Mineral Revenues:

MMS Could Do More to Improve the Accuracy of Key Data Used to Collect and Verify Oil and Gas Royalties

GAO-09-549: Published: Jul 15, 2009. Publicly Released: Sep 15, 2009.

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In fiscal year 2008, the Department of Interior's Minerals Management Service (MMS) collected over $12 billion in royalties from oil and gas production from federal lands and waters. Companies that produce this oil and gas self-report to MMS data on the amount of oil and gas they produced and sold, the value of this production, and the amount of royalties owed. Since 2004, GAO has noted systemic problems with these data and recommended improvements. GAO is providing: (1) a descriptive update on MMS's key efforts to improve the accuracy of oil and gas royalty data; (2) our assessment of the completeness and reasonableness of fiscal years 2006 and 2007 oil and gas royalty data--the latest data available; and (3) factors identified by oil and gas companies that affect their ability to accurately report royalties owed to the federal government.

MMS has several key efforts underway to improve the accuracy of the payor-reported data used to collect and verify royalties, but it is too soon to evaluate their effectiveness. MMS is in the process of implementing (1) GAO's past recommendations to help identify missing royalty reports and monitor payors' changes to royalty data; (2) recommendations from the Royalty Policy Committee--a group empanelled by the Secretary of the Interior to provide advice on managing federal and Indian leases and revenues--to improve edit checks, monitor the quality of natural gas, revise gas valuation regulations, and improve coordination with BLM; and (3) other efforts on adding specific edits for sales prices and identifying discrepancies in volumes between operators and payors. While much of the royalty data we examined from fiscal years 2006 and 2007 are reasonable, we found significant instances where data were missing or appeared erroneous. For example, we examined gas leases in the Gulf of Mexico and found that, about 5.5 percent of the time, lease operators reported production, but royalty payors did not submit the corresponding royalty reports, potentially resulting in $117 million in uncollected royalties. We also found that a small percentage of royalty payors reported negative royalty values, which cannot happen, potentially costing $41 million in uncollected royalties. In addition, payors claimed processing allowances 2.3 percent of the time for unprocessed gas, potentially resulting in $2 million in uncollected royalties. Furthermore, we found significant instances where payor-provided data on royalties paid and the volume and/or the value of the oil and gas produced appeared erroneous because they were outside of expected ranges. Oil and gas company representatives reported that several factors affect their ability to accurately report royalties, including complex land ownership, administratively combining leases into units, ambiguity in federal regulations that establish gas prices, short time frames for filing royalty reports, and inaccuracies in MMS's internal databases.

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: In order to improve the accuracy of royalty data and to help provide a greater assurance that federal oil and gas royalties are being accurately reported, to improve the efficiency of audit and compliance activities, to increase the likelihood of collecting additional royalties in a timely manner, and to simplify the auditing of leases and compliance work, MMS should enforce current MMS requirements to populate the agreement field with the correct agreement number and to populate the agreement field for leases outside of agreements with a single unique code that is easily identifiable.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: In August 2011, Interior reported that it had taken three actions to improve the accuracy of payer reporting on agreements. First, Interior has implemented a volume comparison process that identifies volume differences between the volumes reported on the Oil and Gas Operations Report and the volumes reported on the MMS-2014 royalty reporting form. According to Interior, most volume discrepancies it has identified are caused by agreement misreporting. Second, Interior developed and provided formal training to industry on how to correctly report agreements. Third, Interior will issue Order to Report letters and Notices of Non-Compliance to companies, when necessary, to enforce correct reporting.

    Recommendation: In order to improve the accuracy of royalty data and to help provide a greater assurance that federal oil and gas royalties are being accurately reported, to improve the efficiency of audit and compliance activities, to increase the likelihood of collecting additional royalties in a timely manner, and to improve the quality of data that has been accepted by MMS's database, MMS should use the monthly sums of original and adjusting entries for royalty values, sales values, and sales volumes to ensure that calculated royalty rates and unit prices for each payor on each lease for each commodity fall within expected ranges and highlight potentially erroneous submissions to payors and appropriate MMS staff.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: Interior notified GAO that it had developed a new analysis tool, called the Royalty Equation Analysis dashboard which is designed to analyze key royalty variables to ensure they fall within expected ranges. Specifically, according to Interior, the dashboard sums royalty values and volumes and calculates a minimum and maximum price and royalty rate by payer, lease, commodity and sales period, and identifies differences between the maximum and minimum price. If the difference exceeds a specified limit, Interior's new Data Mining Services group analyzes the resulting exceptions and determines reasonableness of the reported values and volumes.

    Recommendation: In order to improve the accuracy of royalty data and to help provide a greater assurance that federal oil and gas royalties are being accurately reported, to improve the efficiency of audit and compliance activities, to increase the likelihood of collecting additional royalties in a timely manner, and to improve the quality of data that has been accepted by MMS's database, MMS should design and implement additional edit checks to evaluate the net impact of all adjustments on original entries for critical royalty variables, including sales values, royalty values, sales volumes, transportation allowances, and processing allowances, by summing each month all entries for the variable submitted by each payor for each lease and each commodity and highlight potentially erroneous submissions to payors and appropriate MMS staff.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: Beginning in December 2009 and continuing through August 2012, Interior has added additional price and royalty edit checks. Additionally, Interior notified GAO that it had developed a new analysis tool, called the Royalty Equation Analysis dashboard which is designed to analyze key royalty variables to ensure they fall within expected ranges. Specifically, according to Interior, the dashboard sums royalty values and volumes and calculates a minimum and maximum price and royalty rate by payer, lease, commodity and sales period, and identifies differences between the maximum and minimum price. If the difference exceeds a specified limit, Interior's new Data Mining Services group analyzes the resulting exceptions and determines reasonableness of the reported values and volumes.

    Recommendation: In order to improve the accuracy of royalty data and to help provide a greater assurance that federal oil and gas royalties are being accurately reported, to improve the efficiency of audit and compliance activities, to increase the likelihood of collecting additional royalties in a timely manner, and to better prevent the submission of erroneous data into MMS's database, the Secretary of the Interior should direct MMS to share with payors that submit their data through the Electronic Data Interchange (EDI), MMS's recent edit check that prevents payors from submitting data claiming processing allowances for gas that is not processed, including coalbed methane.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: In April 2009, Interior's MMS added an edit check to prevent payers from claiming gas processing allowances for unprocessed gas and later updated this edit check in February 2010. Additionally, MMS has made available its edit checks for payers on its website.

    Recommendation: In order to improve the accuracy of royalty data and to help provide a greater assurance that federal oil and gas royalties are being accurately reported, to improve the efficiency of audit and compliance activities, to increase the likelihood of collecting additional royalties in a timely manner, and to simplify the auditing of leases and compliance work, MMS should collaborate with state and tribal auditors on the possibility of adding more specific adjustment reason codes that describe why payors made corrections to royalty data on the Form MMS-2014.

    Agency Affected: Department of the Interior

    Status: Closed - Implemented

    Comments: In May 2011, Interior met with state and tribal auditors to discuss whether to add additional adjustment reason codes. The parties concluded that additional adjustment codes are not needed at this time, but that Interior should instead focus on ensuring that current adjustment reason codes are used properly.

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