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entitled 'Royalty-In-Kind Program: MMS Does Not Provide Reasonable
Assurance It Receives Its Share of Gas, Resulting in Millions in
Forgone Revenue' which was released on September 14, 2009.
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
August 2009:
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:
GAO Highlights:
Highlights of GAO-09-744, a report to congressional requesters.
Why GAO Did This Study:
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.
What GAO Found:
MMS is forgoing 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:
* 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.
* 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.
* 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.
* 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.
* 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.
What GAO Recommends:
GAO is making seven recommendations to the Secretary of the Interior to
help MMS improve the accurate and timely identification and collection
of RIK gas imbalances. In commenting on this report, Interior agreed
with four of GAO’s recommendations and partially agreed that it should
audit a sample of leases and promulgate program regulations. Interior
did not agree that daily gas imbalances be monitored.
View [hyperlink, http://www.gao.gov/products/GAO-09-744] or key
components. For more information, contact Frank Rusco at (202) 512-3841
or ruscof@gao.gov.
[End of section]
Contents:
Letter:
Background:
MMS May Be Losing Revenue Because It Does Not Accurately and Promptly
Identify and Collect on RIK Gas Imbalances:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Analysis of the Relationship between Price and Percentage
of Gas Production Allocated to MMS and the Effect on Federal Revenue:
Appendix III: Comments from the Department of the Interior:
Appendix IV: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Results of Correlation Analysis:
Figures:
Figure 1: Two RIK Measurement Points with Common and Mixed Royalty
Percentages:
Figure 2: Variation in the Daily Royalty Percentage of Gas Allocated to
MMS:
Figure 3: Frequency of the Correlations of the Measurement Points in
Our Sample:
Abbreviations:
COPAS: Council of Petroleum Accountants Societies:
IG: Inspector General:
Interior: Department of the Interior:
MMBtu: million British thermal units:
MMS: Minerals Management Service:
OGOR: Oil and Gas Operations Report:
PRA: Petroleum Registry of Alberta:
RIK: Royalty-in-Kind:
Treasury: Department of the Treasury:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
August 14, 2009:
The Honorable Jeff Bingaman:
Chairman:
Committee on Energy and Natural Resources:
United States Senate:
The Honorable Ron Wyden:
Chairman:
Subcommittee on Public Lands and Forests:
Committee on Energy and Natural Resources:
United States Senate:
The Honorable Nick J. Rahall, II:
Chairman:
Committee on Natural Resources:
House of Representatives:
The Honorable Darrell Issa:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
In fiscal year 2008, the Department of the Interior's (Interior)
Minerals Management Service (MMS) collected more than $12 billion in
royalties for oil and natural gas developed and produced from federal
lands and waters. These royalties represent one of the country's
largest nontax sources of revenue. Companies that develop and produce
oil and gas resources from federal lands and waters do so under leases
obtained from and administered by agencies of Interior--the Bureau of
Land Management for onshore leases and MMS for offshore leases. MMS
also collects, accounts for, and distributes royalties associated with
oil and gas produced from leased federal lands and waters. MMS collects
royalties either through its royalty-in-value program--whereby
producers pay royalties in cash based on the cash value of the oil and
gas produced and sold--or its royalty-in-kind (RIK) program--whereby
producers pay royalties in oil or gas, and MMS in turn sells the oil or
gas. In fiscal year 2008, MMS estimates it collected gas valued at more
than $2.4 billion and oil valued at nearly $4.2 billion through the RIK
program, which is equal to more than half the royalties collected by
MMS.[Footnote 1] In September 2008, we reported that MMS's oversight of
its RIK natural gas collections was less robust than its oversight of
RIK oil collections and that the agency lacked assurance that it was
collecting the RIK gas royalties it was owed.[Footnote 2]
Given the financial importance of royalty management, MMS has been the
subject of considerable scrutiny by GAO; Interior's Inspector General
(IG); its own internal reviews; and the Royalty Policy Committee, a
group convened in 1997 by the Secretary of the Interior and charged
with advising Interior on managing federal leases and revenues. One
vulnerability identified by these groups is the possibility that MMS
may not receive the total amount of royalties to which it is entitled-
-a situation known as an "imbalance." Interior's IG first noted this
vulnerability in the RIK program in 2002. In June 2007, MMS likewise
found weaknesses in its handling of RIK gas imbalances in its response
to the Office of Management and Budget's Circular A-123, which defines
management's responsibility for internal control in federal agencies.
Based on these findings, MMS implemented an action plan to assist in
the identification and timely resolution of imbalances. Further, the
Royalty Policy Committee's Subcommittee on Royalty Management issued a
report to the full committee in December 2007 that included more than
100 recommendations to strengthen Interior's royalty collections,
including 31 directed at the RIK program. Among these recommendations,
the subcommittee recommended that an RIK subcommittee be formed to
address, among other things, the verification of RIK gas volumes. This
subcommittee, established in April 2008, has since noted RIK gas
imbalances as an issue and has stated that it will be reporting to the
full committee on its findings and recommendations early in the new
administration.
In light of these questions, as well as the potential financial impacts
of RIK gas imbalances, you asked us to determine the extent to which
MMS ensures the accurate and timely identification and collection of
RIK gas imbalances. In conducting our work, we reviewed applicable
statutes and documentation of MMS policies and procedures for
collecting in kind royalties. We also met with officials from MMS, gas
production companies, the North American Energy Standards Board,
[Footnote 3] and pipeline companies, as well as industry experts. To
determine daily imbalances, we analyzed MMS's price and delivery
volumes data, as well as pipeline production statements we received
from MMS's Offshore Energy and Minerals Management division, for a
nongeneralizable sample of 32 gas measurement points. We restricted our
analysis to those measurement points that contained leases with the
same royalty percentage because those were the only points for which we
could obtain sufficient data to perform our analysis. Appendix I
contains a more detailed discussion of our scope and methodology.
We conducted this performance audit between June 2008 and August 2009,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objective.
Background:
MMS collects gas from in kind leases under the authority of the Mineral
Leasing Act of 1920, as amended, and the Outer Continental Shelf Lands
Act of 1953, as amended, and is required to obtain at least fair market
value for the RIK gas it sells.[Footnote 4] Prior to the mid-1990s, in
kind royalties were generally limited to oil sold to small refiners
that did not have an adequate supply of their own. In 1995, MMS began
to study whether there were additional circumstances under which taking
both oil and gas in kind was in the best interest of the federal
government. According to MMS, it can often achieve greater revenues
when it sells gas taken in kind because it is able to negotiate
favorable transportation and processing arrangements. MMS believes in
kind efforts are a means of avoiding lengthy legal disputes between MMS
and industry over the value of the oil and gas produced and is a way to
simplify royalty administration. In addition, MMS concluded that it
would not need to audit RIK sales because the agency would sell the gas
rather than relying on producers to accurately report their own sales
prices, as is done in the royalty-in-value program. The collecting,
reporting, and auditing of cash royalty payments have been challenging
for MMS because of concerns about the accuracy and reliability of
production and pricing data submitted by royalty payors and because
there are about 29,000 leases producing oil and gas, many with several
companies paying monthly royalties. MMS began a series of pilot sales
of royalty oil and gas in 1998 and, based on the results, dramatically
expanded its RIK program until 2007. In 2008 and 2009, the volumes
taken in kind have, and are projected to, decrease as MMS decreases the
number of properties taken in kind, in part because it identified and
removed properties that had lower revenues than a fair market value
benchmark.
MMS is charged with ensuring that RIK oil and gas are not sold for less
than market value and that revenues it receives are at least as great
as the revenues it would have received had it taken the royalties in
cash. To meet this requirement, MMS compares the estimated benefits of
the RIK program with the estimated benefits it would have received if
the royalties had been taken in cash and reports this to Congress
annually. MMS estimated that from fiscal years 2004 through 2007, the
RIK program generated about $150 million more in net value to the
government than MMS would have collected had it received royalties in
cash. Of this $150 million, MMS estimated that (1) $131 million came
from selling RIK oil and gas for more than MMS would have received in
cash royalty payments, (2) $8 million came from interest that accrued
because revenues from RIK sales were received earlier than cash
payments would have been received through the in-value program, and (3)
$11 million came from savings accrued because the RIK program costs
less to administer than the royalty-in-value program.
Through the RIK gas program, companies that produce gas on federal
leases owe MMS a royalty, or a percentage, of the daily gas production.
To ensure that the government obtains the fair value of RIK sales, MMS
must ensure that it receives the percentage of total production volumes
to which it is entitled. The volume of gas a company owes to MMS is
determined by the following equation:
royalty volume = total production volume x royalty percentage:
The royalty percentage for leases taken in kind varies somewhat but is
currently in the range of 12.5 percent to 16.67 percent. Measuring
production and allocating a percentage of that production is relatively
straightforward when one company measures its own output from a federal
lease and reports its own production to MMS. However, multiple
production companies sometimes combine the gas flowing from their
leases at a measurement point in order to share the risks, costs, and
benefits of gas production. These companies often elect from among
themselves a single company--called the operator--to allocate the gas
flowing from each of the companies. Due to the complex nature of the
natural gas market, operators cannot always allocate each production
company or royalty owner its entitled amount of gas, resulting in a
situation known as an "imbalance." Imbalances--both positive and
negative--are a common occurrence for MMS and all companies in the gas
industry because, among other reasons, companies must estimate the
volume of gas they will produce; in turn operators allocate gas based
on those estimates rather than actual production. The operator is also
responsible for monitoring and reporting gas imbalances--the difference
between the volume of gas owed to lease and royalty owners and the
volume actually allocated. Currently, there are about 250 measurement
points and 550 leases in the RIK gas program.
