. Davis and Issa said the loss in royalties could cost taxpayers more than $10 billion over the life of the leases.

"In addition to problems in management of royalty collection from deepwater production, we have reason to believe the shortcomings identified in the investigation may also be impacting the royalty collection from onshore production and on Indian lands," Davis and Issa said in a statement.

Since the investigation was initiated last February, Davis and Issa said their committees have been contacted several times regarding alleged deficiencies in MMS management, reporting by oil and gas companies, government information technology, and the collection of royalty payments.

"While they may seem straightforward at first glance, royalty reporting and collection are complex undertakings," said Issa. "GAO has the capacity and expertise to carry out a comprehensive and unbiased review of MMS and reporting by oil and gas producers holding public leases. Chairman Davis and I look forward to working with GAO as their investigation moves forward."

Several of the largest offshore producers are said to be negotiating with the MMS about the price thresholds. Last month, Shell reached a preliminary agreement with the MMS to add price thresholds and pay royalties on oil and gas production stemming from the flawed deepwater leases when the price ceilings are exceeded (see Daily GPI, Oct. 4). Shell currently holds 73 deepwater leases that were acquired in 1998 and 1999, four of which are producing in the GOM.

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