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United States Government Accountability Office: 
GAO: 

Testimony: 

Before the Subcommittee on Energy Policy, Health Care, and 
Entitlements, Committee on Oversight and Government Reform, House of 
Representatives: 

For Release on Delivery: 
Expected at 10:30 a.m. EDT: 
Thursday, May 16, 2013: 

Oil and Gas Management: 

Continued Attention to Interior's Revenue Collection and Human Capital 
Challenges Is Needed: 

Statement of Frank Rusco, Director: 
Natural Resources and Environment: 

GAO-13-647T: 

GAO Highlights: 

Highlights of GAO-13-647T, a testimony before the Subcommittee on 
Energy Policy, Health Care, and Entitlements, Committee on Oversight 
and Government Reform, House of Representatives. 

Why GAO Did This Study: 

Interior issues permits for the development of new oil and gas wells 
on federal lands and waters; inspects wells to ensure compliance with 
environmental, safety, and other regulations; and collects royalties 
from companies that sell the oil and gas produced from those wells. In 
recent years, onshore and offshore federal leases produced a 
substantial portion of the oil and gas produced in the United States. 
In fiscal year 2012, Interior collected almost $12 billion in mineral 
revenues including those from oil and gas development, making it one 
of the largest nontax sources of federal government funds. Previous 
GAO work has raised concerns about Interior’s management and oversight 
of federal oil and gas resources. 

This testimony focuses on (1) Interior’s oversight of offshore oil and 
gas resources, (2) Interior’s collection of oil and gas revenues, and 
(3) Interior’s progress to address concerns that resulted in its 
inclusion on GAO’s High Risk List in 2011. This statement is based on 
prior GAO reports issued from September 2008 through February 2013. 

What GAO Found: 

Interior’s oversight of offshore resources. In July 2012, GAO reported 
on changes to the Department of the Interior’s oversight of offshore 
oil and gas activities in the Gulf of Mexico following the Deepwater 
Horizon incident. Specifically, GAO reported that Interior had 
established two new bureaus, separating resource management oversight 
activities from safety and environmental oversight activities. GAO 
also reported that new requirements and policy changes designed to 
mitigate risk of a well blowout or spill had initially required 
additional resources and increased permit approval times, but that 
approval times decreased as Interior staff and oil and gas companies 
became more familiar with the new requirements. GAO also found that 
Interior’s inspections of offshore Gulf of Mexico drilling rigs and 
production platforms routinely identified violations, but that Interior’
s database was missing data on when violations were identified and 
corrected. GAO made 11 recommendations aimed at improving Interior’s 
oversight activities. Interior generally agreed with the 
recommendations and plans to implement them. 

Interior’s collection of oil and gas revenues. In September 2008, GAO 
reported that Interior collected lower levels of revenues for oil and 
gas production in the deep water of the U.S. Gulf of Mexico than all 
but 11 of 104 oil and gas resource owners in other countries and some 
states. In July 2009, GAO reported on problems with Interior’s efforts 
to collect data on oil and gas produced on federal lands, including 
missing and erroneous data. In March 2010, GAO reported that Interior 
was not taking needed steps to ensure that oil and gas produced from 
federal lands was accurately measured and was not consistently meeting 
its goals for oil and gas production verification inspections. GAO 
made numerous recommendations aimed at improving Interior’s revenue 
collection policies, including oversight of production verification 
activities and controls on the accuracy and reliability of royalty 
data. Interior generally agreed with these recommendations and has 
implemented many of them. 

Interior’s oil and gas management on GAO’s high risk list. In February 
2011, GAO added Interior’s management of federal oil and gas resources 
to its list of federal programs and operations at high risk for waste, 
fraud, abuse, and mismanagement or needing broad-based transformation. 
GAO added this high risk area because Interior (1) did not have 
reasonable assurance that it was collecting its share of revenues; (2) 
continued to experience problems hiring, training, and retaining 
sufficient staff to provide oversight and management of oil and gas 
operations; and (3) was engaged in a broad agency reorganization that 
could adversely impact its ability to effectively manage oil and gas 
during the crisis following the Deepwater Horizon incident. In 
February 2013, after Interior completed its reorganization, GAO 
narrowed the oil and gas high-risk area to focus on revenue collection 
and human capital challenges and is currently examining these issues. 
While Interior has begun to implement many of GAO’s recommendations, 
it has yet to fully implement a number of others, including 
recommendations intended to (1) provide reasonable assurance that oil 
and gas is accurately measured, and that the public is getting an 
appropriate share of revenues, and (2) address its long-standing human 
capital issues. 