In its guidance to the operator, MMS requests that the operator submit
monthly imbalance statements for each measurement point within 60 days
of the last day of production. Imbalance statements report the total
gas production at a measurement point for the month, the percentage of
that production that the government is entitled to, the volume of gas
delivered on behalf of MMS, and any imbalances. Additionally, MMS
regulations require operators to submit monthly production reports to
MMS by the 15th day of the second month following the month for which
is being reported.[Footnote 5] Production reports contain a large
number of data components, including total production volumes for each
measurement point. MMS compares all of the data components contained in
these two operator-generated reports, as well as third-party online
pipeline statements indicating the amount of gas delivered to RIK gas
purchasers, to confirm the accuracy of data on each of the documents.
MMS considers an imbalance to be "reconciled" if the data components
contained in these reports are consistent. Once MMS reconciles monthly
imbalances, it determines the total cumulative imbalance by adding the
most recent production month's imbalance to that of previous months.
Operators "resolve" imbalances daily by either adjusting future
allocated volumes or paying in cash. MMS has established a policy that
those RIK gas imbalances that reach what the agency deems to be an
"extraordinary" level must be resolved through a payment of cash,
either to MMS if the operator has given the agency less than its
entitled amount of gas or to the operator if MMS has received more than
its entitled amount.[Footnote 6] Additionally, any lease that ceases to
produce gas or is terminated from the RIK program is required to be
settled through a cash payment for any outstanding imbalances.
MMS May Be Losing Revenue Because It Does Not Accurately and Promptly
Identify and Collect on RIK Gas Imbalances:
MMS risks losing millions of dollars in revenue because it does not
accurately and promptly identify and collect on RIK gas imbalances.
Specifically, MMS (1) estimates it is owed a net of $21 million for gas
imbalances, but it lacks the necessary information to determine the
exact amounts; (2) does not audit RIK gas operators' production and
allocation data, and thus cannot verify that it receives the correct
volumes of RIK gas; (3) lacks adequate policies and procedures to
reconcile and resolve imbalances; (4) does not have an information
system that can provide accurate and timely data for reconciling and
resolving imbalances; and (5) has insufficient staff and training to
administer the program efficiently and effectively.
MMS Lacks Information Necessary to Quantify Revenues Due from
Imbalances:
MMS has made progress in reconciling RIK gas imbalances, and its
current estimates value these imbalances at $35 million owed to MMS and
$14 million that MMS owes to operators, resulting in a net of $21
million owed to MMS.[Footnote 7] In 2007 MMS adopted an action plan to
reconcile its backlog of RIK gas imbalances that occurred in 2002
through 2006. To date, MMS has reconciled most of that backlog and has
established the goal of reconciling more recent imbalances within 180
days of production. RIK officials told us that, as of June 2009, the
agency has completely reconciled nearly 99 percent of the imbalances
from 2002 through 2006. In addition, MMS's data indicate it has
completely reconciled almost 99 percent of the imbalances for
production occurring in fiscal year 2007, almost 98 percent for fiscal
year 2008, and about 94 percent for fiscal year 2009.
However, MMS does not know the exact amount it is owed for imbalances
because it lacks at least three types of information. First, it does
not verify all gas production data to ensure it receives its entitled
percentage of RIK gas from all leases taken in kind. Prior to February
2009, MMS reconciled gas imbalances through data from two operator-
generated reports, imbalance statements and monthly production reports,
and online third-party data from pipeline companies on the amount
delivered to purchasers of RIK gas. This verified whether MMS received
the volumes of gas that the operator reported, and whether that volume
was the correct percentage of reported production according to operator-
generated data. However, it did not verify through third-party data
that the operator correctly reported the total production at each lease
in the first place. Therefore, MMS could not use this method to verify
that the gas allocated by operators was equal to MMS's entitled
percentage of gas volumes. Recognizing this, in 2008, we recommended
that MMS bolster its verification process for gas volumes owed to the
government by using third-party production information, such as the
data collected in the Offshore Energy and Minerals Management
division's gas verification system, in addition to the third-party
delivery information it had already been using.[Footnote 8] MMS's gas
imbalance analysts began using the third-party data contained in the
gas verification system in February 2009, but because these data only
include total production at the measurement point rather than for each
lease, analysts cannot use the system to verify that it was allocated
the entitled percentage from each lease taken in kind.
Second, MMS lacks information on how to price gas imbalances 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. Since the RIK program first began,
MMS has updated its guidance letter to operators. Although MMS's most
recent guidance letter states that MMS will charge monthly interest on
imbalances, past guidance letters state that interest will only be
charged if the operator pays its imbalance later than 60 days after the
final month the imbalance occurred. Interior is required by law to
charge interest on late payments and underpayments of royalties.
[Footnote 9] Further, while MMS's current guidance letter to operators
specifies that it will price imbalances according to its own contract
price for the gas during the month the imbalance occurred, the previous
guidance letters did not contain this language. MMS is not actively
trying to collect on the imbalances of those leases that have been
terminated from the program or those leases where production has ceased
because there have been discussions with the Office of the Solicitor
for more than a year about these issues. In a January 2008 memo, MMS
asked the Office of the Solicitor for an opinion on when to charge
interest and whether its current methodology to price imbalances is
consistent with law. In its memo, MMS proposed the following two
pricing methods, in addition to its current method:
1. Calculating the price of the imbalances based on the value
applicable to the month before settling the imbalance in cash and after
crediting any over-allocations existing since the first imbalance
month.
2. Calculating the price using the value when the last imbalance
occurred.
Recently, the Office of the Solicitor asked RIK program officials to
choose the most appropriate pricing and interest methods before issuing
an opinion on those methods. However, those methods have not yet been
presented to the Solicitor, and MMS is currently not making additional
requests for payment of imbalances for leases that have terminated from
the program or those leases where production has ceased.
Finally, MMS could be forgoing revenue because it lacks information on
daily gas imbalances. Section 115 of the Federal Oil and Gas Royalty
Management Act, as amended, provides that a lessee's obligation does
not become "due" until the end of the month following the month in
which the gas is produced.[Footnote 10] In its guidance letter to
operators, MMS requests that deliveries be made on a daily basis equal
to the royalty percentage. Because the statute authorizes MMS to
enforce operator obligations only on a monthly basis, MMS believes it
appropriate to calculate and monitor imbalances owed solely on a
monthly rather than daily basis. However, this leaves open the
possibility that some companies that owe RIK gas could provide less gas
to MMS on days when gas prices are relatively high, and make up the
difference by providing more gas on days when prices are relatively
low. Because purchasers of RIK gas bid on two components of the amount
of gas produced daily--a minimum volume set at a monthly price and an
additional volume, if available, at a fluctuating daily or "spot"
price--MMS would lose revenue because it would miss the opportunity to
sell gas on days when spot prices are higher. Because MMS reconciles
imbalances on a monthly--rather than daily--basis, such an occurrence
could go undetected. MMS guarantees the purchaser of RIK gas the full
minimum volume on a daily basis, except in the case of operational
equipment failure or natural disaster. In contrast, industry officials
we spoke with said that they monitor imbalances daily to ensure their
companies do not lose revenue from daily imbalances.
To investigate the extent to which MMS has been allocated its royalty
percentage of RIK gas on a daily basis, we analyzed daily volumes of
total production and allocation to MMS at a sample of measurement
points. Because measurement points combine the gas from numerous leases
that may have differing royalty percentages, it is not possible to
determine whether MMS received its royalty percentage on a daily basis
using MMS's data. We therefore restricted our analysis to a random
sample of the measurement points that had leases with a common royalty
percentage. These points account for about 85 percent of those in the
RIK gas program. On most days--74 percent of those we examined--the
allocation was within 25 percent of MMS's royalty percentage. However,
on 18 percent of the days, the allocation was more than 25 percent less
than MMS's royalty percentage and on 8 percent of days the allocation
was more than 25 percent greater than MMS's royalty percentage. On
average, MMS received 15.9 percent of total production when its royalty
percentage was 16.67 percent.
In addition, we collected daily data on the differential between the
base and spot price for our sample of measurement points and identified
a small correlation between higher prices and a lower percentage
allocated to MMS. We estimated that the correlation we found would
result in a loss of about $1,400 for each measurement point during a 6-
month time period. Further, the common royalty percentage in the leases
at the measurement points we examined--which accounts for about 85
percent of measurement points in the RIK gas program--makes it easier
to detect this practice. At measurement points with a mix of different
royalty percentages--about 15 percent of measurement points in the RIK
gas program--there are no data available to MMS to detect this, which
could encourage such behavior and result in higher revenue losses for
these measurement points. See appendix II for our complete analysis.
Daily imbalances may also be costing MMS because it does not track
transactions called "keepwhole payments." MMS must make such payments
if RIK gas purchasers do not receive their minimum daily volume of gas.
This is because purchasers typically enter into advance contracts to
resell RIK gas, and if they do not receive their expected volumes they
must buy that volume elsewhere in order to fulfill these contracts.
Daily gas imbalances may be triggering keepwhole payments, but MMS does
not know the extent to which this occurs because it does not adequately
track these payments.
