U.S. Department of the Interior

Minerals Management Service

Performance and Accountability 

Report FY 2006
FY 2006 Annual Report Page  

MMS

Securing Ocean Energy &

Economic Value for America
FY 2006 Annual Report Page 

Ship in Ice Visit our web site at www.mms.gov
FY 2006 Annual Report Page 

TABLE OF CONTENTS

Message from the Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . .8

Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Principal Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . .66

Required Supplementary Information . . . . . . . . . . . . . . . . . . . . 100

Required Supplementary

Stewardship Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108

The photographs in this report were furnished by many individuals. All photographs are proprietary and prior permission 

from the Minerals Management Service is required for any use or reproduction of the photographs.

Page 
FY 2006 Annual Report Page 

Message from the Director 

It is my pleasure to provide the Fiscal Year (FY) 2006 Management Discussion and Analysis and Annual Financial 

Report of the Minerals Management Service (MMS).1 The financial and performance data it presents are complete and 

reliable as outlined in Office of Management and Budget guidance. This report also presents the status of the bureau’s 

compliance with certain legal and regulatory requirements. The annual assurance statement required by the Federal 

Managers’ Financial Integrity Act (FMFIA) concludes that MMS can provide reasonable assurance that its systems of 

management, accounting, and administrative controls, taken as a whole, meet the objectives specified in Section 2 of the 

FMFIA. These objectives ensure that: 

(1) Programs achieve their intended results; 

(2) Resources are used consistent with Agency mission; 

(3) Programs and resources are protected from waste, fraud, and mismanagement; 

(4) Laws and regulations are followed; and 

(5) Reliable and timely information is obtained, maintained, reported and used for decisionmaking. 

The MMS prepares annual financial statements to help fulfill its responsibility to be publicly accountable, and to 

manage its programs efficiently and effectively. The aforementioned FMFIA objectives, which are addressed within the 

Discussion and Analysis of the Financial Statements section, document MMS’s efforts to fulfill these responsibilities. 

Additionally, to provide greater assurance on the integrity of financial operations and the accuracy of financial data, MMS 

undergoes annual financial statement audits. The MMS obtained an unqualified opinion on its financial statements in FY 

2006. Additional information regarding MMS’s financial statements is located within the Discussion and Analysis of the 

Financial Statements section of this document.

For nearly 25 years, MMS has been a leader in asset management for the Federal Government. Our mission includes 

managing the energy and mineral resources on the Outer Continental Shelf (OCS), as well as Federal and Indian mineral 

revenues, to enhance both public and trust benefits, promote responsible use, and realize fair value. In pursuing this 

mission, MMS also supports the broader goals of the Department of the Interior (DOI or the Department), particularly:

• Resource Use for managing resources to enhance public benefit, promoting responsible use, and ensuring optimal 

value in energy and non-energy areas; and

• Serving Communities by fulfilling Indian trust responsibilities. 

The MMS plays a key role in America’s energy supply by managing the mineral resources on 1.76 billion acres of the OCS. 

The approximately 43 million leased OCS acres generally account for about 20 percent of America’s domestic natural gas 

production and approximately 30 percent of America’s domestic oil production. The MMS’s oversight and regulatory 

frameworks ensure production and drilling are done in an environmentally responsible manner, and done safely. The 

MMS also ensures the country receives fair value for its mineral resources and collects, accounts for, substantiates, and 

 1 Please see Appendix A for a list of MMS acronyms.
FY 2006 Annual Report Page  

on average disburses more than $8 billion annually. Revenue collected from Federal and Indian gas and oil production 

is distributed to recipients such as the U.S. Treasury, states, special purpose trust funds such as the Land and Water 

Conservation Fund, and the Office of the Special Trustee for American Indians (OST), for disbursement to tribes ‎and 

individual Indian mineral owners.

The MMS continues to help America meet its energy needs as we fulfill our responsibilities under the Energy Policy Act 

of 2005 (EPAct), signed by President Bush on August 8, 2005. The MMS, in consultation with other Federal agencies, 

states and affected parties, is implementing provisions that authorize MMS to permit and manage alternative energy 

projects on the OCS and to adopt regulatory measures that will increase energy production from traditional OCS oil and 

gas operations. We will strive to protect the environment, protect the lives and property of industry workers and our 

communities, and bring new sources of energy to our Nation while ensuring fair value for America’s renewable resources 

as we work to achieve the Act’s goals.

The MMS is committed to serving our country in the best, most efficient manner possible. As a small Bureau with a vast 

impact, we never stop looking for the most efficient means to ensure that the Nation receives the best value for its precious 

resources now and in the future.

R. M. “Johnnie” Burton

Minerals Management Service Director

October 6, 2006
FY 2006 Annual Report Page  

Operations in Ice
FY 2006 Annual Report Page  

MISSION AND ORGANIZATION 

MMS Mission Statement: 

Manage the ocean energy and 

mineral resources on the Outer 

Continental Shelf and Federal 

and Indian mineral revenues to 

enhance public and trust benefit, 

promote responsible use, and 

realize fair value.

The MMS, a Federal Bureau within DOI, manages the Nation’s natural gas, oil, and 

other energy and mineral resources on the OCS. The Bureau also collects, accounts 

for, and disburses, on average, more than $8 billion per year in revenues from 

Federal offshore mineral leases and from onshore mineral leases on Federal and 

Indian lands. The MMS’s activities provide major economic and energy benefits to 

the American public, states, and the American Indian community.

The MMS has approximately 1,700 employees across the United States. The MMS 

Headquarters is located in Washington, D.C., with offices in Herndon, Virginia; 

New Orleans, Louisiana; Houma, Louisiana; Lafayette, Louisiana; Lake Charles, 

Louisiana; Camarillo, California; Anchorage, Alaska; Lakewood, Colorado; Clute, Houston, and Dallas, Texas; Tulsa and 

Oklahoma City, Oklahoma; and Farmington, New Mexico. The Agency has two primary operating programs: Offshore 

Minerals Management (OMM) and Minerals Revenue Management (MRM), supported by the Directorates of Policy and 

Management Improvement and Administration and Budget, as well as the Offices of Public and Congressional Affairs. 

Every American benefits because of MMS’s efforts, from the gasoline that powers our cars and the natural gas that heats 

our homes, to the benefits obtained through the disbursement of collected mineral revenues. 

Mandated Duties Serving the American Public

The MMS has the responsibility of managing energy and mineral resources on the OCS, and for the fiscal accountability 

and management of the public’s mineral revenues. The Outer Continental Shelf Lands Act (OCSLA) of 1953 called for 

the Federal Government to manage the oil, gas, and other mineral resources of the 

OCS to ensure national security, reduce dependence on foreign sources, protect the 

Nation’s environmental health, and conserve the precious resources of the OCS. 

Secretarial Order 3071 created MMS in January 1982, based on a recommendation 

by the Independent Commission on Fiscal Accountability, that stated proper fiscal 

accountability and a Bureau devoted to minerals management would best serve 

management of the public’s mineral resources. The Federal Oil and Gas Royalty 

Management Act of 1982 (as amended) mandates the manner in which MMS 

manages revenues from leasable minerals.

“The MMS is helping secure 

America’s energy future and 

quality of life, while protecting 

the environment and providing 

fair equity for the use of Federal 

lands.”

R. M. “Johnnie” Burton

MMS Director
FY 2006 Annual Report Page  

The MMS Asset Management Process

The MMS is one of America’s leading mineral asset managers. The Agency manages assets that typically generate about 

30 percent of America’s domestic oil production and approximately 20 percent of domestic natural gas2, and provides 

more than $8 billion in annual revenues, on average, to States, American Indians, and the U.S. Treasury. Through the 

MMS asset management process, MMS ensures optimal value for America’s mineral resources in the Gulf of Mexico 

(GOM) and on Federal and Indian lands. The OMM and the MRM programs carry out the mandated mission. 

The OMM program manages pre-lease through post-lease activities ranging from the 

initial geological and geophysical analysis of OCS resource potential and the leasing 

process, to monitoring the safety of offshore facilities and protecting our coastal and 

marine environments. In addition to oil and gas resources, MMS provides access to 

State and local governments for the recovery of sand and gravel used to protect the 

Nation’s coastal shores and wetlands. New responsibilities under the EPAct include 

offshore renewable energy and coastal impact assistance grant programs.

The MRM program collects, accounts for, substantiates and disburses revenues from 

mineral production on leased Federal and Indian lands. Revenues collected by MMS are one of the largest sources of nontax revenue to the Federal Government. The revenues are collected by taking Royalty-in-Value (RIV) (cash) or Royaltyin-Kind (RIK) (product). The RIK operations build on industry-proven approaches to marketing oil and gas production 

while ensuring fair market value is received for the Nation’s oil and gas resources. Where the use of RIK provides 

increased revenues, creates greater administrative efficiency, or meets a security need of the Nation, MMS will collect 

royalties in-kind, sell the product in the marketplace, and disburse resulting revenues as prescribed by law. Through its 

compliance activities, MMS ensures the American people receive fair value for their domestic resources. 

The MMS is committed to serving our country in the best, most efficient manner possible throughout all of our business 

activities. The graphic on the following page depicts how MMS secures ocean energy and economic value for America 

through its asset management process.

“Reliable and affordable 

energy is critical to our 

economic security.”

President George W. Bush

Sea Otters

2Note: Hurricanes and severe storms during 2004 and 2005 curtailed significant volumes of oil and gas production in the GOM which temporarily 

reduced the normal percentage of national production from the OCS. Recent declines in OCS natural gas production from the shallow waters of the 

GOM also will reduce the current estimates of the percent of U.S. production from the OCS, but production from new deepwater projects projected 

to come on line in 2007 is expected to offset some of this decline in the long-term
FY 2006 Annual Report Page 10
FY 2006 Annual Report Page 11

Helping Meet the Energy Needs of the Nation

One of the cornerstones of President Bush’s National Energy Policy is the role MMS plays in securing ocean energy 

for the Nation. From the start of the OCSLA, the OCS has contributed almost 16 billion barrels of oil and 166 trillion 

cubic feet of natural gas for U.S. consumption. The MMS now administers about 8,100 offshore leases, and about 4,000 

offshore facilities. This is a 200 percent increase in leases since 1982. The trend will likely continue with the growing 

interest in deepwater and ultra-deepwater production in the GOM. 

The offshore areas that MMS has designated for leasing consideration under the current 5-year Oil and Gas Leasing 

Program could yield as much as 22 billion barrels of oil and 61 trillion cubic feet of natural gas. It also may hold 

a potential future supply of natural gas from methane hydrates that could supply America’s needs for natural gas for 

hundreds of years. The MMS plays a vital role in providing safe and environmentally sound access to these domestic 

energy resources.

The MMS is developing the new 5-Year Oil and Gas Leasing Program (2007 – 2012), as required by the OCSLA. The 

MMS received just under 39,500 comments on the Draft Proposed Program, with 39,200 from the public. Of those, just 

under 27,000 were in favor of expanded access and 12,200 opposed. The MMS published the Proposed Program and Draft 

Environmental Impact Statement (EIS) in August 2006 and expects to issue the Proposed Final Program (with a 60-day 

waiting period) in March 2007. 

The graphic below depicts natural gas production for the calendar years of 1996 through 2005, including OCS production 

and the OCS production as a percentage of domestic production.

Natural Gas Production

0

1,000

2,000

3,000

4,000

5,000

6,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Calendar Year

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

OCS Production OCS as % of Total U.S.

Billion Cubic Feet

Production declines since 

2004 due in part to effects 

of Hurricanes Ivan,

 Katrina and Rita in the 

Gulf of Mexico
FY 2006 Annual Report Page 12

The graphic below depicts crude oil and condensate production for the calendar years of 1996 through 2005, including 

OCS production and the OCS production as a percentage of domestic production.

Providing Economic Value

Every American benefits from mineral resource development on Federal lands, whether the benefits are derived by energy 

produced from the lands or revenues generated from those natural resources. 

The strategic use of both RIK and RIV options defines the royalty asset management strategy employed by MMS. The 

RIK program not only creates opportunities to realize additional royalty revenues relative to RIV, but the program also has 

established that RIK is a more cost-effective business process than RIV. In addition, taking royalties “in-kind” simplifies 

audits and reduces conflict associated with valuation of mineral royalties. Market conditions and MMS’s competitive 

position at specific locations have resulted in greater revenues for the American public than from the RIV calculated 

revenues. As such, the option to utilize either RIK or RIV allows for a systematic analysis of the Federal royalty portfolio 

to selectively apply each method to optimize returns and efficiencies for the American public. 

Crude Oil and Condensate Production

0

100

200

300

400

500

600

700

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Calendar Year

Millions of Barrels

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

OCS Production OCS as % of Total U.S.

Production declines since 

2004 due in part to effects 

of Hurricanes Ivan, 

Katrina and Rita in the 

Gulf of Mexico
FY 2006 Annual Report Page 13 

Mineral revenues over the last 10 years are shown in the revenue stack chart below. In its FY 2006 audited financial 

statements, MMS reports mineral revenues of about $11.9 billion.

Note: Historical SPR revenues represent value of oil taken in-kind for delivery to SPR rather than actual dollars. Beginning 

in FY 2005 the Statement of Custodial Activity was revised to present an additional revenue category for onshore lease sale 

activity; FY 2004 was also revised to include this category. This chart reflects those revisions.

Custodial Revenues for 1997-2006 

(dollars in thousands)

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Rents & Royalties Offshore Lease Sales Onshore Lease Sales Strategic Petroleum Reserve (SPR)
FY 2006 Annual Report Page 14 

PERFORMANCE GOALS AND RESULTS

The Government Performance and Results Act (GPRA) requires Federal agencies to formulate Strategic Plans, identify 

major strategic goals, and report performance related to those goals. In FY 2003, the DOI published an integrated Strategic 

Plan (2003-2008), which replaced the previous separate Bureau plans. In August, 2006, the Department published a 

revised draft Strategic Plan (FY 2007- FY 2012), to which MMS will align its strategic performance measures. The 

MMS reports on actual performance results below and in the Department’s Performance and Accountability Report (PAR) 

published in November.

In FY 2006, MMS published a Data Verification and Validation (Data V&V) procedures guide, to ensure all GPRA, 

Program Assessment Rating Tool, and strategic plan measures are reliable. Responsibility for performance reporting is 

included in senior managers’ annual performance plans and cascaded down through the organization.

MMS incurred the below costs related to the DOI Strategic Goals.

Goal FY 2006 FY 2005

Resource Use-Energy 2,120,171 2,403,761

Resource Use-Non_Energy 1,204 1,745

Serving Communities 17,440 21,463

Reimbursable Activity and Other (1,140) (1,178)

Total1 2,137,675 2,425,791

1Dollars in thousands

The following is a discussion of MMS’s key goals, measures, and performance as they pertain to DOI strategic goals.

OCS Leasing Activities

DOI End Outcome 

Goal

Measure FY 2003

Actual

FY 2004 

Actual

FY 2005

Actual

FY 2006 

Planned

FY 2006

Actual

Resource Use: Manage 

or influence resource 

use to enhance public 

benefit, promote 

responsible use and 

ensure optimal value 

(energy)

Number of lease 

sales held 

consistent with the 

Secretary’s Five 

Year Program.

3 4 4 2 2

To facilitate mineral production on the OCS, the MMS prepares a 5-year schedule of proposed oil and gas lease sales. 

The schedule includes lease sales in the available areas of the OCS (i.e., those areas not under congressional moratorium 

or executive withdrawal) that have the highest resource value and expected interest to industry, while recognizing 

environmental values, economic conditions, and competing uses. There are 20 lease sales planned for the current 5-year 

program (2002–2007); two sales for FY 2006. 

During FY 2006, MMS conducted the following sales:

•	 Central Gulf of Mexico Sale 198 was held on March 15, 2006. The sale attracted $588,309,791 in high bids 

from 82 companies. The total of all bids was $978,310,887. A total of 392 tracts were leased for a total of high 

bids of $581,820,861. 

•	 Western Gulf of Mexico Sale 200 was held on August 16, 2006. The sale attracted $340,935,514 in high bids 

from 62 companies. The total of all bids was $462,760,912. Bid analysis is ongoing to determine if Sale 200 bids 

meet DOI’s fair market value determinations. 
FY 2006 Annual Report Page 15 

The MMS evaluated the Cook Inlet lease sale, Lease Sale 199 as a “special sale.” Special sales are held only if interest 

is expressed by industry. Cook Inlet did not receive interest; therefore, MMS did not perform pre-lease work or plan a 

sale. 

The MMS is seeking comments through November 2006 on the Proposed OCS Oil and Gas Leasing Program for 2007-

2012 and its associated Draft EIS, released for public comment on August 25, 2006. In addition to traditional sale areas in 

the GOM and Alaska, the Proposed Program includes sales in the North Aleutian Basin, Alaska, and in the Mid-Atlantic 

off the coast of Virginia. Both areas are subject to Presidential withdrawal and the entire Atlantic has been subject to 

congressional moratoria. These areas were included as both States expressed an interest in gathering more information 

and pursuing a dialogue about the energy potential in these areas. Lease sales would only be held if the President chooses 

to modify the withdrawal in both areas and Congress discontinues the annual statutory moratorium off the coast of 

Virginia. The MMS anticipates publishing the Proposed Final Program in late March of 2007.
FY 2006 Annual Report Page 16

Ensuring Safe and Clean Operations

DOI End Outcome 

Goal

Measure FY 2003

Actual

FY 2004 

Actual

FY 2005

Actual

FY 2006 

Planned

FY 2006

Actual

Serving Communities: 

Protect lives, resources 

and property

Note: target reported in 

DOI PAR was 6. The 

MMS adjusted target to 5

as a result of MMS/OMB 

FY 2005 PART negotiation. 

Number of 

fatalities among 

workers in DOI 

permitted activities

11 3 6 5 9

Serving Communities: 

Protect lives, resources 

and property

Note: target reported in 

DOI PAR was 25. The 

MMS adjusted target to 

23 as a result of MMS/

OMB FY 2005 PART 

negotiation.

Number of serious injuries among 

workers in DOI 

permitted activities

23 29 23 23 29

Resource Use: Manage 

or influence resource 

use to enhance public benefit, promote 

responsible use and 

ensure optimal value 

(energy)

Achieve oil spill 

rate of no more 

than x barrels 

spilled per million 

produced

4.21,2 7.91,2 31.22,3 5 0.94

Over the last 50 years, the safety and environmental record of the offshore industry has dramatically improved. The Nation 

has much to gain from excellent offshore safety and environmental performance because the production and consumption 

of energy are fundamental components of economic development, National security, and societal well-being. The MMS’s 

ongoing commitment to safe and clean operations is a prerequisite for all activity on the OCS. 

The MMS conducts thousands of inspections each year to ensure the safety of the oil and gas workforce and the protection 

1Former measure: Achieve an oil spill rate for offshore development of no more than .00001 barrel spilled per barrel produced. 

2

Production numbers are updated as MMS audits and reviews companies OCS properties to verify federal OCS production and royalty payments. These audits and reviews are normally conducted up to three years after the oil was produced. The result for this measure will continue 

to be revised in future years as “trapped” oil is recovered, previous unknown spills are found and OCS production is verified. Therefore, the 

following changes have been made to reflect the most recent information: FY03 - One spill was added (increasing the number of spills from 33

to 34) for 18.8 bbl. This increased the oil spill ratio from 4.1 to 4.2 per million produced. FY04 - Crude oil and condensate production revisions increased 20 million barrels and reduced oil spill ratio from 8.2 to 7.9 per million produced. FY05 - Crude oil and condensate production 

revisions increased 20 million barrels. Additional oil was also recovered through ongoing recovery efforts. Changes in both the numerator and 

denominator reduced the oil spill ratio from 33.0 to 31.2 per million produced. Future revisions are expected.3An estimated value is provided; 

the FY 2006 results are expected Spring 2007.

3

 Result may change as additional information becomes available, the spill rate excluding hurricanes is 0.2. 4 Estimated value; FY 2006 results are expected Spring 2007.
FY 2006 Annual Report Page 17

of marine, coastal, and human environments. Prevention is our most important safety strategy. Annual inspections 

examine safety equipment designed to prevent blowouts, fires, spills, and other major accidents. The MMS inspectors 

have authority to shut down an operation immediately if it is being conducted improperly or without proper equipment.

The MMS closely monitors and analyzes incident-related data to understand the cause and occurrence of offshore accidents 

and spills and to identify actions that can be taken to prevent occurrence of similar incidents in the future. The annual 

average over the previous 3-year period was approximately 7 fatalities and 25 serious injuries. Though the true target 

for these outcomes is always zero, MMS had established an expected value performance goal of reducing fatalities and 

serious injuries to a level not to exceed 5 and 23, respectively, for the year. 

While no single cause for the increase in fatalities in FY 2006 from FY 2005 can be identified, the unusual offshore 

activity level during FY 2006 is most likely a significant contributing factor. During FY 2006, the offshore industry in the 

Gulf of Mexico has been engaged in recovering from the record damage caused by Hurricanes Katrina and Rita in August 

and September, 2005. The number of repair operations and man-hours operating on the OCS has been well above that of 

recent years. The hurricanes also dramatically affected the availability of equipment and qualified people to conduct the 

recovery and repair operations. The increased activity and lack of equipment and experienced people were likely the most 

significant contributing factors to the greater number of fatalities. The MMS notes that four of the nine fatalities involve 

operations that are regulated by the United States Coast Guard. Three of these incidents involved diving operations at 

OCS facilities and one incident involved a person transferring from a motor vessel to a platform boat landing by using a 

swing rope. The MMS includes these incidents in our statistics because they occurred at OCS facilities even though MMS 

is not the primary agency responsible for the specific activities associated with the fatalities.

The estimated FY 2006 results for oil spills are significantly lower than recent years because there were no major hurricanes 

in the Gulf of Mexico or major spills during FY 2006. Additionally, FY 2004 and FY 2005 have been adjusted because 

of updated production results and additional oil recovered through cleanup exercises.

The FY 2005 hurricanes resulted in 31.2 barrels spilled per million barrels produced when including the 17,322 barrels 

of petroleum spilled during Hurricanes Katrina and Rita. The rate would be reduced to 23.6 barrels if only crude oil and 

condensate spilled (13,182 barrels) were included in the calculation which also includes refined petroleum. The FY 2005 

result was impacted by the hurricanes with both an increase in numerator (spillage) and reduced denominator (production). 

