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Royalty-In-Kind Program: MMS Does Not Provide Reasonable Assurance It Receives Its Share of Gas, Resulting in Millions in Forgone Revenue

GAO-09-744 Published: Aug 14, 2009. Publicly Released: Sep 14, 2009.
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Highlights

Companies that develop and produce oil and gas from federal lands and waters are required to report their production volumes and other data to the Department of the Interior's (Interior) Minerals Management Service (MMS) and to pay royalties either in value (cash) or in kind (oil or gas). In fiscal year 2008, MMS estimated that it had collected more than $2.4 billion in royalty-in-kind (RIK) gas. It is important that MMS ensure that it receives the RIK gas to which it is entitled. The difference between the RIK gas owed--MMS's entitled percentage of gas--and the percentage it actually receives is referred to as a "gas imbalance." GAO was asked to evaluate the extent to which MMS can provide reasonable assurance that it is accurately identifying and collecting RIK gas imbalances in a timely fashion. GAO analyzed MMS documents and data, documentation of industry standards, and interviewed MMS and industry officials.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of the Interior To improve the Minerals Management Service's oversight of the RIK gas program and help ensure that the nation receives its fair share of RIK gas, the Secretary of the Interior should direct the Minerals Management Service to complete establishing polices and procedures to ensure outstanding imbalances are valued appropriately and that the correct amount of interest is charged.
Closed – Implemented
In our August 2009 report on the Department of the Interior's Minerals Management Service's (MMS) Royalty-In-Kind Program, we found that the agency lacked information on how to price gas imbalances - the difference between the percentage of gas MMS is owed and the percentage it actually receives - and the point at which the agency should begin applying interest to the imbalances for leases that have terminated from the program or those leases where production has ceased. We reported that MMS was not actively trying to collect on those imbalances because they were in discussions with the Office of the Solicitor for more than a year about these issues. The Department of the Interior...
Department of the Interior To improve the Minerals Management Service's oversight of the RIK gas program and help ensure that the nation receives its fair share of RIK gas, the Secretary of the Interior should monitor daily gas imbalances to determine whether the allocation practices of gas operators are resulting in lost revenue to MMS. To the extent that this is occuring, identify and propose specific legislative changes that MMS believes are needed to require operators to deliver MMS's royalty percentage on a daily basis.
Closed – Not Implemented
The MMS (now the Office of Natural Resources Revenue) determined that this recommendation is no longer applicable given the Secretary of the Interior's decision to phase out the Royalty-in-Kind Program.
Department of the Interior To improve the Minerals Management Service's oversight of the RIK gas program and help ensure that the nation receives its fair share of RIK gas, the Secretary of the Interior should audit the operators and imbalance data of a sample of leases taken in kind and, on the basis of the audit findings, establish a risk-based auditing program for the RIK properties.
Closed – Implemented
In our August 2009 report on the Department of the Interior's Minerals Management Service's (MMS) Royalty-In-Kind (RIK) Program, we found that the agency had not audited gas companies' production and allocation data, and therefore could not verify that it had received its entitled percentage of gas. We reported that MMS did not audit, in part, because it believed that its verification procedures were sufficient. However, we found that other governments and gas companies routinely audit their imbalances and uncover inaccuracies that would result in lost revenues if left unchecked. The Department of the Interior partially concurred with our recommendation that MMS audit the operators and...
Department of the Interior To improve the Minerals Management Service's oversight of the RIK gas program and help ensure that the nation receives its fair share of RIK gas, the Secretary of the Interior should promulgate RIK program regulations that protect the federal government's interests. At a minimum, a regulation should require operators to submit imbalance statements in a standardized format within 60 days following the month of RIK production. They should also require the use of gas allocation methofs MMS deems will ensure a fair return to the government.
Closed – Not Implemented
The MMS (now the Office of Natural Resources Revenue) determined that this recommendation is no longer applicable given the Secretary of the Interior's decision to phase out the Royalty-in-Kind Program.
Department of the Interior To improve the Minerals Management Service's oversight of the RIK gas program and help ensure that the nation receives its fair share of RIK gas, the Secretary of the Interior should establish procedures, with reasonable deadlines, for resolving and collecting all RIK gas imbalances in a timely manner.
Closed – Implemented
In our August 2009 report on the Department of the Interior's Minerals Management Service's (MMS) Royalty-In-Kind Program (RIK), we found that the agency did not have adequate policies and procedures to ensure it reconciled and resolved RIK gas imbalances - the difference between the percentage of gas MMS is owed and the percentage it actually receives - efficiently. We reported that MMS's practice had been to allow the exchange of information with a lease operator regarding the size and value of an imbalance to continue indefinitely. The Department of the Interior concurred with our recommendation that MMS establish procedures, with reasonable deadlines, for resolving and collecting all...
Department of the Interior To improve the Minerals Management Service's oversight of the RIK gas program and help ensure that the nation receives its fair share of RIK gas, the Secretary of the Interior should determine the information system enhancements necessary to effectively identify and resolve gas imbalances and put into practice such a system.
Closed – Not Implemented
The MMS (now the Office of Natural Resources Revenue) determined that this recommendation is no longer applicable given the Secretary of the Interior's decision to phase out the Royalty-in-Kind Program.
Department of the Interior To improve the Minerals Management Service's oversight of the RIK gas program and help ensure that the nation receives its fair share of RIK gas, the Secretary of the Interior should conduct an RIK staffing and training needs analysis and put into place a corresponsing staffing and training program for MMS staff.
Closed – Implemented
In our August 2009 report on the Department of the Interior's Minerals Management Service's (MMS) Royalty-In-Kind Program (RIK), we found that the agency had been operating without sufficient staff and training to efficiently and effectively carry out its duties for managing gas imbalances - the difference between the percentage of gas MMS is owed and the percentage it actually receives. We reported that, as a result, certain tasks did not receive sufficient attention, leading to a backlog of RIK gas imbalances. To improve the management of the RIK Program, we recommended that the Secretary of the Interior direct MMS to conduct an RIK staffing and training needs analysis and put into...

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Topics

Allocation (Government accounting)Data collectionDocumentationFederal regulationsGas leasesGas pipeline operationsInternal controlsManagement information systemsMonitoringPrices and pricingReporting requirementsRisk managementSchedule slippagesStandardsSystems analysisTraining utilizationNeeds assessmentPolicies and procedures