MMS Does Not Audit Operators' Records to Verify RIK Gas Production:
MMS also may be forgoing revenue because it does not audit operator
data to ensure it has received its entitled royalty percentage. MMS has
procedures for reconciling imbalances and uses third-party production
data to verify some of the data it receives from operators. However, it
has not assessed the risk of forgoing audits at those measurement
points where it does not have complete data with which to verify that
it has been allocated its entitled percentage of gas. Although the RIK
guidance letter to operators states MMS's right to audit operator
information related to RIK gas produced and delivered, MMS has not done
so because it has considered its verification of operator-generated
data to be sufficient. MMS has also claimed that it has saved money as
a result of not auditing and that this is a benefit of the RIK program.
However, other royalty owners and members of the oil and gas industry
regularly audit operator-reported data. According to an industry
representative, this entails traveling to an operator's place of
business to scrutinize gas production documentation. According to an
official from the Texas General Land Office--the agency responsible for
administering Texas's RIK program--state audits often find that the
office has not received the gas volumes it is entitled to. Furthermore,
the Council of Petroleum Accountants Societies (COPAS), a professional
organization of oil and gas accountants, recommends that any royalty or
working interest owner initiate an audit if an operator's response is
unsatisfactory or if a discrepancy is considered significant. Industry
representatives told us that oil and gas companies regularly audit to
ensure that they have received the gas they are entitled to.
Representatives from one company noted that they use a risk-based
approach, auditing operators who allocate large volumes of gas because
there is the greatest risk of error in these cases.
Additionally, there are cases when available third-party production
data do not give MMS adequate information to determine whether it has
received its royalty percentage. For example, when RIK leases combined
at one measurement point have different royalty percentages, MMS cannot
determine from the available gas verification system data whether it
has received its entitled royalty percentage. Figure 1 illustrates this
using two hypothetical measurement points. Measurement point one has
three leases flowing into it, all with a royalty percentage of 16.67
percent. Regardless of whether each lease has different production
volumes, MMS can calculate that it is owed 16.67 percent of the total
production of 10,000 million British thermal units (MMBtu). However,
measurement point two has three leases flowing into it, with two leases
owing a royalty percentage of 16.67 percent and one lease owing a
royalty percentage of 12.5 percent. Because each lease will have a
different volume of production and third-party data from the gas
verification system only includes the total production volume at the
measurement point, MMS is unable to verify it was allocated its
entitled percentage of RIK gas without examining the operator's
production records at the lease level.
Figure 1: Two RIK Measurement Points with Common and Mixed Royalty
Percentages:
[Refer to PDF for image: illustration]
MMS can determine if the operator allocated the entitled royalty
percentage:
Measurement point one (10,000 MMBtu):
Production company one (16.67%; 4,000 MMBtu);
Production company two (16.67%; 5,000 MMBtu);
Production company three (operator) (16.67%; 1,000 MMBtu).
MMS can not determine if the operator allocated the entitled royalty
percentage:
Measurement point two (10,000 MMBtu):
Production company one (16.67%; 4,000 MMBtu);
Production company two (16.67%; 5,000 MMBtu);
Production company three (operator) (12.5%; 1,000 MMBtu).
Source: GAO.
[End of figure]
MMS Lacks Adequate Policies and Procedures to Reconcile and Resolve
Imbalances:
MMS does not have adequate policies and procedures to ensure it
reconciles and resolves RIK gas imbalances efficiently. This
shortcoming is apparent in three main areas.
First, MMS policies do not adequately ensure that operators allocate
MMS's percentage of RIK gas. MMS's guidance letter to operators
requests that operators allocate to MMS the royalty percentage of gas
on a daily basis, but MMS believes it does not have the authority to
enforce this guidance. Further, RIK officials said MMS does not know
what method operators use to allocate gas. Indeed, our analysis shows
that, contrary to its guidance letter to operators, on many days MMS is
not receiving its percentage of RIK gas. This could be happening
because the operator's allocation method ranks other leaseholders
before MMS when allocating gas and total production is less than
expected. In this instance, MMS could receive less than its royalty
percentage of gas or no gas at all. According to COPAS, when the output
of gas from multiple leases is combined and measured at a single
measurement point, it is imperative that all parties agree on the
method the operator will use to allocate the gas. We learned from
industry representatives that gas companies rely extensively on such
agreements to ensure they receive the gas volumes they are owed and to
minimize the negative impact of imbalances on company revenues.
Second, MMS does not have adequate policies and procedures to compel
operators to report imbalances promptly and in a standard format.
Although the RIK gas guidance letter to operators requests that the
operator provide an imbalance statement to MMS within 60 days of the
month of production, the guidance is not enforceable and MMS cannot
impose a penalty for failing to submit imbalance statements within that
time period. To allow MMS to take enforcement actions, regulations are
required. These regulations must (1) go through the public notice and
comment process, and thus be transparent to the public, oversight
agencies, and Congress; and (2) carry the full force of the law and
hold the agency implementing the program and program participants
accountable to the terms specified in the regulations. RIK officials
said MMS has operated the RIK program without regulations because of
the onerous nature of establishing regulations and because industry had
been cooperative. More recently, RIK officials told us they have
recognized that it is necessary to implement regulations for the RIK
gas program in order for the agency to receive imbalance statements in
a timely manner, among other reasons, and have begun drafting these
regulations. In contrast, the provincial government of Alberta, Canada,
has regulations in place that state a company can be fined a portion of
its royalty payment if it does not submit required production data on
time. Similarly, COPAS guidelines for the oil and gas industry provide
that operators should submit imbalance statements to appropriate
parties within 45 days of the month of production, unless other timing
requirements have been agreed to. Following this guideline, gas
companies we spoke with said they have policies in place to compel
timely reporting. For example, one industry agreement we obtained
states that if an operator fails to submit imbalance statements for
four consecutive months, the operator could be subject to auditing.
Our review of MMS's spreadsheet for tracking imbalance statements shows
that, from January 2007 through June 2008, at least 35 percent of
expected imbalance statements were received late and about 10 percent
remain missing.[Footnote 11] As a result, MMS analysts spend a great
deal of time repeatedly calling companies to inquire about missing
imbalance statements. RIK officials agreed that this was not an
efficient use of resources.
MMS also does not have a policy to require operators to submit
imbalance statements in a standardized or electronic format. Operators
submit imbalance statements by e-mail, but the statements commonly
arrive in different file formats--even from a single operator.
Additionally, some operators report gas volumes in MMBtu, the
measurement unit used by MMS, while others use different units of
measure, such as thousand cubic feet. In these cases, MMS analysts must
manually convert reported gas volumes to a uniform measurement unit--
increasing the chance of calculation errors--and must spend additional
time combining the information from different reports into one format,
rather than focusing on reconciling imbalances. MMS could require
operators to submit imbalance statements in an MMS-approved standard
format.[Footnote 12] In contrast to MMS, the government of Alberta
requires companies to report gas volumes electronically in a
standardized format and measurement unit, and these reports must pass
data checks. Alberta officials have stated that standardized reporting
has improved the efficiency of its RIK operations.
The third area in which MMS does not have adequate policies and
procedures is in collecting payment for an imbalance from a company
when a cash-out settlement between MMS and the company has not been
reached. When there is an extraordinary imbalance, MMS sends the
operator an initial cash-out memo explaining the amount that MMS
believes the company owes. The operator can either pay for the
imbalance or dispute it by submitting evidence that the imbalance value
is incorrect. To pay for the imbalance, the operator submits to MMS a
royalty payment form, which indicates the company's agreement with
MMS's calculation of the imbalance and classifies the imbalance as an
open receivable, triggering the debt collection process with the
Department of the Treasury (Treasury). The royalty payment form is the
only means of triggering debt collection, but the operator would not
submit this form if it disputes an imbalance. With no other bill or
invoice to begin the debt collection process for disputed imbalances,
MMS's practice has been to allow the exchange of supporting evidence
with the operator regarding the size and value of the imbalance to
continue indefinitely. In one instance, MMS sent an operator a cash-out
memo in December 2006 for an imbalance valued at nearly $900,000 and,
as of February 2009, was still negotiating with the operator. In such
cases, because MMS has not sent a demand letter to a company for
payment, it has not referred a company to Treasury.[Footnote 13] RIK
officials stated that the agency has avoided debt collection for
imbalances because it is an onerous process and because it is waiting
for the Office of the Solicitor to issue an opinion on the pricing and
interest associated with imbalances for leases that have reached the
end of their contract term. If such debts are not collected within 7
years, the statute of limitations renders them uncollectible.[Footnote
14]
In contrast, MMS has debt collection policies and procedures in place
to collect debt from companies that have purchased and received RIK gas
from MMS but have not submitted payment for their purchase. According
to MMS policy, a company purchasing RIK gas receives an invoice, which
triggers the debt collection process. If the company does not pay
within the agreed time frame, MMS issues a demand letter for payment.
If the amount due MMS is still unpaid after 180 days, the issue is
referred to Treasury.
