The Minerals Management Services’ (MMS) oversight of natural gas production volumes under its royalty in kind (RIK) program is less rigorous than its oversight of crude oil production volumes, and the agency may tend to overstate the benefits of the RIK program to Congress each year, the Government Accountability Office (GAO) said in a report issued Wednesday.

“Under the royalty-in-kind program, [the MMS] oversight of its natural gas production volumes is less robust than its oversight of oil production volumes. As a result, MMS does not have the same level of assurance that it is collecting the gas royalties it is owed,” reported the GAO, the investigative arm of Congress. The RIK programs allows offshore producers to pay their royalties in product (oil and gas volumes) rather than in cash. The Interior Department agency then sells the oil and gas at market prices.

“For oil, MMS compares companies’ self-reported oil production data with third-party pipeline meter data from OEMM’s [MMS’ Offshore Energy and Minerals Management] liquid verification system, which records oil volumes flowing through pipeline metering points. Using these third-party pipeline statements to verify production volumes reported by companies provides a check against companies’ self-reported statement of royalty payments owed to the federal government,” the report noted.

“While analogous data are available from OEMM’s gas verification system, MMS does not use these third-party data to verify the company-reported production numbers.”

The GAO further said that the MMS “in some instances may overstate the benefits” of the RIK program in its annual report to Congress. “For example, MMS’ calculation that from fiscal years 2004 to 2006 [it] sold royalty oil and gas for $74 million more than it would have received in cash was based on assumptions, not actual sales data.”

Moreover, the MMS “calculation that the royalty-in-kind program cost about $8 million less to administer than the royalty-in-value program over the same period did not include certain costs, such as information technology costs shared with the royalty-in-value program, that would likely have changed the result of the [agency’s] administrative cost analysis,” the GAO said.

“We are recommending that MMS improve its verification of gas volumes owed to the government and, therefore, gas royalties owed by using third-party production information, such as data from OEMM’s gas verification system. We are also recommending that MMS take several actions to improve its calculation of the benefits and costs of the royalty-in-kind program and the information it presents annually to Congress on the program.”

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