For comparison, FY 2004 results excluding Hurricane Ivan spills are 0.2 barrels per million barrels produced. The FY 

2005 results excluding Hurricanes Katrina and Rita spills are also 0.2 barrels per million barrels produced. Oil spill 

results are subject to revisions as hurricane damage assessments are completed and additional oil is recovered. The MMS 

remains committed to safety and environmental protection as top priorities.
FY 2006 Annual Report Page 18

Financial Management and Fulfilling Indian Trust Responsibilities

DOI End Outcome 

Goal

Measure FY 2003

Actual

FY 2004

Actual

FY 2005

Actual

FY 2006 

Planned

FY 2006 

Actual

Resource Use: 

Manage or influence 

resource use to 

enhance public benefit, 

promote responsible use 

and ensure optimal value 

(energy)

Percent of 

revenues 

disbursed on a 

timely basis per 

statute

92.6% 95.5% 98.0% 96.5%1 94.5%1

Serving 

Communities: Fulfill 

Indian fiduciary trust 

responsibilities: 

Improve Indian Trust 

ownership and other 

information

Transfer X% 

of revenue to 

OST within 24

hours of receipt

99.3% 100% 100% 99.5% 100%

Serving 

Communities: Fulfill 

Indian fiduciary trust 

responsibilities: Improve 

Indian Trust ownership 

and other information

Provide lease 

distribution 

data to BIA for 

X% of 

royalties by 

first semimonthly

 distribution

N/A

New 

Measure

84% 92% 90% 94.7%2

The MMS collects and processes reports and payments from bonuses, rents, and royalties from about 3,700 reporters for 

about 26,000 producing leases each month. The MMS distributes and disburses these revenues directly to States, the OST, 

other Federal agencies, and U.S. Treasury accounts. With the enactment of the EPAct, MMS has begun disbursement of 

geothermal royalty revenues to counties in a limited number of states. With this small exception, MMS is only required 

to disburse royalty revenues to States. The States may disburse royalty revenues to their counties at their discretion. The 

distribution and disbursement function ensures that revenues are properly disbursed to the appropriate recipients. The 

MMS achieved 94.5 percent timely disbursements in FY 2006.

The MMS contributes to DOI’s ability to provide accurate and timely information and revenues to Trust beneficiaries. As 

an example, MMS transfers American Indian mineral revenues to OST on a daily basis. The OST in turn, deposits funds 

into interest-bearing accounts. The MMS has established a measure to document the percentage of all Indian revenue 

received on a daily basis transferred to OST within one business day of identification, and in FY 2006, the MMS achieved 

100 percent timely transfer.

The Bureau of Indian Affairs (BIA) requires Financial Distribution Report information in order to distribute funds to 

individual Indian mineral owners. The MMS provides this lease distribution data to BIA twice each month. The MMS is 

1In FY 2006, MRM focused on reducing Accounts Receivable and unapplied payments. This resulted in the processing of several 

older payments, which lowered our timely disbursements result to 94.5%, compared to 98% in FY 2005. MRM has completed this 

work, so timely disbursements should increase during FY 2007.

2As the target for FY 2006 was being set, MRM anticipated some changes in the business process that would result in stricter enforcement of industry reporting requirements. These changes would have delayed distribution of some of the data to BIA. However, MRM 
FY 2006 Annual Report Page 19

improving the timeliness of sending lease distribution data to BIA, thus enhancing BIA’s ability to provide revenues more 

quickly to the ultimate Trust beneficiaries. The MMS exceeded its FY 2006 goal of 90 percent, providing 94.7 percent of 

American Indian lease distribution data to BIA by the first semi-monthly distribution.

Mineral Revenue Compliance Activities

DOI End Outcome

Goal

Measure FY 2003

Actual

FY 2004

Actual

FY 2005

Actual

FY 2006

Plan

FY 2006

Actual

Resource Use: 

Manage or influence 

resource use to enhance 

public benefit, promote 

responsible use and 

ensure optimal value 

(energy)

Royalties received 

for mineral leases 

are X% of predicted 

revenues, based on 

market indicators in 

the production year

N/A

New 

Measure

96.1% of 

predicted 

revenues 

(75% of 

CY 2001 

royalty 

universe)

98% of 

predicted 

revenues 

(75% of 

CY 2002 

royalty 

universe)

98% 

predicted 

revenues 

(75% of 

CY 2003

royalty 

universe)

98.5% 

predicted 

revenues 

(75% of CY 

2003 royalty 

universe)

Resource Use: 

Manage or influence 

resource use to enhance 

public benefit, promote 

responsible use and 

ensure optimal value 

(energy)

Compliance work is 

completed within the 

3-year compliance 

cycle for X% of royalties for production 

year X

46% of 

CY 2000 

royalties

69.4% of 

CY 2001

 royalties

71% of 

CY 2002

 royalties

72% of 

CY 2003

royalties

72.5% of 

CY 2003

royalties

Mineral revenue compliance activities represent a large and critical part of MMS’s operational strategy, to ensure timely 

and correct payment for minerals produced on Federal and Indian leased lands. The MMS predicts expected revenues, 

analyzes variances, performs targeted and random audits, resolves valuation discrepancies, and negotiates settlements to 

ensure that the American public and Indian recipients receive optimal value. During the time period from FY 1982 to 

FY 2005, additional collections of royalties and interest attributed to its compliance activities totaled over $3.1 billion. 

Compliance assurance is performed on all types of royalties due, whether received as RIV or RIK. 

One compliance measure is a ratio comparing actual payments to predicted revenues. This measure provides an indication 

of not only how well industry is complying with MMS regulations and reporting guidelines, but also the effectiveness 

of MMS regulations and oversight at driving compliance. Utilizing the results from this measure, MMS coordinates 

with select companies to resolve issues and improve timeliness and accuracy of future reporting. In FY 2006, the MMS 

measured calendar year (CY) 2003 royalty payments and determined that company payments were 98.5 percent of 

predicted revenues (for properties representing about 75 percent of all CY 2003 royalties).

The MMS has recently implemented new aggressive compliance goals aimed at shortening the compliance cycle and 

increasing the percentage of revenues being reviewed and/or audited within three years. The MMS is continuing to 

expand compliance coverage within the shortened compliance cycle to ensure that the Government is realizing fair market 

value, and that companies comply with applicable laws, regulations and lease terms. In FY 2006, the MMS achieved its 

highest-ever level of contemporaneous (within 3 years) compliance coverage by confirming reasonable compliance on 

72.5 percent of all CY 2003 royalties. In addition, in October 2005, the MMS’s audit program received an unqualified 

peer review opinion from an independent certified public accounting firm stating that the system of quality control for the 

MMS audit function has been designed to meet the quality control standards established by the Comptroller General and 

to provide MMS with reasonable assurance of conforming with applicable auditing standards, policies, and procedures. 

The opinion was issued with no material weaknesses and no reportable conditions. 
FY 2006 Annual Report Page 20

SIGNIFICANT ACCOMPLISHMENTS

Gulf of Mexico Regional Office Returns to New Orleans 

The MMS Gulf of Mexico Regional Office (GOMR), located in New Orleans, Louisiana, sustained extensive damage 

during Hurricane Katrina, resulting in a temporary loss of offices housing more than 600 employees. The MMS quickly 

responded to the challenge by establishing a temporary office in Houston, operated by contingent MMS employees.

After operating for two months with a reduced staff in Houston, TX, MMS reopened GOMR offices with employees in 

both Houston and New Orleans. By April, 2006, all employees were located back 

in New Orleans. Approximately 100 district employees, who work in offices along 

the Gulf Coast, continued to work in their offices despite Hurricanes Katrina and 

Rita. Although forced to temporarily close as a result of Hurricane Rita, the Lake 

Charles district office resumed full operations on October 24, 2005. Throughout the 

severe disruptions to operations, MMS remained committed to New Orleans and its 

revival.

The safety of MMS employees was a primary concern for the Bureau throughout the hurricanes. According to GOMR 

Director Chris Oynes, “Most of the Gulf Regional employees who work in New Orleans live in the areas that were hardest 

hit by Hurricane Katrina. Although all of our employees escaped the powerful storm without serious injury, many of them 

lost their homes completely or their homes suffered major damage.” 

Implementation of the Energy Policy Act of 2005

Enacted August 8, 2005, the EPAct amended the OCSLA, the Mineral Leasing Act, the Geothermal Steam Act of 1970 

and other statutes as well as creating new statutory requirements designed to increase the Nation’s energy supplies. The 

Act establishes a number of new responsibilities and mandates for DOI which have been delegated to MMS. 

Among its major provisions, MMS is now authorized to serve as the lead agency for the permitting of renewable energy 

and alternate uses of America’s offshore public lands. The MMS has been charged by Congress to develop a comprehensive 

program and regulations to implement the new authority. Objectives of the new 

regulatory program are to provide access to the OCS in a way that: balances competing 

and complementary uses of offshore acreage; ensures consultation with affected states 

and local governments; takes into account the evolving nature of the energy industry; 

transfers responsibility for projects already under federal review (Cape Wind, Long 

Island Offshore Wind Park); and provides a fair return to the United States for access 

to the OCS.

Also, the Act directs the Secretary, as delegated to MMS, to establish and administer the 

Coastal Impact Assistance Program (CIAP). Under the program MMS is to disburse 

$250 million each fiscal year from FY 2007 through FY 2010 to the six coastal States 

(Alabama, Alaska, California, Louisiana, Mississippi, and Texas) where OCS oil and 

gas production occurs. A Notice of Availability was published in the September 29, 

2006 Federal Register (FR) informing the States and the public of availability of 

guidelines for the Program. State Plans may be submitted to MMS following the Notice 

of Availability in the FR. The MMS will accept grant applications, from States with 

approved Plans in Spring 2007 and will award the CIAP funds to approved projects with 

objectives for the conservation, protection or restoration of coastal areas; mitigation 

of damage to fish, wildlife or natural resources; implementation of comprehensive 

conservation management plans; or the mitigation of the impact of OCS activities. 

The MMS continues to make a major resource commitment to the timely and effective implementation of all the provisions 

of the Act for which we have responsibility. Since passage of the Act in August 2005, the MMS accomplished a great 

deal:

“The MMS is committed to stay in the 

New Orleans area and contribute to the 

economic revival of the area.” 

R.M. “Johnnie” Burton

MMS Director
FY 2006 Annual Report Page 21

•	 Included Royalty Relief for Deep Water Production, as called for in the Act, in all GOM lease sales held after 

August 8, 2005.

•	 Published a comprehensive inventory of OCS oil and natural gas resources.

•	 Issued CIAP guidelines to assist eligible States in applying for the grants and complying with Federal grant 

program accounting and reporting requirements.

•	 Published, in partnership with the Bureau of Land Management (BLM), two Advanced Notice of Proposed 

Rulemakings (ANPR) seeking public comment on the use of royalty incentives to promote the future production 

of gas from hydrate deposits on the OCS and Federal lands in Alaska and to promote enhanced oil recovery on 

Federal leases through the injection of carbon dioxide (CO2) and other appropriate substances. After a thorough 

review of the comments received in response to the ANPRs and an assessment of the emerging nature of these 

technologies, the Department determined, as provided for in the Act, that publication of royalty incentive rules 

for CO2 and gas hydrates are not appropriate at this time. A separate report was submitted to Congress on 

opportunities to enhance natural gas production for gas hydrates on the OCS and Federal lands.

•	 Published, in conjunction with BLM, proposed rules to implement provisions and procedures for geothermal 

leasing, exploration, and development designed to streamline the geothermal valuation and payment process 

and encourage the development of new geothermal energy resources. The MMS has worked closely with the 

geothermal industry, affected States, and others in developing the regulations. 

•	 Completed MRM Support System modifications for automated county-level geothermal royalty

disbursements and disbursements to special accounts including Naval Petroleum Reserve, Ultra Deep Water 

Research, and CIAP. Initiated design and development of system changes needed to implement three credit 

provisions in the EPAct. The Act authorizes limited or partial credits against royalties for (1) geothermal lessees 

for the value of electricity delivered in-kind to a state or county government; (2) reimbursement of lessees for 

costs to reclaim orphaned, abandoned, or idled wells on leased or unleased Federal land; (3) payments made by 

a lessee directly to a state under section 6004(c) of the Oil Pollution Act (primarily involving one lessee and old 

drainage issues with the State of Louisiana).

•	 Established numerous new Treasury accounts to fund programs specified by the Act, including the Naval Petroleum 

Reserve, the BLM Permit Processing Pilot Office, and BLM Geothermal activities, and funded $35.8 million to 

date through mineral revenues.

•	 Submitted a report to Congress on actions taken to develop business processes and automated systems to fully 

support the RIK program and on future RIK business operation plans and objectives.

•	 Issued Notice of Intent to Prepare an EIS for Offshore Renewable Energy and Alternative Use of OCS 

Facilities.

•	 Published an ANPR for Alternative Energy-Related Uses on the OCS.

Although MMS has accomplished much during the first year of the Act, work still remains to be done. The MMS continues 

to work diligently to fully implement the provisions that have not been completed, while continuing to contribute toward 

helping meet the Nation’s domestic energy needs.
FY 2006 Annual Report Page 22

The MMS Published Revised Incident Reporting Requirements

The MMS published the final rule titled “Oil and Gas and Sulphur Operations 

in the Outer Continental Shelf—Incident Reporting Requirements,” which 

revises regulations at 30 CFR Part 250. The revisions pertain to requirements 

for reporting incidents associated with natural gas, oil, and other mineral 

operations on the OCS, and attempt to clarify the requirements by providing 

more precise reporting definitions, timeframes, and thresholds. The revisions 

are expected to result in more comprehensive and consistent operator reporting, 

which will enhance MMS’s capability to identify incidents and evaluate the 

safety and environmental performance of OCS operations. The regulations will 

continue to require the reporting of all serious accidents, any death or serious 

injury, and all blowouts, explosions, and fires, by lessees, operators, easement 

holders, and other permit holders. The rule became effective July 17, 2006.

Gulf of Mexico Lower Tertiary Play

Results from a critical production test (announced September 5, 2006) on a 

GOM ultra-deepwater discovery, coupled with preliminary well data from the same geological trend have elevated the U.S. 

GOM’s emerging Lower Tertiary play to significant national importance. This unfolding play is expansive—stretching 

several hundred miles across the Gulf, i.e., from Walker Ridge westward through Keathley and Alaminos canyons, at 

distances from about 150 to 200 miles offshore Texas and Louisiana—and is believed to hold potentially billions of barrels 

of recoverable oil in dozens of individual prospects. 

The MMS is optimistic that industry will continue their interest and investment in this geologic trend. However, the 

Lower Tertiary is filled with risks, including vast salt sheets covering much of the trend that can make imaging targets 

below the salt difficult. Because of the challenging environment associated with the ultra-deepwater and drilling depths 

exceeding 6 miles, it will require new technology and billions of dollars in investment for the infrastructure to support the 

drilling, production and transportation of the oil to the U.S. markets. The MMS will continue to work with industry to 

explore and develop this national resource in a safe and environmentally-sound manner.

The MMS Offers Suspensions of Operations for Ultra-Deep Wells 

The MMS issued a final rule that will allow, in certain situations, Suspensions of Operations (SOO) to oil and gas lessees 

or operators who drill ultra-deep wells. Ultra-deep wells are wells that are deeper than 25,000 feet true vertical depth 

below the ocean surface. 

While technology indicates hydrocarbon accumulations may be present at ultra-deep levels, companies may be reluctant 

to drill without additional analysis, which can be not only time-consuming, but also costly. Normally, lessees must be 

producing or conducting other lease holding operations to extend leases beyond the primary term. The MMS recognizes 

that the added complexity and cost associated with planning and drilling an ultra-deep well may require more time for 

exploration and development. In such cases, the lease term may be extended through a SOO. By allowing companies 

to initiate a SOO, the ‘clock’ on the lease term is temporarily halted to prevent the lease from expiring. Although some 

leases with 10-year primary terms are issued in deep water, they are not covered by the final rule, because MMS believes 

that 10 years is sufficient to explore and develop such deep prospects. The MMS anticipates allowing SOOs will generate 

increased domestic production using ultra-deep wells.

Proposed New Indian Oil Valuation Rule

In February 2006, the MMS proposed a new Indian Oil Valuation Rule, which MMS developed following several public 

workshops and consultations with American Indian Tribes. The proposed rule focuses on adding more certainty to 

the valuation of oil produced from Indian lands and addressing the unique terms of Indian (Tribal and allotted) leases. 

Specifically addressed is the “major portion” provision, which is calculated based on the highest price paid or offered at 

the time of production for the major portion of oil produced from the same field. The MMS is contemplating not issuing 

the February 2006 proposed Indian Oil Valuation Rule as proposed, and instead taking separate actions by publishing a 

final rule containing technical corrections to the current 1988 Indian Oil Valuation Rule and establishing a negotiated 

“The MMS has a strong regulatory program focused on safe and clean operations 

and the offshore industry has worked hard 

to achieve their excellent safety record. 

The MMS is committed to promoting further improvements by conducting improved 

analyses of incident information, sharing 

this information with the offshore industry, 

and working cooperatively with the industry to address safety and environmental 

concerns.”

R. M. “Johnnie” Burton

MMS Director
FY 2006 Annual Report Page 23 

rulemaking committee to address issues regarding oil major portion for Indian leases. The goal of the negotiated rulemaking 

committee will be to address alternatives for calculating oil major portion. 

Implementation of National-scale Mineral Revenue Compliance Strategy

In FY 2006, the MMS continued to implement a national-scale mineral revenue compliance strategy as follows: closed 

139 audits, conducted compliance reviews on approximately 4,000 producing properties, and achieved compliance on 

$5.8 billion in mineral revenues, and reviewed and/or audited 72.5 percent of all Federal and Indian royalty payments 

within three years from the date of receipt of payment, using a system that targets the largest royalty properties.

Audit Program Receives Unqualified Opinion

In October 2005, the MMS’s audit program received an unqualified peer review opinion from an independent certified 

public accounting firm stating that the system of quality control for the MMS audit function has been designed to meet 

the quality control standards established by the Comptroller General and to provide MMS with reasonable assurance 

of conforming with applicable auditing standards, policies, and procedures. The opinion was issued with no material 

weaknesses and no reportable conditions. In its opinion, the accounting firm stated: “In our opinion, the system of 

quality control for the Federal Audit Function of MMS in effect for the 2-year period ending December 31, 2004, has been 

designed to meet the requirements of the quality control standards established by the Comptroller General of the United 

States for a Federal Government audit organization and was complied with during the 2-year period ending December 

31, 2004, to provide MMS with reasonable assurance of conforming with applicable auditing standards, policies, and 

procedures.”

Implemented a Comprehensive Business Recovery Plan

In FY 2006, the MMS’s Minerals Revenue Management program successfully developed, implemented, and tested a 

comprehensive business recovery plan to ensure an alternate site for operation of the MMS mineral revenue financial and 

accounting systems in case of a national emergency or disaster.

Completed MRM Strategic Business Plan

The MRM Strategic Business Planning Initiative was completed in December 2005. This Initiative charts the course and 

direction of the future MRM business through the year 2012. The new Initiative focused on identifying and implementing 

best value services with high quality and integrity. Key outcomes include an MRM program-wide strategic plan and 

business plans that emphasize market-based regulatory guidance, valuation certainty, and improved business processes 

and systems with effective performance measures and strong internal controls. The MRM is currently developing the 

following five business plans over the course of the next 2 years: Financial Management, Compliance, Indian Trust, Asset 

Management, and Resource and Information Management. Importantly, the Initiative will be supportive of, and fully 

integrated with, Department and MMS strategic planning guidelines and responsive to the Administration’s management 

improvement goals and objectives. 

Implementing OMB Circular A-123

In FY 2006, the MMS conducted an evaluation of the internal controls over program operations and financial reporting in 

effect as of September 30, 2006. The evaluations were conducted in accordance with OMB Circular A-123, Management’s 

Responsibility for Internal Control, and the CFO Council’s Implementation Guide. Based on the results of the evaluation, 

MMS provides reasonable assurance that the internal controls over program operations and financial reporting for the line 

items identified as material to the Department of Interior were suitably designed and operating effectively as of September 

30, 2006. No material weaknesses were found in the design or operation of the internal controls over program operations 

or financial reporting. 
FY 2006 Annual Report Page 24 

Wyoming Royalty-in-Kind Gas Pilot Initiated

The MMS successfully conducted its first pilot sale of RIK gas from Federal leases in Wyoming. The sale produced strong 

bids and resulted in two companies receiving contracts for the total sale of 10.95 billion cubic feet of Federal RIK gas 

produced in Wyoming. Delivery of the gas began on April 1, 2006; deliveries will take place over a period of 12 months. 

The MMS plans to conduct additional RIK gas sales in the future.

Royalty-in-Kind Generates Solid, Measurable Results

In March 2006, the MMS completed an analysis that examined the performance of the RIK program during FY 2005, the 

second full year the program was in an operational status following six years of pilot testing. Among the highlights of 

the report:

•	 RIK sales of oil and gas generated a revenue gain of $32.3 million over what would have been received if MMS 

had taken the royalties in-value, or as cash payments. 

•	 Moreover actual, measured administrative costs were from 42 percent to 52 percent less than the costs that would 

have been incurred under a universal royalty in-value approach, an efficiency gain that translates to $3.7 million 

in cost avoidance. 

New Pipeline may Provide Greater Return to the American Public

In 2006, the MMS signed a precedent agreement to transport natural gas through the Rockies Express Pipeline. The 

agreement becomes effective on the completion of the pipeline, which is dependent on meeting specific conditions outlined 

in the agreement. If all of the conditions are met, the pipeline will begin in Wyoming and become fully operational in 

2009. If the agreement becomes effective, it commits MMS to transport more than 18 billion cubic feet (Bcf) of gas per 

year, or 50,000 thousand cubic feet per day, through the 1,323 mile Rockies Express Pipeline. The pipeline will transport 

gas from Wyoming and Colorado to markets in eastern Ohio, which connect with other pipelines serving markets in 

the eastern United States. The pipeline will allow MMS to expand its RIK program in Wyoming by transporting the 

increasing natural gas production from the Rocky Mountain Region to other regions and thus enabling expansion to other 

markets. The MMS signed the commitment following economic analysis, which demonstrated the potential to provide 

the American public greater returns by taking more gas in-kind and transporting that gas to higher priced markets. The 

pipeline project requires final approval from the Federal Energy Regulatory Commission, and the agreement becomes 

effective when the pipeline becomes fully operational in 2009.