MMS's Information System Does Not Provide Accurate and Timely Data:
MMS's information system does not provide accurate and timely data on
RIK gas imbalances, which reduces the agency's ability to collect on
these imbalances. In 2003, MMS acquired a commercial, off-the-shelf
software product and a custom-built database for the RIK program. The
purpose was to integrate all of the program's information needs in a
single database where it could monitor and track gross gas production,
imbalance statement data, gas deliveries, and monthly and cumulative
gas imbalances. However, the information system is not capable of
providing accurate and timely information on RIK gas imbalances. For
instance, MMS's RIK Deputy Program Manager told us that the system
cannot provide accurate information on the number and amount of
keepwhole payments MMS has made and cannot calculate RIK cash-out
imbalances. Therefore, as of June 2009, MMS was entering data manually
into a spreadsheet and performing calculations based on the manually
entered data. MMS officials further told us that gas imbalance
information systems cannot analyze data from the operator-submitted
imbalance statements, operator-submitted monthly production reports,
and MMS's gas verification system to calculate gas imbalances. As a
consequence, more than half of MMS's gas imbalance work, according to
the RIK gas imbalance manager, is currently done manually. For example,
two employees spend a portion of their time logging information from
operator-submitted imbalance statements onto spreadsheets after which
gas imbalance analysts manually upload imbalance statement data into
MMS's information system. An RIK manager said the manual processing of
RIK gas imbalance data has put a considerable burden on the RIK gas
imbalance staff.
According to GAO's Standards for Internal Control in the Federal
Government, transactions from initiation to completion should be
promptly recorded to maintain their relevance and value to management
in controlling operations and making decisions. Similarly, according to
Interior's Internal Controls Handbook, accurate and timely information
is essential for assuring the safeguarding of assets from waste, loss,
unauthorized use, or misappropriation, as well as to assure compliance
with laws and regulations. In its December 2007 report on mineral
revenue collection,[Footnote 15] MMS's Royalty Policy Committee
recommended the electronic submission of all offshore production
records to improve MMS's compliance and enforcement activities.
According to RIK officials, the committee's recommendation was not
specifically directed at, and therefore did not pertain to, the RIK
program. Yet RIK program managers also told us that they recognized as
early as August 2007 that the system needed improvements. According to
the RIK gas imbalance manager, when MMS alerted the software
manufacturer to these problems, there was a disagreement as to whether
the manufacturer or the support services contractor were responsible.
In July 2008, MMS contracted with the software manufacturer for support
services, but this system is still not meeting MMS's needs.
At the time of our review, MMS had planned to enhance the system but
was also exploring the possibility of acquiring a new information
management system. According to RIK officials, one candidate system was
the Petroleum Registry of Alberta (PRA), which the government of
Alberta uses to manage its RIK program. PRA differs from MMS's current
system in several aspects. PRA was jointly developed by government and
industry, with the government providing about 73 percent of the $35
million budget. According to Alberta officials and the provincial
government Web site, PRA improves compatibility by serving as the
system of record for both government and industry.[Footnote 16] In
addition, companies participating in the Alberta RIK program are
responsible for promptly entering accurate production data
electronically. If a company does not enter accurate production data
into PRA on time, one MMS RIK official told us, PRA will alert Alberta
officials regarding the issue and the company can be fined. This
official added that an automated system such as the PRA would have to
be customized to fit MMS's needs at some unknown cost, but that it
could save RIK gas imbalance analysts' hours of time currently spent e-
mailing and calling companies to submit their operator imbalance
statements. According to MMS officials, they have decided not to pursue
PRA in part because customization could cause issues with future
upgrades and fixes, regulation would be required for MMS to require
online and standardized reporting, and the system would require
significant buy-in from industry. RIK program managers told us that,
although they believe that a better information system would immensely
improve RIK gas imbalance work, MMS does not have a timeline to acquire
a more effective system.
Insufficient Staff and Training Remains a Long-Standing Issue:
The RIK gas imbalance office, according to various MMS reports, has
been operating without sufficient staff and training to efficiently and
effectively carry out its assigned duties. As a result, certain tasks-
-such as gas balancing work--have not received sufficient attention,
leading to the development of a backlog of RIK gas imbalances.
Effective management of an organization's human capital--its employees,
as well as their skills and training--is essential to achieving results
and an important part of a program's internal controls. Human capital
has been a long-standing problem for the RIK gas program. Specifically,
each of the following reports found that RIK human capital needed
improvement.
* A January 2001 MMS report indicated that the RIK organizational
structure would need to evolve to fully support the RIK operational
activity.[Footnote 17] The report also stated that the future RIK
activity would require MMS staff training in handling imbalances, as
well as several other areas.
* A September 2003 report prepared by an MMS contractor noted that, in
order to support a permanent RIK program of significant scale, specific
personnel requirements should be identified and filled for all RIK
personnel.[Footnote 18]
* A May 2004 MMS report noted that enhancements to human resource
capabilities would be necessary in order to meet the objectives of
MMS's RIK business plan.[Footnote 19] Therefore, the report indicated
that specific skill sets and expertise should be acquired or developed
in-house by March 2006.
These human capital deficiencies continue to be a problem for the RIK
gas program. For example, an RIK manager told us that, although
mistakes can occur in gas imbalance calculations, MMS does not have
enough staff to dedicate someone to review this work. However,
beginning in November 2008, MMS began reviewing a sample of this work.
In addition, according to internal MMS e-mails and our discussions with
managers, RIK gas imbalance personnel have received training in oil and
gas revenue accounting but managers noted that personnel need
additional training in seven different courses, especially a course on
industry standards on gas imbalance calculations and a communication
skills course for dealing with external customers. Our review of
employee training records showed, however, that RIK gas imbalance
personnel received training in neither of these two courses and only
about half of all the training identified. According to the MMS RIK gas
imbalance manager, the training employees have received is sufficient
given their workload dealing with gas imbalance improvement actions and
current duties.
According to GAO's Standards for Internal Control in the Federal
Government, operational success is dependent on assigning the right
personnel for the job and providing them with adequate training and
tools. Similarly, according to Interior's Internal Controls Handbook,
in order to eliminate or reduce financial reporting risks, an
organization should have, among other things, sufficient resources to
perform the various job functions and should provide staff with
technical and ethical training.
To MMS's credit, it recognizes that human capital issues remain. MMS is
in the process of taking four additional actions. Specifically:
* In October 2008, MMS reinstituted, after a 15-year absence, the
requirement that each employee have an individual development plan by
the end of November 2008.[Footnote 20] These plans, according to MMS's
RIK training director, were developed by supervisors sitting down with
their employees and informally discussing their training needs.
However, the federal government's Office of Personnel Management's 2001
Training Needs Assessment Handbook suggests that agencies use training
provided to employees in other organizations as a source of assessing
their staff's training needs. MMS officials told us they did not do so
in developing individual development plans.
* In February 2009, MMS hired, after several months of effort, seven
additional RIK imbalance and invoicing personnel, including one gas
imbalance analyst. According to RIK officials, management arrived at
the decision to hire seven additional staff based on an internal
discussion and without a formal analysis. However, in our 2002 primer
on good human capital management practices, we noted that high-
performing organizations should conduct a staffing needs analysis to
determine the appropriate number of employees needed to perform an
organization's work.[Footnote 21] MMS has not conducted such an
analysis.
* As of March 2009, MMS was in the process of entering into a 6-month
contract for an assessment of the organization of RIK invoicing and
imbalance work, procedures, and processes. Included in the tasks to be
performed under this contract is determining whether: (1) staffing
levels are sufficient to meet current and anticipated future workloads
and (2) staffing levels, skill sets, education, and experience are
comparable to industry. As of June 2009, this contracting effort was
still ongoing and the results from that effort were not available to
include in our review.
* Lastly, at our suggestion during the course of our review, MMS is
reviewing the possibility of enrolling some of its employees in
training classes offered by oil and gas companies to their employees
participating in the RIK gas program. In offering this suggestion, we
pointed out that MMS employees could (1) gain first hand knowledge into
how industry does its gas imbalance work, (2) make strategic contact
with industry gas imbalance employee counterparts, and (3) gain some
insight into industry training requirements. With regard to the latter,
whereas COPAS requires its oil and gas accounting members to receive 10
hours of continuing education annually, MMS officials told us that its
RIK gas revenue specialists are not required to meet any annual
education requirements. As of June 2009, MMS had not decided whether to
use this industry training.
Conclusions:
Although Interior has made efforts to improve its management of
royalties, continuing problems with identifying and collecting RIK gas
imbalances have led to forgone revenues and uncertainty about how much
gas the government is owed. While MMS has made recent progress in
establishing policies and procedures for charging interest on
imbalances owed the government, these policies and procedures are
incomplete and are leading to forgone revenues. In particular, the
agency is not actively pursuing collection of past imbalances or
associated interest. Further, daily gas imbalances are common and can
lead to forgone revenue for the government, because they can trigger
keepwhole payments made to buyers of RIK gas or because an operator
could strategically deliver more gas when prices are low and less when
prices are high. MMS requests that these operators allocate MMS its
percentage of royalties on a daily basis, but MMS does not monitor
daily gas imbalances and, does not believe it could enforce such an
allocation under existing authority. In addition, despite the fact that
audits are commonplace in the gas industry, MMS has not employed audits
in the RIK program, and thus cannot ensure that it is receiving its
entitled percentage of gas. MMS also operates without key regulations
that define how operators submit imbalance statements and how operators
are to allocate gas owed the government. The absence of such
regulations has led to a system in which imbalance statements are not
submitted in a standardized format or in a timely fashion and in which
MMS has no authority to require an allocation system that is beneficial
to the government. In addition, MMS is operating without procedures
that define reasonable deadlines for resolving and collecting gas
imbalances, and as a result, some imbalances have remained uncollected
for years. And because MMS lacks an adequate information system that
could receive relevant information electronically and effectively
identify and resolve gas imbalances, MMS staff often must manage data
manually or operate without appropriate internal controls for data
management. Finally, MMS has been operating without sufficient
workforce analysis and planning, and as a result, training for MMS
staff is not clearly aligned with agency needs or benchmarked against
training of their counterparts in gas companies participating in the
RIK program.
