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

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 concurred with our recommendation that MMS complete establishing policies and procedures to ensure outstanding imbalances are valued appropriately and that the correct amount of interest is charged. Based on our finding and recommendation, the Secretary of the Interior and MMS have taken action to implement our recommendation. Specifically, in October 2009, MMS issued policies and procedures to complete the reconciliation and resolution of all oil and gas imbalances, including a methodology to ensure that outstanding imbalances are valued appropriately and that the correct amount of interest is charged. The procedures included (1) valuing each production month's imbalance using the MMS contract price applicable to that production month and measurement point, (2) calculating interest in accordance with the regulations starting with the due date of the production month through the date payment is received, and (3) applying a 7-year statute of limitations to all production months where there are imbalances.

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 imbalance data of a sample of leases taken in kind and, on the basis of those findings, establish a risk-based auditing program. Based on our finding and recommendation, the Office of Natural Resources Revenue (ONRR)--formerly MMS--has taken action to implement our recommendation. Specifically, in July 2011 ONRR developed a risk analysis methodology and created a risk-level summary report that separated all offshore facility measurement points into various risk categories. ONRR used criteria, including the number of properties and operators associated with a facility measurement point and whether there are different royalty rates, to sample facility measurement points at six locations that ranked as high risk for further analysis. ONRR, in collaboration with the Bureau of Ocean Energy Management, Regulation and Enforcement, performed a review of the operator's allocation methodologies and documentation and compared them to the approved agreement language. The results of the review showed that production allocation reviews are necessary and should be performed on a regular basis. Based on the results of this analysis, an annual process was established to verify volume allocation methods used by companies for offshore leases of high-risk facility measurement points. In those cases where there are allocation issues, ONRR will follow-up, track, and resolve the issues.

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 RIK gas imbalances in a timely manner. On the basis of our finding and recommendation, in October 2009, MMS established procedures for resolving and collecting all RIK gas imbalances. According to these procedures, MMS will (1) identify any measurement points with gas imbalances that have reached a 7-year statute of limitations as not resolved, (2) determine whether gas imbalance monies owed to MMS are greater than the Federal Oil and Gas Royalty Simplification and Fairness Act of 1996 calculated cost/benefit provision and issue a Demand Letter to the operator, and (3) issue memorandums for those measurement points where gas imbalance monies are owed to the operator from MMS. In addition, an August 2010 status report identifies the progress and target dates for resolving and collecting all of the RIK gas imbalances by September 30, 2011.

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 place a corresponding staffing and training program for MMS staff. The Department of the Interior concurred with this recommendation. On the basis of our finding and recommendation, the Bureau of Ocean Energy Management, formerly known as MMS, identified and approved the training needs of the office responsible for the duties formerly handled by the RIK program. Specifically, in fiscal year 2010, employees completed Individual Development Plans (IDPs) that were agreed to by his/her manager and designed to meet the training development needs of the employee and organization. IDPs are now required to be completed annually. Additionally, the agency conducted a limited staffing needs analysis and determined the skills needed to phase out the RIK Program.