Record Royalty-in-Kind Gas Sale 

The MMS conducted a RIK gas sale in mid-March, selling a record volume of RIK gas produced from Federal leases in 

the GOM. Twenty-one companies submitted 127 offers for the 14 sales packages during this sale, setting a record for the 

total number of bidding companies and total number of bids for a sale. The sale provides for delivery of approximately 

118 billion cubic feet of RIK gas over seven-month or twelve-month terms. The gas will be delivered to 14 offshore 

pipeline systems originating in the GOM, equating to 509,800 Million British Thermal Units (MMBtu) per day- enough 

to supply the heating needs of approximately 1.6 million Midwest homes for one year. The gas is destined for consumer 

and industry use in the continental United States. The MMS began deliveries on the sale in April 2006, and is billing on 

a monthly basis for those deliveries.
FY 2006 Annual Report Page 25 

PMA Scorecard Rating - August 20061,2

Human Capital (green)

Competitive Sourcing (green)

Improved Financial Performance (yellow)

E-Government (green)

Budget and Performance Integration (yellow)

Environmental Stewardship

 

 (green)

Transportation Management

 

(yellow)

Presidential Management Agenda (PMA) Scorecards

The PMA Scorecards are one method used to track how bureaus are using the American public’s money in the most efficient 

and effective manner. In 2006, the MMS continued to improve upon its performance within the PMA areas under its 

purview, including: Human Capital, Competitive Sourcing, Improved Financial Performance, E-Government, Budget and 

Performance Integration, Environmental Stewardship, and Transportation Management. In FY 2006, the MMS submitted 

its internal PMA Scorecards and Scorecard ratings to DOI once—in August 2006—which are listed below. 

1 Note: Ratings reflect MMS’s self-assessment score. The ratings are pending Departmental assessment, and may be adjusted at a later time. For instance, the Department revised MMS’s self-assessment 

for the Budget and Performance Integration scorecard, and changed the rating from green to yellow.

2

 The PMA Scorecard, which employs a stoplight scoring system, utilizes the following rating system: 

green (success), yellow (mixed results), red (unsatisfactory).
FY 2006 Annual Report Page 26

LOOKING AHEAD – MANAGEMENT CHALLENGES

The oil and gas industry is a globally competitive business. With an eye 

on the future, MMS is actively involved in providing access to energy 

resources for the American people, from traditional sources such as oil and 

natural gas, as well as renewable sources of energy on the OCS. The MMS 

ensures the American public receives the maximum benefit from these 

resources through the collection, accounting, and disbursement of revenues 

from mineral leases on OCS, Federal and American Indian lands.

Improving Preparations for Hurricanes

Several hurricanes affected MMS operations in the GOM last year, with 

Hurricanes Katrina and Rita causing the greatest overall destruction. 

The effects of these two hurricanes caused unprecedented and prolonged 

evacuations and shut-in offshore facilities, subsequently affecting the Nation’s domestic oil and gas supply. While these 

storms were the worst in the history of GOM oil and gas production, the offshore industry was able to maintain a record 

of no loss of life and no significant environmental damage from wells on the OCS during both storms.

The MMS continues to research hurricane damage in an attempt to document lessons learned from the 2005 hurricane 

season. The MMS is sponsoring research on a variety of topics related to the hurricanes and the damage to offshore oil 

and gas facilities and effects on impacted communities. The research includes the following activities: 

(1) Assess and evaluate pipeline movement or damage; 

(2) Assess and evaluate fixed offshore platform damage; 

(3) Develop a database of wind, sea state and currents resulting from Hurricanes Katrina and Rita meteorological data 

to assess the damages and the reason for the damages in those storms. The damage assessments will be used to 

determine if regulatory or design changes need to be made to prepare for future storms; 

(4) Post-hurricane assessments of sensitive habitats, OCS-related infrastructures and communities; 

and fiscal and employment effects on impacted communities;

(5) Assess methods to eliminate hydrates in pipelines and risers during startups after a hurricane; and 

(6) Assess the response of waves and currents throughout the water column in the northern GOM slope and shelf. 

In addition, MMS is working closely with other Federal agencies and the oil and gas industry in the development of stronger 

safety standards for operations within the GOM for the 2006 hurricane season, in an attempt to apply lessons learned from 

the previous hurricanes. In preparation for hurricane season 2006, the MMS implemented several improvements to their 

oversight system. They include: 

(1) Extensive pre-season planning with the Department of Energy and the U.S. Coast Guard (USCG) to facilitate

 communications during storms; 

(2) Coordination with the industry to improve safety, specifically through Mobile Offshore Drilling Unit 

 improvements, jack-up site assessment guidelines, risk assessment tools, and platform upgrades; 

(3) Inviting a representative of the USCG to join the MMS Continuity of Operations Plan team to improve and 

 enhance communication regarding damage to facilities and subsequent warnings to mariners by the USCG; and 

(4) A new electronic hurricane reporting system, part of the eWell system, to better improve communications 

 between industry and MMS. 

“Although a number of different variables 

have to be taken into consideration in 

crafting a regime for other ocean uses, the 

scope and comprehensiveness of the OCS 

oil and gas program can be a model for the 

management of a wide variety of offshore 

activities.“

Pg. 290 An Ocean Blueprint for the 21st 

Century, Final Report of the U.S. Commission on Ocean Policy, July 22, 2004.
FY 2006 Annual Report Page 27

Increasing Demands on the OCS

Managing access to the OCS is becoming more complicated for MMS and our sister agencies. Challenges include ultradeepwater exploration, aquaculture, salt and sulphur, wind and wave power, hazard areas, artificial reefs, sand borrow 

sites, shipping, fishing, liquefied natural gas (LNG) ports and fiber optic cables competing for limited space. These 

projects present MMS with increasingly complicated multiple-use and primacy issues. The MMS may need to reevaluate 

environmental impact analyses and develop new lease stipulations and operating conditions, as alternative uses on the 

OCS continue to expand. The MMS expects to increase its coordination and consultation efforts to ensure that mineral 

resource domains remain accessible, that MMS-granted energy and non-energy rights are protected, and that OCS related 

activities continue to be conducted in a safe and environmentally sound manner.

RIK Gas Expansion

The RIK program is anticipated to add significant gas volumes by FY 2009 to roughly double the levels taken in-kind 

today to a total 1.2 Bcf per day. This expansion will also double the number of gas properties taken in-kind and increase 

the overall properties in RIK by 33 percent considering the existing oil portfolio. Growth of RIK gas volumes is projected 

at an optimal level consistent with expectations of being equal or exceeding appropriate fair market value benchmarks. 

Currently, the natural gas RIK business unit comprises more than 40 percent of GOM natural gas royalties; MMS expects 

this percentage to rise to 80 percent in the foreseeable future. In order to accomplish this, the RIK Five-Year Plan 

targets enhancement of specific marketing, analytical and supporting functions to allow the RIK program to evaluate 

various marketing alternatives, continuously monitoring historical and forward-looking market intelligence pertaining to 

the alternatives, and assess the risks and rewards associated with each marketing strategy and its potential impact on the 

portfolio. 

RIK Risk Metrics

In FY 2007, the MMS plans to implement effective risk metrics to quantitatively identify exposures and inform commercial 

decisionmaking within the RIK Program. The metrics will be based on MMS’s RIK Risk Management Policy and 

associated Risk Procedures Manual, which were published in FY 2005 and FY 2006. The MMS has adopted a conservative 

business model, based on sound and widely-used commercial practices, in itself a risk mitigation mechanism. All RIK 

decisions, including expansion of RIK volumes, will be made in accordance with this policy. 

Managing Compliance Risk

The MMS uses a risk-based approach to select properties for review or audit and to allocate resources to achieve 

performance measures. The MMS’s operational strategy is to address risk and capture process and cost efficiencies 

through full integration of Federal and Indian operations. In December 2005, the MRM published its program-wide 

Strategic Business Plan for FY 2007-2012. Over the 5-year Plan horizon, MMS will strategically direct compliance 

resources toward the highest risk areas (whether Indian or Federal) while still achieving ambitious royalty coverage 

targets. The MMS is currently reevaluating MRM Compliance strategies and measures as a part of the Compliance 

Business Planning process, and has engaged Lukens Energy Group to assist in identifying major areas of risk within 

MRM’s compliance program, and to provide collaborative consultation regarding strategies and performance measures 

for fulfilling compliance responsibilities. 
FY 2006 Annual Report Page 28

Increasing Indian Outreach

Working in partnership with our sister agencies, BLM, BIA, OST, and the U.S. Geological Survey, the MMS is leading an 

effort to expand the number of Indian outreach sessions provided by developing Indian oil and gas training that covers all 

aspects of trust management including land ownership, leasing, drilling, production verification, lease inspection, royalty 

reporting, compliance, royalty disbursement, and financial trust accounts. The new training will be tailored for tribes and 

Individual Indian Mineral Owners in the various regions where outreach is conducted, as well as for DOI employees who 

are involved in Indian oil and gas activities. The additional outreach sessions and the joint agency training program will 

provide Indian communities and DOI employees opportunities to gain more knowledge of the full spectrum of Indian 

mineral resources.

Implementing the Energy Policy Act of 2005 to Meet Increasing Energy Demand

The MMS has made great progress over the past year in implementing the provisions of the EPAct. Many of the items in 

the Act for which MMS is responsible have been completed, but much still remains to be done. Some of the tasks MMS 

will be working on in the upcoming year include:

•	 Develop and issue final rules providing royalty incentives to encourage the production of energy from geothermal 

resources, marginal properties, and from deep gas fields on the OCS.

•	 Establish a program for alternative energy-related uses on the OCS and provide for a 27 percent sharing of any 

royalties, bonuses, and rentals for these projects within three nautical miles seaward of State waters. Proposed 

rule to be published in Spring 2007.

•	 Continue the implementation of the new CIAP:

•	 Receive grant applications as soon as October 2, 2006.

•	 Dispense $250 million per year for FY 2007 through FY 2010 to Louisiana, Texas, Mississippi, Alabama, 

Alaska and California in a formula based upon each State’s proximity to production, population and length of 

coastline. 

•	 Implementation of Minerals Revenue Management Support System modifications to implement provisions of the 

EPAct that allow royalty credits. 

New Frontiers for the OCS Oil and gas Program

With the increasing pressure on domestic and global energy markets, high oil and gas prices and growing dependence 

on foreign oil supplies, the United States is facing new challenges in meeting our energy demand. But these challenges 

also present new opportunities to expand the sources of our domestic oil and gas production. The offshore petroleum 

industry, under MMS oversight, has already moved into deeper OCS waters. This trend will continue, with exploration 

and production occurring in even deeper waters and from depths below the earth’s surface not thought possible just a few 

years ago. As oil and gas companies have moved into deeper water in their search for essential energy supplies, MMS has 

had to develop the technical and environmental information and expertise necessary to support industry’s progress and 

perform its regulatory responsibilities.

In addition to dealing with the challenges associated with these technological frontiers in existing areas of production, 

MMS is looking into the possibility of development in new geographic areas. The Proposed OCS Program for 2007 – 2012 

considers leasing in areas that have not been available for many years. Should these areas remain in the Final Program, 

MMS will need to establish research initiatives to gather the information necessary to support decisions on whether or not 

to offer leases in these areas and, if so, when and under what conditions. Just as with industry’s advance into deep water, 

we will not allow leasing and development in these frontier areas until we have sufficient environmental, geological and 

operational information to conclude that all proposed activities can take place cleanly, safely and in a manner compatible 

with other coastal and marine resources.
FY 2006 Annual Report Page 29

DISCUSSION AND ANALYSIS OF THE FINANCIAL STATEMENTS

The MMS prepares annual Financial Statements to help fulfill its responsibility to be publicly accountable, and to manage 

its programs efficiently and effectively. The MMS’s principal Financial Statements include the consolidated balance 

sheet, consolidated statements of net cost, consolidated statement of changes in net position, consolidated statement of 

financing, combined statement of budgetary resources, and statement of custodial activity.

To provide greater assurance on the integrity of financial operations and the accuracy of financial data, MMS undergoes 

annual Financial Statement audits. The MMS’s goals are to obtain an unqualified audit opinion on its Financial Statements, 

eliminate findings related to the internal control environment, and ensure the Bureau does not have instances of noncompliance with provisions of laws and regulations that have a direct and material impact on the Financial Statements.

The MMS obtained an unqualified opinion on its Financial Statements in FY 2006 and FY 2005. While MMS has made 

significant progress in enhancing its overall control environment we have not been able to eliminate all instances of 

reportable conditions or non-compliance with applicable laws and regulations.

Limitation of Financial Statements

Responsibility for the integrity and objectivity of the Financial Statements lies with MMS management. The Financial 

Statements and supplementary schedules included in the report reflect the financial position and results of operations 

of MMS pursuant to the Chief Financial Officers Act of 1990 and the Government Management Reform Act of 1994. 

While the statements are prepared from the books and records of the Bureau in accordance with generally accepted 

accounting principles for Federal entities and the formats prescribed by OMB, the statements differ from financial reports 

used to monitor and control budgetary resources prepared from the same books and records. The Financial Statements 

should be read with the realization that MMS is a Bureau of the Department of the Interior, an Agency of the executive 

branch of the United States Government, a sovereign entity. Accordingly, unfunded liabilities reported in the statements 

cannot be liquidated without the enactment of an appropriation, and ongoing operations are subject to the enactment of 

appropriations.

General

Statement of Net Cost and the Strategic Plan

In accordance with OMB Circular A-136, MMS aligned its Statement of Net Cost directly to the goals and outcomes 

identified in the Department of the Interior Strategic Plan. As required by the Government Performance Results Act 

(GPRA), the Department updated its departmentwide strategic plan in FY 2004. Under the updated Strategic Plan, the 

mission goals and categories for MMS are as follows: 

1. Resource Use

2. Serving Communities

3. Reimbursable Activity, and Other

Interior Franchise Fund

Realignment

Effective October 1, 2005, the Department of the Interior transferred the Interior Franchise Fund from the Minerals 

Management Service to Departmental Offices. In accordance with OMB Circular A-136, the Minerals Management Service 

has restated its FY 2005 financial statements to remove the Interior Franchise Fund financial amounts and therefore present 

the FY 2005 financial statements comparative to the FY 2006 financial statements. Note 24 of the financial statements 

summarizes the changes to the FY 2005 financial statements as a result of this change in reporting entity.

 
FY 2006 Annual Report Page 30

Operating Challenges

Fiscal year 2006 presented a number of important challenges that affected MMS’s financial position and results of 

operations. The most significant of these were the realignment of the Interior Franchise Fund, increased royalty and 

related collections and distributions caused by higher oil and gas prices and production volume, and the development of 

alternative processes to accurately report on oil and gas production for those companies affected by Hurricanes Katrina 

and Rita. 

Assets 

The MMS’s Consolidated Balance Sheet shows FY 2006 assets totaling $3,827 million, a decrease of $229 million from 

FY 2005. The decrease is primarily attributable to a decrease in Administrative Accounts Receivable due on deferred 

bonuses for on-shore solid mineral leases. 

Liabilities and Net Position

The MMS’s Consolidated Balance Sheet shows FY 2006 liabilities totaling $3,238 million, a decrease of $254. The 

decrease is primarily a result of a decrease State Liabilities. 

Federal agencies, by law, cannot make payments unless Congress appropriated funds. The MMS’s unfunded liabilities 

excluding the accrued liability to the States, deferred credits for lease bonus money on oil and gas leases that have not yet 

been finalized, and custodial liabilities for royalties payable is approximately $574 million. The $574 million consists of 

accrued contingent liabilities as described below, annual leave, unfunded workers compensation claims under the Federal 

Employees Compensation Act, which are considered an expense and liability in the current year, but which will be paid 

out of funds made available to the Agency in future years, and capital lease liabilities. 

The Net Position of the Bureau consists of Unexpended Appropriations - Other Funds, Cumulative Results of Operations 

- Earmarked Funds, Cumulative Results of Operations - Other Funds. The MMS’s Net Position as of September 30, 2006, 

is $590 million, which consists of $24.7 million of Unexpended Appropriations, a deficit of $502 million in Cumulative 

Results of Operations – Other Funds, and $1,067 million in Cumulative Results of Operations – Earmarked Funds.

The Unexpended Appropriations represent spending authority appropriated by Congress that has not yet been used.

Cumulative Results of Operations is the net results of the Bureau’s operations over time, and is a deficit at September 

30, 2005, due to a legal contingent liability that has been accrued for. It is legal counsel’s opinion that ultimately any 

liability associated with this case will be funded by the Department of Justice’s Judgment Fund, at which time MMS will 

recognize a financing source, and the deficit will be eliminated. The Cumulative Results - Earmarked Funds related to 

the EIRF, results from a June 29, 2000 U.S. Supreme Court decree, settling a long-standing dispute between the State of 

Alaska and the Federal Government, over the State/Federal boundary of areas leased for oil and gas in the Beaufort Sea. 

The law requires that the corpus of the Fund be invested. Twenty percent of the interest earned each year is permanently 

appropriated to the Department of Commerce with the remaining interest staying with the fund to be appropriated by 

Congress to other agencies as specifically provided by the law.

Costs of Operations

As reflected on the Consolidated Statement of Net Cost, the total FY 2006 cost of MMS operations was $2.14 billion, a 

decrease of approximately $288 million from the FY 2005 cost of $2.42 billion. While there was a net overall decrease of 

$288 million there was a significant increase of approximately $494 million of royalty collections paid to the States. This 

increase was off-set by a decrease in lease bonus collections paid to the states.

Revenues

In general, MMS’s strategic goals are intended to be funded by general government funds derived from tax receipts and 

other sources. However, other fees and collections support a number of MMS activities. As authorized by Congress, 
FY 2006 Annual Report Page 31

MMS collected approximately $168 million in revenues during FY 2006, from the public as royalties, rents, and bonus 

receipts. 

Budgetary Resources

The MMS’s major sources of budgetary resources consist of direct appropriations and offsetting collections. In FY 2006 

total budgetary resources increased from $1,976 million to $2,510 million. The increase is primarily the result of a $494 

million increase in appropriations received for royalties that will ultimately be distributed to the states. 

The MMS’s FY 2006 budgetary resources of $2,510 million consisted of approximately $173 million or 7% of offsetting 

collections, $2,320 million or 92% of appropriations received, and $17 million or 1% of Unobligated Balances brought 

forward from prior years, Recoveries of prior year unpaid obligations, nonexpenditure transfers, and other amounts either 

temporarily or permanently unavailable. Of the total budgetary resources, $2,469 million were obligated in FY 2006.

The MMS’s mission critical operations are funded from three sources: the Royalty and Offshore Minerals Management 

(ROMM) appropriation, Oil Spill Research, and offsetting collections received primarily from rental receipts from offshore 

leases. For FY 2006, the MMS had total annual appropriated resources of $357.2 million, of which $171.2 million was 

from offsetting collections. 

Custodial Accounts 

The MMS’s custodial revenues are from Outer Continental Shelf and onshore oil, gas, and mineral lease sales and royalties. 

These revenues are presented on MMS’s Statement of Custodial Activity, and not its Statement of Net Cost or Statement 

of Changes in Net Position, because they are considered to be revenue of the Government as a whole rather than to MMS 

or the Department. Revenues are collected on behalf of the U.S. Treasury, other Federal agencies, States, Indian Tribes, 

and Individual Indian Allottees.

In FY 2006 MMS had custodial revenues of approximately $11,863 million, a decrease of approximately $519 million 

from FY 2005. Despite the overall decrease there was an increase of $1,688 million of rents and royalties collected due to 

a combination of higher oil and gas prices and increased volume by producers, and an increase of $389 million received 

for offshore lease sales. These increases were offset by decreases in onshore lease sales of $1,384 million, and a decrease 

of $1,213 million of receipts related to the Strategic Petroleum Reserve. 

COMPLIANCE WITH LAWS, SYSTEMS, CONTROLS, AND FINANCIAL PERFORMANCE

Compliance With Laws

MMS is required to comply with several key legal and regulatory financial requirements, including the Prompt Payment Act, 

the Debt Collection Improvement Act, the Improper Payments Information Act, the Inspector General Act Amendments 

(Audit Follow-Up), the Federal Oil and Gas Royalty Management Act, the Federal Financial Management Improvement 

Act (FFMIA), and the Federal Financial Management Improvement Act (FFMIA). 

Federal Financial Management Improvement Act (FFMIA)

As of September 30, 2006 MMS financial management systems complied substantially with the U.S. Standard General 

Ledger (USSGL) at the Transaction Level, financial management systems requirements, and accounting standards 

applicable to Federal entities. 

Federal Managers’ Financial Integrity Act (FMFIA)

The MMS centrally manages the Federal Managers Financial Integrity Act program, with oversight responsibilities 

assigned to the bureau CFO and deputy CFO. Each of the four MMS Associate Directors maintains responsibility 
FY 2006 Annual Report Page 32

for effective controls to provide reasonable assurance that Government resources are protected against fraud, 

waste, abuse, mismanagement, or misappropriation.

Audit Follow-Up

During fiscal year 2006 MMS made significant progress in implementing processes and procedures to correct findings 

identified during previous audits. While considerable effort and resources have been expended, and most findings from 

previous audits have been corrected, MMS has not yet completed its efforts to eliminate previous findings or noncompliances related to system and application controls and accounts receivable.

Improper Payments Information Act

The Improper Payments Information Act (IPIA) of 2002 (P.L. 107-300) requires Federal agencies to carry out a costeffective program for identifying payment errors and recovering any amounts overpaid. An improper (or erroneous) 

payment includes any payment that should not have been made, or that was made in an incorrect amount under 

statutory, contractual, administrative, or other legally applicable requirement. Incorrect amounts include: overpayments; 

underpayments (including inappropriate denials of payment or service); any payment made to an ineligible recipient or 

for an ineligible service; duplicate payments; payments for services not received; and payments that do not account for 

credit for applicable discounts.

To implement IPIA, the Office of Management and Budget (OMB) required agencies to review all programs (meeting 

OMB’s definition of “program”) to determine the risk susceptibility of making improper payments and to perform more 

in depth assessments for those programs meeting OMB’s criteria for “significant erroneous payments”, defined as annual 

erroneous payments in the program exceeding both 2.5% of program payments and $10 million.

Based on management analysis and a series of internal control review techniques, MMS determined that none of its 

programs are risk-susceptible for making significant improper payments at or above the threshold levels set by OMB. 

It should be noted that these reviews were conducted in addition to audits under the Chief Financial Officers Act of 

1990, GAO reviews, and reviews by Interior’s Inspector General. Three different techniques were used to arrive at this 

determination: (1) risk assessments of internal controls related to payments for all programs using the thresholds set out 

above; (2) Departmental Functional Reviews (DFRs) focusing on the general control environment for making payments 

and the controls related to specific payment types; and (3) post-payment recovery audits. Each of the three techniques is 

summarized below:

1. Risk Assessments. Under Departmental Management Control Guidance for FY 2006 MMS conducted risk assessments 

of all programs to determine if any were risk-susceptible for making significant improper payments. The assessments were 

used to establish risk profiles for all bureau programs. As a result of these reviews MMS came to the conclusion that none 

of its programs pose a high-risk of making significant improper payments based on OMB’s criteria.