Recommendations for Executive Action:
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, we recommend that the Secretary of the Interior direct the
Minerals Management Service to take the following seven actions:
* Complete establishing policies and procedures to ensure outstanding
imbalances are valued appropriately and that the correct amount of
interest is charged.
* Monitor daily gas imbalances to determine whether the allocation
practices of gas operators are resulting in lost revenues to MMS. To
the extent that this is occurring, identify and propose specific
legislative changes that MMS believes are needed to require operators
to deliver MMS's royalty percentage on a daily basis.
* 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 RIK properties.
* Promulgate RIK program regulations that protect the federal
government's interests. At a minimum, regulations 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 methods MMS deems will ensure a fair
return to the government.
* Establish procedures, with reasonable deadlines, for resolving and
collecting all RIK gas imbalances in a timely manner.
* Determine the information system enhancements necessary to
effectively identify and resolve gas imbalances and put into practice
such a system.
* Conduct an RIK staffing and training needs analysis and put into
place a corresponding staffing and training program for MMS staff.
Agency Comments and Our Evaluation:
We provided a draft of this report to Interior for review and comment.
Interior generally agreed with our findings and concurred with four of
our recommendations, partially concurred with two of our
recommendations, and did not concur with one recommendation.
Specifically, Interior concurred with our recommendations to: (1)
complete establishing policies and procedures to ensure outstanding
imbalances are valued appropriately and that the correct amount of
interest is charged; (2) establish procedures, with reasonable
deadlines, for resolving and collecting all RIK gas imbalances in a
timely manner; (3) determine the information system enhancements
necessary to effectively identify and resolve gas imbalances and put
into practice such a system; and (4) conduct an RIK staffing and
training needs analysis and put into place a corresponding staffing and
training program for MMS staff.
Interior partially concurred with our recommendation to audit operators
and imbalance data of a sample of leases taken in kind and, on the
basis of these findings, establish a risk-based auditing program.
Interior stated that it would conduct an analysis of the benefits of
conducting risk-based audits on a sample of leases. While we believe
this is an important first step, we continue to believe it is important
to conduct audits of a sample of leases taken in kind. Although MMS's
verification processes may uncover some discrepancies between their
entitled percentage and the volumes delivered, we have shown that in
some instances MMS's verification processes are not sufficient to
uncover discrepancies. Further, industry and other RIK programs audit
to ensure they receive their entitled royalties.
Interior also partially concurred with our recommendation to promulgate
RIK program regulations that protect the federal government's interest
and, at a minimum, require operators to submit imbalance statements in
a standardized format, within 60 days following the month of
production, and require the use of gas allocation methods MMS deems
will ensure a fair return to the government. Interior stated that the
drafting of regulations addressing the operator's obligation to
deliver, report, and account for production and to resolve or mitigate
production imbalances is well underway, which we commend. MMS stated
that it will evaluate whether it should require operators to submit
imbalance statements in a standardized format. We continue to believe
that requiring operators to submit standardized imbalance statements
would allow MMS's gas imbalance analysts to devote more time to
reconciling imbalances and would reduce the chance of calculation
errors. MMS also stated that it will evaluate whether to require
operators to use gas allocation methods. While we believe this is a
positive first step, we continue to believe that the use of allocation
methods will minimize the negative impact of imbalances on revenues by
ensuring MMS receives the gas volumes it is owed.
Interior did not concur with our recommendation to monitor daily gas
imbalances to determine whether the allocation practices of gas
operators are resulting in lost revenue to MMS. Interior's letter
states that the agency believes the operator's obligation to deliver
MMS's royalty percentage should be the same whether royalties are paid
in kind or in value. However, the in-kind program is different from the
in-value program in that MMS has an obligation to provide RIK gas to
purchasers on a daily basis. Therefore, in order to provide reasonable
assurance that the government is receiving its fair volumes of gas and
in turn meeting its obligations to RIK gas purchasers, receipt of RIK
gas volumes from operators should be monitored on a daily basis. While
we acknowledge in our report that the law authorizes MMS to enforce
operator obligations only on a monthly basis, this leaves open the
possibility that operators may provide less to MMS on days when gas
prices are relatively high, and make up that difference by providing
additional gas when prices are relatively low. Further, we found that
industry monitors imbalances on a daily basis to ensure they do not
lose revenue. For these reasons, we continue to believe that MMS should
begin to monitor imbalances daily and, to the extent that lost revenues
are occurring, propose legislative changes requiring operators to
deliver MMS the royalty percentage on a daily basis.
Interior's full letter commenting on the draft report is reprinted in
appendix III. In addition, Interior made technical comments, which we
have addressed as appropriate.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to interested congressional committees, the Secretary of the Interior,
and other interested parties. The report will be available at no charge
on the GAO Web Site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix IV.
Signed by:
Frank Rusco:
Director, Natural Resources and Environment:
[End of section]
Appendix I: Scope and Methodology:
We were asked to determine the extent to which MMS ensures the accurate
and timely identification and collection of royalty-in-kind (RIK) gas
imbalances. To address our objective, we reviewed various reports by
the Department of the Interior (Interior) and Interior's Minerals
Management Service (MMS) on the history and current status of
imbalances associated with the RIK gas program including: (1) a 2002
internal MMS assessment of RIK gas imbalances; (2) a 2002 report by
Interior's Office of Inspector General, which discussed, in part, MMS's
vulnerability to underreporting of gas receipts due to RIK gas
imbalances;[Footnote 22] (3) MMS's monthly action plan on RIK
imbalances and open receivables, first prepared in August 2007; and (4)
MMS's periodic cumulative imbalance, cash-out, and keepwhole summary
statements.
We also reviewed various reports prepared on the direction and overall
performance of the RIK program, including (1) an examination of a 2001
MMS report which outlined MMS's future plans for the RIK program; (2) a
2003 MMS contractor report that assessed the RIK program; (3) a 2007
report by the Subcommittee on Royalty Management, part of the Royalty
Policy Committee, which reviewed the operations of the RIK program;
[Footnote 23] (4) a 2008 MMS internal review report on RIK processes;
and (5) a 2008 interim report by the Royalty in Kind Subcommittee, also
part of the Royalty Policy Committee, which examined various issues,
including imbalances, associated with the RIK program. We also examined
various reports prepared by other governmental entities--including the
Alberta, Canada government and the Texas state government--regarding
their RIK programs. We further discussed the issue of RIK imbalances
with officials from MMS, gas production companies, gas operators,
industry experts, and pipelines.
To examine MMS's management of RIK gas imbalances, we received a
detailed walk-through of MMS's processes for reconciling RIK gas
imbalances. We reviewed a variety of MMS documentation including (1)
MMS procedures manuals, (2) correspondence between MMS and Interior's
Office of the Solicitor on RIK legal requirements, and (3) MMS's
guidance letters to operators of RIK gas leases. We also reviewed
federal and Interior's internal control and management standards and
policies, including: (1) GAO's Standards for Internal Control in the
Federal Government,[Footnote 24] (2) Interior's Internal Controls
Handbook, (3) MMS's Training Needs Assessment Process, (4) the Office
of Personnel Management's Training Policy and Training Needs Assessment
Handbooks, (5) Office of Management and Budget's Circular A-130 on
management of federal information resources, (6) Office of Management
and Budget's Circular A-123 on management's responsibility for internal
control in federal agencies, and (7) the Information Technology
Resources Board's 1999 lessons-learned report on acquiring commercial-
off-the-shelf software. Further, we reviewed various documents issued
by the Council of Petroleum Accountants Societies such as its 1993
report on oil and gas operator and producer roles and responsibilities
and its 2001 report on producer gas imbalances, and information
generated by the North American Energy Standards Board.[Footnote 25] In
addition to reviewing documentation, we also conducted interviews with
MMS officials; gas production companies; purchasers of MMS's RIK gas;
the North American Energy Standards Board; pipeline companies; and
industry experts. Lastly, we reviewed legislation pertinent to MMS's
management of the RIK gas program and RIK gas imbalances. This included
the Mineral Leasing Act of 1920, as amended; the Outer Continental
Shelf Lands Act of 1953, as amended; and the Debt Collection
Improvement Act of 1996, as amended.
Appendix II contains information on the scope and methodology we used
to analyze the relationship between gas prices and the daily percentage
of gas production allocated to MMS and the effect of this relationship
on federal revenue.
We conducted this performance audit from June 2008 to August 2009, in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Analysis of the Relationship between Price and Percentage
of Gas Production Allocated to MMS and the Effect on Federal Revenue:
To ensure that the government obtains a fair value for the RIK gas it
sells, the Department of the Interior's Minerals Management Service
(MMS) must ensure that it receives the volumes of gas to which it is
entitled. The difference between the RIK gas owed--MMS's entitled
percentage of gas--and the percentage of gas it actually receives is
referred to as an "imbalance." As discussed in the body of this report,
MMS attempts to reconcile gas imbalances monthly.
