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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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.

MMSisforgoing revenues for gas royalties owed to the federal government because it does not provide reasonable assurance that it accurately and promptly identifies and collects on RIK gas imbalances. GAO found that MMS is forgoing revenues for the following reasons: (1) MMS estimates that it is owed a net of $21 million for past imbalances but it lacks the information necessary to calculate the full amount of revenues due. MMS does not have sufficient data to determine whether it has received its full percentage of RIK gas. Also, MMS's estimate does not include interest on some unpaid imbalances because MMS has not determined when interest begins to accrue on imbalances, as required by law. Further, MMS monitors imbalances on a monthly, rather than daily basis, which leaves open the possibility that some companies owing RIK gas could provide less gas to MMS when gas prices are relatively high, making up the difference by providing more gas when prices are relatively low, something that could cost MMS additional revenues because it could miss the opportunity to sell gas on the days when prices are high. (2) MMS does not audit gas companies' production and allocation data, therefore it cannot verify that it is receiving its entitled percentage of gas. MMS does not audit, in part, because it believes that its verification procedures are sufficient. However, other governments and gas companies routinely audit their imbalances and uncover inaccuracies that would result in lost revenues if left unchecked. (3) MMS lacks adequate policies and procedures for accurately and promptly identifying and collecting gas imbalances. For instance, the agency does not know how companies allocate gas among all parties having a claim on a share of gas produced; this may affect whether MMS receives its percentage of gas on a daily basis. In addition, MMS does not compel companies to document production and deliveries in a consistent format and meet deadlines. As a result, MMS analysts spend time gathering and reformatting data instead of identifying and collecting on imbalances. MMS also allows companies to negotiate imbalances indefinitely. For example, MMS has been negotiating with a company for more than 2 years regarding a $900,000 imbalance. (4) MMS's information system does not provide accurate and timely data on RIK gas imbalances. For instance, MMS's information system cannot calculate cash settlements for imbalances or compare various types of data that companies submit. Consequently, MMS processes more than half of its gas imbalance data manually. (5) MMS has been operating for many years without sufficient staff to reconcile gas imbalances, and the staff it has is not sufficiently trained. For instance, according to RIK management, MMS does not have sufficient staff to dedicate someone to fully review RIK gas analysts' work on imbalances, even though mistakes in that work often occur. MMS recently hired one new gas imbalance analyst but has not formally assessed staffing needs. In addition, RIK gas imbalance staff lack, among other things, training on industry standards on gas imbalance calculations.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Interior

  2. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Interior

  3. Status: Closed - Not Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Interior

  4. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Interior

  5. Status: Closed - Not Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Interior

  6. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Interior

  7. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of the Interior

 

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