2. Department-Wide Functional Reviews (DFRs). Under Departmental guidance MMS conducted DFRs in FY 2006 

for the following payment processes: vendor, travel, and purchase card. The results of the DFRs indicated that internal 

controls were adequate and working as intended in the vendor, travel, and purchase card processes. 

3. Recovery Audits - In response to Section 831 of the Defense Authorization Act for FY 2002 (U.S. Code 31 USC 3561-

3567), Interior contracted with a recovery audit firm that began work in FY 2004. Since 2004 the recovery audit firm has 

identified less than $75 thousand in erroneous payments.

MMS Plans for FY 2007 – FY 2008. Annual goals are to maintain adequate controls over payment processes to ensure 

that erroneous payments are minimized. The MMS will continue using contractor assistance to perform postpayment recovery audits initiated in FY 2004.

Financial Systems
FY 2006 Annual Report Page 33 

Currently MMS relies on a set of financial management systems to collectively support program and financial managers. 

Systems are managed at various levels within MMS ranging from bureau level centrally managed systems, locally managed 

systems, and externally managed systems upon which MMS relies. Collectively these systems represent MMS’s financial 

management systems architecture.

In alignment with the views of the government-wide CFO council, MMS believes that the key to improved program and 

financial management is improved financial management systems. To meet the need for improved systems MMS has fully 

aligned with a department wide initiative to implement the Financial and Business Management System (FBMS) and will 

convert to the FBMS system in the first quarter of FY2007. 

Management Controls

MMS’s management control program is designed to ensure compliance with the goals, objectives, and requirements of 

the FMFIA and Office of Management and Budget (OMB) Circular A-123, “Management Accountability and Control,” 

Circular A-127, “Financial Systems,” and OMB Circular A-130, “Management of Federal Information Resources.”

MMS believes that in addition to reoccurring controls within each of its significant business processes, the key to sound 

internal control is cognizance of the overall control environment by all levels of management, and the communication 

of management’s emphasis on the importance of a sound control environment. As part of its overall control program 

MMS has implemented a comprehensive management review program to include Administrative Management Assistance 

Reviews, Department-Wide Functional Reviews, and Risk Assessments of its major programs.

Financial Performance

The MMS monitors financial management performance through periodic collection and reporting of data for the Prompt 

Payment, Electronic Funds Transfers, and the Debt Collection Act. These reports are prepared and submitted to the 

Department of the Interior’s Office of Financial Management for review by Departmental senior managers.

Performance Measure: To have the percentage of payments without interest penalties meet or exceed the government 

wide goal of 98 percent. 

2006 Results: The MMS paid 99.7 percent of all payments without interest penalty in FY 2006. 

Performance Measure: To use Electronic Funds Transfer (EFT) to the maximum extent possible when making payments, 

in-order to exceed the government wide goal of 90%. 

2006 Results: The MMS achieved its goal by continuing to require new vendors and employees to enroll for EFT 

payments. During FY 2006, 99.9 percent of all payments were made via EFT. 

Performance Measure: To identify and refer 95 percent of delinquent debt to Treasury when 180 days past due.

2006 Results: The MMS met this goal by identifying and referring 99.9 percent of eligible delinquent debt to Treasury 

when 180 days past due. 

Performance Measure: To reduce the delinquency rate of employee individually billed travel charge card 

accounts past due 61+ days to one percent or less.

2006 Results: The MMS met this goal. In 2006 there were no delinquencies of employee individually billed 

travel charges. 
FY 2006 Annual Report Page 34 

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Principal Financial Statements
Page 57 FY 2006 Annual Report

Launch of Remotely Operated Vehicle
FY 2006 Annual Report Page 58

FY 2006

ASSETS

Intragovernmental Assets:

Administrative Fund Balance 148,541

Fund Balance with Treasury (Note 2) 148,541

Restricted Treasury Securities 1,062,796

Custodial Treasury Securities 58,392

Investments, Net (Note ) 1,121,188

Custodial Accounts Receivable 267,707

Administrative Accounts Receivable 478

Accounts and Interest Receivable (Note ) 268,185

Other:

Advances and Prepayments 18

Total Intragovernmental Assets 1,537,932

Custodial Accounts and Interest Receivable 1,452,390

Administrative Accounts Receivable 812,654

Accounts and Interest Receivable, Net (Note ) 2,265,044

General Property, Plant and Equipment, Net (Note ) 24,452

TOTAL ASSETS (Note 6) $ 3,827,428

Stewardship Assets (Note 1)

(dollars in thousands)

 U.S. Department of the Interior

Minerals Management Service

Consolidated Balance Sheet

As of September 30, 2006
FY 2006 Annual Report Page 59

FY 2006

LIABILITIES

Intragovernmental Liabilities:

Accounts Payable $ 3,838

Other:

Custodial Liability 1,701,399

Accrued Employee Benefits 3,702

Total Intragovernmental Liabilities 1,708,939

Accounts Payable 18,222

Federal Employee Benefits - FECA Actuarial Liability (Note 7) 9,038

Other:

State Liabilities 812,588

Contingent Liabilities (Note 8) 550,000

Royalty Credit Liability (Note 9) 44,322

Advances, Deferred Revenue, and Deposit Funds 55,112

Custodial Liability 22,080

Unfunded Annual Leave 12,138

Accrued Payroll and Benefits 5,057

Capital Lease Liability (Note 10) 24

TOTAL LIABILITIES (Note 11) 3,237,520

Commitments and Contingencies (Note 8 and 9)

Net Position

Unexpended Appropriations - Other Funds 24,768

Cumulative Results of Operations - Earmarked Funds (Note 20) 1,067,265

Cumulative Results of Operations - Other Funds (502,125)

Total Net Position 589,908

TOTAL LIABILITIES AND NET POSITION $ 3,827,428

The accompanying notes are an integral part of these financial statements.

 U.S. Department of the Interior

Minerals Management Service

Consolidated Balance Sheet

As of September 30, 2006

(dollars in thousands)
FY 2006 Annual Report Page 60

FY 200 

(Restated - Note 2)

ASSETS

Intragovernmental Assets:

Administrative Fund Balance $ 111,724

Custodial Fund Balance 1

Fund Balance with Treasury (Note 2) 111,725

Restricted Treasury Securities 1,030,926

Custodial Treasury Securities 57,320

Investments, Net (Note ) 1,088,26

Custodial Accounts Receivable 00,068

Administrative Accounts Receivable 1,471

Accounts and Interest Receivable (Note 4) 401,539

Other:

Advances and Prepayments 107

Total Intragovernmental Assets 1,601,617

Custodial Accounts and Interest Receivable 1,16,0

Administrative Accounts Receivable 1,009,512

Accounts and Interest Receivable, Net (Note ) 2,26,02

General Property, Plant and Equipment, Net (Note ) 28,

Other:

Advances and Prepayments 2

TOTAL ASSETS (Note 6) $ ,06,21

Stewardship Assets (Note 1)

(dollars in thousands)

 U.S. Department of the Interior

Minerals Management Service

Consolidated Balance Sheet

As of September 30, 2005
FY 2006 Annual Report Page 61

FY 200 

(Restated - Note 2)

LIABILITIES

Intragovernmental Liabilities:

Accounts Payable $ 2,827

Other:

Custodial Liability 1,799,017

Accrued Employee Benefits 3,759

Advances and Deferred Revenue 6

Total Intragovernmental Liabilities 1,806,139

Accounts Payable 21,11

Federal Employee Benefits - FECA Actuarial Liability (Note 7) 9,837

Other:

State Liabilities 1,009,419

Contingent Liabilities (Note 8) 550,690

Advances, Deferred Revenue, and Deposit Funds 2,02

Custodial Liability 2,28

Accrued Payroll and Benefits 17,495

Capital Lease Liability (Note 10) 1

TOTAL LIABILITIES (Note 11) 3,490,882

Commitments and Contingencies (Note 8)

Net Position

Unexpended Appropriations 8,573

Cumulative Results of Operations:

Administrative Cumulative Results of Operations (474,167)

EIRF Cumulative Results of Operations 1,030,926

Total Cumulative Results of Operations 556,759

Total Net Position 6,2

TOTAL LIABILITIES AND NET POSITION $ ,06,21

(dollars in thousands)

The accompanying notes are an integral part of these financial statements.

 U.S. Department of the Interior

Minerals Management Service

Consolidated Balance Sheet

As of September 30, 2005
FY 2006 Annual Report Page 62

FY 2006 FY 200

Resource Use Energy

Manage and Provide Incentives for Access

and Development

Costs $ 90,082 $ 80,66

Less: Earned Revenue 28,037 0,11

Net Cost 62,045 0,2

Enhance Responsible Use Management Practices

Costs 70,704 69,117

Less: Earned Revenue 21,689 ,880

Net Cost 49,015 35,237

Effective Lease and Permit Management

Costs 2,110,784 2,373,898

Less: Earned Revenue 104,665 58,278

Net Cost 2,006,119 2,1,620

Improve Information Base, Resource Management

and Technical Assistance

Costs 6,649 4,711

Less: Earned Revenue 3,657 2,259

Net Cost 2,992 2,2

Total Resource Use Energy

Costs 2,278,219 2,528,292

Less: Earned Revenue 158,048 12,1

Net Cost 2,120,171 2,403,761

Resource Use Non-Energy

Costs 3,536 3,872

Less: Earned Revenue 2,332 2,127

Net Cost 1,204 1,745

Serving Communities

Costs 28,267 1,16

Less: Earned Revenue 10,827 9,700

Net Cost 17,440 21,6

Reimbursable Activity and Other (Restated - Note 24)

Costs 14,595 13,271

Less: Earned Revenue 15,735 14,449

Net Cost (1,140) (1,178)

Total (Restated - Note 24)

Costs 2,324,617 2,576,598

Less: Earned Revenue (Note 1) 186,942 150,807

Net Cost of Operations (Note 12) $ 2,137,675 $ 2,425,791

(dollars in thousands)

The accompanying notes are an integral part of these financial statements.

U.S. Department of the Interior

Minerals Management Service

Consolidated Statement of Net Cost

For the years ended September 30, 2006 and 2005
FY 2006 Annual Report Page 63 

FY 200

Earmarked FY 2006 Consolidated

(Note 20) All Other Consolidated (Restated - Note 2)

UNEXPENDED APPROPRIATIONS

Beginning Balance $ - $ 8,573 $ 8,573 $ 7,450

Budgetary Financing Sources

Appropriations Received, General Funds 18,61 - 184,651 169,175

Appropriations Transferred In/(Out) - (,) (3,343) ,

Appropriations-Used (162,2) - (162,523) (168,927)

Other Adjustments - (2,590) (2,590) (2,68)

Net Change - 16,195 16,195 1,12

Ending Balance - Unexpended Appropriations $ - $ 24,768 $ 24,768 $ 8,573

CUMULATIVE RESULTS OF OPERATIONS

Beginning Balance $ 1,06,226 $ (479,467) $ 556,759 $ ,88

Budgetary Financing Sources

Appropriations-Used 162,2 - 162,523 168,927

Other Budgetary Financing Sources - MRM Exchange Revenue (Note 14) 1,931,073 - 1,931,073 2,229,171

Non-Exchange Revenue 31,869 - 31,869 29,272

Transfers In/(Out) without Reimbursement 6,903 - 6,903 7,006

Other Financing Sources

Transfers In/(Out) without Reimbursement - (1,2) (1,253) (88)

Imputed Financing from Costs Absorbed by Others - 14,941 14,941 1,128

Total Financing Sources 1,969,845 176,211 2,146,056 2,447,666

Net Cost of Operations (1,938,806) (198,869) (2,137,675) (2,425,791)

Net Change 31,039 (22,68) 8,381 21,875

Ending Balance - Cumulative Results of Operations $ 1,067,265 $ (02,12) $ 565,140 $ 556,759

(dollars in thousands)

The accompanying notes are an integral part of these financial statements.

U.S.Department of the Interior

Minerals Management Service

Consolidated Statement of Changes in Net Position

For the years ended September 30, 2006 and 2005
FY 2006 Annual Report Page 64 

FY 2006 FY 200

(Restated - Note 2)

Budgetay Resources:

Unobligated balance, beginning of Fiscal Year: $ 16,563 $ 13,572

Recoveries of prior year unpaid obligations 6,949 6,195

Budget Authority

Appropriation 2,319,561 1,808,910

Spending authority from offsetting collections

Earned

Collected 187,050 10,266

Change in receivables from Federal sources (993) (16)

Change in unfilled customer orders

Advance received (1,302) (6,60)

Without advance from Federal sources (12,034) 2,68

Total Budgetary Authority 2,492,282 1,955,003

Nonexpenditure transfers, net, anticipated and actual (3,344) ,

Temporarily not available pursuant to Public Law (102) (99)

Permanently not available (2,590) (2,467)

Total Budgetary Resources $ 2,509,758 $ 1,975,548

Status of Budgetary Resources:

Obligations incurred:

Direct $ 2,299,974 $ 1,810,0

Reimbursable 169,076 18,

Total Obligations incurred (Note 1) 2,469,050 1,958,985

Unobligated balance available:

Apportioned 38,607 1,10

Unobligated balance not available (Note 17) 2,101 1,8

Total Status of Budgetary Resources $ 2,509,758 $ 1,975,548

Change in Obligated Balance:

Obligated balance, net

Unpaid obligations, brought forward, beginning of Fiscal Year $ 109,927 $ 106,077

Less: Uncollected customer payments from Federal sources,

brought forward, beginning of Fiscal Year (14,767) (12,6)

Total unpaid obligated balance, net, beginning of Fiscal Year 95,160 93,741

Obligations incurred, net 2,469,050 1,958,985

Less: Gross outlays (2,462,493) (1,948,939)

Less: Recoveries of prior year unpaid obligations, actual (6,949) (6,195)

Change in uncollected customer payments from Federal sources 13,027 (2,2)

Total, unpaid obligated balance, net, end of period $ 107,795 $ 95,160

Obligated balance, net, end of period - by component:

Unpaid obligations $ 109,534 $ 109,927

Less: Uncollected customer payments from Federal sources (1,739) (14,767)

Total, unpaid obligated balance, net, end of period $ 107,795 $ 95,160

Net Outlays:

Net Outlays

Gross outlays $ 2,462,493 $ 1,948,939

Less: Offsetting collections (185,749) (1,661)

Less: Distributed Offsetting receipts (2,640,078) (2,070,117)

Net Outlays (Receipts) $ (363,334) $ (264,839)

The accompanying notes are an integral part of these financial statements.

U.S. Department of the Interior

Minerals Management Service

Combined Statement of Budgetary Resources

For the years ended September 30, 2006 and 2005

(dollars in thousands)
FY 2006 Annual Report Page 65 

FY 2006 FY 200

(Restated - Note 2)

Resources Used to Finance Activities:

Budgetary Resources Obligated:

Obligations Incurred $ 2,469,050 $ 1,958,985

Less: Spending Authority From Offsetting Collections/Recoveries (179,670) (12,288)

Obligations Net of Offsetting Collections and Adjustments 2,289,380 1,806,697

Less: Offsetting Receipts (2,640,078) (2,070,117)

Net Obligations (350,698) (26,20)

Other Resources:

Transfers In/Out Without Reimbursement (1,253) (88)

Imputed Financing From Costs Absorbed by Others 14,941 1,128

Net Other Resources Used to Finance Activities 13,688 13,290

Total Resources Used to Finance Activities (337,010) (20,10)

Resources Used to Finance Items Not Part of the Net Cost 

of Operations:

Change in Budgetary Resources Obligated for Goods, Services, and

Benefits Ordered but Not Yet Provided (2,032) 6,898

Change in Unfilled Customer Orders (13,335) (,08)

Resources That Fund Expenses Recognized in Prior Periods (198,408) (9)

Budgetary Offsetting Collections and Receipts That Do Not Affect

Net Cost of Operations:

Offsetting Receipts Not Part of the Net Cost of Operations 2,640,078 2,070,117

Resources That Finance the Acquisition of Assets (1,214) (2,218)

Other Resources or Adjustments to Net Obligated Resources That Do

Not Affect Net Cost of Operations 235 529

Total Resources Used to Finance Items Not Part of the Net

Cost of Operations 2,425,324 2,071,279

Total Resources Used to Finance the Net Cost of Operations 2,088,314 1,821,149

Components of Net Cost of Operations That Will Not Require or 

Generate Resources in the Current Period:

Components Requiring or Generating Resources in Future Periods:

Increase in Annual Leave Liability (Note 21) - 616

Other (Note 21) 44,322 599,060

Total Components of Net Cost of Operations That Will Require or Generate

Resources in Future Periods 44,322 599,676

Components Not Requiring or Generating Resources:

Depreciation and Amortization 4,800 4,898

Revaluation of Assets or Liabilities 242 28

Other (3) (21)

Total Components of Net Cost of Operations That Will Not Require or 

Generate Resources 5,039 4,966

Total Components of Net Cost of Operations That Will Not

Require or Generate Resources in the Current Period 49,361 60,62

Net Cost of Operations $ 2,137,675 $ 2,425,791

The accompanying notes are an integral part of these financial statements.

Department of the Interior

Minerals Management Service

Consolidated Statement of Financing

For the years ended September 30, 2006 and 2005

(dollars in thousands)
FY 2006 Annual Report Page 66

FY 2006 FY 200

Revenues on Behalf of the Federal Government

Mineral Lease Revenue

Rents and Royalties $ 10,656,292 $ 8,968,062

Onshore Lease Sales 275,031 1,658,786

Offshore Lease Sales 949,875 60,622

Strategic Petroleum Reserve (Note 22) (18,466) 1,194,618

Total Revenue $ 11,862,732 $ 12,82,088

Disposition of Revenue

Distribution to Department of the Interior

Minerals Management Service (Note 2) 2,295,815 1,762,091

Bureau of Reclamation 1,649,066 1,287,972

National Park Service Conservation Funds 898,304 1,048,870

Bureau of Land Management 71,821 81,08

Fish and Wildlife Service 1,608 1,06

Distribution to Other Federal Agencies

Department of the Treasury 6,869,771 5,502,192

Department of Agriculture 73,531 0,860

Department of the Commerce 25 1

Department of Energy (Note 22) (18,466) 1,194,618

Distribution to Indian Tribes and Agencies 158,155 11,02

Distribution to States and Others 82,355 72,323

Change in Untransferred Revenue (219,253) 1,266,692

Total Disposition of Revenue 11,862,732 12,82,088

Net Custodial Activity $ - $ -

(dollars in thousands)

The accompanying notes are an integral part of these financial statements.

U.S. Department of the Interior

Minerals Management Service

Statement of Custodial Activity

For the years ended September 30, 2006 and 2005
FY 2006 Annual Report Page 48

Note 1.1 Significant Accounting Policies

A. Basis of Presentation

These financial statements have been prepared to report the financial position, net cost of operations, changes in net 

position, budgetary resources, reconciliation of net cost to budgetary obligations, and custodial activities of the Minerals 

Management Service (MMS), as required by the Chief Financial Officers Act of 1990 and the Government Management 

Reform Act of 1994.

The financial statements have been prepared from the accounting records of MMS in accordance with accounting principles 

generally accepted in the United States of America (GAAP) using guidance issued by the Federal Accounting Standards 

Advisory Board (FASAB). Significant MMS accounting policies are summarized in this note.

The financial statements should be read with the realization that they are for a component of the United States Government, 

a sovereign entity. One implication of this is that liabilities cannot be liquidated without legislation that provides resources 

and legal authority to do so.

Certain MMS financial activities interact with and depend on the financial activities of the centralized management 

function of the Federal Government. These activities are performed for the benefit of the whole Federal Government, 

and include public debt and employee retirement, life insurance, and health benefit programs. Employee retirement, life 

insurance and health benefit costs, along with an assigned (imputed) financing source for these costs, are included in the 

MMS financial statements. Public debt activities that are performed for the benefit of the Federal Government as a whole 

are not included in these financial statements.

B. Reporting Entity

The Minerals Management Service was created on January 19, 1982, by Secretarial Order No. 3071, under authority 

of Section 2 of Reorganization Plan No. 3 of 1950 (64 Stat. 1262). On May 10, 1982, by Secretarial Order No. 3071, 

Amendment No. 1, all Outer Continental Shelf (OCS) leasing responsibilities of the Department of the Interior were 

consolidated within MMS under Section 2 of Reorganization Plan No. 3 of 1950. Amendment No. 2, dated May 26, 1982, 

set forth the basic organizational structure for MMS and provided for the transfer of administrative functions. Secretarial 

Order No. 3087, dated December 3, 1982, and Amendment No. 1, dated February 7, 1983, provided for the transfer of 

royalty and mineral revenue management functions, including collection and distribution performed by the Bureau of 

Land Management, to MMS.

The accompanying financial statements include all components of Minerals Management Service, including, Royalty and 

Offshore Minerals Management, Mineral Leasing, and Oil Spill Research.

MMS has principal responsibility for the offshore leasing program, leasing management, and resource evaluation and 

classification functions, the environmental review of leasing activities, regulation of operations and lease management, 

inspection and enforcement programs, and leasing and related public liaison and planning functions on OCS lands. In 

addition, MMS is responsible for the prevention of fraud and theft and the prompt, full, and complete collection of monies 

and certain other forms of royalty due the Federal Government, States, and Indian lessors under contractual agreements 

with lessees.

The Minerals Revenue Management (MRM) Program, within MMS, performs primarily custodial activities that include 

the collection, distribution, and accounting for revenues as regulated by law. Some operational accounting activities 

also performed by MRM Program personnel include but are not limited to providing data for reporting requirements, 

investing revenues for both federal and non-federal funds, expending appropriations, establishing accounting procedures, 

and reconciling balances with other entities and Treasury.

In accordance with OMB Circular A-136, Financial Reporting Requirements, comparative statements are presented.

Notes to Financial Statements

September 30, 2006 and 2005
FY 2006 Annual Report Page 49

C. Transactions within MMS

Transactions and balances among the MMS components have been eliminated from the Consolidated Balance Sheet 

and the Consolidated Statement of Net Cost. The Consolidated Statement of Changes in Net Position does not have 

transactions or balances among the MMS components to be eliminated. In order to present all custodial activity, the 

distributions to MMS have not been eliminated on the Statement of Custodial Activity. However, the amounts are reported 

separately on the statement.