The nature of gas production causes some daily variation in volume. For
example, companies must estimate the volume of gas they will produce on
any given day and determine allocations based on these estimates. If
actual allocation volumes differ from the estimated volumes, MMS may
receive either an under-delivery of gas or an over-delivery of gas.
Daily imbalances may be resolved through a subsequent day's under-or
over-delivery, resulting in further variation in volume; however, MMS
risks losing revenue if that variation is associated with a variance in
price. Specifically, if operators allocate less than the royalty
percentage of gas to MMS on days when the spot price is high and more
than the royalty percentage of gas on days when the spot price is low,
they could still meet the royalty percentage across the month. However,
if this occurs, MMS may lose revenue because it may miss opportunities
to sell the gas at the higher price, even if no long-term imbalances
accumulate.
This appendix describes our analysis of the relationship between prices
and the percentage of gas allocated to MMS, and how it affects the
revenue that MMS receives. Specifically, it (1) explains, in
mathematical terms, the potential for lost revenue if the operators
allocate less than the royalty percentages of gas when the spot price
is high; (2) describes the data that we used to empirically examine the
daily variation in percentage of gas allocated to MMS; (3) describes
the methodology and results of our analysis of daily variation in
percentages of gas allocated to MMS; (4) describes the methodology and
results of our analysis of the relationship between the daily variation
in percentage of gas allocated to MMS and gas prices; and (5) describes
the methodology and results of our analysis of the potential amounts of
lost revenue.
Potential for Lost Revenue:
To explain, in mathematical terms, the potential for lost revenue if
operators allocate less than the royalty percentages of gas when the
spot price is high, we examined how this relationship affects the
expected, or average, return for an MMS lease.
The royalties that MMS are owed can be expressed as follows:
royalty volume = total production volume x royalty percentage:
On a daily basis, the royalty volume can be expressed by the product of
the daily gas production and the daily volume of gas allocated to MMS:
(1) RVt = Volt x At:
where RVt is the royalty volume at time t, Volt is the volume of gas
allocated to MMS at time t, and At is the royalty percentage at time t.
In equation (1), and the equations that follow, t stands for any given
day. The monetary value of the gas allocated to MMS can then be
expressed by multiplying the royalty volume and the gas spot price at
the time of delivery.
(2) Revt = Pt x RVt:
Substituting equation (1) into equation (2) results in the following
formula:
(3) Revt = Pt x Volt x At:
where the revenue MMS receives is the product of the price, volume, and
royalty percentage at that time.
To determine how different levels of covariance affect the average
revenue, we determined the expectation, as shown in equation (4).
(4) E(Revt)= E(Pt x Volt x At):
Because the focus of our analysis was the effect of daily variances in
gas allocated to MMS that was associated with variances in the spot
price, we assumed that the volume at the time of delivery is
independent of the product of price and the royalty percentage, and
that the volume is constant over the period.
(5) E(Revt) = E(Volt) x (E(Pt)E(At)+Cov(Pt,At)):
If higher prices tend to correspond with higher percentages of gas
allocated to MMS, then the covariance term Cov(Pt,At) will be positive,
and the expected revenue will be higher. However, if high prices
correspond with lower percentage of gas allocated to MMS, then the
covariance term will be negative, and the expected revenue will fall.
The covariance describes both the relationship between the variables
and the absolute variability of each. A substitute for the covariance
would be to introduce the correlation coefficient. The correlation
coefficient captures only the relationship between the variables and
takes a value between negative 1 and 1. A correlation coefficient of
zero would indicate that there was no relationship between the
variables. A correlation coefficient close to 1 would indicate a strong
positive relationship, while a correlation coefficient close to
negative 1 would indicate a strong negative relationship. Using the
correlation coefficient, an alternate expression for the equation (5)
would be the following:[Footnote 26]
(6) E(Revt) = E(Volt) x (E(Pt)E(At)+Corr(Pt,At) x SD(Pt) x SD(At)):
From equation (6), it is apparent that, all things being equal, the
more the price and percentage of gas allocated to MMS are negatively
correlated, the greater the loss in revenue. However, the size of the
effect is scaled by the absolute variability in each, SD(Pt) and
SD(At).[Footnote 27]
Data We Used for Our Analyses:
To investigate the extent to which MMS receives its daily percentage of
RIK gas, consistent with equation (6) above, we analyzed daily volumes
of total production and allocation to MMS at a sample of measurement
points. Specifically, we collected data from three sources:
* Price data: We collected price data from MMS's Entegrate database,
which a contractor updates daily with prices from published sources.
The daily price of the natural gas the operator delivers is made up of
two components--the base price and the spot price. The base price is
the price applied to the baseload of gas, or the amount of natural gas
the operator allocates to MMS over a given period of time at a steady
rate unless an adverse or "force majeure" action occurs. The base price
remains the same throughout the month and is set at the beginning of
every month based on the first-of-month price published in Inside FERC,
a monthly gas market report.[Footnote 28] The spot price is the price
applied to the swing volume of gas, or the supply of natural gas that
is last to be taken and first to be curtailed and absorbs production
variations. The spot price varies daily.
* Delivery data: We collected delivery data from MMS's Entegrate
database. MMS downloads final delivery volumes from the electronic
bulletin boards for regulated pipelines, or it receives delivery
volumes from either operator or purchaser pipeline statements, or both.
MMS enters the actual volumes into the Entegrate database monthly.
* Volume data: We collected volume data from the Offshore Energy and
Minerals Management division of MMS, which collects hard copy pipeline
statements. MMS provided copies of the pipeline statements, which a
contractor keypunched. We checked the keypunched data, and found no
errors. We then matched the daily production volume data to the daily
price and delivery data for use in our analyses.
Because pipeline statements do not report production volume at the
lease level, we could not analyze allocation percentages at the lease
level. For all three sources, we collected data at the level of the
measurement point--the metered point at which gas is measured. A
measurement point may combine the gas flowing from numerous leases.
In addition, we excluded from our sample measurement points whose
leases had differing royalty percentages. For cases in which the
measurement points had differing royalty percentages, it would not have
been possible to calculate whether MMS was allocated its share of gas.
For example, in figure 1, measurement point one has three leases
flowing into it, all with the same royalty percentage of 16.67 percent.
Therefore, regardless of whether each lease has different production
volumes, MMS can calculate that it is owed 16.67 percent of the total
production of 10,000 MMBtu. However, measurement point two has three
leases flowing into it, with two leases owing a royalty percentage of
16.67 percent and one lease owing a royalty percentage of 12.5 percent.
Because each lease will likely have a different volume of production
and MMS will only have the total production volume available from third
party data, it is unable to determine its entitled volume of RIK gas.
Because of this limitation, we restricted our analysis to a random
sample of those measurement points that had leases with a common
royalty percentage. Then, for each of the randomly selected 32
measurement points, we obtained 6 months of daily observations--October
2007 through March 2008--resulting in 5,856 daily observations. MMS
officials suggested that we use this 6 month time period in order to
avoid hurricane season, which typically occurs during the summer
months, but gas prices during these months may differ from those
included in our time period. However, 677 days had no production, and
data for 366 days was missing values for allocation volumes to MMS.
Because we could not produce a percentage of gas allocated to MMS in
those cases, our ultimate sample contained 4,829 daily observations
with values for volume of gas allocated to MMS and the differential
between spot and base price and 31 measurement points.
Methodology and Results of Our Analysis of Daily Variation in
Percentages of Gas Allocated to MMS:
To determine the extent to which the daily percentage of gas allocated
to MMS deviated from its royalty percentage of gas for the measurement
points in our sample, we calculated the daily percentage of gas
allocated to MMS by dividing the volume of gas allocated to MMS from
that measurement point on a given day by the volume of gas produced at
the measurement point. We then counted the days that the percentage of
gas allocated to MMS differed from the prescribed amount of 16.67
percent by a substantial amount, which we defined as more than 25
percentage points.
Our analysis of daily data found variation in the percentage of gas
allocated to MMS; however, on the majority of days, the allocation did
not substantially differ from MMS's royalty allocation, as shown in
Figure 2. Specifically, 3,573 of the 4,829 days--about 74 percent--had
an allocation that was between 75 and 125 percent of the entitled
royalty percentage of one-sixth or 0.167. But on many days, the royalty
percentage of gas allocated to MMS was much less or much greater. For
example, on 883 days--about 18 percent of the total, shown as the sum
of the bottom three bars on figure 2--the royalty percentage of gas
allocated to MMS was less than 75 percent of the prescribed amount. On
the other hand, on 373 days--about 8 percent of the total, shown in the
top two bars--more than 125 percent of the royalty percentage of gas
allocated to MMS. On average MMS received 15.9 percent.
Figure 2: Variation in the Daily Royalty Percentage of Gas Allocated to
MMS:
[Refer to PDF for image: horizontal bar graph]
Allocation percentage: More than 150 percent of entitlement;
Number of days: 211.
Allocation percentage: Between 125 and 150 percent of entitlement;
Number of days: 162.
Allocation percentage: Between 75 and 125 percent of entitlement;
Number of days: 3,573.
Allocation percentage: Between 50 and 75 percent of entitlement;
Number of days: 242.
Allocation percentage: Between 0 and 50 percent of entitlement;
Number of days: 548.
Allocation percentage: Zero royalty allocated;
Number of days: 93.
Source: GAO analysis of MMS data.