What GAO Recommends: 

GAO is making no new recommendations. Interior continues to act on the 
recommendations that GAO has made to improve the management of oil and 
gas resources. GAO continues to monitor Interior’s implementation of 
these recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-13-647T]. For more 
information, contact Frank Rusco at (202) 512-3841 or ruscof@gao.gov. 

[End of section] 

United States Government Accountability Office: 
GAO: 
441 G St. N.W. 
Washington, DC 20548: 

Chairman Lankford, Ranking Member Speier, and Members of the 
Subcommittee: 

I am pleased to be here today to discuss the Department of the 
Interior's management and oversight of federal oil and gas resources 
and collection of associated mineral revenues. Interior plays an 
important role in permitting the development of new oil and gas wells 
on federal lands and waters; inspecting those wells to ensure 
compliance with environmental, safety and other regulations; and 
collecting royalties from the companies that sell the oil and gas 
produced from those wells. 

In recent years federal leases onshore and in offshore federal waters 
produced a substantial portion of the natural gas and oil produced in 
the United States. In 2012, onshore federal leases produced 13 percent 
of domestic natural gas and 5 percent of domestic oil, while in 2011--
the most recent year for which data are available--offshore federal 
leases produced almost 24 percent of domestic natural gas and over 6 
percent of domestic oil. In fiscal year 2012, the federal government 
collected almost $12 billion in mineral revenues, including those from 
oil and gas produced from federal lands and waters, bonus bids for new 
oil and gas leases, and annual rents on existing leases.[Footnote 1] 
Revenues from federal oil and gas are one of the largest nontax 
sources of federal government funds--and, as we have previously 
reported, improvements in the management of federal oil and gas 
resources could provide an important source of potential revenue 
enhancements as the government faces fiscal challenges.[Footnote 2] 

Several Interior bureaus are responsible for regulating the processes 
that oil and gas companies must follow when leasing, drilling, and 
producing oil and gas from federal leases. The bureaus are also 
responsible for ensuring that companies comply with all applicable 
requirements. Historically, Interior's Bureau of Land Management (BLM) 
managed onshore federal oil and gas activities, while the Minerals 
Management Service (MMS) managed offshore activities and collected 
royalties on federal leases.[Footnote 3] In May 2010, in the aftermath 
of the Deepwater Horizon incident, the Secretary of the Interior 
announced plans to reorganize MMS and divide its responsibilities 
among separate bureaus. The Secretary stated that this division of 
responsibilities would help ensure that each of the newly established 
bureaus would have a distinct and independent mission. Since the 
reorganization, BLM continues to oversee onshore federal oil and gas 
activities, the Bureau of Ocean Energy Management oversees offshore 
oil and gas leasing, the Bureau of Safety and Environmental 
Enforcement reviews drilling permits and conducts inspections for 
offshore oil and gas activities, and the Office of Natural Resources 
Revenue is responsible for collecting royalties on oil and gas 
produced from both onshore and offshore federal leases. 

Interior's management of federal oil and gas activities has been a 
focus of a large body of our work over the past several years. In our 
resulting reports, we noted numerous weaknesses and challenges, and we 
made specific recommendations to Interior for addressing them. In 
February 2011, we added Interior's management of federal oil and gas 
resources to our list of federal programs and operations at high risk 
for waste, fraud, abuse, and mismanagement or needing broad-based 
transformation.[Footnote 4] Since that time, Interior has taken 
significant steps to address identified weaknesses and modify its 
practices for managing oil and gas resources but, as of May 2013, many 
of our recommendations remained unimplemented. 

In this context, my testimony today discusses findings from our past 
work on three broad areas: (1) Interior's oversight of offshore oil 
and gas resources, (2) Interior's collection of oil and gas revenues, 
and (3) Interior's progress to address concerns that resulted in its 
inclusion on our High Risk List in 2011. This statement is based on 
our extensive body of work on Interior's oil and gas leasing and 
royalty collection programs, including reports issued from September 
2008 through February 2013. We conducted the performance audit work 
that supports this statement in accordance with generally accepted 
government auditing standards. Additional information on our scope and 
methodology is available in each issued product. 