As provided for by OMB Circular A-136, Financial Reporting Requirements, the Statement of Budgetary Resources 

is presented on a combined basis. Therefore, intra-MMS transactions and balances have not been eliminated from this 

statement.

In accordance with OMB Circular A-136, intra-MMS transactions and balances have been eliminated from all the amounts 

on the Consolidated Statement of Financing, except for obligations incurred and spending authority from offsetting 

collections and adjustments, which are presented on a combined basis.

D. Basis of Accounting

MMS maintains its accounting records on both an accrual accounting basis and a budgetary accounting basis. Under the 

accrual method, revenues are recognized when earned and expenses are recognized when incurred, without regard to the 

receipt or payment of cash. 

Under budgetary accounting, MMS records budgetary authority when it’s legally received and records obligations of 

authority when legally incurred. Budgetary accounting facilitates compliance with constraints and controls over the use 

of Federal funds.

E. Fund Balance With Treasury

MMS’s receipts and disbursements are processed through the Federal Reserve System and the U.S. Treasury. The “Fund 

Balance with Treasury” balance as shown on the Consolidated Balance Sheet includes the unexpended balances of 

appropriations from which MMS is authorized to incur expenses and pay liabilities. The unobligated appropriation fund 

balances in expired accounts are unavailable for new obligations.

F. Accounts and Interest Receivable

Accounts receivable consist of amounts owed to MMS by other federal agencies and the public. No allowance is established 

for receivables due from federal agencies, as they are considered fully collectible.

G. General Property, Plant, and Equipment, Net

Property and equipment are valued at historical costs. Property and equipment are capitalized if the initial acquisition cost 

is $15,000 or more and the estimated useful life is two years or greater (excluding internal use software). Internal use 

software with a purchase price or development cost of more than $100,000 and the estimated useful life is greater than 

two years is capitalized. Depreciation is recorded using the straight-line method based on useful lives ranging from 3 to 

6 years for equipment and 10 years for internal use software.

H. Liabilities

Operating liabilities of MMS represent amounts likely to be paid by MMS as a result of transactions or events that have 

already occurred. However, no liabilities relating to MMS operations can be paid absent an appropriation. Liabilities for 

which an appropriation has not been enacted are classified as liabilities not covered by budgetary resources, without any 

certainty that an appropriation will be enacted.
FY 2006 Annual Report Page 50

I. Federal Employees Compensation Act

The Department of Labor (DOL) administers the Federal Employees Compensation Act (FECA), which provides workers’ 

compensation benefits to Federal employees. There are two types of liabilities related to workers’ compensation. 

The first type is unfunded accrued FECA liability, which represents MMS Workers Compensation claims paid by the DOL 

for Workers’ Compensation that have not yet been reimbursed by MMS. There is generally a two to three year time period 

between payment by DOL and reimbursement by MMS.

The second type is the unfunded actuarial FECA liability, which represents the estimated liability for future benefit 

payments as a result of past events. This liability includes death, disability, medical, and miscellaneous costs.

DOL determines the actuarial FECA liability annually, as of September 30, using a method that considers historical benefit 

payment patterns, wage inflation factors, medical inflation factors, and other variables. DOL discounts the projected 

annual benefit payments to present value using the Office of Management and Budget’s economic assumptions for 10-year 

Treasury notes and bonds.

To provide for the effects of inflation on the actuarial FECA liability, DOL applies wage inflation factors (i.e., cost of living 

adjustments) and medical inflation factors (i.e., consumer price index medical adjustments) to the calculation of projected 

future benefit payments. These factors are also used to adjust historical benefit payments to current-year constant dollars. 

DOL applies a discounting formula to recognize the timing of benefit payments as 13 payments per year instead of one 

lump sum payment per year.

DOL evaluates the estimated projections to ensure that the estimated future benefit payments are appropriate. The analysis 

includes three tests: (1) a comparison of the current-year projections to the prior year projections; (2) a comparison of 

the prior-year projected payments to the current-year actual payments, excluding any new case payments that had arisen 

during the current year; and (3) a comparison of the current-year actual payment data to the prior-year actual payment 

data. Based on the outcome of this analysis, adjustments may be made to the estimated future benefit payments.

J. Federal Employees Group Life Insurance (FEGLI) Program

Most MMS employees are entitled to participate in the FEGLI Program. Participating employees can obtain “basic life” 

term life insurance, with the employee paying two-thirds of the cost and MMS paying one-third. Additional coverage is 

optional, to be paid fully by the employee. The basic life coverage may be continued into retirement if certain requirements 

are met. 

The Office of Personnel Management (OPM) administers this program and is responsible for the reporting of liabilities. 

For each fiscal year, OPM calculates the U.S. Government’s service cost for the post-retirement portion of the basic 

life coverage. Because MMS’s contributions to the basic life coverage are fully allocated by OPM to the pre-retirement 

portion of coverage, MMS has recognized the entire service cost of the post-retirement portion of basic life coverage as 

an imputed cost and imputed financing source.
FY 2006 Annual Report Page 51

K. Advances and Deferred Revenue

Intra-governmental advances and deferred revenue represent liabilities to perform services or deliver goods to customers 

that have remitted payment in advance of receiving the goods and services. These amounts will be earned upon furnishing 

goods and services to customers typically within the next 12 months.

Public advances represent liabilities to perform services or deliver goods to customers that have remitted payment in 

advance of receiving the goods and services. These amounts will be earned upon furnishing goods and services to 

customers typically within the next 12 months. In FY 2005, deferred revenue consisted of receipts retained from royalty 

collections for the Strategic Petroleum Reserve (SPR). MMS was also authorized to retain collections for the transportation 

costs of the royalty oil taken in kind from Federal leases in the Gulf of Mexico, which was transferred to the Department of 

Energy. SPR receipts were recorded as deferred revenue when collected and the revenue was recognized when the costs 

were incurred for transportation costs. Since the SPR fill initiative was completed in July of 2005, the closing out of the 

fund took place in FY 2006 and there are no deferred revenues related to the SPR as of September 2006.

L. Accrued Unfunded Annual Leave

Amounts associated with the payment of annual leave are accrued while employees are earning leave. This accrual is 

reduced as leave is taken. Each year the balance in the accrued annual leave account is adjusted to reflect current pay 

rates. To the extent current or prior year appropriations are not available to finance annual leave, future financing sources 

will be used.

Sick leave and other types of leave are expensed as taken because they are non-vesting in nature.

M. Contingent Liabilities

Contingent liabilities are recorded when an event potentially leading to the recognition of a liability is probable, and the 

scope of the potential liability may be estimated.

Contingent liabilities are disclosed in the footnotes when the conditions for financial statement recognition are not met and 

when the outcome of a liability is more than remote and may be estimated.

N. Retirement Plans

MMS employees participate in one of two retirement systems, the Civil Service Retirement System (CSRS) or the Federal 

Employees’ Retirement System (FERS). Employees hired prior to January 1, 1984 could elect to join FERS or continue 

to participate in CSRS. Employees hired after December 31, 1983 are automatically covered by FERS and Social 

Security. 

CSRS employees may contribute up to ten percent of basic pay and receive no matching contributions from MMS. For 

FERS employees, MMS automatically contributes one percent of pay and matches any employee contribution up to an 

additional four percent of pay. FERS employees may contribute up to 15 percent of gross earnings. For employees in 

FERS, MMS also contributes the employer’s matching share for Social Security.

The OPM is responsible for reporting assets, accumulated plan benefits and unfunded liabilities, if any, applicable to 

CSRS participants and FERS employees government-wide, including MMS employees. MMS has recognized an imputed 

cost and imputed financing source for the difference between the estimated service cost and the contributions made by the 

MMS and covered CSRS employees.
FY 2006 Annual Report Page 52

O. Exchange Revenues

The prices charged by Minerals Management Service are set by law or regulation. Prices set for products and services 

offered through reimbursable agreements under the Economy Act are intended to recover the full costs incurred by these 

activities.

MMS reports, as exchange revenues, the amount of royalties, rents and bonuses that Congress authorizes MMS to use for 

operations, as these revenues off-set the costs incurred to generate the revenues.

P. Other Financing Sources and Revenues

The primary financing sources for Minerals Management Service operations come from its annual Congressional 

appropriation and its authority to retain certain receipts resulting from its activities. MMS is authorized to retain a portion 

of the rental income collected as a part of the custodial activity provided by the Minerals Revenue Management Program 

to fund its operating costs. These funds are used for operating and capital expenses of MMS. Additional amounts are 

obtained through reimbursements for services performed for other Federal agencies under the Economy Act. 

In addition, MMS receives appropriations for specific purposes such as computer acquisitions; to carry out title I, section 

1016, title IV, section 4202 and 4303, title VII, and title VIII, section 8201 of the Oil Pollution Act of 1990; to carry out 

provisions of the Minerals Leasing Act; to provide National Forest Fund payments to States, and to provide payments to 

States from lands acquired for flood control, navigation, and allied purposes.

Provisions in the FY 2006 Department of the Interior Appropriation’s Bill enable MMS to recover Royalty-in-Kind 

(RIK) sales revenue previously transferred to Treasury to offset the expenses associated with transportation, processing 

and administrative costs for the RIK sales. Similar legislative provisions enable MMS to recover RIK sales revenue 

previously transferred to Treasury to offset the necessary expenses incurred to deliver oil of sufficient quality and quantity 

to the Department of Energy for deposit into the Strategic Petroleum Reserve.

Appropriations: Appropriations are recognized as financing sources on the Statement of Changes in Net Position when 

goods and services are received or benefits are provided. This is true whether the goods, services, and benefits are payable 

or paid as of fiscal year end and whether the appropriations are used for items that are expensed or capitalized. In addition, 

appropriations are recorded as budgetary authority on the Statement of Budgetary Resources when realized.

Imputed Financing Sources: In certain instances, operating costs of MMS are paid out of funds appropriated to other 

federal agencies. For example, the Office of Personnel Management, by law, pays certain costs of retirement programs and 

the Judgment Fund maintained by Treasury pays certain legal judgments against MMS. MMS also recognized imputed 

financing sources and costs for costs paid by other Interior components in accordance with the Federal Accounting Standards 

Advisory Board’s Interpretation Number 6, Accounting for Imputed Intra-departmental Costs: An Interpretation of SFFAS 

Number 4. As a result, MMS recognized approximately $785 thousand and $1.7 million of imputed financing sources 

and costs in FY 2006 and FY 2005, respectively. For certain costs that are identifiable to MMS and directly attributable 

to MMS operations are paid by other agencies, MMS recognizes these amounts as operating expenses. In addition, MMS 

recognizes an imputed financing source on the Consolidated Statement of Changes in Net Position to indicate the funding 

of operations by other federal agencies.

Q. Net Position

Net position consists of unexpended appropriations and cumulative results of operations. Unexpended appropriations 

include available and unavailable unobligated balances as well as undelivered orders. Cumulative results of operations 

include the difference between revenues and expenses, the net amount of transfers of assets in and out without reimbursement, 

and donations (all of these include balances since the inception of the fund). The Environmental Improvement and 

Restoration Fund is not available until appropriated by Congress. As of September 30, 2006 and 2005, there are no 

estimated obligations related to canceled appropriations.
FY 2006 Annual Report Page 53 

R. Income Taxes

As an entity of the U.S. Government, MMS is exempt from all income taxes imposed by any governing body, whether it 

is a federal, state, local, commonwealth, or foreign government.

S. Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions 

that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the 

financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may 

differ from those estimates. 

T. Comparative Data

MMS has reclassified data on the fiscal year 2005 financial statements and footnotes to conform with fiscal year 2006 

presentation requirements.

U. Stewardship Assets

Effective October 1, 2005, MMS adopted SFFAS No. 29, Heritage Assets and Stewardship Land. This standard 

requires federal agencies to reclassify all heritage asset information to the note disclosures (basic information) except 

for condition information. This change in reporting is phased in over a four year period beginning fiscal year 2006. The 

following is required disclosure information for fiscal year 2006.

The mission of MMS is to manage the mineral resources on the Outer Continental Shelf and Federal and Indian mineral 

revenues to enhance public and trust benefit, promote responsible use, and realize fair value. The museum property 

collection, although not directly related to this mission, provides information about processes, events, and interactions 

amount cultures, individuals, and the environment. Objects in the museum property collection provide baseline 

data, serving as scientific and historical documentation of MMS’s resources and the purposes for which MMS was 

established.

The MMS policy on managing the collection follows the 411 DM 3.3 “Standards to Preserve and Protect Museum 

Property in Administrative Office Space” to ensure all our museum objects/displays meet the Departmental 

requirements. 

V. Future Accounting Standards

SFFAS No. 30 - In August 2005, the FASAB issued SFFAS No. 30, Inter-Entity Cost Implementation. SFFAS No. 30 

requires that the full inter-entity cost should incorporate the full cost of goods or services that an entity receives from 

other entities, and that recognition of inter-entity costs that are not fully reimbursed is limited to material items. SFFAS 

No. 30, Inter-Entity Cost Implementation, is effective for reporting periods beginning after September 30, 2008. MMS 

has not completed the process of evaluating the impact that will result from adopting SFFAS No. 30, Inter-Entity Cost 

Implementation.

SFFAS No. 31 – In October 2006, the FASAB issued SFFAS No. 31, Accounting for Fiduciary Activities. SFFAS 

31 requires Federal entities to distinguish the information relating to fiduciary activities of the Federal entity from all 

other activities of the Federal entity. Further the Federal entity is required to provide a note disclosure that; explains 

the nature of the fiduciary relationship, provide a schedule of fiduciary net assets, and provide a schedule of fiduciary 

activity. SFFAS No. 31, Accounting for Fiduciary Activities is effective for periods beginning after September 30, 

2008. MMS has not completed the process of evaluating the impact that will result from adopting the standard.
FY 2006 Annual Report Page 54 

Note 1.2 Significant Accounting Policies Relating to the Minerals Revenue Management 

(MRM) Program

A. Financing Sources and Revenues

MMS collects and accrues for lease sales, rents, royalties and other receipts from Federal Government and Indian leases 

and distributes all proceeds to the Treasury, other Federal agencies, states, counties, Indian tribes, and Indian allottees 

in accordance with legislated allocation formulas. MMS reports these revenues on the Statement of Custodial Activity. 

MMS recognizes lease sales as bids are accepted and executed, rents when earned, and royalties and other receipts when 

MMS has legal claim.

In addition, MMS reports certain state amounts as revenues on the Statement of Changes in Net Position because the 

revenues are derived from the sale of federally owned mineral rights for which MMS incurred minimal costs in earning 

the revenue. When distributed to the states, MMS reports the distributions as costs in the Effective Lease and Permit 

Management program on the FY 2006 and FY 2005 Statements of Net Cost, respectively, because the distributions reduce 

the net position of the Federal Government as a whole and MMS received budgetary authority to make the distributions.

Royalty-in-Kind Program

MMS, under the provisions of the Mineral Lands Leasing Act of 1920 and the Outer Continental Shelf Lands Act (OCSLA) 

of 1953, may take part or all of its oil and gas royalties in-kind (a volume of the commodity) as opposed to in value (cash). 

MMS may either transfer the volume of oil or gas commodity taken in kind to Federal agencies for internal use or sell the 

commodity on the open market at fair market value and transfer the cash received. MMS determines the value of the RIK 

commodity using the fair market value on the date of the sale. MMS reflects royalty-in-kind as mineral lease revenue and 

as distributions to Federal agencies on the Statement of Custodial Activity.

In prior years, MMS assisted with the administration’s initiative to fill the Strategic Petroleum Reserve, which was completed 

in July 2005. MMS transferred to the Department of Energy royalty oil taken in kind from Federal leases in the Gulf of 

Mexico. During fiscal year 2005, MMS transferred approximately 25.6 million barrels to the Department of Energy for 

use in adding to the reserve. MMS determined the value of the commodity transferred using the fair market value on the 

date of the transfer. MMS reports these transfers as mineral lease revenue and distribution to the Department of Energy 

on the Statement of Custodial Activity. The fiscal year 2006 Strategic Petroleum Reserve revenue and distribution to the 

Department of Energy represents changes to prior year estimates based on revised pipeline statements.

Environmental Improvement and Restoration Fund (EIRF)

The Environmental Improvement and Restoration Fund was established pursuant to Title 4 of the Department of the 

Interior and Related Agencies Appropriations Act for FY 1998. Half of the principal and interest from the distribution 

of the Alaska Escrow Fund was deposited into EIRF during FY 2000. During FY 2006 and 2005, MMS deposited to the 

EIRF interest earned from investments of the EIRF principal. Congress has permanently appropriated 20 percent of the 

prior fiscal year interest earned by the EIRF to the Department of Commerce. The remaining 80 percent of interest earned 

remains in the fund and is recorded as other non-exchange revenue on the Statement of Changes in Net Position. The 

remaining interest earned may be appropriated by Congress to certain other agencies, as provided by law. No assets of the 

fund are available to the Department of the Interior unless appropriated by Congress. 
FY 2006 Annual Report Page 55 

B. Distributions of Revenues

Federal Revenues: Distributions to other Federal entities are based on the Mineral Lands Leasing Act of 1920, 30 USC 

191 as amended, the Federal Oil and Gas Royalty Management Act of 1982 (PL 97-451, 96 Stat. 2447, 30 USC 1701), the 

1986 OCS Lands Act amendments of 1985 (PL 99-272), and subsequent legislation and lease terms. 

Based on legislation, Federal revenues distributed to MMS are subsequently appropriated and/or made available for 

program expenses and disbursements approved by Congress. Monies collected in MMS administrative appropriated funds 

are recorded as exchange revenues and subsequently used for operational purposes.

Non-Federal Revenues: Distributions are based on the Mineral Lands Leasing Act of 1920, as amended, subsequent 

legislation and lease terms.

Revenues generated from mineral production on Indian Lands go directly to Interior’s Office of Trust Fund Management 

for subsequent distribution to tribes and allottees, meeting a wide variety of needs as outlined in the Indian Mineral 

Development Act of 1982 and other applicable laws and guidance.

C. Fund Balance With Treasury

MMS receipts and disbursements are processed through the Federal Reserve System and the U.S. Treasury. Receipts are 

processed through electronic transfers, fedwires, Treasury’s Government On-Line Accounting Link System, and checks. 

The “Custodial Fund Balance with Treasury” as shown on the Consolidated Balance Sheet includes deposit and clearing 

account balances that are not available for obligation.

At the end of each fiscal year, MMS distributes the undisbursed custodial clearing account fund balance to the General Fund 

of the Treasury and reports the portion due to non-Treasury entities as a custodial accounts receivable. At the beginning of 

the following year, the balance is returned from Treasury and is available for distribution to the beneficiaries.

D. Accounts and Interest Receivable

The custodial and administrative receivables represent amounts due for royalty revenue, deferred bonuses, accumulated 

interest, audit bills, and royalty in kind.

The royalty accrual for custodial receivables and distributions payable represents the current period activity anticipated to 

be received in the subsequent period. The balance is estimated based on an analysis of the last twelve months of royalty 

activity, and recent events, such as significant settlements due in September.

Receivables due from the public are reported net of allowances for uncollectible amounts. An allowance for estimated 

uncollectible custodial receivables is recognized to reduce the gross amount of receivables to its realizable value. The 

allowance is estimated based on historical experience of collections in relation to revenues. The allowance is calculated 

as the historical collection percentage multiplied by the year end accounts receivable balance.
FY 2006 Annual Report Page 56

E. Investments

Investments represent non-marketable market based Treasury securities issued by the Bureau of the Public Debt. These 

securities are not traded on any securities exchange, but mirror the prices of similar Treasury Securities trading in the 

Government securities market. Investments are expected to be held to maturity.

Investments are reported at cost, net of amortized premiums or discounts. Premiums and discounts for T-Bills, short term 

T-Notes and long-term T-Notes are amortized using effective interest method. Interest on investments is accrued as it is 

earned and is recorded as other non-exchange revenue on the Statement of Changes in Net Position.

The market value of investments is calculated using the market price of securities as shown on Treasury’s FedInvest Price 

File on September 30. Market values for overnight investments are the same as, or equivalent to par value.

MMS has limited investment authority based on two categories: (1) restricted and (2) custodial.

Restricted Investments

The Environmental Improvement and Restoration Fund is available for investment under the DOI and Related Agencies 

Appropriations Act of 1998. Congress has permanently appropriated 20 percent of the prior fiscal year interest earned by 

the EIRF to the Department of Commerce. The remaining 80 percent of interest earned remains in the fund and may be 

appropriated by Congress to certain other agencies, as provided by law. This investment was initially funded in FY 2000 

by the settlement of the boundary dispute with the State of Alaska.

Custodial Investments

MMS is also required by regulation to invest the 1/5 OCS bid amounts from the high bidders for all OCS lease sales. 

Should any of the high bids later be rejected, the 1/5 bid and actual interest earned are returned to the bidder. Should the 

bidder forfeit their bid, the 1/5 bonus and accrued interest reverts to Treasury. The interest earned on accepted bids reverts 

to the Treasury when the bids are accepted.

F. Liabilities

MMS liabilities include custodial liabilities, deposit funds, and royalty credit liability. Custodial liabilities represent 

amounts owed to royalty recipients (the public or Federal agencies) and offset custodial assets. Deposit funds include 

receipts for bonuses that are pending award or refund and non-Federal revenues collected on behalf of the states. 

Liabilities for which an appropriation has not been enacted are classified as liabilities not covered by budgetary resources. 

MMS does not record a payable for potential overpayments by payors as MMS is not obligated, according to the Federal 

Oil and Gas Royalty Management Act of 1982 (PL 97-451, 96 Stat. 2447, 30 USC 1701), to repay such amounts until 

requested by the payor or until MMS completes a compliance audit and determines the amount that is refundable.

G. State Liabilities

MMS makes payments to states according to the Mineral Lands Leasing Act of 1920, 30 USC 191 as amended, the 

Federal Oil and Gas Royalty Management Act of 1982 (PL 97-451, 96 Stat. 2447, 30 USC 1701), and PL 99-272 from the 

1986 OCS Lands Act amendments of 1985. The liabilities to states for accrued minerals revenue are shown as unfunded 

because budgetary resources, which are authorized by the Act as permanent indefinite appropriations, are based on actual 

collections (appropriated revenues). The accrued unfunded liabilities associated with expenses for the payments to the 

States are reported on the Consolidated Balance Sheet as “State Liabilities”. 
FY 2006 Annual Report Page 57

Note 2. Fund Balance with Treasury

A summary of the Fund Balance with Treasury (FBWT) by fund type is listed in the first table below. The general funds 

consist of the appropriated funds for the operation of MMS, such as salaries and expenses, and computer acquisition. The 

trust funds consist of funds for oil spill research and development. The other fund types consist of the proceeds from 

the sale of equipment. The proceeds received from the sale of equipment can be retained for two years to purchase new 

vehicles. 