[End of figure]
Methodology and Results of Our Analysis of the Relationship between the
Daily Variation in the Percentage of Gas Allocated to MMS and Gas
Prices:
While there may be inherent daily variation in the percentage of gas
allocated to MMS, the loss of revenue is determined by the extent to
which that variation is associated with price. To analyze whether the
percentage of gas allocated to MMS varies with price, we used the daily
data on the differential between the base and spot price for our sample
of measurement points and measured the correlation between these two
variables for each measurement point. We found a small negative average
and median correlation between higher prices and a lower percentage of
gas allocated to MMS. Specifically, the average correlation was
negative 0.014, while the median was negative 0.038.
Although the average was slightly negative, we found that correlations
had a wide range. Figure 3 presents the frequency of the correlations
of the differential between spot price and base price and percentage of
gas allocated to MMS for the 31 measurement points in our sample. The
maximum, or the most positive, correlation in our sample was 0.645. The
minimum, or most negative, was negative 0.560. As figure 3 shows, the
vast majority of measurement points had a correlation between negative
0.25 and 0.25.[Footnote 29]
Figure 3: Frequency of the Correlations of the Measurement Points in
Our Sample:
[Refer to PDF for image: horizontal bar graph]
Correlation: Between negative 0.75 and negative 0.50;
Number of measurement points: 1.
Correlation: Between negative 0.50 and negative 0.25;
Number of measurement points: 1.
Correlation: Between negative 0.25 and 0;
Number of measurement points: 17.
Correlation: Between 0 and 0.25;
Number of measurement points: 9.
Correlation: Between 0.25 and 0.50;
Number of measurement points: 1.
Correlation: Between 0.50 and 0.75;
Number of measurement points: 2.
Source: GAO analysis of MMS data.
[End of figure]
Methodology and Results of Our Analysis of Potential Amount of Lost
Revenue:
The potential amount of lost revenue depends on the size and
variability of the percentage of gas allocated to MMS, gas produced,
and the spot-minus-base differential. To estimate the revenue loss that
would be associated with a certain correlation, we used an hypothetical
measurement point that had the same average characteristics as the ones
in our sample[Footnote 30]. We then generated data that had the same
average mean and standard deviation as our hypothetical example, but
different correlations between the variables. We computed the average
revenue for that hypothetical measurement point during a 6-month time
period. We used a wide range of correlations, including the median
value found in the above example. Finally, we compared the revenue to a
baseline of zero correlation.
We estimate that the median correlation we found would result in a
revenue loss of about $1,400 for each measurement point during a 6-
month time period, as shown in table 1. Each row of the table is the
result of one million simulations of data with the given correlation
and the mean and average standard deviation of the measurement points
in our sample. However, the common royalty percentage in the leases at
the measurement points we sampled from--which accounts for about 85
percent of measurement points in the RIK gas program--would make it
easier to detect the under-delivering when prices were high. It follows
that this may introduce a bias into our distribution of correlations.
Specifically operators at those measurement points may be less likely
to link gas allocations to price because they fear detection, therefore
we would be less likely to find negative correlations. At measurement
points with a mix of different royalty percentages--about 15 percent of
measurement points in the RIK gas program--the potential for this
practice may increase, and could result in more negative correlations.
As table 1 shows, a more negative correlation would result in higher
revenue losses for these measurement points. For example, a correlation
of negative 0.5 would result in a loss of about $21,000 during a 6-
month time period for that measurement point.
Table 1: Results of Correlation Analysis:
Correlation between (spot - base) and percentage of gas allocated to
MMS: -0.90;
Estimated revenue during 6-month time period: $4,564;
Difference in revenue with zero correlation: -$36,912.
Correlation between (spot - base) and percentage of gas allocated to
MMS: -0.50;
Estimated revenue during 6-month time period: $21,066;
Difference in revenue with zero correlation: -$20,441.
Correlation between (spot - base) and percentage of gas allocated to
MMS: -0.10;
Estimated revenue during 6-month time period: $37,557;
Difference in revenue with zero correlation: -$3,973.
Correlation between (spot - base) and percentage of gas allocated to
MMS: -0.04; [This row is shaded]
Estimated revenue during 6-month time period: $40,154;
Difference in revenue with zero correlation: -$1,379.
Correlation between (spot - base) and percentage of gas allocated to
MMS: 0;
Estimated revenue during 6-month time period: $41,509;
Difference in revenue with zero correlation: -$15.
Correlation between (spot - base) and percentage of gas allocated to
MMS: 0.10;
Estimated revenue during 6-month time period: $45,669;
Difference in revenue with zero correlation: $4,139.
Correlation between (spot - base) and percentage of gas allocated to
MMS: 0.50;
Estimated revenue during 6-month time period: $62,114;
Difference in revenue with zero correlation: $20,607.
Correlation between (spot - base) and percentage of gas allocated to
MMS: 0.90;
Estimated revenue during 6-month time period: $78,553;
Difference in revenue with zero correlation: $37,077.
Source: GAO analysis.
Note: The difference in revenue is computed by subtracting the revenue
under the correlation from the average differential between the spot
and base prices, the average production volume, and the assumption that
the percentage of gas allocated to MMS is 0.167. The shaded row
indicates the rounded median correlation of negative 0.038 that we
found.
[End of table]
[End of section]
Appendix III: Comments from the Department of the Interior:
United States Department of the Interior:
Office of the Secretary:
Washington, DC 20240:
July 20, 2009:
Mr. Frank Rusco:
Director, Natural Resources and Environment:
Government Accountability Office:
441 G Street. NW:
Washington, D.C. 20548:
Dear Mr. Rusco:
Thank you for the opportunity to review and comment on the Government
Accountability Office (GAO) draft report entitled, 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).
We generally agree with your findings and fully concur with four of
your seven recommendations. Regarding the other three recommendations,
we partially concur with two and do not concur with one. Responses to
each recommendation are provided in the Enclosure. In addition, for
your consideration, we have provided technical comments on the draft
report via separate electronic transmission.
As noted in your draft report, the Minerals Management Service (MMS)
has completed or has several efforts underway to improve gas imbalance
processes and the knowledge base of its employees. The MMS identified
issues related to royalty-in-kind (RIK) imbalances as part of a Fiscal
Year 2007 annual review of internal controls performed in compliance
with Office of Management and Budget Circular A-123, Management's
Responsibility for Internal Control. In response, in June 2007 MMS
issued a comprehensive 27-point action plan to address RIK imbalances
and open receivables. The MMS has made substantial progress in
implementing that action plan. Accomplishments include 1) increasing
staffing levels within the RIK accounting group, 2) issuing notices to
companies having past imbalances in excess of $20 million, 3) hiring a
third-party contractor to evaluate the RIK accounting processes and
procedures and staffing skill sets and levels, 4) ensuring that
accounting personnel receive specific training in oil and gas
accounting, 5) implementing process improvements, and 6) initiating
system improvements to the RIK imbalance reconciliation process.
As a general matter, it is important to note that production volume
imbalances can be either positive or negative depending on whether the
operator over-delivered or under-delivered production. While GAO
acknowledges this point in certain sections of the draft report, the
title and executive summary imply that past imbalances always result in
forgone revenues, when in fact imbalances can result in the Federal
Government owing the operator money plus interest. Further, in cases
where the operator under delivers production, the Federal Government
does not forgo the revenues associated with the imbalance because MM.
pursues any additional revenues owed plus interest when the imbalance
exceeds certain thresholds, the RIK contract ends, or the property
ceases production.
We appreciate GAO's insights and recommendations to improve the RIK
Program. If you have any questions, please contact Andrea Nygren, MM.
Audit Liaison Officer, at (202) 208-4343.
Sincerely,
Signed by:
Ned Farquhar:
Acting Assistant Secretary:
Land and Minerals Management:
Enclosure:
[End of letter]
Enclosure:
Response to Government Accountability Office Draft Report entitled,
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).
Recommendation 1: Complete establishing policies and procedures to
ensure outstanding imbalances are valued appropriately and than the
correct amount of interest is charged.
Response: Concur. The Minerals Management Service (MMS) established its
first written procedures for reconciling royalty-in-kind (RIK) oil and
gas operator imbalances in 2005 and revised and enhanced those
procedures in July 2007 to include additional internal controls,
thresholds, cash out correspondence, and cash out calculation
worksheets. More recently, MMS developed a policy to value imbalances
and to calculate interest on a monthly basis and is seeking formal
concurrence from the Office of the Solicitor as to the legal
sufficiency of such a policy.
Recommendation 2: Monitor daily gas imbalances to determine whether the
allocation practices of gas operators ore resulting in lost revenues to
MMS. To the extent that this is occurring, identify and propose
specific legislative changes that MMS believes are needed to require
operators to deliver MMS's royalty percentage on a daily basis.
Response: Do not concur. As a practical matter, natural gas is
produced, delivered, and transported on a continuous basis. Current
statutes already allow MMS to require operators to deliver production
as it occurs.
The MMS believes that the operators obligation to deliver MMS's royalty
percentage should be the same whether royalties are paid in kind or in
value. Further, we believe RIK imbalances should be calculated on a
monthly basis just as they are for imbalances associated with royalties
paid in value. Under the Royalty Fairness and Simplification Act
(RFSA), royalty obligations become due "for any given production month
...on the last day of the calendar month following the month in which
oil or gas is produced. Id § I724(c)(2). It is not disputed that RIK is
a royalty obligation. The RFSA states that an 'obligation' includes
"any duty of a lessee... to deliver oil or gas royalty in kind.' 30
U.S.C. § 1702(25,)(B). We believe that Congress intended that a royalty
obligation (paid in kind or in value) for a particular month becomes
enforceable on the last day of the calendar month following the month
of production. Changing the royalty obligation to a daily obligation is
impractical and would be extremely costly and administratively
burdensome to the Federal Government and to Federal oil and gas lease
operators.
