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GAO Cites 'Material Weaknesses' in Royalty Collection Practices

The Government Accountability Office (GAO) Tuesday reported a number of "material weaknesses" in the federal government's collection of royalties from oil and natural gas produced on public lands.

The Interior Department "collects, on average, over $10 billion annually in mineral lease revenues, but many material weaknesses in federal oil and gas management and revenue collection processes and practices place an unknown but significant proportion of royalties and other oil and gas revenues at risk," said officials with the GAO, the investigative arm of Congress, during a hearing before a House Appropriations subcommittee.

Last September "we reported that compared with other countries, the United States receives one of the lowest shares of revenue for its oil and gas resources...[And] despite significant changes in the oil and gas industry and widely fluctuating prices, Interior has not systematically reexamined how the federal government is compensated for oil and gas on federal lands for over 25 years," testified Robin M. Nazzaro and Frank Rusco, both with the GAO's natural resources and environment office.

"We reported that [the] Minerals Management Service's (MMS) management of cash royalty collection lacks key controls, such as the ability to effectively monitor and validate oil and gas company adjustments to self-reported royalty data, including those made after audits have been completed," they said.

"MMS' royalty compliance efforts rely too heavily on self-reported data, but the more consistent use of available third-party data as a check on self-reported data could provide greater assurance that royalties are accurately assessed and paid." The GAO has noted that the MMS oversight of natural gas volumes is "less robust than its oversight of oil volumes -- a finding that raises questions about the accuracy of company-reported volumes of natural gas from which MMS must determine whether it is receiving its appropriate share" of royalties.

The GAO also cited problems with the Interior Department's Bureau of Land Management (BLM). "BLM's inability to attract and retain sufficiently trained staff has kept the agency from meeting requirements to inspect the drilling and production of oil and gas on federal lands," the officials told House lawmakers. This "lack of inspection puts federal revenues at risk because inspections have found violations, including errors in the volumes of oil and gas that operators reported."

Moreover, Interior "is not meeting statutory or agency targets for inspecting certain onshore and offshore leases and metering equipment for measuring oil and gas production, raising questions about the accuracy of company-reported oil and gas production figures."

And then there's the issue of foregone royalties due to mistakes made by Interior in offshore leases, or the result of the royalty relief that was provided by Congress in the late 1990s. "We developed a number of scenarios that showed that foregone royalties from leases issued between 1996 and 2000 under the [Deep Water Royalty Relief Act of 1995] could be as high as $53 billion," the GAO said.

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