Fund Balance with Treasury by Fund Type

As of September 30

(dollars in thousands)

FY 2006

FY 2005 

Restated

General Funds $142,928 $104,851

Trust Funds 5,575 6,872

Other Fund Types 38 2

Total Fund Balance with Treasury by Fund Type $148,541 $111,725

The table below displays the status of FBWT amounts obligated and unobligated as presented in the Statement of 

Budgetary Resources.

Status of Fund Balance with Treasury

As of September 30

(dollars in thousands)

FY 2006

FY 2005 

Restated

Unobligated:

 Available $38,607 $15,105

 Unavailable 2,101 1,458

Obligated Net Yet Disbursed 107,795 95,160

Subtotal 148,503 111,723

FBWT not Covered by Budgetary Resources:

 Clearing and Deposit Accounts 38 2

Total Status of Fund Balance with Treasury $148,541 $111,725
FY 2006 Annual Report Page 58

Note 3. Investments, Net

Investments consist of non-marketable, market-based Treasury securities that are not traded on any securities exchange 

but mirror the prices of marketable securities with similar terms. MMS has limited investment authority based on two 

categories: restricted and custodial. The restricted (EIRF) investments are further discussed in Note 1.2A and 1.2E, and 

the custodial investments are discussed in Note 1.2E. 

As of September 30, 2006

(dollars in thousands)

Investment Type Cost

Net Amortized 

(Premium) / 

Discount Investments, Net

Market Value 

Disclosure

U.S. Treasury Securities

Restricted

Non-Marketable, 

market-based $1,067,414 $(10,371) $1,057,043 $1,039,783

Custodial

Non-Marketable, 

market-based 58,324 68 58,392 58,411

Total U.S. Treasury Securities 1,125,738 (10,303) 1,115,435 1,098,194

Accrued Interest 5,753 - 5,753 -

Total Non-Public Investments 1,131,491 (10,303) 1,121,188 1,098,194

Total Investments $1,131,491 $(10,303) $1,121,188 $1,098,194

As of September 30, 2005

(dollars in thousands)

Investment Type Cost

Net Amortized 

(Premium) / 

Discount Investments, Net

Market Value 

Disclosure

U.S. Treasury Securities

Restricted

Non-Marketable, 

market-based $1,032,450 $(6,803) $1,025,647 $1,014,909

Custodial

Non-Marketable, 

market-based 57,214 106 57,320 57,261

Total U.S. Treasury Securities 1,089,664 (6,697) 1,082,967 1,072,170

Accrued Interest 5,279 - 5,279 -

Total Non-Public Investments 1,094,943 (6,697) 1,088,246 1,072,170

Total Investments $1,094,943 $(6,697) $1,088,246 $1,072,170
FY 2006 Annual Report Page 59

Note 4. Accounts and Interest Receivable, Net

Accounts receivable relating to general operations of the bureau consist primarily of amounts due to MMS from other 

agencies in connection with various interagency agreements, and refunds due from MMS vendors and/or employees. 

MMS has custodial accounts receivable from intra-governmental agencies totaling approximately $268 and $400 million, 

of which, $268 and $344 million is due from Department of the Treasury and approximately $115 thousand and $56 

million is due from Bureau of Land Management in FY 2006 and FY 2005 respectively. Interest receivables are included 

as part of the custodial receivables in the amount of approximately $79 million and $65 million as of FY 2006 and FY 

2005, respectively. Refer to Note 1.2C for information on custodial receivables from Federal agencies. 

Accounts and Interest Receivable, Net

As of September 30

(dollars in thousands)

FY 2006

FY 2005 

Restated

Accounts and Interest Receivable from Federal Agencies

 Billed $115 $56,124

 Unbilled 268,070 345,415

Total Accounts and Interest Receivable - Federal $268,185 $401,539

FY 2006

FY 2005 

Restated

Accounts and Interest Receivable from Public

 Current $348,040 $60,330

 1 – 180 Days Past Due 184,215 112,759

 181 – 365 Days Past Due 4,086 9,217

 1 to 2 Years Past Due 3,015 21,427

 Over 2 Years Past Due 68,469 76,688

Total Billed Accounts and Interest Receivable – Public 607,825 280,421

Unbilled Accounts and Interest Receivable 1,811,768 2,299,814

Total Accounts and Interest Receivable – Public 2,419,593 2,580,235

Allowance for Doubtful Accounts - Public (154,549) (154,183)

Total Accounts and Interest Receivable – Public, Net of Allowance $2,265,044 $2,426,052
FY 2006 Annual Report Page 60

Note 5. General Property, Plant and Equipment, Net

MMS property and equipment categories, with corresponding accumulated depreciation, are shown in the table below. 

Depreciation expense amounted to approximately $4.8 million and $4.9 million as of September 30, 2006 and 2005, 

respectively.

General Property, Plant and Equipment, Net

As of September 30, 2006

(dollars in thousands)

Acquisition Cost

Accumulated 

Depreciation

Net Book Value 

FY 2006

Equipment and Vehicles $13,067 ($10,015) $3,052

Assets under Capital Lease 155 (118) 37

Internal Use Software, In Use 37,149 (15,786) 21,363

Total General Property, Plant and Equipment $50,371 ($25,919) $24,452

General Property, Plant and Equipment, Net

As of September 30, 2005

(dollars in thousands)

Acquisition Cost

Accumulated 

Depreciation

Net Book Value 

FY 2005

Equipment and Vehicles $15,405 ($12,004) $3,401

Assets under Capital Lease 179 (114) 65

Internal Use Software, In Use 37,149 (12,072) 25,077

Total General Property, Plant and Equipment $52,733 ($24,190) $28,543
FY 2006 Annual Report Page 61

Note 6. Assets Analysis

Assets of MMS include entity unrestricted, entity restricted and non-entity assets. Entity assets are those currently 

available for use by MMS. Restricted entity assets consist of the Environmental Improvement and Restoration Fund. 

Restricted entity assets cannot be used until appropriated by Congress, except for twenty percent of the interest earned on 

the EIRF investments that are transferred once a year to the Department of the Commerce. Non-entity assets are currently 

held by MMS but will be forwarded to Treasury, other agencies, or states at a future date. These assets are not available 

for use by MMS.

Asset Analysis

As of September 30, 2006

(dollars in thousands)

Entity

Unrestricted

Entity

Restricted

Non Entity

Restricted FY 2006

Intragovernmental Assets:

 Fund Balance with Treasury $148,541 $ - $ - $148,541

 Investments, Net - 1,062,796 58,392 1,121,188

 Accounts and Interest Receivable 478 - 267,707 268,185

 Other:

 Advances and Prepayments 18 - - 18

Total Intragovernmental Assets 149,037 1,062,796 326,099 1,537,932

Accounts and Interest Receivable, Net 66 - 2,264,978 2,265,044

General Property, Plant and Equipment, Net 24,452 - - 24,452

Total Assets $173,555 $1,062,796 $2,591,077 $3,827,428

Asset Analysis

As of September 30, 2005

(dollars in thousands)

Entity

Unrestricted

Entity

Restricted

Non Entity

Restricted

FY 2005 

Restated

Intragovernmental Assets:

 Fund Balance with Treasury $111,724 $ - $ 1 $ 111,725

 Investments, Net - 1,030,926 57,320 1,088,246

 Accounts and Interest Receivable 1,471 - 400,068 401,539

 Other:

 Advances and Prepayments 107 - - 107

Total Intragovernmental Assets 113,302 1,030,926 457,389 1,601,617

Accounts and Interest Receivable, Net 94 - 2,425,958 2,426,052

General Property, Plant and Equipment, Net 28,543 - - 28,543

Other:

 Advances and Prepayments 2 - - 2

Total Assets $141,941 $1,030,926 $2,883,347 $4,056,214
FY 2006 Annual Report Page 62

Note 7. Federal Employee Benefits – FECA Actuarial Liability

MMS has recorded an estimated, unfunded actuarial liability for the expected future cost for death, disability, and medical 

claims under the Federal Employees Compensation Act (FECA) of approximately $9.0 million and $9.8 million as of 

FY 2006 and FY 2005, respectively. This liability is determined using a method that utilizes historical benefit payment 

patterns related to a specific incurred period to predict the ultimate payments related to that period. Projected annual 

benefit payments are discounted to present value using the OMB’s economic assumptions for 10-year Treasury notes and 

bonds. The resulting liability is then distributed by DOL to each benefiting agency.

Note 8. Contingent Liabilities

The MMS is party to various administrative proceedings, legal actions, environmental suits, and claims that may eventually 

result in the payment of substantial monetary claims to third parties. The cases primarily relate to oil and gas leases and 

employee claims. MMS accrued approximately $550 million and $551 million as of FY 2006 and FY 2005, respectively, 

for claims deemed probable of loss and where the amount of potential liability can be estimated. It is management’s 

opinion that any amounts due will be paid from the Department of the Justice Judgment Fund. Management believes that 

the ultimate resolution of other proceedings, actions and claims will not materially affect the financial position or net cost 

of operations of MMS. The potential liability claims deemed to be probable and reasonably possible of loss are estimated 

in the chart below:

Estimated Range of Loss

As of September 30, 2006

(dollars in thousands)

Estimated Range of Loss

Accrued 

Liabilities

Lower End of 

Range

Upper End of 

Range

Contingent Liabilities $550,000

 Probable $550,000 $2,000,000

 Reasonably Possible 150 300

Estimated Range of Loss

As of September 30, 2005

(dollars in thousands)

Estimated Range of Loss

Accrued 

Liabilities

Lower End of 

Range

Upper End of 

Range

Contingent Liabilities $550,690

 Probable $550,690 $1,200,690

 Reasonably Possible 50 100
FY 2006 Annual Report Page 63 

Note 9. Royalty Credit Liability

MMS has recognized a liability in the amount of $44.3 million, in accordance with Section 383 of the Energy Policy 

Act and provisions in Statement of Federal Financial Accounting Standards (SFFAS) 5, Accounting for Liabilities of the 

Federal Government. The liability is for compensation due to a lessee for the competitive oil and gas drainage of the West 

Delta field in Louisiana that occurred in the late 1980’s. The liability will be reduced incrementally, beginning in fiscal 

year 2007, as royalty credits authorized by the Act are taken. Because no cash will be received or distributed to liquidate 

the lessee’s royalty obligation, the royalty credits will reduce the distributions to the Department of the Treasury’s General 

Funds as the credits are taken. Accordingly, the liquidation of the liability will not affect the financial position or net cost 

of MMS.

Note 10. Leases

Capital Leases:

MMS has six capital leases for copiers, which transfer ownership of the property to MMS at the end of the lease term. The 

gross cost and net book value of these leases is $155 thousand and $37 thousand as of FY 2006, and $179 thousand and 

$65 thousand as of FY 2005, respectively. The accumulated amortization is $118 and $114 as of FY 2006 and FY 2005, 

respectively. The table below shows the future minimum lease payments expected for these lease agreements.

Future Capital Lease Payments

As of September 30, 2006

(dollars in thousands)

Fiscal Year

Personal 

Property

2007 $16

2008 16

2009 -

2010 -

2011 -

Thereafter -

Total Future Capital Lease Payments 32

Less: Imputed Interest 8

FY 2006 Net Capital Lease Liability $24

FY 2005 Net Capital Lease Liability $51
FY 2006 Annual Report Page 64 

Note 10. Leases (Continued)

Operating Leases:

MMS has several General Services Administration (GSA) operating lease agreements for office space and vehicles. The 

terms of the space lease agreements vary according to whether the underlying assets are owned by GSA (or another Federal 

agency) or rented by GSA from the private sector. The GSA lease vehicle agreements are typically on a year-by-year basis 

or are cancelable at any time. Future minimum lease payments are subject to appropriations becoming available.

For GSA-owned property, MMS generally does not execute an agreement with GSA nor is there a formal lease expiration 

date. Although MMS may normally vacate these properties after giving 120 to 180 days notice of intent to vacate, in 

actuality, MMS normally occupies these properties for an extended period of time, with little variation from year to year.

For real and personal property, future operating lease payments are calculated based on the terms of the lease or if the 

lease is silent, an annual inflationary factor of 2.4 percent for years 2007 and beyond. The inflationary factors are applied 

against the actual 2006 rental expense. For operating leases that have an indefinite period of performance, future lease 

payments are only calculated for six years.

MMS also has equipment operating leases for copiers that are not disclosed in the schedule below as the amounts are 

insignificant. The Federal Real Property category consists of the office space leases, and the Federal Personal Property 

consists of the vehicles leases.

Future Operating Lease Payments

As of September 30, 2006

(dollars in thousands)

Fiscal Year

Real Property 

Federal

Personal 

Property 

Federal Total

2007 $12,692 $40 $12,732

2008 13,902 41 13,943

2009 12,831 42 12,873

2010 9,936 43 9,979

2011 9,822 44 9,866

Thereafter 73,137 - 73,137

Total Future Operating Lease Payments $132,320 $210 $132,530
FY 2006 Annual Report Page 65 

Note 11. Liability Analysis

Liabilities shown below include all liabilities, both funded and unfunded, that are due to the public and other Federal 

entities. Funded liabilities are liabilities covered by budgetary resources; likewise, unfunded liabilities are liabilities not 

covered by budgetary resources. The Custodial Liability and Liabilities to States, which are current liabilities, not covered 

by budgetary resources, are further discussed in Note 1.2F.

Liability Analysis

As of September 30, 2006

(dollars in thousands)

Covered by 

Budgetary 

Resources

Not Covered by Budgetary 

Resources

Current Current Non-Current FY 2006

Intragovernmental Liabilities:

 Accounts Payable $ 3,838 $ - $ - $3,838 

 Other:

 Custodial Liability - 1,386,651 314,748 1,701,399

 Accrued Employee Benefits 1,050 832 1,820 3,702

 Total Other Liabilities 1,050 1,387,483 316,568 1,705,101

Total Intragovernmental Liabilities 4,888 1,387,483 316,568 1,708,939

Public Liabilities

 Accounts Payable 18,222 - - 18,222

 Federal Employee Benefits – FECA - - 9,038 9,038

 Other:

 State Liabilities - 497,842 314,746 812,588

 Contingent Liabilities - - 550,000 550,000

 Royalty Credit Liability - 5,441 38,881 44,322

 Advances, Deferred Revenue, and

 Deposit Funds 101 55,011 - 55,112

 Custodial Liability - 22,080 - 22,080

 Unfunded Annual Leave - - 12,138 12,138

 Accrued Payroll and Benefits 5,057 - - 5,057

 Capital Lease Liability - 12 12 24

 Total Other Liabilities 5,158 580,386 915,777 1,501,321

Total Public Liabilities 23,380 580,386 924,815 1,528,581

Total Liabilities $28,268 $1,967,869 $1,241,383 $3,237,520
FY 2006 Annual Report Page 66

Note 11. Liability Analysis (Continued)

Liability Analysis

As of September 30, 2005

(dollars in thousands)

Covered by 

Budgetary

Resources 

Current

Not Covered by Budgetary

Resources

Current Non-Current 

FY 2005

Restated

Intragovernmental Liabilities:

 Accounts Payable $2,827 $ - $ - $2,827

 Other:

 Custodial Liability - 1,799,017 - 1,799,017

 Accrued Employee Benefits 1,082 845 1,832 3,759

 Advances and Deferred Revenue 536 - - 536

 Total Other Liabilities 1,618 1,799,862 1,832 1,803,312

Total Intragovernmental Liabilities 4,445 1,799,862 1,832 1,806,139

Public Liabilities:

 Accounts Payable 21,511 - - 21,511

 Federal Employee Benefits – FECA - - 9,837 9,837

 Other:

 State Liabilities - 1,009,419 - 1,009,419

 Contingent Liabilities - 690 550,000 550,690

 Advances, Deferred Revenue, and

 Deposits Funds 828 51,674 - 52,502

 Custodial Liability - 23,238 - 23,238

 Accrued Payroll and Benefits 5,266 - 12,229 17,495

 Capital Lease Liability - 51 - 51

 Total Other Liabilities 6,094 1,085,072 562,229 1,653,395

Total Public Liabilities 27,605 1,085,072 572,066 1,684,743

Total Liabilities $32,050 $2,884,934 $573,898 $3,490,882
FY 2006 Annual Report Page 67

Note 12. Net Cost by Responsibility Segment

The Government Performance Results Act (GPRA) requires that Federal agencies formulate Strategic Plans, identify 

major strategic goals, and report performance and costs related to these goals. Under GPRA, Strategic Plans are to be 

revised and updated every three years. Accordingly, the Department of the Interior (Department) updated the Departmentwide Strategic Plan in FY 2004. OMB Circular A-136, Financial Reporting Requirements, requires that the presentation 

of the Statement of Net Cost align directly with the goals and outcomes identified in the Strategic Plan. Accordingly, 

MMS has presented the earned revenues and gross costs in FY 2006 and FY 2005 by the applicable mission goals and 

categories in the Department’s FY 2004 Strategic Plan as follows.

1. Resource Use

a. Resource Use Energy

i. Manage and Provide Incentives for Access and Development

ii. Enhance Responsible Use Management Practices

iii. Effective Lease and Permit Management

iv. Improve Information Base, Resource Management and Technical Assistance

b. Resource Use Non-Energy

2. Serving Communities

a. Indian Trust Fulfillment

3. Reimbursable Activity and Other

OMB Circular A-136, requires that the presentation of the Statement of Net Cost align with the goals and outcomes 

identified in the Strategic Plan. Accordingly, MMS presented the earned revenue and gross costs in FY 2006 and FY 2005 

by the Intermediate Strategy rolled up to the Mission Goals of the FY 2004 Strategic Plan.The tables on the following 

pages present MMS’s earned revenues, gross cost and net cost of operations by program and by responsibility segment.
FY 2006 Annual Report Page 68

Note 12. Net Cost by Responsibility Segment (Continued)

Offshore

Minerals

Management

Mineral

Revenue

Management Other 

 Elimination of 

Intra Bureau 

Activity FY 2006

Resource Use Energy

Manage and Provide Incentives for Access and Development

Intragovernmental Costs $ 16,26 $ - - $ $ - $ 16,256

Public Costs 73,826 - - - 73,826

Total Costs 90,082 - - - 90,082

Total Public Earned Revenue 28,037 - - - 28,037

Net Cost 62,0 - - - 62,045

Enhance Responsible Use Management Practices

Intragovernmental Costs 25,649 37 - - 25,686

Public Costs ,022 () - - 45,018

Total Costs 70,671  - - 70,704

Total Public Earned Revenue 21,26 16 - - 21,689

Net Cost 49,145 (10) - - 49,015

Effective Lease and Permit Management

Intragovernmental Costs 11,60 18,021 - - 29,624

Public Costs 0,68 2,00,02 - - 2,081,160

Total Costs 62,261 2,08,2 - - 2,110,784

Total Public Earned Revenue 24,963 79,702 - - 104,665

Net Cost 37,298 1,968,821 - - 2,006,119

Improve Information Base, Resource Management and Technical Assistance

Intragovernmental Costs 1,2 - - - 1,342

Public Costs 5,307 - - - 5,307

Total Costs 6,649 - - - 6,649

Total Public Earned Revenue 3,657 - - - 3,657

Net Cost 2,992 - - - 2,992

Total Resource Use Energy

Intragovernmental Costs ,80 18,08 - - 72,908

Public Costs 174,813 2,030,498 - - 2,205,311

Total Costs 229,663 2,08,6 - - 2,278,219

Total Public Earned Revenue 78,183 79,865 - - 158,048

Net Cost 11,80 1,968,691 - - 2,120,171

Resource Use Non-Energy

Intragovernmental Costs 60 - - - 360

Public Costs 3,176 - - - 3,176

Total Costs ,6 - - - 3,536

Total Public Earned Revenue 2,2 - - - 2,332

Net Cost 1,20 - - - 1,204

Serving Communities

Intragovernmental Costs - 5,529 - - 5,529

Public Costs 22,738 - - - 22,738

Total Costs 28,267 - - - 28,267

Total Public Earned Revenue 10,827 - - - 10,827

Net Cost 17,440 - - - 17,440

Reimbursable Activity and Other

Intragovernmental Costs - ,00 - (1) 3,266

Public Costs - 11,329 - - 11,329

Total Costs - 14,729 - (1) 14,595

Intragovernmental Earned Revenue - 1,2 - (1) 14,289

Public Earned Revenue - 1,6 - - 1,446

Total Earned Revenue - 15,869 - (1) 15,735

Net Cost - (1,10) - - (1,140)

Total

Intragovernmental Costs ,210 23,587 ,00 (1) 82,063

Public Costs 177,989 2,0,26 11,329 - 2,242,554

Total Costs 233,199 2,076,823 14,729 (1) 2,324,617

Intragovernmental Earned Revenue - 1,2 - (1) 14,289

Public Earned Revenue 80,1 90,692 1,6 - 172,653

Total Earned Revenue 80,1 15,869 90,692 (1) 186,942

Net Cost of Operations $ 12,68 $ 1,986,131 $ (1,10) $ - $ 2,137,675

Schedule of Net Cost by Program and Responsibility Segment 

For the year ended September 30, 2006

(dollars in thousands)
FY 2006 Annual Report Page 69

Note 12. Net Cost by Responsibility Segment (Continued)

Offshore

Minerals

Management

Mineral

Revenue

Management Other 

 Elimination of 

Intra Bureau 

Activity FY 2005

Resource Use Energy

Manage and Provide Incentives for Access and Development

Intragovernmental Costs $ 13,487 $ - - $ $ - $ 13,487

Public Costs 67,079 - - - 67,079

Total Costs 80,66 - - - 80,566

Total Public Earned Revenue 0,11 - - - 30,114

Net Cost 0,2 - - - 50,452

Enhance Responsible Use Management Practices

Intragovernmental Costs 20,675 220 - - 20,895

Public Costs 34,673 13,549 - - 48,222

Total Costs ,8 13,769 - - 69,117

Total Public Earned Revenue 20,111 13,769 - - 33,880

Net Cost 35,237 - - - 35,237

Effective Lease and Permit Management

Intragovernmental Costs 9,129 27,243 - - 36,372

Public Costs ,261 2,294,265 - - 2,337,526

Total Costs 52,390 2,21,08 - - 2,373,898

Total Public Earned Revenue 17,163 1,11 - - 58,278

Net Cost 35,227 2,280,393 - - 2,315,620

Improve Information Base, Resource Management and Technical Assistance

Intragovernmental Costs 6 - - - 456

Public Costs ,2 - - - 4,255

Total Costs 4,711 - - - 4,711

Total Public Earned Revenue 2,259 - - - 2,259

Net Cost 2,2 - - - 2,452

Total Resource Use Energy

Intragovernmental Costs 43,747 27,463 - - 71,210

Public Costs 149,268 2,307,814 - - 2,457,082

Total Costs 193,015 2,335,277 - - 2,528,292

Total Public Earned Revenue 69,647 ,88 - - 124,531

Net Cost 12,68 2,280,393 - - 2,403,761

Resource Use Non-Energy

Intragovernmental Costs 2 - - - 324

Public Costs ,8 - - - 3,548

Total Costs 3,872 - - - 3,872

Total Public Earned Revenue 2,127 - - - 2,127

Net Cost 1,745 - - - 1,745

Serving Communities

Intragovernmental Costs - 9,822 - - 9,822

Public Costs 21,1 - - - 21,341

Total Costs 1,16 - - - 31,163

Total Public Earned Revenue - 9,700 - - 9,700

Net Cost 21,6 - - - 21,463

Reimbursable Activity and Other (Restated)

Intragovernmental Costs - 5,471 - 11 5,622

Public Costs - 7,649 - - 7,649

Total Costs - 1,120 - 11 13,271

Intragovernmental Earned Revenue - 1,60 - 11 13,781

Public Earned Revenue - 668 - - 668

Total Earned Revenue - 14,298 - 11 14,449

Net Cost - (1,178) - - (1,178)

Total

Intragovernmental Costs 44,071 37,285 5,471 11 86,978

Public Costs 12,816 2,329,155 7,649 - 2,489,620

Total Costs 196,887 2,66,0 1,120 11 2,576,598

Intragovernmental Earned Revenue - 1,60 - 11 13,781

Public Earned Revenue 71,774 6,8 668 - 137,026

Total Earned Revenue 71,774 14,298 6,8 11 150,807

Net Cost of Operations $ 12,11 $ 2,01,86 $ (1,178) $ - $ 2,425,791

Schedule of Net Cost by Program and Responsibility Segment (Restated)

For the year ended September 30, 2005

(dollars in thousands)
FY 2006 Annual Report Page 70

Note 13. Earned Revenue

The Sales of Goods and Services in the table below represent reimbursable revenues from customers recognized for 

services provided. Other revenues represent MRM federal revenues distributed to MMS for operational purposes.

