A Washington, DC-based watchdog group has called on the Obama administration to scrap the royalty-in-kind (RIK) program to increase revenue and cut costs for the federal government.
Shelving the RIK program was one of five recommendations made by the Project on Government Oversight (POGO), which when combined would result in an additional $103.3 billion in revenue and fewer costs for the federal government, the watchdog group said. POGO said it was unable to estimate the savings that would result from cutting the RIK program due to its “opaqueness.”
Despite the Minerals Management Service’s (MMS) “embrace of the royalty-in-kind program,” the Government Accountability Office (GAO) “has repeatedly found that MMS cannot accurately verify the program’s costs and benefits. In fact, the information that is available strongly suggests that RIK exists primarily to benefit the oil and gas industry,” POGO said.
“While the opaqueness of the RIK program makes it difficult to estimate its costs and benefits, the GAO has found, for instance, that in FY [fiscal year] 2006 64% of oil collected in-kind was sold for less than MMS would have received for the oil in value. The GAO also found that MMS has not been upfront about the uncertainties surrounding the supposed benefits of taking royalties in kind.”
In 2003 the GAO, the investigative arm of Congress, reported that it was unable to conclusively determine whether the MMS program for accepting royalty payments from oil and gas producers in-kind, rather than in-value, was a success or flop due to the agency’s lack of documentation and adequate controls over the program (see NGI, Jan. 20, 2003).
Under the RIK programs, which have been conducted in Wyoming and the Gulf of Mexico, the MMS permits producers to pay part of their royalty bills with oil and gas production rather than cash. The MMS then sells the oil and gas to the highest bidders at competitive auctions. The agency estimated that it collected about $682 million in in-kind payments in fiscal year 2003, and expected in-kind collections to climb to as high as $2.5 billion in 2008.
In October 2008 the GAO reported that the MMS oversight of natural gas production volumes under its RIK program was less rigorous than the agency’s oversight of crude oil production volumes, and that the agency tended to overstate the benefits of the RIK program to Congress each year. As a result, the MMS “does not have the same level of assurance that it is collecting the gas royalties it is owed,” said the GAO (see NGI, Nov. 3, 2008).
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