Interior's Oversight of Offshore Oil and Gas Resources: 

In July 2012, we reported on changes Interior made to its oversight of 
offshore oil and gas activities in the Gulf of Mexico in the aftermath 
of the Deepwater Horizon incident.[Footnote 5] Specifically, we 
reported that: 

* On October 1, 2011, Interior officially established two new bureaus, 
separating offshore resource management oversight activities, such as 
reviewing oil and gas exploration and development plans, from safety 
and environmental oversight activities, such as reviewing drilling 
permits and inspecting drilling rigs. Because the responsibilities of 
these new bureaus are closely interconnected, and carrying them out 
will depend on effective coordination, Interior developed memoranda 
and standard operating procedures to define roles and responsibilities 
and facilitate and formalize coordination. 

* New safety and environmental requirements and policy changes 
designed to mitigate the risk of a well blowout or spill initially 
required Interior to devote additional resources and time to reviewing 
certain oil and gas exploration and development plans and drilling 
permits for oil and gas activities in the Gulf of Mexico. 
Specifically, these policy changes affected Interior's (1) 
environmental analyses, (2) reviews of oil and gas exploration and 
development plans, and (3) reviews of oil and gas drilling permits. 
Our analysis of drilling permit approval time frames found that 
approval times initially increased after the new requirements went 
into effect, but as both Interior staff and oil and gas companies 
became more familiar with these requirements, the review times 
decreased. 

* Interior's inspections of offshore Gulf of Mexico oil and gas 
drilling rigs and production platforms from January 1, 2000, through 
September 30, 2011, routinely identified violations. However, 
Interior's database was missing data on when violations were 
identified, as well as when they were corrected for about half of the 
violations issued. As a result, Interior did not know on a real-time 
basis whether or when all violations were identified and corrected, 
potentially allowing unsafe conditions to continue for extended 
periods. During this same period, Interior issued approximately $18 
million in civil penalty assessments. At the time of our report, 
Interior had begun implementing a number of policy changes to improve 
both its inspection and civil penalty programs--but had not assessed 
how these changes would affect its ability to conduct monthly drilling 
rig inspections. 

* Interior continued to face challenges following its reorganization 
that may affect its ability to oversee oil and gas activities in the 
Gulf of Mexico. Specifically, Interior's capacity to identify and 
evaluate risks associated with drilling remained limited, raising 
questions about the effectiveness with which it allocated its 
oversight resources. Interior also experienced difficulties in 
implementing effective information technology systems, such as those 
that aid its reviews of oil and gas companies' exploration and 
development plans. It also continued to face workforce planning 
challenges, including hiring, retaining, and training staff. Moreover, 
Interior did not have current strategic plans to guide its information 
technology or workforce planning efforts. 

Our July 2012 report resulted in 11 recommendations for specific 
improvements to Interior's oversight of offshore oil and gas 
activities, including those intended to improve its drilling 
inspection program and human capital planning. Interior generally 
agreed with our recommendations and has committed to implementing them. 

Interior's Collection of Oil and Gas Revenues: 

Federal oil and gas resources generate billions of dollars annually in 
revenues that are shared among federal, state, and tribal governments; 
however, in several reviews over the past 5 years we found Interior 
may not be properly assessing and collecting these revenues. 

In September 2008, we reported that Interior collected lower levels of 
revenues for oil and gas production in the deepwater of the U.S. Gulf 
of Mexico than all but 11 of 104 oil and gas resource owners in other 
countries, as well as in some states whose revenue collection systems 
were evaluated in a comprehensive industry study.[Footnote 6] In 
addition, despite significant changes in the oil and gas industry over 
the past several decades, we found that Interior had not 
systematically reexamined how the U.S. government is compensated for 
extraction of oil and gas in over 25 years. We recommended Interior 
conduct a comprehensive review of the federal oil and gas fiscal 
system using an independent panel. After Interior initially disagreed 
with our recommendations, we recommended that Congress consider 
directing the Secretary of the Interior to convene an independent 
panel to perform a comprehensive review of the federal oil and gas 
fiscal system and establish procedures to periodically evaluate the 
state of the fiscal system. In response to that recommendation, 
Interior commissioned a study that compared the U.S. government's 
fiscal system with that of other resource owners. We are currently 
conducting work to assess how Interior plans to use the results of 
this study to inform decisions about its fiscal system. 

Furthermore, we reported, in July 2009, on numerous problems with 
Interior's efforts to collect data on oil and gas produced on federal 
lands and waters, including missing data, errors in company-reported 
data on oil and gas production, and sales data that did not reflect 
prevailing market prices for oil and gas.[Footnote 7] As a result of 
its lack of consistent and reliable data on the production and sale of 
oil and gas from federal lands and waters, Interior could not provide 
reasonable assurance that it was assessing and collecting the 
appropriate amount of royalties on this production. We made a number 
of recommendations to Interior to improve controls on the accuracy and 
reliability of royalty data. Interior generally agreed with our 
recommendations and has implemented the majority of them. 

We also reported, in March 2010, that Interior was not taking the 
steps needed to ensure that oil and gas produced from federal lands 
and waters was accurately measured.[Footnote 8] For example, we found 
that neither BLM nor MMS had consistently met their agency goals for 
oil and gas production verification inspections, intended to examine, 
among other things, whether lessees were taking steps to ensure that 
the amount of oil and gas produced from federal lands and waters was 
being accurately measured. Without such verification, Interior cannot 
provide reasonable assurance that the public is collecting its share 
of revenue from oil and gas development. We also raised concerns over 
Interior's efforts to develop software to allow inspection staff to 
remotely monitor gas production. Specifically, we found that BLM's 
Remote Data Acquisition for Well Production program--a program 
designed to provide industry and government with common tools to 
validate production and to view production data in near real-time--had 
shown few results, despite 10 years of development and costs of over 
$1.5 million. Our March 2010 report identified 19 recommendations for 
specific improvements to oversight of production verification 
activities, including recommendations intended to strengthen BLM's 
production inspection program and its ability to obtain near real-time 
gas production data. Interior generally agreed with our 
recommendations; it has already implemented many of them and continues 
to work on the remainder. 

Additionally, we reported, in October 2010, that Interior's data 
likely understated the amount of natural gas produced on federal 
leases, because the data did not quantify the amount of gas released 
directly to the atmosphere (vented) or burned (flared) during the 
production process.[Footnote 9] This vented and flared gas represents 
lost royalties to the government and contributes to greenhouse gases. 
We recommended that Interior improve its data and address limitations 
in its regulations and guidance to reduce this lost gas. Interior 
generally agreed with our recommendations and is taking steps to 
implement them. 

Interior's Oil and Gas Management on the High Risk List: 

In February 2011, we added Interior's management of federal oil and 
gas resources to our list of federal programs and operations at high 
risk for waste, fraud, abuse, and mismanagement or needing broad-based 
transformation.[Footnote 10] We added Interior to the list because the 
department: (1) did not have reasonable assurance that it was 
collecting its share of revenue from oil and gas produced on federal 
lands; (2) continued to experience problems in hiring, training, and 
retaining sufficient staff to provide oversight and management of oil 
and gas operations on federal lands and waters; and (3) was engaged in 
a broad reorganization of both its offshore oil and gas management and 
revenue collection functions, leading to concerns about whether 
Interior could provide effective program oversight while undergoing 
such a broad reorganization. 

In the February 2013 update to our High Risk list,[Footnote 11] we 
narrowed the federal oil and gas management high-risk area to focus on 
revenue collection and human capital challenges because Interior had 
completed its reorganization. 

In order for GAO to remove the high-risk designation, Interior must 
successfully address the challenges we have identified, implement open 
recommendations, and meet its responsibilities to manage federal oil 
and gas resources in the public interest. While Interior recently 
began implementing a number of GAO recommendations, including those 
intended to improve the reliability of data necessary for determining 
royalties, the agency has yet to implement a number of other 
recommendations, including those intended to help the agency (1) 
provide reasonable assurance that oil and gas produced from federal 
leases is accurately measured and that the public is getting an 
appropriate share of oil and gas revenues and (2) address its long-
standing human capital issues. 

We are currently engaged in two reviews examining the remaining two 
high-risk issues. First, we are conducting a follow up review of 
Interior's collection of revenues from the production of oil and gas 
on federal lands and waters. As part of this review, we will examine 
Interior's progress, if any, in (1) ensuring the government is getting 
a fair return for federal oil and gas resources, (2) meeting agency 
targets for conducting oil and gas production verification 
inspections, and (3) providing greater assurance that oil and gas 
production and royalty data are consistent and reliable. Second, we 
are reviewing the extent to which Interior continues to face problems 
hiring, training, and retaining staff, and how any remaining problems 
affect Interior's ability to oversee oil and gas activities on federal 
lands and waters. As part of this effort, we will focus on the causes 
of Interior's human capital challenges, actions taken, and Interior's 
plans for measuring the effectiveness of corrective actions. In 
addition, while we have narrowed the focus of the high-risk area to 
revenue collection and human capital issues, we will, in the course of 
ongoing work on these issues, continue to consider Interior's 
reorganization and its affect on the agency's ability to oversee 
federal lands and waters. 

In conclusion, Interior's management of federal oil and gas resources 
is in transition. Our past work has found a wide range of weaknesses 
in Interior's oversight of federal oil and gas resources, ultimately 
resulting in its inclusion on our High Risk List in 2011. Since then, 
Interior has successfully implemented many recommendations and 
resolved one of the three concerns that led to its inclusion on the 
high risk list--the challenges associated with its reorganization. We 
remain hopeful that Interior will continue to implement the many 
remaining recommendations we have made, thereby providing greater 
assurance of effective oversight of federal oil and gas resources. 

Chairman Lankford, Ranking Member Speier and Members of the 
Subcommittee, this concludes my prepared statement. I would be pleased 
to answer any questions that you or other Members of the Subcommittee 
may have at this time. 

GAO Contact and Staff Acknowledgments: 

If you have any questions concerning this testimony, please contact me 
at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this statement. Other individuals who made key contributions 
include Jon Ludwigson, Assistant Director; Christine Kehr, Assistant 
Director; Janice Ceperich; Glenn Fischer; Cindy Gilbert; Alison 
O'Neill; and Barbara Timmerman. 

[End of section] 

Footnotes: 

[1] Readily available data from Interior for nonroyalty revenue--such 
as rents and bonus bids--include revenue from all minerals, including 
oil and gas, coal, and other resources. 

[2] GAO, Opportunities to Reduce Potential Duplication in Government 
Programs, Save Tax Dollars, and Enhance Revenue, [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: March 
2011). 

[3] MMS's Offshore Energy and Minerals Management oversaw offshore oil 
and gas activities, while its Minerals Revenue Management was 
responsible for royalty collections from both onshore and offshore 
federal leases. 

[4] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February 
2011). 

[5] GAO, Oil and Gas Management: Interior's Reorganization Complete 
but Challenges Remain in Implementing New Requirements, [hyperlink, 
http://www.gao.gov/products/GAO-12-423] (Washington, D.C.: July 30, 
2012). 

[6] GAO, Oil and Gas Royalties: The Federal System for Collecting Oil 
and Gas Revenues Needs Comprehensive Reassessment, [hyperlink, 
http://www.gao.gov/products/GAO-08-691] (Washington, D.C.: Sept. 3, 
2008). 

[7] GAO, Mineral Revenues: MMS Could Do More to Improve the Accuracy 
of Key Data Used to Collect and Verify Oil and Gas Royalties, 
[hyperlink, http://www.gao.gov/products/GAO-09-549] (Washington, D.C.: 
July 15, 2009). 

[8] GAO, Oil and Gas Management: Interior's Oil and Gas Production 
Verification Efforts Do Not Provide Reasonable Assurance of Accurate 
Measurement of Production Volumes, [hyperlink, 
http://www.gao.gov/products/GAO-10-313] (Washington, D.C.: Mar. 15, 
2010). 

[9] GAO, Federal Oil and Gas Leases: Opportunities Exist to Capture 
Vented and Flared Natural Gas, Which Would Increase Royalty Payments 
and Reduce Greenhouse Gases, [hyperlink, 
http://www.gao.gov/products/GAO-11-34] (Washington, D.C.: Oct. 29, 
2010). 

[10] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February, 
2011). 

[11] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-13-283] (Washington, D.C.: February, 
2013). 

[End of section] 

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