Fiscal Years 2006 and 2005

(dollars in thousands)

2006 2005

Restated

Sales of Goods and Services:

 To the Public $428 $359

 To Other Federal Agencies 14,289 13,781

Other Revenues:

 Other Revenues from the Public 1,022 304

 As Appropriated by Congress 171,203 136,363

Total Earned Revenue $186,942 $150,807

Note 14. MRM Exchange Revenues

The royalty exchange revenues distributed to Federal agencies are reported by the receiving entity on the Statement of 

Changes in Net Position as an exchange revenue in accordance with the federal accounting standards. In fiscal year 

2006 and 2005, MMS received approximately $1,931 million and $2,229 million of revenues, respectively, of permanent 

indefinite appropriations that MMS subsequently provided to the states. 

Note 15. Apportionment Categories of Obligations Incurred

The amounts of direct and reimbursable obligations incurred at MMS presented below, are apportioned under Category 

B and were subject to annual apportionment by OMB. The obligation amounts agree to the Statement of Budgetary 

Resources, but do not agree to MMS’s FACTSII Report (SF-133) in FY 2006 and FY 2005 by $2 million and $1 million, 

respectively. This difference is attributable to the fact that MMS reports a portion of 14X5003 on FACTSII (SF-133) for 

Bureau of Land Management (BLM). BLM reports their portion of 14X5003 on it’s Statement of Budgetary Resources.

The following table reflects direct and reimbursable obligations.

Fiscal Years 2006 and 2005

(dollars in thousands)

2006 2005

Restated

Direct Obligations $2,299,974 $1,810,450

Reimbursable Obligations 169,076 148,535

Total Obligations Incurred $2,469,050 $1,958,985
FY 2006 Annual Report Page 71

Note 16. Permanent Indefinite Appropriations

MMS has four permanent, indefinite appropriations that relate to the State and County Programs: 

1. The Mineral Leasing Act (MLA), 30 U.S.C. 181 et seq., provides that all States be paid 50 percent of the revenues 

resulting from the leasing of mineral resources on Federal public domain lands within their borders (except 

Alaska which receives 90 percent).

2. Under 16 U.S.C. 499, at the end of each fiscal year States receive a Forest Fund payment equal to 25 percent of all 

revenue obtained during that year as a result of activities occurring in each of the national forests situated in that 

State. The law requires a State’s payment be based on national forest acreage, and where a national forest occurs 

in several States, an individual State’s payment is proportionate to its area within that particular national forest.

3. Flood control payments to states are shared according to the Flood Control Act of 1936 (22U.S.C.701 et seq.) 

which provides that 75 percent of custodial revenue collected be shared with the state in which it was collected. 

These funds are to be expended as the state legislature may prescribe for the benefit of the public schools and 

roads in the county which the revenue was collected or for defraying of the expenses of county government. 

These types of expenses include public obligations of levee and drainage districts for flood control and draining 

improvements.

4. The Energy Policy Act of 2005 (P.L. 109-58) amended section twenty of the Geothermal Steam Act of 1970 (30 

U.S.C. 1019 et seq.). The amendment provides that for the revenues collected from geothermal leasing, twentyfive percent are to be paid to the County in which the leased lands or geothermal resources are located.

Note 17. Legal Arrangements Affecting Use of Unobligated Balances

MMS’s unobligated unavailable balances for FY 2006 and FY 2005 are approximately $2.1 million and $1.5 million, 

respectively, and consist of expired authority. Unobligated balances, whose period of availability has expired are not 

available to fund new obligations but is available to pay for adjustments to obligations incurred prior to expiration. For 

a fixed appropriation account, the balance can be carried forward for five fiscal years after the period of availability ends. 

At the end of the fifth year, the account is closed and any remaining balance is canceled.

Note 18. Undelivered Orders at the End of the Period 

MMS’s undelivered order balances at the end of FY 2006 and FY 2005 are approximately $81.4 million and $79.4 

million, respectively.
FY 2006 Annual Report Page 72

Note 19. Differences Between the Statement of Budgetary Resources and the 

Budget of the United States Government

The FY 2008 Budget of the United States Government with the FY 2006 ‘actuals’ was not available at the time the annual 

report was prepared. The document is expected to be available in February 2007 and may be found at the Office of 

Management and Budget website, www.whitehouse.gov/omb.

The differences between the FY 2005 Statement of Budgetary Resources (SBR) and actual amounts for FY 2005 as reported 

in the FY 2007 Budget of the United States Government are greatly attributed to the unique reporting requirements for 

each report. The specific differences exist as presented on the table following a - f explanations: 

a. The unobligated balances, start of year line, and offsetting collections line reflect a difference between the SBR 

and the Budget of the United States Government because the SBR includes the expired appropriations, but the 

Budget of the United States Government does not.

b. For the resources available from recoveries of prior year obligations, the Budget of the United States Government 

does not include the Oil Spill Trust fund and annual year appropriations, where as the SBR does include them.

c. A difference resulted on the Total Budgetary Resources and Total Status of Budgetary Resources lines because the 

President’s Budget did not include a “total budgetary resources available for obligation” line for funds 14X5003 

– Mineral Leasing, 14X5243 – National Forest Fund, 14X5248 – Leases of Lands Acquired for Flood Control, 

Navigation, and Allied Purposes, and 14X8370 – Oil Spill Research; however, the MMS Combined Statement of 

Budgetary Resources includes these funds in the total budgetary resources and total status of budgetary resources. 

There is not a difference in the individual budgetary resource line items as both the President’s Budget and the 

MMS Combined Statement of Budgetary Resources include the amount for funds 14X5003, 14X5243, 14X5248, 

and 14X8370

d. Appropriation 14X5003 is a shared appropriation between MMS and Bureau of Land Management. For reporting 

purposes, MMS reports the BLM annual amount for appropriation 14X5003 on the Budget of the United States 

Government, but does not report the BLM amount on the MMS SBR. However, it is reported on BLM’s SBR. 

In FY 2005, the BLM amount that was included in the Budget of the US Government was approximately $1 

million.

e. Due to the reclassification of Reimbursement and Other Income Earned – Collected to Delivered Orders – Paid in 

FY 2006 for the transfer out of the Interior Franchise Fund to the National Business Center.

f. Due to rounding, other small differences have resulted between the SBR and the Budget of the United States 

Government. The SBR is presented in “thousands of dollars”, the Budget of the US Government is presented in 

“millions of dollars”.
FY 2006 Annual Report Page 73

(dollars in millions)

Total 

President’s 

Budget

Total 

Statement of 

Budgetary 

Resources Difference Explanation

Budgetary Resources:

 Unobligated balance, Beginning of Fiscal

 Year $12 $13 ($1) a

 Recoveries of Prior Year Unpaid Obligations 5 6 (1) b

 Budget Authority:

 Appropriations Received 1,810 1,809 1 f

 Spending Authority from Offsetting

 Collections 183 146 37 e

 Total Budgetary Resources 370 1,977 (1,607) c,e

Status of Budgetary Resources:

 Obligations Incurred 1,995 1,959 36 d,e,f

 Unobligated Balances – Available/Not

 Available 15 16 (1) f

 Total Status of Budgetary Resources 370 1,977 (1,607) c,e

Change In Obligated Balance:

 Obligations Incurred 1,995 1,959 36 d,e,f

 Less: Gross Outlays (1,989) (1,949) (40) d,e,f

 Less: Recoveries of Prior Year Unpaid

 Obligations (5) (6) (1) b

 Change in Uncollected Customer Payments

 from Federal Sources 0 (2) (2) f

 Total Unpaid Obligated Balance, Net, End of

 Fiscal Year (95) (96) (1) f

Net Outlays:

 Gross Outlays 1,989 1,949 40 d,e,f

 Less: Offsetting Collections (183) (144) (39) a,f

Note 19. Differences Between the Statement of Budgetary Resources and 

the Budget of the United States Government (Continued)
FY 2006 Annual Report Page 74

Note 20. Earmarked Funds

MMS adopted the provisions of Statement of Federal Financial Accounting Standard No. 27, Identifying and Reporting 

Earmarked Funds, effective October 1, 2005. In accordance with SFFAS No. 27, MMS reported earmarked non-exchange 

revenue, transfer in/(out) without reimbursement, and net cost of operations separately on the fiscal year 2006 Statement 

of Changes in Net Position. Cumulative results of operations attributable to earmarked funds on the Balance Sheet and 

Statement of Changes in Net Position were also reported separately for fiscal year 2006. In accordance with the federal 

accounting and reporting standards, MMS did not apply the provisions of SFFAS No. 27 to the fiscal year 2005 statements 

and note disclosures, thus making the balance sheets, statement of changes in net positions, and the earmarked fund note 

disclosure not comparable.

The Federal Government does not set aside assets to pay future benefits or other expenditures associated with earmarked 

funds. The cash receipts collected from the public for an earmarked fund are deposited in the U.S. Treasury, which uses 

the cash for general Government purposes. Treasury securities are issued to MMS as evidence of its receipts. Treasury 

securities are an asset to MMS and a liability to the Department of the Treasury. Because the MMS and the Department 

of the Treasury are both parts of the Government, these assets and liabilities offset each other from the standpoint of 

the Government as a whole. For this reason, they do not represent an asset or a liability in the U.S. Government-wide 

financial statements. Treasury securities provide MMS with authority to draw upon the Department of the Treasury to 

make expenditures. When MMS requires redemption of these securities to make expenditures, the Government finances 

those expenditures out of accumulated cash balances, by raising taxes or other receipts, by borrowing from the public 

or repaying less debt, or by curtailing other expenditures. This is the same way that the Government finances all other 

expenditures.

MMS’s earmarked funds include Environmental Improvement and Restoration Fund, Oil Spill Research (OSR), and 

Payments to States and Counties.

Half of the Alaska Escrow Fund, an inflow to the government, was distributed to MMS to initially fund EIRF. MMS 

invests the EIRF in Treasury securities, in which Treasury uses the cash for general Government purposes. Since MMS 

and Treasury are both parts of the government, MMS assets and Treasury liabilities offset each other from the standpoint 

of the Government as a whole. For this reason, they do not represent an asset or a liability in the U.S. Government-wide 

financial statements. The purpose of EIRF is to invest money and earn interest, an intra-governmental flow, until there 

is further Congressional action. Congress has permanently appropriated and MRM transfers twenty percent of the prior 

fiscal year interest earned by the EIRF to the Department of Commerce each year for their marine research activities. The 

amounts transferred to the Department of Commerce were approximately $7.8 million and $6.8 million in FY 2006 and 

FY 2005, respectively. The remaining eighty percent will remain in the fund to earn interest and may be appropriated 

by Congress to certain other agencies, as provided by law. No assets of the fund are available to the Department of the 

Interior unless appropriated by Congress. 

The funding for OSR is appropriated from the Department of the Treasury managed Oil Spill Liability Trust fund (OSLTF) 

each year. The OSLTF is funded from oil taxes, interest on fund principal, cost recovery from responsible parties, and 

penalties, which represent inflows to the government. The OSR appropriation funds oil spill research, oil spill prevention, 

response planning activities, and regulation of oil spill financial responsibility. MMS is the principal federal agency funding 

offshore oil spill response research. The Oil Spill Response Research (OSRR) program supports research to improve the 

capabilities for detecting and responding to an oil spill in the marine environment. MMS is responsible for the planning, 

preparedness, and response-related activities related to oil and gas exploration, development, and productions seaward 

of the coastline. The MMS also implements the financial responsibility provisions for Outer Continental Shelf Land Act 

(OCSLA) and Oil Pollution Act (OPA), which require companies responsible for certain offshore oil and gas facilities, 

in both Federal and State waters, to demonstrate their ability to pay the costs of facility oil spill discharge removal and 

damages. The amount transferred to MMS’s OSR from the Department of the Treasury’s OSLTF was approximately $7 

million in FY 2006 and FY 2005, respectively.

MMS collects and accrues for lease sales, rents, royalties and other receipts from Federal Government leases as inflows 

to the federal government and distributes such proceeds to the states and counties in accordance with legislated allocation 

formulas. MMS reports these state and county amounts as revenues on the Statement of Changes in Net Position 
FY 2006 Annual Report Page 75

because the revenues are derived from the sale of federally owned mineral rights for which MMS incurred minimal costs in 

earning the revenue. When distributed to the states and counties, MMS reports the distributions as costs in the Effective Lease 

and Permit Management program on the FY 2006 and FY 2005 Statements of Net Cost, respectively, because the distributions 

reduce the net position of the Federal Government as a whole and MMS received budgetary authority to make the distributions. 

MMS makes payments to states and counties, which represent outflows to the federal government, according to the Mineral 

Lands Leasing Act of 1920, 30 USC 191 as amended, the Federal Oil and Gas Royalty Management Act of 1982 (PL 97-451, 

96 Stat. 2447, 30 USC 1701), and PL 99-272 from the 1986 OCS Lands Act amendments of 1985. The liabilities to states for 

accrued minerals revenue are shown as unfunded because budgetary resources, which are authorized by the Act as permanent 

indefinite appropriations, are based on actual collections (appropriated revenues). The accrued unfunded liabilities associated 

with expenses for the payments to the States are reported on the Consolidated Balance Sheet as “State Liabilities”. 

Note 20. Earmarked Funds (Continued)
FY 2006 Annual Report Page 76

Note 20. Earmarked Funds (Continued)

Earmarked Funds

As of and for the year ended September 30, 2006

(dollars in thousands)

Environmental 

Improvement and 

Restoration Fund

Oil Spill 

Research 

Fund

Mineral Leasing 

and Associated 

Payments to States 

and Counties FY 2006

Assets

Fund Balance with Treasury $ - $5,573 $ - $5,573

Investments, Net 1,062,796 - - 1,062,796

Accounts Receivable, Net - 14 812,588 812,602

Total Assets $1,062,796 $5,587 $812,588 $1,880,971

Liabilities

Accounts Payable $ - $1,040 $ - $1,040

Other Liabilities - 78 812,588 812,666

Total Liabilities - 1,118 812,588 813,706

Net Position

Cumulative Results of Operations 1,062,796 4,469 - 1,067,265

Total Net Position 1,062,796 4,469 - 1,067,265

Total Liabilities and Net Position $1,062,796 $5,587 $812,588 $1,880,971

Cost/Revenue

Gross Costs - 8,027 1,931,073 1,939,100

Earned Revenue - (294) - (294)

Net Cost of Operations - 7,733 1,931,073 1,938,806

Net Position

Net Position, Beginning Balance 1,030,927 5,299 - 1,036,226

Other Budgetary Financing Sources

- MRM Exchange Revenue - - 1,931,073 1,931,073

Non-Exchange Revenue 31,869 - - 31,869

Other Financing Sources:

 Transfers In/(Out) without

 Reimbursement - 6,903 - 6,903

Net Cost of Operations - (7,733) (1,931,073) (1,938,806)

Change in Net Position 31,869 (830) - 31,039

Net Position, Ending Balance $1,062,796 $4,469 $ - $1,067,265
FY 2006 Annual Report Page 77

Note 21. Explanation of the Relationship Between Liabilities Not Covered by 

Budgetary Resources on the Balance Sheet and the Change in Components 

Requiring or Generating Resources in Future Periods

Increases in unfunded liabilities that are not covered by budgetary resources are reported in the Components of Net Cost 

of Operations that will not Require or Generate Resources in the Current Period section of the Statement of Financing. 

In FY 2006, the royalty credit liability had an increase of $44.3 million. FY 2005 increases included unfunded annual 

leave and related taxes - $668 thousand, unfunded accrued and actuarial FECA - $1.8 million, contingent liabilities - $690 

thousand, and liabilities to the states of $597 million. Unfunded liabilities that are not covered by budgetary resources 

with a decrease are reported in the Resources Used to Finance Items not part of the Net Cost of Operations section of 

the Statement of Financing. In FY 2006 decreases included, unfunded annual leave and related taxes- ($83) thousand, 

unfunded and actuarial FECA – ($832) thousand, contingent liabilities – ($690) thousand, and liabilities to the states 

– ($197) million.

Note 22. Strategic Petroleum Reserve

During FY 2005, MMS transferred to the Department of Energy approximately 25.6 million barrels of oil, drawn from 

Federal leases within the Gulf of Mexico. The purpose of these transfers was to refill selected Strategic Petroleum Reserve 

locations in accordance with no-cost transfer arrangements of Royalty-in-Kind crude oil to DOE. The transferred oil 

was reflected as mineral lease revenue and a distribution of revenue on the Statement of Custodial Activity. The SPR fill 

initiative was completed in July 2005.

The value of the oil transferred in FY 2005 was approximately $1,195 million. The value of the oil was based on actual 

volumes reported on pipeline statements applied to commodity prices at on-shore market centers less actual monthly value 

differences between offshore and onshore market centers that were bid by the successful bidders on the RIK volumes. 

The volume of oil transferred in September 2005 was estimated based on nominations (projected production) from the 

suppliers as the actuals were not available. In addition, the value of the September oil was estimated based on August 

pricing. Subsequent revisions to pipeline statements and final revisions to estimates were made during FY 2006 in a 

decrease amount of ($18) million. 

Note 23. Custodial Distributions to MMS

MRM distributes custodial funds to MMS when amounts are collected from producers. These amounts fund payments 

to states and counties, RIK transportation and administrative costs, and MMS operations. The amount used to fund 

operations is legislated by Congress as part of MMS’s Annual Appropriation.

Fiscal Years 2006 and 2005

(dollars in thousands)

2006 2005

Payments to States $2,123,991 $1,632,632

Payments to Counties 3,912 -

RIK and SPR Costs 44,882 21,751

Revenues to Fund Operations 123,030 107,708

Total Distribution $2,295,815 $1,762,091
FY 2006 Annual Report Page 78

Note 24. Transfer out of Interior Franchise Fund Operations

Effective October 1, 2005, the Department of the Interior merged the Interior Franchise Fund (IFF) into the National 

Business Center (NBC), a component of Interior Departmental Offices. This action enabled the Department of the Interior 

to consolidate acquisition services in support of the delivery of effective and efficient services that are competitive and 

responsive to customer needs. In accordance with OMB Circular A-136, MMS has restated its FY 2005 financial statements 

to remove the IFF financial amounts and therefore present the FY 2005 financial statements comparative to the FY 2006 

financial statements. The following summarizes the changes to the FY 2005 financial statements as a result of this change 

in reporting entity. The FY 2005 balances for the Statement of Budgetary Resources and Statement of Financing in the 

column “As Originally Reported Year Ended 2005”, have been reclassified to conform with the FY 2006 presentation. 

The following schedules only include the Financial Statement line items that have been restated, therefore the totals do 

not represent the sum of lines above the total.

Description 

(dollars in thousands)

As Originally 

Reported Year 

Ended 2005

Transfer Out 

of Interior 

Franchise Fund

Adjustment of 

Intra-Bureau 

Eliminations

As Restated Year 

Ended 2005

Balance Sheet – restated line items only

ASSETS

Intragovernmental Assets:

 Fund Balance with Treasury $1,444,637 ($1,332,912) $ - $111,725

 Account and Interest Receivable 404,789 (3,961) 711 401,539

 Advances and Prepayments 194 (153) 66 107

Total Intragovernmental Assets 2,937,866 (1,337,026) 777 1,601,617

 Accounts and Interest Receivable, Net 2,426,301 (249) - 2,426,052

Total Assets 5,392,712 (1,337,275) 777 4,056,214

LIABILITIES

Intragovernmental Liabilities

 Accounts Payable 3,464 (1,348) 711 2,827

 Advances and Deferred Revenue 1,079,418 (1,078,948) 66 536

 Accrued Employee Benefits 3,781 (22) - 3,759

Total Intragovernmental Liabilities 2,885,680 (1,080,318) 777 1,806,139

 Accounts Payable 249,353 (227,842) - 21,511

 Advances, Deferred Revenue, and Deposit

 Funds 52,504 (2) - 52,502

 Accrued Payroll and Benefits 17,966 (471) - 17,495

Total Liabilities 4,798,738 (1,308,633) 777 3,490,882

Net Position

 Administrative Cumulative Results of

 Operations (445,525) (28,642) - (474,167)

Total Cumulative Results of Operations 585,401 (28,642) - 556,759

Total Net Position 593,974 (28,642) - 565,332

Total Liabilities and Net Position 5,392,712 (1,337,275) 777 4,056,214
FY 2006 Annual Report Page 79

Note 24. Transfer out of Interior Franchise Fund Operations (Continued)

Description 

(dollars in thousands)

As Originally 

Reported Year 

Ended 2005

Transfer Out 

of Interior 

Franchise Fund

Adjustment of 

Intra-Bureau 

Eliminations

As Restated Year 

Ended 2005

Statement of Net Cost – restated line items only

Total Reimbursable Activity and Other

 Costs 1,520,404 (1,543,709) 36,576 13,271

 Less: Earned Revenue 1,532,965 (1,555,092) 36,576 14,449

Net Cost (12,561) 11,383 - (1,178)

Total 

 Costs 4,083,731 (1,543,709) 36,576 2,576,598

 Less: Earned Revenue 1,669,323 (1,555,092) 36,576 150,807

Net Cost of Operations 2,414,408 11,383 - 2,425,791

Statement of Changes in Net Position – restated line items only

Cumulative Results of Operations

 Beginning Balance 562,153 (27,269) - 534,884

Budgetary Financing Sources

 Transfers In/(Out) without Reimbursement (3,994) 11,000 - 7,006

Other Financing Sources

 Imputed Financing from Costs Absorbed by

 Others 15,117 (989) - 14,128

Total Financing Sources 2,437,656 10,010 - 2,447,666

Net Cost of Operations (2,414,408) (11,383) - (2,425,791)

Net Change 23,248 (1,373) - 21,875

Ending Balance – Cumulative Results of 

Operations $585,401 ($28,642) $- $556,759

Statement of Budgetary Resources – restated line items only

 Budgetary Resources:

 Unobligated Balance, beginning of Fiscal

 Year $748,532 ($734,960) $- $13,572

 Budget Authority:

 Spending authority from offsetting collections

 Earned

 Collected 1,715,892 (1,565,626) - 150,266

 Change in receivables from Federal

 Sources (1,474) 1,338 - (136)

 Change in unfilled customer orders

 Advance received (64,641) 58,036 - (6,605)

 Without advance from Federal sources (10,365) 12,933 - 2,568

 Total Budgetary Resources 4,203,827 (2,228,279) - 1,975,548
FY 2006 Annual Report Page 80

Note 24. Transfer out of Interior Franchise Fund Operations (Continued)

Description 

(dollars in thousands)

As Originally 

Reported Year 

Ended 2005

Transfer Out 

of Interior 

Franchise Fund

Adjustment of 

Intra-Bureau 

Eliminations

As Restated Year 

Ended 2005

 Status of Budgetary Resources:

 Obligations Incurred:

 Reimbursable 1,588,204 (1,439,670) - 148,535

 Total Obligations incurred 3,398,654 (1,439,670) - 1,958,985

 Unobligated balance available:

 Apportioned 803,715 (788,610) - 15,105

Total Status of Budgetary Resources 4,203,827 (2,228,279) - 1,975,548

Change in Obligated Balance:

 Obligated balance, net

 Unpaid obligations, brought forward,

 beginning of Fiscal Year 938,552 (832,475) - 106,077

 Less: Uncollected customer payments from

 Federal Sources, brought forward, beginning

 of Fiscal Year (185,548) 173,212 - (12,336)

 Total unpaid obligated balance, net,

 beginning of Fiscal Year 753,004 (659,263) - 93,741

 Obligations incurred, net 3,398,654 (1,439,670) - 1,958,985

 Less: Gross Outlays (3,517,840) 1,568,901 - (1,948,939)

 Change in uncollected customer payments

 from Federal Sources 11,838 (14,270) - (2,432)

 Total, unpaid obligated balance, net, end of

 period 639,462 (544,302) - 95,160

Obligated balance, net, end of period – by component:

 Unpaid obligations 813,171 (703,244) - 109,927

 Less: Uncollected customer payments from

 Federal Sources (173,710) 158,943 - (14,767)

 Total, unpaid obligated balance, net, end of

 period 639,462 (544,302) - 95,160

Net Outlays:

 Net Outlays

 Gross outlays 3,517,840 (1,568,901) - 1,948,939

 Less: Offsetting collections (1,651,249) 1,507,588 - (143,661)

 Net Outlays (Receipts) (203,526) (61,313) - (264,839)
FY 2006 Annual Report Page 81

Note 24. Transfer out of Interior Franchise Fund Operations(Continued)

Description 

(dollars in thousands)

As Originally 

Reported Year 

Ended 2005

Transfer Out 

of Interior 

Franchise Fund

Adjustment of 

Intra-Bureau 

Eliminations

As Restated Year 

Ended 2005

Statement of Financing – restated line items only

 Resources Used to Finance Activities:

 Budgetary Resources Obligated:

 Obligations Incurred $3,398,654 ($1,439,669) - 1,958,985

 Less: Spending Authority from Offsetting

 Collections/Recoveries (1,645,607) 1,493,319 - (152,288)

 Obligations Net of Offsetting Collections

 and Adjustments 1,753,047 53,650 - 1,806,697

 Net Obligations (317,070) 53,650 - (263,420)

 Other Resources:

 Imputed Financing from Costs Absorbed by

 Others 15,117 (989) - 14,128

 Net Other Resources Used to Finance

 Activities 14,279 (989) - 13,290

 Total Resources Used to Finance Activities (302,791) 52,661 - (250,130)

 Resources Used to Finance Items Not Part of the Net Cost of Operations

 Change in Budgetary Resources Obligated

 for Goods, Services, and Benefits Ordered

 but Not Yet Provided 130,103 (123,205) - 6,898

 Change in Unfilled Customer Orders (75,006) 70,968 - (4,038)

 Resources that Fund Expenses Recognized in

 Prior Periods 32 (41) - (9)

 Other Resources or Adjustments to Net

 Obligated Resources that do not affect Net

 Cost of Operations (10,471) 11,000 - 529

 Total Resources used to Finance Items not

 Part of Net Cost of Operations 2,112,556 (41,277) - 2,071,279

 Total Resources Used to Finance the Net Cost

 of Operations 1,809,766 11,383 - 1,821,149

Components of Net Cost of Operations that will not Require or Generate Resources in the Current Period:

Net Cost of Operations 2,414,408 11,383 - 2,425,791
FY 2006 Annual Report Page 101

Required Supplementary Information

(Unaudited, see accompanying auditors’ report)
FY 2006 Annual Report Page 102

Royalty and 

Offshore Total

Mineral Mineral Oil Spill Budgetary

Management Leasing Research Other Accounts

Budgetay Resources:

Unobligated balance, beginning of Fiscal Year: $ 16,220 $ - $  $ 16,6 - $ 

Recoveries of prior year unpaid obligations 6,744 - 20 - 6,949

Budget Authority:

Appropriation 18,62 2,110,2 7,006 17,471 2,319,561

Spending authority from offsetting collections

Earned

Collected 186,607 -  187,050 - 

Change in receivables from Federal sources (8) - (18) - (993)

Change in unfilled customer orders

Advance received (1,294) - (8) (1,02) - 

Without advance from Federal sources (12,06) - 22 (12,0) - 

Total Budgetary Authority 357,064 2,110,2 7,315 17,471 2,492,282

Nonexpenditure transfers, net, anticipated and actual (,) - - (,) - 

Temporarily not available pursuant to Public Law - - (102) - (102)

Permanently not available (2,590) - - (2,590) - 

Total Budgetary Resources $ 374,094 $ 2,110,2 $ 7,761 $ 17,471 $ 2,509,758

Status of Budgetary Resources:

Obligations incurred:

Direct $ 16,882 $ 2,110,2 $ 7,189 $ 17,471 $ 2,299,974

Reimbursable 168,776 - 00 169,076 - 

Total Obligations incurred ,68 2,110,2 7,489 17,471 2,469,050

Unobligated balance available:

Apportioned 8, - 272 38,607 - 

Unobligated balance not available 2,101 - - - 2,101

Total Status of Budgetary Resources $ 374,094 $ 2,110,2 $ 7,761 $ 17,471 $ 2,509,758

Change in Obligated Balance:

Obligated balance, net

Unpaid obligations, brought forward, beginning of Fiscal Year $ 103,195 $ - $ 6,732 $ 109,927 - $ 

Less: Uncollected customer payments from Federal sources,

brought forward, beginning of Fiscal Year (1,6) - (20) (14,767) - 

Total unpaid obligated balance, net, beginning of Fiscal Year 88,61 - 6,529 95,160 - 

Obligations incurred, net ,68 2,110,2 7,489 17,471 2,469,050

Less: Gross outlays (325,954) (2,110,2) (8,66) (17,471) (2,462,493)

Less: Recoveries of prior year unpaid obligations, actual (6,744) - (20) (6,949) - 

Change in uncollected customer payments from Federal sources 12,901 - 126 13,027 - 

Total, unpaid obligated balance, net, end of period $ 102,492 $ - $ ,0 $ 107,795 - $ 

Obligated balance, net, end of period - by component:

Unpaid obligations $ 10,1 $ - $ ,80 $ 109,534 - $ 

Less: Uncollected customer payments from Federal sources (1,662) - (77) (1,739) - 

Total, unpaid obligated balance, net, end of period $ 102,492 $ - $ ,0 $ 107,795 - $ 

Net Outlays:

Net Outlays

Gross outlays $ 325,954 $ 2,110,2 $ 8,66 $ 17,471 $ 2,462,493

Less: Offsetting collections (18,1) - () (185,749) - 

Less: Distributed Offsetting receipts (2,110,2) - (529,646) - (2,640,078)

Net Outlays (Receipts) $ 10,60 $ - $ 8,201 $ (512,175) $ (6,)

(dollars in thousands)

U.S. Department of the Interior

Minerals Management Service

Combining Statement of Budgetary Resources

For the year ended September 30, 2006
FY 2006 Annual Report Page 103 

Royalty and 

Offshore Total

Mineral Mineral Oil Spill Budgetary

Management Leasing Research Other Accounts

Restated - Note 24

Budgetay Resources:

Unobligated balance, beginning of Fiscal Year: $ 1, $ - $ 139 $ 13,572 - $ 

Recoveries of prior year unpaid obligations 5,923 - 272 - 6,195

Budget Authority:

Appropriation 169,175 1,620,107 7,103 12,2 1,808,910

Spending authority from offsetting collections

Earned

Collected 149,910 - 6 10,266 - 

Change in receivables from Federal sources (274) - 18 - (16)

Change in unfilled customer orders

Advance received (6,492) - (11) (6,60) - 

Without advance from Federal sources 2,607 - (39) - 2,68

Total Budgetary Authority 314,926 1,620,107 7,445 12,2 1,955,003

Nonexpenditure transfers, net, anticipated and actual , - - - ,

Temporarily not available pursuant to Public Law - - (99) - (99)

Permanently not available (2,467) - - (2,467) - 

Total Budgetary Resources $ 335,159 $ 1,620,107 $ 7,757 $ 12,2 $ 1,975,548

Status of Budgetary Resources:

Obligations incurred:

Direct $ 170,748 $ 1,620,107 $ 7,070 $ 12,2 $ 1,810,0

Reimbursable 148,191 -  18, - 

Total Obligations incurred 318,939 1,620,107 7,414 12,2 1,958,985

Unobligated balance available:

Apportioned 14,762 -  1,10 - 

Unobligated balance not available 1,8 - - - 1,8

Total Status of Budgetary Resources $ 335,159 $ 1,620,107 $ 7,757 $ 12,2 $ 1,975,548

Change in Obligated Balance:

Obligated balance, net

Unpaid obligations, brought forward, beginning of Fiscal Year $ 99,244 $ - $ 6,8 $ 106,077 - $ 

Less: Uncollected customer payments from Federal sources,

brought forward, beginning of Fiscal Year (12,21) - (10) (12,6) - 

Total unpaid obligated balance, net, beginning of Fiscal Year 87,013 - 6,728 93,741 - 

Obligations incurred, net 318,939 1,620,107 7,414 12,2 1,958,985

Less: Gross outlays (309,064) (1,620,107) (7,243) (12,2) (1,948,939)

Less: Recoveries of prior year unpaid obligations, actual (5,923) - (272) (6,195) - 

Change in uncollected customer payments from Federal sources (2,) - (99) (2,2) - 

Total, unpaid obligated balance, net, end of period $ 88,62 $ - $ 6,28 $ 95,160 - $ 

Obligated balance, net, end of period - by component:

Unpaid obligations $ 103,195 $ - $ 6,732 $ 109,927 - $ 

Less: Uncollected customer payments from Federal sources (1,6) - (20) (14,767) - 

Total, unpaid obligated balance, net, end of period $ 88,62 $ - $ 6,28 $ 95,160 - $ 

Net Outlays:

Net Outlays

Gross outlays $ 309,064 $ 1,620,107 $ 7,243 $ 12,2 $ 1,948,939

Less: Offsetting collections (1,18) - (2) (1,661) - 

Less: Distributed Offsetting receipts (1,620,107) - (0,010) - (2,070,117)

Net Outlays (Receipts) $ 16,66 $ - $ 7,000 $ (437,485) $ (264,839)

(dollars in thousands)

U.S. Department of the Interior

Minerals Management Service

Combining Statement of Budgetary Resources

For the year ended September 30, 2005
FY 2006 Annual Report Page 104 

Museum Collections:

The Mineral Management Service maintains a cultural museum collection that consists of Art, Ethnography, History, 

Documents, and Geology items. There were no accessions or deaccessions during the year. The assets within the 

collection are fully documented and are in good condition, as they are properly preserved and presentable to the public. 

The standards achieved by facilities that house collections are good indicators of the status of collections for which 

item-level condition data are not available. Facilities that meet at least 70% of the Department’s standards for managing 

museum collections (411 DM 3) are judged to be in “good” condition.

FY 2006 Collectible Heritage Assets – Location Housing Assets

MMS Museum Collections

Beginning 

Balance Increases Decreases

Ending 

Balance

Condition of 

Facility Housing 

Collection

Held at MMS Facilities 1 - - 1 Good Fair Poor

100%
FY 2006 Annual Report Page 105 

Required Supplementary

Stewardship Information

(Unaudited, see accompanying auditors’ report)
FY 2006 Annual Report Page 106

Investment in Research and Development:

The MMS manages the mineral resources on 1.76 billion acres of the Outer Continental Shelf (OCS) to ensure that 

exploration, development, and production activities are conducted in a manner that conserves natural resources, provides 

for the safety of offshore workers, provides a fair return to the public for the mineral rights conveyed, and assures protection 

of the environment. Numerous laws, particularly the National Environmental Policy Act (NEPA), provide the basis for 

environmental assessment and study of impacts associated with OCS related activities. The OCS Lands Act (OCSLA) 

mandates the conduct of environmental studies needed for the assessment and management of potential environmental 

impacts on the human, marine, and coastal environments affected by oil, natural gas, or other mineral development. The 

Oil Pollution Act (OPA) of 1990 sets down specific areas of research to improve not only the technologies for preventing 

oil pollution, but also the response to accidental spills. Inherent in this effort is improvement of our understanding of the 

fate, transport, and effects of oil when spilled. MMS research supports the prediction of potential environmental impacts 

and aids in the development of mitigating measures to ensure safe, pollution-free operations. The Environmental Studies 

Program (ESP) provides environmental and socioeconomic information to support decision-making for all phases of the 

OCS minerals management program. The Technology Assessment and Research (TA&R) program pursues engineering 

studies focusing on operational safety, pollution prevention, and effective spill response.

Significant Outcomes/Accomplishments in the MMS studies programs include:

Field observations, data analysis and modeling of deepwater ocean currents on the Gulf of Mexico continental slope 

provide information which improves MMS’s estimates of oil-spill transport, fate, and impacts to the environment. 

Observations and surveys of deepwater currents have been conducted in recent years using current meters, drifting buoys, 

satellite images, and shipboard surveys. Research efforts have improved our understanding of the depth of penetration 

of the Gulf of Mexico Loop Current which can have speeds up to four knots, the equivalent of a 60 mph gale-force wind, 

at depths down to 500 meters. Intense cold water jet currents, moving at speeds of up to 1.5 knots, have been detected at 

depths below 2,000 meters. Results are used by MMS for oil spill trajectory analyses, discharge models, and studies of 

larval dispersal. Findings directly support MMS management decisions and are useful in the review of development and 

production plans and oil spill contingency plans. As an outcome of the physical oceanography research, MMS established 

an information requirement for offshore drilling and production sites to collect and archive the surface and deepwater 

current observations made by the oil and gas industry. The information is shared among the operators in the Gulf of 

Mexico to enhance safe operations and improve the design of OCS structures to withstand the strong currents and current 

forces on offshore operations. In addition, as a pilot program under the U.S. Integrated Ocean Observing System, the 

data from nineteen companies are being transferred to the NOAA National Oceanographic Data Center and are publicly 

available on the internet. 

In another example of adaptive management practices, MMS utilized a three-phased approach to understand the fates 

and effects of deepwater drilling and discharges. Because of the great water depths, effects may be much different 

from those found on the comparatively well studied continental shelf. In addition, new technological approaches to 

deepwater drilling and production, such as the greatly increased reliance on synthetic-based drilling fluids (SBF’s), may 

result in volumes and characteristics of discharged material quite different from those used for decades in shallower 

water. The three-phased approach involved modeling the fate of chemical discharges, establishing reliable indicators 

of impacts, and undertaking field studies. To meet the information needs, field studies were undertaken to characterize 

the geological, physical, chemical, and biological characteristics and the physical and chemical impacts to each of the 

ecosystem components at exploration and post-development continental slope sites in the Central and Western Gulf of 

Mexico OCS. The study design addressed basic questions in the form of null hypotheses and utilized a closely integrated 

series of multi-disciplinary assessments for the impacts of oil and gas activities on deepwater ecosystems. The assessment 

used a statistically valid sampling design and incorporated numerous reference sites for comparison. Environmental 

indicators of contaminant stress were also examined to assess changes in the benthic environment. This study provided 

the information necessary for managing oil and gas development in the deepwaters of the Gulf of Mexico well beyond the 

continental shelf break. As an outcome, MMS was able to review existing mitigative measures and develop refinements 

for future deepwater exploration and development which continue to protect the deep ocean ecosystem. 
FY 2006 Annual Report Page 107

OHMSETT – Oil and Hazardous Materials Simulated Environmental Test Tank:

As part of its mandate to ensure that the best and safest technologies are used in offshore oil and gas operations, MMS 

operates a 2.6-million gallon test tank for two essential functions related to oil spill response planning: responder training 

and full-scale equipment and chemical testing. Providing training at OHMSETT ensures responders can be trained under 

realistic conditions with releasing oil into the sea. Most of the quantitative performance data on mechanical equipment 

used by industry, the U.S. Coast Guard, and the U.S. Navy to contain and cleanup spilled oil was obtained through 

OHMSETT testing and evaluation. To increase testing value, MMS is upgrading the OHMSETT facility to provide 

greater reproducibility for testing and training. Additionally, OHMSETT is able to simulate realistic broken ice conditions. 

Recent activities include cold water dispersant effectiveness tests with Alaska crude oils, evaluations of oil booms, oil 

herding surfactants and ocean imaging sensors, basic research on the weathering of oil in ice and snow conditions, and 

annual Texas A&M University and Coast Guard oil spill response training. 

MMS research activities are pursued in partnership with universities; private sector companies and associations; and 

Federal, State, and Foreign Government agencies – pursuing common goals in safety, environmental protection, and 

natural resource conservation.

Investment in Research and Development 

(in millions)

Category FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 Total

Applied Research $ 28.5 $ 29.4 $ 29.3 $ 30.2 $ 28.6 $ 146.0 
FY 2006 Annual Report Page 108

Appendix A

List of MMS Acronyms

ANPR- Advanced Notice of Proposed Rulemaking

Bcf- billion cubic feet [of gas]

BIA- Bureau of Indian Affairs 

BLM- Bureau of Land Management 

CIAP- Coastal Impact Assistance Program

CO2- carbon dioxide 

CY- calendar year

Data V&V- Data Verification and Validation 

DOI- Department of the Interior

EIS- Environmental Impact Statement 

EPAct- Energy Policy Act of 2005

FR- Federal Register

FFMIA- Federal Financial Management Improvement Act 

FMFIA- Federal Managers’ Financial Integrity Act 

FY- fiscal year

GOM- Gulf of Mexico 

GOMR- Gulf of Mexico Regional Office 

GPRA- Government Performance and Results Act 

LNG- liquefied natural gas 

MD&A- Management Discussion and Analysis

MMS- Minerals Management Service

MRM- Minerals Revenue Management

OCS- Outer Continental Shelf 

OCSLA- Outer Continental Shelf Lands Act 

OMM- Offshore Minerals Management

OST- Office of Special Trustee for American Indians 

PAR- Performance and Accountability Report

RIK- Royalty-in-Kind 

RIV- Royalty-in-Value 

SOO- Suspensions of Operations 

SPR- Strategic Petroleum Reserve

USCG- U.S. Coast Guard
The Department of the Interior Mission

As the Nation's principal conservation agency, the Department of the Interior has responsibility 

for most of our nationally owned public lands and natural resources. This includes fostering 

sound use of our land and water resources; protecting our fish, wildlife, and biological diversity; 

preserving the environmental and cultural values of our national parks and historical places; 

and providing for the enjoyment of life through outdoor recreation. The Department assesses 

our energy and mineral resources and works to ensure that their development is in the best 

interests of all our people by encouraging stewardship and citizen participation in their care. 

The Department also has a major responsibility for American Indian reservation communities 

and for people who live in island territories under U.S. administration. 

The Minerals Management Service Mission 

As a bureau of the Department of the Interior, the Minerals Management Service's (MMS) 

primary responsibilities are to manage the mineral resources located on the Nation's Outer 

Continental Shelf (OCS), collect revenue from the Federal OCS and onshore Federal and Indian 

lands, and distribute those revenues. 

Moreover, in working to meet its responsibilities, the Offshore Minerals Management Program 

administers the OCS competitive leasing program and oversees the safe and environmentally 

sound exploration and production of our Nation's offshore natural gas, oil and other mineral 

resources. The MMS Minerals Revenue Management meets its responsibilities by ensuring the 

efficient, timely and accurate collection and disbursement of revenue from mineral leasing and 

production due to Indian tribes and allottees, States and the U.S. Treasury. 

The MMS strives to fulfill its responsibilities through the general guiding principles of: (1) being 

responsive to the public's concerns and interests by maintaining a dialogue with all potentially 

affected parties and (2) carrying out its programs with an emphasis on working to enhance the 

quality of life for all Americans by lending MMS assistance and expertise to economic 

development and environmental protection.