Mineral Revenues:

A More Systematic Evaluation of the Royalty-in-Kind Pilots Is Needed

GAO-03-296: Published: Jan 9, 2003. Publicly Released: Jan 16, 2003.

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In fiscal year 2001, the federal government collected $7.5 billion in royalties from the sale of oil and gas produced on federal lands. Although most oil and gas companies pay royalties in cash, the Department of the Interior's Minerals Management Service (MMS) has the option to take a percentage of the oil and gas produced and either transfer this percentage to other federal agencies or to sell this percentage itself--known as "taking royalties in kind." GAO reviewed the extent to which MMS has taken royalties in kind since 1995, the reasons for taking royalties in kind, and MMS's progress in implementing management control over its Royalty-in-Kind Program.

From January 1995 through September 2001, the Minerals Management Service (MMS) took, in kind, 178 million barrels of oil and 213 billion cubic feet of gas, or 32 percent of the federal government's royalty share of all oil and 3 percent of the federal government's royalty share of all gas produced on federal lands. MMS sold the majority of this oil--143 million barrels--to small refiners in accordance with long-standing legislation. MMS also took 29 million barrels of federal royalty oil to fill the Strategic Petroleum Reserve. MMS took the remaining 6 million barrels of oil in kind and all the gas in kind under a series of pilot projects to evaluate whether there are additional circumstances under which taking royalties in kind is in the best interest of the federal government. MMS personnel have made progress in implementing some components of management control for its Royalty-in-Kind Program, such as addressing the risks associated with oil and gas sales and developing written procedures. However, MMS does not plan to complete and implement all management controls until 2004, when it will consider the Royalty-in-Kind pilots to have changed from a pilot stage to a fully operational stage and when it will have acquired additional systems support. To date, MMS has not developed clear strategic objectives linked to statutory requirements nor collected the necessary information to effectively monitor and evaluate the Royalty-in-Kind Program. Without clear objectives linked to statutory requirements and the collection of necessary information, MMS cannot systematically assess whether Royalty-in-Kind sales are administratively less costly, whether they generate fair market value or at least as much revenue as traditional cash royalty, payments, and thus whether MMS should expand or contract the Royalty-in-Kind Program.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To continue the further development of management control for MMS' Royalty-in-Kind Program, the Secretary of the Interior should instruct the appropriate managers within MMS, to clarify the Royalty-in-Kind Program's strategic objectives to explicitly state that goals of the Royalty-in-Kind pilots include obtaining fair market value and collecting at least as much revenue as MMS would have collected in cash royalty payments.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: MMS implemented its Five Year Royalty In Kind Program Plan in May 2004. Under Section 4.2 #1 (p. 15) and section 6, MMS clarifies its strategic objectives to state that MMS principles are to guide business activities including meeting or exceeding fair market value benchmarks that are established in accordance with statutory guidelines. Also, the plan states that fair market value benchmarks are developed using commercial fair market value measures and estimates of what a comparable RIV program would yield.

    Recommendation: To continue the further development of management of control for MMS' Royalty-in-Kind Program, the Secretary of the Interior should instruct the appropriate managers within MMS, prior to expanding the Royalty-in-Kind Program, identify and acquire key information needed to monitor and evaluate performance. Such information, as identified by MMS, should include the revenue impacts of all Royalty-in-Kind sales, administrative costs of the Royalty-in-Kind Program, estimates of savings in avoiding potential litigation, and expected savings in auditing revenues.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: Minerals Management Service (MMS) implemented its Five Year Royalty In Kind (RIK) Program Plan in May 2004. In the plan (per section 8.3.2 p. 36), MMS plans to develop and implement a revenue performance measurement program during the first year of this plan. Administrative cost comparisons between RIK and RIV will be developed during the first two years of the plan. In February 2005, MMS presented to GAO the summary of its consultant's recommendations for assessing the revenue impacts of RIK sales. GAO was satisfied that these efforts fulfilled part 1 of the recommendation. In October 2005, MMS presented to GAO the results of an internal team that examined RIK costs. Using activity based cost data for FY 2004, MMS was able to quantify the administrative costs of the RIK program and was able to compare the differences in costs between auditing different leases. GAO concluded that these efforts fulfilled parts 2 and 4 of the recommendation. However, MMS concluded that it could not quantify savings in avoiding potential litigation (part 3 of recommendation) and GAO agrees. In discussions with MMS staff, GAO suggested that MMS not claim savings in litigation as a benefit of RIK as it could not be quantified. Therefore, GAO concluded that MMS has implemented this overall recommendation to its fullest ability. Support for the implementation of the recommendation is documented in accomplishment report GAO-06-854A, approved January 2006.

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