Recommendation 3: 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 RIK properties.
Response: Partially concur. The MMS currently verifies the accuracy of
operator-reported data by systematically comparing the information
reported by the operator to third-party source documentation, including
run tickets for oil and gas volumes statements for natural gas. While
MMS believes this process is sufficient to ensure the accuracy of
operator-reported data, it will conduct an analysis of the benefits of
conducting risk based audits on a sample of leases.
Recommendation 4: Promulgate RIK program regulations that protect the
federal government's interests. At a minimum, regulations 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 methods MMS deems will
ensure a fair return to the government.
Response: Partially Concur. As a result of actions taken in response to
a recommendation in the December 2007 final report of the Royalty
Policy Committee, Subcommittee on Royalty Management, MMS is well
underway in drafting regulations that address among other things the
operator's obligation to deliver, report, and account for RIK
production and to resolve or mitigate production imbalances. During the
process of promulgating RIK regulations, MMS will evaluate 1) whether
we should require operators to submit imbalance statements in a
standardized format and 2) the use of gas allocation methods.
Recommendation 5: Establish procedures, with reasonable deadlines, for
resolving and collecting all RIK gas imbalances in a timely manner.
Response: Concur. The MMS established its first written procedures for
reconciling RIK oil and gas operator imbalances in 2005 and revised and
enhanced those procedures in July 2007 to include additional internal
controls, thresholds, cash out correspondence, and cash out calculation
worksheets. Due primarily to the significant growth in the RIK program
from 2005 to 2007, MMS was unable to resolve RIK imbalances in a timely
manner. We believe that actions MMS has taken since 2007 (including
reducing the growth in the RIP program) coupled with modifications to
its existing procedures will allow MMS to systematically resolve gas
imbalances in a timely manner in the future.
Recommendation 6: Determine the information system enhancements
necessary to effectively identify and resolve gas imbalances and put
into practice such a system.
Response: Concur. The MMS's June 2007 Action Plan for resolving RIK
imbalances actually includes four actions related to information system
enhancements to support the resolution of gas imbalances. Three of
those actions are complete. The enhancement to MMS's RIK Property
Imbalance Module has been delayed pending a necessary upgrade to the
RIK invoicing system. We anticipate the upgrade and associated changes
to be completed in September 2009 at which time MMS will proceed with
the enhancements necessary to effectively identify and resolve gas
imbalances.
Recommendation 7: Conduct an RIK staffing and training needs analysis
and put into place a corresponding staffing and training program for
MMS staff.
Response: Concur. The MMS has completed or has several efforts underway
to analyze and improve the training needs of each employee. As a
result, MMS has identified the need for and has increased staffing
levels within the accounting group, hired a third-party contractor to
evaluate RIK's accounting processes and procedures, including staffing
skill sets and levels, and is ensuring that accounting personnel
receive specific training in oil and gas accounting.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Frank Rusco, (202) 512-3841 or ruscof@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, key contributors to this
report included Karla Springer, Assistant Director; Robert Baney;
Benjamin Bolitzer; Melinda Cordero; Cindy Gilbert; Alison O'Neill; Dae
Park; Justin Reed; Holly Sasso; Ben Shouse; and Barbara Timmerman.
[End of section]
Footnotes:
[1] Included in the $4.2 billion in oil collected was $1.6 billion
transferred from leases taken in kind to the Strategic Petroleum
Reserve.
[2] GAO, Oil and Gas Royalties: MMS's Oversight of Its Royalty-in-Kind
Program Can Be Improved through Additional Use of Production
Verification Data and Enhanced Reporting of Financial Benefits and
Costs, [hyperlink, http://www.gao.gov/products/GAO-08-942R]
(Washington, D.C.: Sept. 26, 2008).
[3] The North American Energy Standards Board serves as an industry
forum for the development and promotion of standards that will lead to
a seamless marketplace for wholesale and retail natural gas and
electricity, as recognized by its customers, business community,
participants, and regulatory entities.
[4] Energy Policy Act of 2005, Pub. L. No. 109-58, § 342.
[5] 30 CFR 210.103. Production reports refer to form MMS-4054, also
referred to as the Oil and Gas Operations Report (OGOR). The OGOR is an
operator-submitted form that identifies all oil and gas lease
production and dispositions. The form is used for all production
reporting for offshore Outer Continental Shelf and onshore federal and
Indian lands.
[6] We are not reporting the amount of MMS's extraordinary threshold
because the agency believes this will compromise its efforts to collect
additional revenues associated with imbalances in a timely manner.
Further, MMS determines when imbalances have reached this threshold by
applying a fixed rate of $5 per million British thermal units to volume
imbalances. MMS officials said they will re-evaluate the fixed rate and
the "extraordinary" level in the future.
[7] This does not include any interest associated with the value of
uncollected imbalances.
[8] [hyperlink, http://www.gao.gov/products/GAO-08-942R].
[9] 30 U.S.C. § 1721(a).
[10] 30 U.S.C. § 1724(c)(2).
[11] We chose to examine only information up to June 2008 to allow some
lag time for the revisions companies are permitted to make to
previously submitted imbalance statements.
[12] Under the Paperwork Reduction Act, agencies may not conduct or
sponsor the collection of information unless approved by the Office of
Management and Budget. The Office of Management and Budget is required
to determine that the agency's collection of information is necessary
for the proper performance of the functions of the agency, including
whether the information will have practical utility. 44 U.S.C. § 3508.
[13] Outstanding debts are referred to Treasury as required by the Debt
Collection Improvement Act of 1996, Pub. L. No. 104-134 (1996).
[14] 30 U.S.C. § 1724(b).
[15] Royalty Policy Committee, Subcommittee on Royalty Management,
Mineral Revenue Collection from Federal and Indian Lands and the Outer
Continental Shelf (Dec. 17, 2007).
[16] PRA was developed based upon the recommendations of a task force
composed of government and industry representatives including,
individuals from Amoco Canada Petroleum Ltd., Shell Canada Limited, and
Gulf Canada Resources Ltd.
[17] Department of the Interior, Minerals Management Service,
Implementing Royalty in Kind Business Processes and Support Systems:
Road Map to the Future (Washington, D.C., January 2001).
[18] Lukens Energy Group, Assessment of the Federal Royalty-in-Kind
("RIK") Program and Development of RIK Business Plan (September 2003).
[19] Department of the Interior, Minerals Management Service, Five Year
Royalty In Kind Business Plan (Washington, D.C., May 2004).
[20] An individual development plan is a tool used by an employee and
supervisor to forecast, identify, and schedule individual training and
development opportunities to meet mission, organizational, and
individual requirements.
[21] GAO, A Model of Strategic Human Capital Management, [hyperlink,
http://www.gao.gov/products/GAO-02-373SP] (Washington, D.C.: Mar. 15,
2002).
[22] Department of the Interior, Office of the Inspector General.
Evaluation of Vulnerabilities to Underreporting: Royalty-in-Value
versus Royalty-in-Kind, 2002-I-0044 (Washington, D.C., September 2002).
[23] The Subcommittee on Royalty Management. Report to the Royalty
Policy Committee: Mineral Revenue Collection from Federal and Indian
Lands and the Outer Continental Shelf, (Washington, D.C., Dec. 17,
2007).
[24] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[25] The Council of Petroleum Accountants Societies (COPAS) is a
professional organization comprised of oil and gas industry
accountants. COPAS committees produce accounting guidelines,
interpretations, best practices, and training and reference
publications used by the energy industry. The North American Energy
Standards Board serves as an industry forum for the development and
promotion of wholesale and retail natural gas and electricity
standards.
[26] Noting that corr(X,Y) = cov(X,Y)/SD(X)SD(Y).
[27] An analogous argument could be made with respect to swings in
percentage of gas allocated to MMS with respect to volume: E(Revt) =
E(Pt) x (E(Vt)E(At)+ Corr(Vt,At) x SD(Vt) x SD(At)). Therefore, if high
volumes correspond to lower royalty percentages, then the covariance
term will be negative and the expected revenue will fall.
[28] Inside FERC is a gas market report that is published by Platts, a
division of The McGraw-Hill Companies, which is a leading global
provider of energy and commodities information.
[29] In its technical comments, MMS agreed that an average correlation
of negative 0.014 and a median correlation of negative 0.038 indicate a
"small" relationship between higher prices and lower percentages of gas
allocated to MMS. However, it is important to note that we found a wide
range of variability in the correlations of our sample.
[30] The average measurement point in our sample had an average (spot -
base) differential of 0.235, with an average standard deviation of
0.522. Although it had an average of 0.170 allocation percentage, we
applied an average of 0.167, with an average standard deviation of
0.074. We assumed an average of 0.167 because that is the entitled
royalty percentage--so no long term imbalances in volume of gas would
develop. It had an average of 5,826 decatherms of natural gas produced,
with an average standard deviation of 1,527. We assumed no correlation
between volume and price or allocation percentage.
[End of section]
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E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548: