a

GAO

United States General Accounting Office

Report to Congressional Requesters

April 2004 MINERAL REVENUES

Cost and Revenue 

Information Needed to 

Compare Different 

Approaches for 

Collecting Federal Oil 

and Gas Royalties

GAO-04-448
www.gao.gov/cgi-bin/getrpt?GAO-04-448.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim Wells at 

(202) 512-3841 or wellsj@gao.gov. 

Highlights of GAO-04-448, a report to

Representative Nick J. Rahall, Ranking 

Minority Member, House Committee on 

Resources, and Representative Carolyn 

B. Maloney 

April 2004

MINERAL REVENUES

Cost and Revenue Information Needed to 

Compare Different Approaches for 

Collecting Federal Oil and Gas Royalties 

Although data on administrative savings are limited, there are substantial 

audit savings attributable to RIK sales, but there are no quantified savings in 

the overall administration of royalty collections. MMS has anticipated 

savings in auditing and litigation expenses. While MMS data showed that 

auditing costs for RIK sales were less than auditing costs for cash sales on a 

per lease basis, MMS redirected the resources it saved to auditing additional 

leases. At this time, MMS cannot quantify the benefit from additional 

auditing. The costs of litigation, which the Solicitor’s Office in the 

Department of the Interior performs for MMS, are not tracked. However, 

officials with the Solicitor’s Office were unable to attribute any savings in 

litigation to the increased use of RIK and said that future litigation costs are 

difficult to predict. Finally, MMS must weigh these benefits against 

additional costs required to conduct RIK sales. 

Despite limitations in MMS’s analyses and revenue data that prevented a 

more comprehensive assessment of all RIK sales, our estimate of the 

revenue impacts from RIK sales in three areas indicates a mixed 

performance. Specifically, RIK oil sales in Wyoming increased revenues by 

2.6 percent, for a gain of $967,000 on sales of $37 million. RIK oil sales in the 

Gulf of Mexico decreased revenues by $7.2 million, for a loss of 5.5 percent 

on sales of $131 million. RIK gas sales in the Gulf increased revenues by $4 

million, for a gain of 2 percent on revenues of $210 million. However, these 

sales only represent 11 percent of the gas and 57 percent of the oil that MMS 

took in kind from inception of the pilots through November 2003. MMS does 

not analyze all sales because there is no requirement to do so, staff considers 

existing information on sales sufficient, few staff are assigned to analyzing 

sales, and MMS management has a lengthy review process for finalizing sales 

analyses. 

Actual and Projected RIK Gas Sales in the Gulf of Mexico 

In fiscal year 2003, the federal 

government collected $5.6 billion in 

royalties from oil and gas 

production on federal lands. 

Although most oil and gas 

companies pay royalties in cash, 

the Department of the Interior’s 

Minerals Management Service 

(MMS) has the option to take a 

percentage of the oil and gas 

produced and sell this product—

known as “taking royalties in kind 

(RIK).” MMS has taken royalties in 

kind continuously since 1998 with 

the goal of achieving administrative 

savings while maintaining revenue. 

GAO attempted to (1) quantify the 

administrative savings that may be 

attributable to the RIK sales and (2) 

compare the sales revenues from 

RIK sales to what would have been 

collected in cash royalty payments. 

GAO reported on MMS’s RIK 

Program in 2003 and recommended 

that MMS identify and acquire key 

information to monitor and 

evaluate the RIK Program prior to 

expanding the program further. 

While MMS has made some 

progress, it has yet to implement 

these recommendations. Should 

the Congress seek more assurance 

of the level of success of the RIK 

Program, it might consider 

directing MMS to establish a 

systematic evaluation of the 

revenue impacts of all future sales 

and to quantify overall changes in 

the administration of royalty 

collections. In commenting on the 

draft report, Interior generally 

agreed with GAO’s observations. 
Page i GAO-04-448 Mineral Revenues

Contents

Letter 1

Results in Brief 3

Background 4

Savings in Auditing RIK Occur, but Overall Impact on Royalty 

Administration Costs Cannot Be Completely Quantified 6

The Revenue Impact of RIK Sales Is Mixed 11

Conclusions 20

Matters for Congressional Consideration 21

Agency Comments and Our Evaluation 21

Appendixes

Appendix I: Objectives, Scope, and Methodology 23

Wyoming Oil 24

Gulf of Mexico Oil 28

Gulf of Mexico Gas 30

Other Factors May Affect Revenue Analysis 31

Appendix II: Comments from the Department of the Interior 32

GAO Comments 36

Appendix III: GAO Contacts and Staff Acknowledgments 38

GAO Contacts 38

Acknowledgments 38

Figures Figure 1: Comparison of Weighted Average Monthly Sales Prices 

Obtained from Wyoming Severance Tax Database and 

MMS’s Financial System for Selected Asphaltic 

Properties Subsequently Included in RIK Sales 26

Figure 2: Comparison of Weighted Average Monthly Sales Prices 

Obtained from Wyoming Severance Tax Database and 

MMS’s Financial System for Selected General Sour 

Properties Subsequently Included in RIK Sales 27

Figure 3: Comparison of Weighted Average Monthly Sales Prices 

Obtained from Wyoming Severance Tax Database and 

MMS’s Financial System for Selected Sweet Properties 

Subsequently Included in RIK Sales 28
Contents

Page ii GAO-04-448 Mineral Revenues

Abbreviations

ABC activity-based cost

DOE Department of Energy

GAO General Accounting Office

MMBtu one million British thermal units

MMS Minerals Management Service

MOPS Matagorda Offshore Pipeline System

MRM Minerals Revenue Management

NYMEX New York Mercantile Exchange

RIK royalty in kind

SPR Strategic Petroleum Reserve

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-04-448 Mineral Revenues

United States General Accounting Office

Washington, D.C. 20548

A

April 16, 2004 Letr

The Honorable Nick J. Rahall

Ranking Minority Member

Committee on Resources

House of Representatives

The Honorable Carolyn B. Maloney

House of Representatives

In fiscal year 2003, the Department of the Interior’s Minerals Management 

Service (MMS) collected about $5.6 billion in royalties from oil and gas 

production on federal lands. MMS traditionally accepts the federal 

government’s oil and gas royalties in cash. Under the Mineral Leasing Act of 

1920 and the Outer Continental Shelf Lands Act, MMS also has the 

authority to take a portion of the actual oil and gas produced, referred to as 

“taking royalties in kind.” MMS then sells this oil and gas to the highest 

bidders at competitive auctions. MMS established Royalty-in-Kind (RIK) 

pilot sales with the intent of testing whether MMS can (1) decrease the cost 

of administering royalties and (2) maintain or increase royalty revenues. 

MMS began to evaluate the use of federal royalty oil as an alternative to 

cash royalty payments through a series of pilot sales in Wyoming beginning 

in 1998. In addition, MMS has conducted pilot sales for gas and oil in the 

Gulf of Mexico. We estimate that revenue from RIK pilot sales was about 

$682 million in fiscal year 2003. Based on MMS estimates for further 

expansion of RIK sales, MMS could be collecting between $1.5 billion and 

$2.5 billion per year in revenue from RIK pilot sales by 2008.

To address MMS progress toward a more systematic evaluation of MMS’s 

RIK efforts, you asked us to (1) quantify any savings in administering 

royalty collections that are attributable to the RIK pilots and (2) compare 

sales revenues from RIK pilots to what would have been collected under 

cash royalty payments.

In responding to the objectives, we discussed the RIK sales program with 

MMS officials and oil and gas marketers who are active in Wyoming and the 

Gulf of Mexico, where MMS has conducted almost all of its RIK pilot sales. 

We initially reviewed documents analyzing RIK sales and the costs to 

administer these sales. However, we found at the start of our review that 

MMS had only released two draft reports that analyzed the impact of RIK 

sales, and these reports and other informal studies only addressed the 

revenue impacts associated with 9 percent of the royalty oil sold through 
Page 2 GAO-04-448 Mineral Revenues

July 2002 and about 44 percent of the royalty gas sold through March 2002. 

The reports remained in draft until approved by management in March 

2004. While the two studies asserted that RIK sales produce administrative 

savings, the studies did not conclusively quantify any savings. Given the 

nature of MMS’s limited analysis of administrative cost and revenue 

impacts, we attempted to address the objectives by acquiring and analyzing 

additional MMS data. However, in the course of our analysis, we found that 

sufficiently detailed administrative cost information necessary to compare 

RIK to cash royalties does not exist, leaving us unable to completely assess 

the administrative impacts.

In evaluating the revenue impact of RIK sales, we obtained royalty data 

from MMS’s financial data system. However, this system was designed to 

collect and disburse revenues and not to specifically analyze the revenue 

impacts of RIK sales; therefore it was not suitable for doing a 

comprehensive evaluation of the RIK sales. In addition, some erroneous 

and missing data required time-consuming inspections of the royalty data 

to ensure their reliability and integrity. As a result, we were only able to 

assess the revenue impacts in case studies representing parts of three RIK 

pilot sales areas: Wyoming oil, Gulf of Mexico oil, and Gulf of Mexico 

natural gas. The sales we analyzed represented about 57 percent of the 

royalty oil and 11 percent of the royalty gas MMS took in kind from 

inception of these pilots through November 2003. We performed 

significance tests on the results of our case studies and found them to be 

statistically significant at the 5 percent level. However, it was not possible 

to project the total revenue impact of all the RIK pilot sales from these case 

studies because the difference between RIK revenues and cash royalty 

revenues can vary greatly over time and because the case studies are not 

representative samples of all RIK sales. In addition, we were unable to 

obtain data that would have enabled us to measure the effects of audits on 

revenues from RIK and cash sales, which adds uncertainty to our estimates 

in the case studies. Therefore, we are unable to determine conclusively 

how well the RIK pilot sales have done compared to what would have been 

expected from cash sales over the long term.

We conducted our work from February 2003 through March 2004 in 

accordance with generally accepted government auditing standards. For a 

more detailed discussion of the scope and methodology of our review, see 

appendix I.
Page 3 GAO-04-448 Mineral Revenues

Results in Brief There are substantial administrative savings in auditing royalty collections 

that are attributable to the RIK pilots, but there are no quantified savings in 

the overall administration of royalty collections. MMS has stated that the 

RIK pilots should create savings primarily by reducing the costs of auditing 

royalty payments and by decreasing overall litigation. RIK royalty auditing 

costs are substantially less than cash royalty auditing costs on a per-lease 

basis, but MMS simply redirected any resources it saved to auditing more 

cash payments. Although more audits of these cash payments could result 

in higher revenue collections if the audits identified royalty 

underpayments, MMS is not currently able to determine this benefit 

because the auditing of cash payments takes several years to complete. 

Similarly, the Department of the Interior’s Solicitor’s Office could not 

identify any change in the amount of litigation attributable to the RIK pilots 

or predict the extent to which RIK would affect its future litigation 

workload. MMS did incur other administrative costs under RIK that it 

would not have incurred by accepting cash royalty payments. For example, 

it incurred $1.7 million in direct costs to conduct the RIK pilot sales during 

fiscal year 2003 and one-time costs of $13 million to purchase information 

systems that, among other things, were intended to bill, collect, and report 

revenues from the RIK pilots.

Our analysis of the revenue impacts from three case studies of RIK pilots 

indicated a mixed performance when compared to cash royalty payments. 

Specifically, we estimated that (1) RIK sales in Wyoming increased 

revenues by about 2.6 percent, for a gain of $967,000 on sales of about $37 

million; (2) a 6-month oil sale in the Gulf of Mexico decreased revenues by 

5.5 percent, for a loss of $7.2 million on sales of about $131 million; and (3) 

natural gas sales in the Gulf of Mexico increased revenues by about 2 

percent, for an estimated gain of about $4 million on sales of about $210 

million. These sales represented about 11 percent of the gas and 57 percent 

of the oil that MMS took in kind from inception of the pilots through 

November 2003. Limitations in MMS’s data and a lack of MMS analyses of 

RIK sales precluded us from comprehensively analyzing the revenue 

impact of more RIK sales in a timely manner. Currently, MMS is not 

required to analyze sales or document them, the staff responsible for 

conducting sales considers the information on sales results sufficient, few 

staff are assigned to analyzing sales, and MMS management has not placed 

a priority on the time-consuming review of sales results.

In January 2003, we reported to the Congress that MMS had not developed 

sufficient management control over its RIK sales, including the collection 
Page 4 GAO-04-448 Mineral Revenues

of the data necessary to quantify the revenue impacts and the 

administrative savings attributable to the RIK program.1

 In our report, we 

recommended that the Secretary of the Interior instruct the appropriate 

managers in MMS to identify and acquire key information to monitor and 

evaluate the RIK program prior to expanding the program. We 

recommended that such information include the revenue impacts of all RIK 

sales and the administrative costs and savings attributable to RIK. MMS 

generally agreed with our recommendations and emphasized their current 

efforts and future plans to improve the evaluation of RIK. We recognized 

MMS’s progress in establishing management control and documenting the 

results of its RIK sales. However, as RIK sales have continued to grow, it is 

still difficult to completely quantify the administrative cost and revenue 

impact of the RIK program. As MMS looks to continue to expand the use of 

RIK, we are suggesting that if the Congress wants to ensure a systematic 

and timely evaluation of RIK efforts, the Congress may want to consider 

directing MMS to conduct an evaluation of all future RIK sales and to 

quantify any changes in the administrative cost and revenue impact on 

royalty collections as a result of RIK.

Background In general, royalty rates for onshore federal oil and gas leases are 12- 1/2 

percent of the value of the oil and the gas produced, whereas royalty rates 

for offshore leases are generally 16- 2/3 percent. MMS also administers 

programs under which royalties are reduced or suspended to encourage 

exploration and production. The administration of cash royalty payments 

has been challenging for MMS. MMS relies upon royalty payors to selfreport the amount of oil and gas they produce, the value of this oil and gas, 

and the cost of transportation and processing that they deduct from cash 

royalty payments. With 22,000 producing leases and often several 

companies paying royalties on each lease each month, the auditing of these 

cash royalty payments has become a formidable task. In addition, payors 

and MMS often disagree over the value of the oil and gas and the 

transportation and processing deductions, leading to time-consuming and 

costly appeals and litigation for those disagreements that they cannot 

resolve. MMS claims that compared to cash royalty payments, RIK can 

substantially simplify the administration of royalties because it reduces 

these disagreements and the time that MMS must spend resolving them. 

While RIK offers the promise of simplified administration, MMS must also 

1

U.S. General Accounting Office, Mineral Revenues: A More Systematic Evaluation of the 

Royalty-in-Kind Pilots Is Needed, GAO-03-296 (Washington, D.C.: Jan. 9, 2003).
Page 5 GAO-04-448 Mineral Revenues

consider the revenue impact of RIK. The Mineral Leasing Act of 1920 and 

the Outer Continental Shelf Lands Act authorize taking royalties in kind. 

These two acts directed the Secretary of the Interior to obtain fair market 

value for the oil and gas taken in kind.2

 The Outer Continental Shelf Lands 

Act defined “fair market value” as the average unit price for the mineral 

sold either from the same lease or, if such sales did not occur, in the same 

geographic area. Moreover, the fiscal years 2001 through 2004 

Appropriation Acts for Interior and related agencies directed MMS to 

collect at least as much revenue from RIK sales as MMS would have 

collected from traditional cash royalty payments.

In recent years, MMS conducted three major RIK pilots involving (1) oil in 

Wyoming, (2) oil in the Gulf of Mexico, and (3) natural gas in the Gulf of 

Mexico. For oil in Wyoming, MMS has taken royalties in kind since October 

1998. Although the amount of royalty oil that MMS takes in kind in 

Wyoming is less than 1 percent of all federal royalty oil, MMS has gained 

valuable experience during these sales. MMS has also taken royalty oil in 

kind in the Gulf of Mexico in two 6-month sales between November 2000 

and March 2002. Unlike in Wyoming, the amount of royalty oil that MMS 

took in the Gulf approached 20 percent of all federal royalty oil during the 

second 6-month sale from October 2001 through March 2002. MMS’s RIK oil 

pilot in the Gulf was put on hold when the president directed that MMS use 

royalty oil to fill the nearby Strategic Petroleum Reserve (SPR). Finally, for 

natural gas in the Gulf of Mexico, MMS has consistently taken natural gas 

in kind since December 1998. MMS currently takes about 19 percent of 

total federal royalty gas in pilots conducted in the Gulf of Mexico, and this 

program continues to grow. 

2

The Mineral Leasing Act uses the term “market price” not “fair market value.” The 

requirement to obtain market price does not cover competitive sales, which by their very 

nature, provide some protection to the federal government.
Page 6 GAO-04-448 Mineral Revenues

Savings in Auditing RIK 

Occur, but Overall 

Impact on Royalty 

Administration Costs 

Cannot Be Completely 

Quantified

While there are substantial administrative savings in auditing royalty 

collections that are attributable to the RIK pilots, there are no quantified 

savings in the overall administration of royalty collections. MMS’s overall 

budget to administer royalties has declined slightly as MMS increased the 

use of RIK, but the development of many other changes in royalty 

administration during the same time makes it difficult to assess the relative 

impact of RIK. MMS only began collecting detailed administrative cost 

information starting in fiscal year 2003, so it is not possible to attribute 

costs to the different royalty administration activities before then. MMS’s 

development of a more specific cost information system in 2003 may help 

with future impact assessments, but will not allow any comparison to the 

past. MMS claims that the administrative cost savings from using RIK 

comes primarily from a reduction in audit and litigation activities that 

would have occurred under cash royalty collections. Information collected 

by MMS starting in 2003 has supported MMS’s assertion that RIK pilots can 

create savings by reducing the costs of auditing royalty payments. While 

MMS has redirected auditing resources it saved to auditing more cash 

payments, it is not yet able to determine the benefit of this increased audit 

effort on overall royalty collection. Regarding litigation savings, no 

litigation cost information has been collected nor have any savings been 

identified. Finally, these potential savings must be weighed against 

additional specific costs that would otherwise not be incurred under cash 

royalties, such as operating costs in fiscal year 2003 of $1.7 million to 

conduct the RIK sales. MMS also incurred a capital investment of $13 

million to purchase information systems. 

MMS’s Budget to Administer 

Royalty Collections Has 

Declined Slightly, but the 

Impact of RIK Is Not Clear

In October 2001, MMS reorganized and created the Minerals Revenue 

Management organization (MRM) within MMS to collect, disburse, and 

audit royalty revenues. Since its creation, MRM’s budget has declined by 

about 7 percent, from $86.5 million in fiscal year 2002 to $80.4 million in 

fiscal year 2004. Approximately 41 percent of MRM’s budget over this 

period supported financial management, including the collection and 

disbursement of royalty revenues. Nearly all of the remaining 59 percent of 

the budget supported compliance asset management, a major function of 

which is the auditing of oil and gas royalty revenues. Budget documents 

indicate that MRM has maintained about 572 full-time personnel from fiscal 

years 2002 through 2004, of which 184 were assigned to financial 

management and 388 were assigned to compliance asset management. An 

official within the Department of the Interior added that the actual number 

of employees on board was 558 in 2004, with some of this difference due to 
Page 7 GAO-04-448 Mineral Revenues

a decrease in the number of personnel assigned to compliance asset 

management. Within compliance asset management is the RIK Office that 

oversees RIK pilot sales, the Small Refiners Program, and the filling of the 

SPR.

Other developments in the administration of royalty collection have made 

it difficult to attribute changes in the MRM budget to RIK activities. 

Whereas RIK sales significantly change the processes for collecting royalty 

revenues, other developments, including the substantial change in the 

duties of the personnel responsible for auditing oil and gas revenues and 

for ensuring compliance with applicable rules and regulations, have 

ultimately affected the way MMS deploys its personnel—a major 

component of MRM’s budget. For example, in June 2000 MMS implemented 

new oil valuation regulations that provide more specific guidance on what 

prices companies must report to MMS on the sales of oil to their affiliates, 

and this should decrease discrepancies between MMS auditors and royalty 

payors. Similarly, MMS’s increased willingness to write formal agreements 

on these prices is also expected to decrease such disagreements. The 

change in the way MMS audits oil and gas revenues since its reorganization 

is also expected to decrease its workload. For example, MMS auditors no 

longer routinely compare all production volumes reported by the operators 

of oil and gas leases against all sales volumes reported by royalty payors to 

search for possible underpayments. Instead, MMS auditors now perform 

this activity on a case-by-case basis as needed. MMS auditors are also 

increasingly selecting the property as the entity to audit rather than 

selecting an individual company. Finally, when MMS does select a company 

to audit, there are fewer companies to select because of the recent mergers 

of the large oil and gas companies.

Prior to fiscal year 2003, MMS lacked the necessary data to conclusively 

quantify the difference in administrative costs under different royalty 

collection methods. Under Interior’s agencywide initiative, MMS 

implemented an activity-based cost (ABC) management system in fiscal 

year 2003. The system identifies specific work activities in order to 

measure their costs, monitor and evaluate program performance and 

results, and improve the way MMS does its work. In essence, MMS 

personnel record the hours spent on specific work activities, such as RIK 

audits, and convert these hours into labor costs. These labor costs are then 

added to nonlabor costs, such as travel and materials costs, to produce 

total direct costs for the identified work activities. MMS has captured the 

costs of the work activities included in the collection and auditing of 

royalty revenues during fiscal year 2003. Such information may help MMS 
Page 8 GAO-04-448 Mineral Revenues

compare the costs of administering the RIK sales to the costs of 

administering cash royalty collections; however, there is no way to make 

this comparison prior to fiscal year 2003.

RIK Reduces Audit Costs, 

But Overall Impact on 

Royalty Collection Is Not 

Quantified

According to MMS, the auditing and compliance effort is significantly 

reduced under RIK because MMS and the RIK purchaser agree to a 

contractual price before the sale and because transportation deductions 

are no longer an issue when MMS sells the oil or gas at the lease. MMS 

further explained that auditing RIK leases can be done within as little as 

120 days after the sale because it has all the necessary price information at 

that time, while up to 3 years transpire before MMS initiates an audit of 

cash royalty payments. During such cash royalty audits, MMS personnel 

must physically collect and inspect collaborative pricing and transportation 

documents, often at the payors’ offices, while similar pricing information 

for RIK sales is instantly available in MMS’s information systems.

The data from MMS’s newly implemented ABC management system does 

support MMS’s assertion that the auditing of certain RIK sales revenues is 

less costly on a per-lease basis than the auditing of comparable cash royalty 

payments. A review of the auditing and compliance costs for oil and gas 

leases in the Gulf of Mexico and Wyoming—two locations in which MMS 

received both cash and in-kind royalty payments during fiscal year 2003—

showed that the costs to audit cash sales per lease were substantially 

higher than the costs to audit in-kind royalties in both areas. In the Gulf of 

Mexico, MMS reported spending $6,765,000 to audit cash sales from 242 oil 

and gas leases, or $27,956 per lease, while spending $458,000 to audit all 297 

gas leases included in the RIK pilot sales, or $1,542 per lease. Similarly, 

MMS reported spending $820,000 to audit cash royalties from 912 oil and 

gas leases in Wyoming, or $899 per lease, while spending $38,000 to audit 

all 580 RIK oil leases in Wyoming, or $66 per lease.

While the ABC data suggest that the auditing costs for RIK sales revenues 

are less than the auditing costs for cash royalty payments, this difference 

does not necessarily mean that MMS is spending less money as it moves 

more leases into its RIK sales. MMS explained that instead of decreasing its 

audit budget, it has used these freed-up resources to audit additional cash 

royalty payments that it would not have otherwise audited. In addition, 

MMS has stated that auditing additional cash royalty payments could result 

in the collection of additional revenues. For fiscal year 2000, the latest year 

for which audit data are available, MMS reported that its audit activities, 

together with state and tribal audits of federal royalty revenues, generated 
Page 9 GAO-04-448 Mineral Revenues

about $219 million (or 5 percent) on royalty revenues of about $4.6 billion. 

However, MMS will not know the results of auditing additional cash royalty 

payments for several years because it takes time to select leases for audit, 

conduct the audits, and resolve related appeals and litigation. In the future, 

it is possible that MMS may experience different rates of revenue increase, 

either upwards or downwards, as it expands its audit coverage because of 

the different leases it selects for audit.

Litigation Costs Are Not 

Tracked

MMS’s new ABC system provided costs associated with taking royalties in 

kind during fiscal year 2003, but it did not capture the costs associated with 

specific types of litigation performed by others for MMS. Litigation 

sometimes arises after MMS or state and tribal auditing efforts identify a 

discrepancy that cannot be resolved by MMS and the payors. Such 

discrepancies commonly involve the value of oil and gas or the costs of 

transporting this oil and gas to market. MMS has maintained that the taking 

of royalties in kind reduces litigation. However, the savings that could 

result from avoiding litigation cannot be quantified by MMS because MMS 

does not conduct the litigation. Instead MMS relies primarily upon the 

Department of the Interior’s Solicitor’s Office, which does not track 

specific types of litigation costs for MMS. Officials in the Solicitor’s Office 

reported that since fiscal year 1999, between two and four of their 

attorneys worked full-time on MMS royalty issues. In addition, these 

officials said that attorneys within the Department of Justice represent 

MMS in court. Officials in the Solicitor’s Office could not attribute any 

decrease in litigation to an increase in the use of RIK. They also stated that 

the nature of the royalty litigation could change as a result of RIK; while 

litigation over valuation and transportation deductions may decrease, 

litigation over RIK contracts and discrepancies over volumes sold may 

increase. They also cautioned that future litigation over administrative 

decisions and rule making is impossible to predict. Finally, regardless of 

the volume of RIK sales, they cautioned that as long as MMS receives some 

cash royalty payments, there would always be the potential for litigation on 

valuation issues and transportation allowances.

RIK Sales Require 

Additional Costs Not 

Incurred When Collecting 

Cash Royalties

The administration of the RIK pilot sales includes additional activities that 

are not necessary when accepting cash royalty payments and therefore add 

to the cost of collecting royalties in kind. Such activities include identifying 

properties from which to sell oil and gas, calculating minimum acceptable 

bids, awarding and monitoring contracts, billing purchasers, negotiating 

transportation rates, and reconciling discrepancies in volumes. In fiscal 
Page 10 GAO-04-448 Mineral Revenues

year 2003, MMS’s preliminary ABC data showed direct costs of $1.7 million 

to conduct activities for the RIK pilot sales that it would not have incurred 

had it accepted cash royalty payments.3

 Of this $1.7 million, MMS 

reportedly spent $475,000 to identify properties, calculate minimum 

acceptable bids, and conduct sales; $464,000 to market the royalty oil and 

gas; $176,000 to monitor the credit worthiness of purchasers; $496,000 for 

auditing leases and reconciling volumes; and $127,000 for policy 

compliance and legal support.

MMS also incurred one-time costs of more than $13 million to acquire three 

information systems, part of whose functions are to bill, collect, and report 

on revenues from the RIK pilots. When fully implemented, these systems 

may help address the management control weakness that we previously 

identified involving the manual entry of data into unlinked computer 

spreadsheets.4 The first of these systems, the gas information system, is

wholly dedicated to the administration of the RIK gas pilot sales and cost 

$7.3 million. Implemented in January 2003, the system automates the 

billing, collecting, and reporting functions. MMS’s second system, the 

liquids information system, cost almost $5 million and was implemented in 

June 2003. Like the gas system, it is designed to automate the billing, 

collecting, and reporting functions, but unlike the gas system it is not 

wholly dedicated to the RIK pilot sales, but also supports the Small 

Refiners Program and the filling of the SPR. MMS’s third system, the Risk 

and Performance Management System, cost about $0.9 million and is 

designed to measure the results of the RIK gas sales and the Small Refiners 

Program for periods during 2003. In addition, MMS’s preliminary ABC data 

shows that MMS incurred direct costs of $682,000 in fiscal year 2003 to 

develop and maintain these information systems. MMS will also incur 

additional costs in future years to operate and maintain these systems.

3

We relied upon the direct costs identified by MMS—costs that MMS defines as directly 

supporting its mission. We regarded the RIK direct costs as being most indicative of the 

incremental costs to administer the RIK pilots. We did not analyze indirect costs—those 

costs that MMS defines as sustaining the organization, normally referred to as overhead, 

including information technology support, general management, and general administrative 

support. Indirect costs are allocated back to the mission-supporting activities based on the 

ratio of the labor cost contained in each direct work activity to the total labor cost in all 

direct work activities.

4

U.S. General Accounting Office, Mineral Revenues: A More Systematic Evaluation of the 

Royalty-in-Kind Pilots is Needed, GAO-03-296 (Washington, D. C.: Jan. 9, 2003).
Page 11 GAO-04-448 Mineral Revenues

The Revenue Impact of 

RIK Sales Is Mixed

Our analysis of sales in three RIK pilots indicates a mixed performance 

when comparing RIK sales revenue to what might have been collected 

under cash royalty payments. Specifically, (1) RIK sales in Wyoming 

increased revenues by about 2.6 percent, for an estimated gain of $967,000 

on sales of about $37 million; (2) a 6-month oil sale in the Gulf of Mexico 

decreased revenues by 5.5 percent, for an estimated loss of $7.2 million on 

sales of about $131 million; and (3) natural gas sales in the Gulf of Mexico 

produced more revenues than would have been collected from cash royalty 

payments—an increase of about 2 percent, for an estimated gain of $4 

million on revenues of $210 million. These sales represented about 11 

percent of the gas and 57 percent of the oil that MMS took in kind from 

inception of the pilots through November 2003. Our attempts to review the 

revenue impact of more RIK sales were precluded by specific limitations in 

MMS financial data and the availability of only two independent MMS 

draft reports.5 As we observed in our January 2003 report, MMS continues

to expand its RIK pilots without analyzing and documenting the revenue 

impacts of all its RIK sales. MMS is making some progress in this area, but 

still has not demonstrated that it has received fair market value, or at least 

as much as it would have received in cash royalty payments.

RIK Oil Sales in Wyoming 

Increased Revenues by 

About 2.6 Percent

MMS chose to conduct its first RIK oil sales in Wyoming because of the 

state’s active oil markets and the cooperative spirit of state officials. MMS 

offered for sale the federal government’s royalty share of oil together with 

the state of Wyoming’s royalty oil that was for 6-month periods beginning in 

October 1998.6

 Bidders offered a fixed amount of money either more or less 

than published market prices, such as Wyoming posted prices, Canadian 

posted prices, and the oil futures contract on the New York Mercantile 

Exchange (NYMEX). 7

 The winning bidders, which included companies that 

5

Staff independent of the MMS RIK sales staff conducted draft studies for 18 months of the 

Wyoming oil sales and 19 months of the Gulf of Mexico gas sales. See Wyoming Oil Royalty 

In Kind Pilot, Evaluation Report (June 1, 2002) and Texas General Land Office/Minerals 

Management Service 8(g) Gas Royalty In Kind Pilot, A Report (March 27, 2002).

6

Wyoming participated in all but the first 6-month sale.

7

A NYMEX futures contract is an agreement through the New York Mercantile Exchange for 

a future purchase or sale of 1,000 barrels of sweet crude oil, similar in quality to West Texas 

Intermediate oil. While most NYMEX contracts result in a financial gain or loss, rather than 

the delivery and receipt of oil, parties to the agreement can exchange oil at Cushing, 

Oklahoma, where several oil pipelines intersect and where storage facilities exist.
Page 12 GAO-04-448 Mineral Revenues

market, refine, transport and/or produce oil in Wyoming and adjacent 

states, accepted delivery of the oil at the lease. Although MMS’s RIK sales in 

Wyoming accounted for only about 1 percent of total federal royalty oil, 

MMS acquired significant knowledge on how to conduct sales and market 

oil onshore. For example, MMS determined that companies more 

commonly bid on royalty oil from properties that are connected to 

pipelines and prefer flexibility in choosing a specific price upon which to 

base their bid. In addition, MMS learned in 2002 that it was not profitable to 

transport the volumes from many scattered leases to one central location 

for sale. 

In a draft report issued in March 2001, updated in June 2002, and finalized 

in March 2004, MMS estimated that it received slightly more revenue in its 

first three RIK sales than it would have received in cash royalty payments. 

Specifically, MMS reported that it collected $810,000 more from RIK sales 

than it would have received in cash royalty payments, or an increase of 

about 2.9 percent on sales of $27.66 million from October 1998 through 

March 2000. MMS based its conclusion on a comparison of winning RIK 

bids to severance taxes that producers reported and paid to the state of 

Wyoming. State severance taxes are calculated as a percentage of the value 

of all oil that companies sell, regardless of whether the oil is produced from 

federal, state, or private lands. Because the state of Wyoming’s oil valuation 

statutes are similar to how the federal government values oil, MMS 

assumed that the price that companies reported for state severance taxes 

on RIK properties was equal to the price that the government would have 

received in cash royalty payments. However, MMS did not demonstrate that 

the average sales prices for cash royalty payments were equal to the 

average sales prices used to calculate Wyoming severance taxes, initially 

creating some uncertainty about MMS’s revenue calculations.

To address the uncertainty in MMS’s assumption about the relationship 

between cash royalty payments and severance tax prices, we analyzed the 

relationship. For nine federal properties8

 that accounted for about 47 

percent of the oil that MMS sold in Wyoming during the first seven RIK 

sales, we compared Wyoming severance tax data with MMS’s financial data 

for the 33-month period prior to the RIK sales and concluded that Wyoming 

severance tax prices are a reasonable proxy for cash royalty payments. 

Therefore, based on Wyoming severance tax data, we estimated that MMS 

8

Properties consist of one or more leases. In Wyoming, producing properties often contain 

more than one contiguous lease.
Page 13 GAO-04-448 Mineral Revenues

collected $967,000 more from the RIK sales from October 1998 through 

March 2002 than it would have collected in cash royalty payments—an 

increase of about 2.6 percent on sales of about $37 million. The results of 

our analysis of selected Wyoming RIK sales are consistent with MMS’s 

conclusion that the RIK sales that it analyzed resulted in slightly more 

revenue that it would have realized if it had accepted cash royalty 

payments. A more detailed discussion of our analysis appears in 

appendix I.

Six Months of RIK Oil Sales 

in the Gulf of Mexico 

Decreased Revenues by 

About 5.5 Percent, But Long 

Term Impacts Could Differ

Although MMS has a long-standing history of selling royalty oil through the 

Small Refiners Program, MMS did not sell offshore royalty oil directly to 

other qualified purchasers until November 2000. MMS sold, through two 

separate 6-month sales, up to 20 percent of the federal government’s 

royalty share of oil in the offshore Gulf of Mexico to all purchasers meeting 

predetermined financial qualifications, whether they were small refiners, 

large refiners, producers, or marketers.9

 Winning bidders offered a fixed 

amount of money that was more than or less than a formula based on one 

of two widely published oil prices—Koch’s published price for West Texas 

Intermediate oil in the first sale and the NYMEX futures contract in the 

second sale. During the first sale, MMS offered about 39,000 barrels of oil 

per day, but awarded contracts for only about 7,600 barrels per day. Only 

two companies submitted bids. MMS attributed the lack of interest to the 

delivery points for the oil being at market centers onshore rather than 

offshore near the lease. During the second sale, which commenced in 

October 2001, MMS offered and awarded approximately 48,000 barrels of 

oil from six major pipeline systems. Nearly all of the oil consisted of two 

types, referred to as the Mars and Eugene grades, produced in water depths 

up to about 4,000 feet. The delivery point for the oil was offshore near the 

lease, and competition was robust. MMS terminated the Gulf RIK oil pilots 

after the second sale when ordered by a Presidential directive to transfer 

oil from these properties to the SPR.

As of July 2003, MMS had not evaluated the revenue impacts of either sale. 

Because of the larger amount of oil sold during the second sale, we chose 

to analyze this sale and estimated that MMS received about $7.2 million less 

in revenues than it would have received had it accepted cash royalty 

payments—a 5.5 percent loss on sales of about $131 million. We selected 13 

9

The first sale was automatically extended for another 5 months.
Page 14 GAO-04-448 Mineral Revenues

of the 26 leases included in the second sale that collectively accounted for 

about 89 percent of the oil offered and sold. For the 16-month period prior 

to the start of the second oil sale, we compared the average monthly sales 

price for oil from each lease to the price as prescribed by MMS’s oil 

valuation regulations for sales between affiliated parties (transactions not 

at arm’s-length).10 We then computed a weighted average difference in the 

monthly prices for the entire 16-month period and assumed that this 

weighted average difference would have persisted over the 6-month RIK 

sales period had royalties been paid in cash. A detailed explanation of our 

analysis appears in appendix I.

Because revenue from RIK sales and from cash sales can differ 

considerably in any given month, a longer period of evaluation is needed to 

determine whether a specific type of RIK sales can generate at least as 

much royalty revenue as cash sales. The reason that RIK and cash sales 

revenues differ month to month is that they are generally based on different 

sets of market prices. For example, the formula that MMS used to award 

RIK bids in the second Gulf of Mexico sale differs from the formula 

prescribed in the oil valuation regulations primarily in two ways: (1) the 

bidding formula relies on prices from a period that is almost a month 

earlier than that prescribed by the oil valuation regulations, thereby 

creating a timing difference and (2) the bidding formula relied on an 

adjustment to NYMEX futures price, referred to as “the roll.” The roll is an 

adjustment that compensates for differences in oil futures prices for 

subsequent months. If futures prices for the next three trade months trend 

downward, the roll is a positive adjustment. If futures prices trend upward 

for the next three trade months, the roll is a negative number. Rising oil 

futures prices that accompanied uncertainty in the financial markets after 

the September 11 terrorist attacks resulted in generally lower-thananticipated RIK royalties caused by the timing differential and a negative 

roll, thereby contributing significantly to the negative performance of the 

second sale. 

MMS officials agree that a 6-month term is an insufficient period of time 

during which to evaluate a sales methodology. Specifically, MMS added that 

it had intended to continue the oil sales in the Gulf of Mexico but that the 

President directed that royalty oil be used to fill the SPR, and royalty oil 

10We chose MMS’s valuation regulations for transactions not at arm’s-length for comparison 

because these regulations rely upon readily available published oil prices at market centers 

through which the oil must flow.
Page 15 GAO-04-448 Mineral Revenues

from the leases included in the pilot sales was the only feasible source. 

Although MMS generally agrees with the magnitude of the revenue impact 

that we identified during the 6-month period of the second sale, MMS 

believes that we should have examined a longer period of time, even 

though the oil that was sold during this sale was thereafter transferred to 

the SPR. After learning of our analysis, MMS conducted its own evaluation 

of many of the same leases. MMS combined the results of the 6-month 

second sale with the following 12 months during which oil from these same 

leases was transferred to the SPR. MMS estimated that during this 

combined 18-month period, its sales methodology increased revenues by 

$4.9 million. This estimate, however, does not mean that MMS collected 

$4.9 million more than it would have collected in cash royalty payments. 

MMS’s estimate is based on combining cash collections from RIK sales in 

the first 6 months with market index prices at the time that MMS 

transferred the oil to the Department of Energy (DOE) for filling of the 

SPR. MMS estimated that it lost $6 million in cash during the first six 

months and that the value of the oil transferred to DOE was $10.9 million 

more than it would have received in cash royalties had the RIK pilot sales 

continued for the next 12 months.

We do not believe that MMS’s evaluation of the SPR program is necessarily 

indicative of how the RIK program would have performed had it been 

allowed to continue. The SPR program does not generate royalty income 

for the federal government in the same way as the RIK program does. In the 

SPR program, the royalty oil, or an equivalent amount from another source, 

is pumped into the reserve, and revenues will only be generated upon its 

removal and sale at some unspecified period in the future. In addition, the 

data that MMS used in estimating the revenue impacts of its Gulf of Mexico 

oil sales was problematic in several ways. First and most important, MMS 

did not adjust its revenue estimate by quality bank adjustments. Quality 

bank adjustments are either positive or negative adjustments to sales 

revenues that pipeline companies compute because the royalty oil is of 

either better or worse quality than the average quality of oil in the pipeline. 

Payors either add or subtract these adjustments from both their cash and 

in-kind royalty payments to MMS. Quality bank adjustments can be 

substantial—during the second RIK sale, they lowered MMS’s revenues on 

the leases we examined by $2.5 million. Second, MMS did not use the actual 

transfer volumes to the SPR in its financial database, opting instead to use 

volumes recorded in its production database or to use estimates of these 

volumes, adding uncertainty to the accuracy of its revenue calculations. 

For example, we examined the production volumes for 8 of the 13 leases 

we reviewed during the 6-month sale and found significant discrepancies 
Page 16 GAO-04-448 Mineral Revenues

between these volumes and the volumes in its financial database. Similarly, 

independent auditors performing an audit of MMS’s fiscal year 2002 

financial statements noted that MMS’s use of estimated volumes did not 

ensure an accurate calculation of the SPR amounts transferred to DOE. 

Third, we identified some minor discrepancies in the prices MMS used to 

calculate the value of the SPR transfers, such as using an index other than 

that used during the 6-month sale and assuming that companies bid exactly 

the same on the SPR transfers as they did in the 6-month sale, but it is 

unclear as to whether these discrepancies would significantly alter MMS’s 

calculations. 

Sales of Royalty Gas from 

Two Pipelines in the Gulf of 

Mexico Generated Higher 

Revenues Than Would Have 

Been Expected from Cash 

Royalties

After initial experimentation with selling royalty gas in 1995 and 

simultaneously with the contracting of gas marketers in 1999, MMS 

established sales procedures for offshore royalty gas similar to those in 

2003. Beginning in June 1999, MMS tested the sale of offshore royalty gas 

from 11 federal offshore leases. Production from these leases flowed 

through the Matagorda Offshore Pipeline System or through the Blessing 

Pipeline System.11 MMS entered a cooperative agreement with the Texas 

General Land Office to conduct the RIK sales because under section 8(g) of 

the Outer Continental Shelf Lands Act, royalty revenues for federal leases 

located in coastal waters are to be shared with the state. MMS sold the 

royalty gas for 1-month periods at competitive auctions, during which 

purchasers who met minimum financial qualifications bid an increment or 

decrement relative to applicable published gas indexes. Several months 

into the pilot, MMS started dividing the gas into two separate packages—a 

larger package (base volume), for which MMS guaranteed that it would 

deliver the specified volume at a fixed first-of-the-month price, and a 

smaller package (swing volume), for which MMS did not guarantee the 

volume delivered and which MMS offered at published prices that varied 

daily. Beginning in 2000, MMS began combining its monthly gas sales into 

two sales periods for administrative reasons. MMS now conducts gas sales 

for delivery from April through October, corresponding to the period 

during which natural gas is used extensively for air conditioning, and for 

delivery from November through March, corresponding to the period 

during which natural gas is used extensively for heating.

11Although not technically named the Blessing Pipeline System, GAO and MMS refer to it by 

this name because the pipelines terminate at a gas plant in Blessing County, Texas.
Page 17 GAO-04-448 Mineral Revenues

In accordance with its cooperative agreement with the Texas General Land 

Office, MMS issued a draft report in March 2002 on the analysis of its gas 

sales from the Blessing and the Matagorda Offshore Pipeline Systems from 

June 1999 through December 2000. The report stated that the RIK sales 

increased revenues by nearly $1 million over what it would have collected 

in cash royalties—an increase of about 1 percent on sales of almost $100 

million. MMS obtained this estimate by comparing RIK sales revenues to 

cash royalty sales from 18 other leases located in the same geographic area. 

However, because of limitations with its financial data, MMS did not 

subtract the costs of transporting the gas to its sales points onshore, 

comparing gross unit prices rather than prices net of transportation 

allowances.

After reviewing MMS’s study and conducting our own analysis, we reached 

conclusions similar to those of MMS—that revenues from the sale of RIK 

gas from the Blessing and Matagorda Offshore Pipeline Systems were 

higher than MMS would have received in cash royalty payments. We 

included additional RIK leases in our analysis, excluded some cash royalty 

payments that MMS later identified as not coming from leases on the same 

pipeline systems, and extended the time frame of our study to December 

2001. We estimated that, including the cost to transport the RIK gas to its 

onshore sales points, revenues were increased by about 2 percent. Hence, 

we estimate that MMS realized about $4 million more than it would have 

collected in cash royalties, or a gain of about 2 percent on sales of about 

$210 million. A more detailed description of our analysis appears in 

appendix I.

Data Limitations Prevent a 

More Comprehensive 

Analysis of RIK Sales

In analyzing RIK sales, we identified specific limitations in MMS’s financial 

data that inhibited our analysis and precluded us from conducting a 

comprehensive computer-based assessment of all RIK sales. A small 

amount of erroneous, missing, and improperly coded financial data, 

together with other anomalous but legitimate financial data, required timeconsuming inspections of these data and complex edit checks to ensure 

data reliability and integrity. For example, in our analysis of the three RIK 

pilot sales, we analyzed almost 60,000 financial transactions, followed at 

times by a line-by-line inspection of some of these data, discussions with 

MMS personnel, and manual checks of source documents. MMS staff 

confirmed that the financial data in their raw form were unreliable in 

assessing program performance; in some instances, MMS staff chose to use 

contract prices or production volumes in lieu of the financial data because 

they lacked confidence in the available financial data. In addition, the lack 
Page 18 GAO-04-448 Mineral Revenues

of a systematic method to electronically combine data in its financial 

database with well, pipeline, product quality, and market center data also 

prevented us from analyzing the revenue impacts of all offshore RIK sales. 

Although MMS obtains and records these data for individual properties 

included in its RIK sales, MMS personnel must manually obtain these data 

for each property through time-consuming phone calls and searches of 

industry databases. According to its procedures, MMS performs these data 

collection efforts each time it expands the RIK program into new areas. 

However, MMS’s unsystematic collection and recording of these data may 

slow the development of benchmarks against which to compare RIK sales 

in the future. 

In 2001, MMS took steps to improve its collection and management of 

royalty data and to develop the means to identify and correct erroneous 

financial data. For example, MMS began to develop a more consistent 

coding of RIK transactions, and MMS personnel in the RIK Office began to 

take a more active role in entering RIK transactions for the purpose of 

ensuring data reliability. In October 2001, MMS revised its electronic form 

for collecting royalty data in an attempt to correct erroneous data. More 

recently, MMS sought external assistance in developing software to identify 

erroneous data that can then be corrected or eliminated. While some of the 

data problems may have been resolved by MMS, other problems continue 

to be evident. Specifically, the misallocation of SPR volumes to some 

individual leases and the aggregating of sales from multiple gas leases will 

continue to complicate future analyses unless these problems are 

corrected. MMS says that it plans to correct these deficiencies as it further 

refines its newly acquired oil and gas information systems. See appendix I 

for more detailed information on data problems.

Lacking Formal 

Requirements, Many RIK 

Sales Remain Unanalyzed

Our ability to assess the revenue impact of RIK sales was further limited by 

the failure of MMS to analyze and document the results of its sales. We 

reported in January 2003 that MMS quantified the revenue impacts of only 9 

percent of the 15.8 million barrels of federal royalty oil that it sold from 

October 1998 through July 2002 and about 44 percent of the 241 billion 

cubic feet of federal royalty gas that it sold from December 1998 through 

March 2002. MMS has since sold an additional 201 billion cubic feet of gas 

in the Gulf of Mexico and an additional 1.4 million barrels of oil in Wyoming 

through November 2003, but has not published an analysis of the revenue 

impacts of these sales. In total, we estimate that MMS has analyzed only 8 

percent of the 17.2 million barrels of royalty oil and 24 percent of the 442 

billion cubic feet of royalty gas sold during RIK pilot sales through 
Page 19 GAO-04-448 Mineral Revenues

November 2003. This limited analysis of revenue impacts could be a 

significant issue as RIK sales expand in the future. Based on MMS’s 

estimates for further expansion of the program, we estimate that MMS 

could be collecting between $1.5 billion and $2.5 billion per year in revenue 

from the RIK pilot sales by 2008.

MMS has not systematically analyzed and documented the results of all its 

RIK sales for four main reasons. The first and most significant reason is 

that MMS has no requirement that all sales results be analyzed and 

documented. Although the Congress directs MMS to (1) obtain fair market 

value and (2) collect at least as much revenue from the RIK sales as MMS 

would have collected from traditional cash royalty payments, MMS is not 

required to document how this directive is met. While MMS does analyze 

factors that will affect the revenues of upcoming sales, MMS lacks a 

systematic process for analyzing the final results of each of its sales. 

Second, staff responsible for conducting sales already believe that they 

have enough information on sales results. For example, MMS staff cited the 

second 6-month oil sale in the Gulf of Mexico in which market conditions 

unexpectedly moved in a manner that resulted in revenue collections that 

were less for this period than what would have been expected from cash 

royalty collections. MMS stated that they had enough information on the 

market conditions that drove the sales results even before completion of 

the 6-month sale. Third, insufficient staff is available for analyzing sales. We 

observed that staff who conduct sales are busy with identifying properties 

for inclusion in sales, establishing minimum acceptable bids, evaluating 

bids, and expanding the program. MMS has only one staff member 

independent of the RIK Program whose duties involve selectively analyzing 

RIK sales results at the direction of MMS management. To ensure proper 

management control and to remove the appearance of a conflict of interest, 

it is best to segregate the responsibility of a program’s operation from the 

responsibility of reviewing the program, which MMS correctly did when it 

reviewed the Wyoming oil and the Gulf of Mexico gas sales. Fourth, a 

lengthy management review process limits the usefulness of analyses that 

are conducted. For example, MMS’s report on the Wyoming pilot sales 

dated March 2001 and its report on gas sales in the Gulf of Mexico dated 

March 2002 remained in draft form pending final management approval 

until March 2004. In addition, a study of subsequent gas sales in the Gulf of 

Mexico, completed in April 2003, is still being reviewed and modified under 

the direction of MMS management.
Page 20 GAO-04-448 Mineral Revenues

MMS Has Recently Taken 

Steps to Address 

Deficiencies in Analyzing 

Sales Results and 

Quantifying Administrative 

Efficiency

Since our last report, MMS has hired an industry consulting group to 

develop a strategic plan to guide the transition of the RIK pilots through the 

end of 2008. MMS intends to develop a 5-year business plan based largely 

upon the consulting group’s plan. The consulting group, among other 

things, has proposed that MMS (1) develop benchmarks that are indicative 

of fair market value; (2) develop a consistent process for monitoring RIK 

sales at regular time periods against these benchmarks; (3) develop a 

consistent process for deciding whether to accept cash royalty payments or 

to take RIK; (4) track administrative efficiency expressed as the cost per 

unit of royalty oil and gas sold; and (5) measure the amount of time it takes 

to collect, report, audit, and reconcile RIK revenue collections. The 

consulting group intends that the benchmarks satisfy MMS’s congressional 

mandates that RIK sales achieve fair market value and generate at least 

what would have been collected in cash royalty payments. The consulting 

group has developed a timetable for MMS to develop benchmarks for fair 

market value by March 2004 and benchmarks for administrative efficiency 

by March 2005.

While much of the data collection for developing benchmarks will remain a 

manual process, MMS anticipates that overall calculation of RIK Program 

performance will be facilitated by MMS’s newly acquired RIK information 

systems. MMS stated that while data on RIK sales are available in less than 

30 days after the sales month, RIK purchasers continue to submit data on 

quality adjustments and volume imbalances after these sales, and MMS 

must enter these data into its financial systems and audit the final figures. 

MMS believes that 120 days after an RIK sale, it will have completed these 

audits and has set this 120-day period as a formal objective. Within 180 

days, MMS stated that it would be able to report on the results of these 

sales. However, many RIK sales only have a length of about 180 days or 

less, so obtaining performance results 180 days after a sale is not timely 

enough to use these results to modify the next sale. Recognizing this 

limitation, the consulting group recommended that performance be 

measured on a monthly or quarterly basis, and MMS believes this will be 

possible with its newly acquired RIK information systems.

Conclusions RIK can be an important tool for managing the collection of royalty 

revenues from federal oil and gas leases. In light of the possibility of 

revenue collections from RIK sales approaching $1.5 billion to $2.5 billion 

by 2008, it is important that MMS measure and document the revenue 

impact and costs of administering RIK relative to cash royalty payments, to 
Page 21 GAO-04-448 Mineral Revenues

ensure itself and the public that royalties are collected in the most efficient 

manner. In doing so, MMS may be able to conclusively show that it has 

reduced overall administrative costs or collected more than traditional 

cash royalty payments. MMS has made some progress in analyzing the 

revenue impacts of some of its sales, but many sales remain unanalyzed, 

and MMS has yet to implement a more systematic and timely approach to 

analyzing these sales. Also, completely quantifying the administrative 

efficiency of these RIK sales continues to be a challenge. While key data 

from MMS’s new activity-based cost management system have shed some 

light on the difference in costs to administer RIK and cash royalties, MMS 

has been unable to quantify any overall benefit that may arise from shifting 

resources to auditing more cash royalty payments and from changes in 

litigation due to RIK. Unless steps are taken to quantify the impacts of 

these changes, MMS and the Congress will be unable to determine the 

efficiency of RIK. Because MMS has not systematically assessed and 

documented the overall administrative cost and revenue impacts of many 

RIK sales, knowledge of MMS’s RIK Program is insufficient to determine 

whether MMS should expand or contract the use of RIK.

Matters for 

Congressional 

Consideration

Should the Congress seek a more systematic and timely evaluation of RIK 

efforts, the Congress may want to consider directing MMS to implement a 

systematic process for evaluating all future RIK sales in a timely manner 

and to quantify any changes in the administrative cost and revenue impact 

on royalty collections as a result of RIK.

Agency Comments and 

Our Evaluation

We provided the Department of the Interior with a draft of this report for 

review and comment. Interior generally agreed with our observations and 

emphasized the steps that they are taking to improve their measurement of 

RIK sales performance. Interior said that the insights and conclusions 

contained in the report are timely and will be valuable in their efforts to 

improve the RIK Program. Their comments and our response to these 

comments are reproduced in appendix II.

As agreed with your offices, and unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from the 

date of this letter. At that time, we will send copies of this report to the 

Secretary of the Interior; the Director of the Office of Management and 

Budget; and other interested parties. We will also make copies available to 
Page 22 GAO-04-448 Mineral Revenues

others upon request. This report will be available at no charge on GAO’s 

Web site at http://www.gao.gov. 

If you have any questions about this report, please call Mark Gaffigan or me 

at (202) 512-3841. Key contributors to this report are listed in appendix III.

Jim Wells

Director, Natural Resources

and Environment
Page 23 GAO-04-448 Mineral Revenues

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

To determine the administrative cost savings associated with RIK, we first 

examined MMS’s two draft studies on RIK sales—Wyoming Oil Royalty In 

Kind Pilot, Evaluation Report (June 1, 2002) and Texas General Land 

Office/Minerals Management Service 8(g) Gas Royalty In-Kind Pilot, A 

Report (March 27, 2002). We reviewed MMS’s logic and assumptions in 

these reports concerning the quantification of administrative savings and 

benefits attributable to RIK. We used the data in these reports, MMS’s 

budgetary data, and testimonial evidence from MMS officials to identify 

which aspects of administrative savings and benefits to investigate. We 

then obtained data from the activity-based cost (ABC) management system 

for the entire fiscal year 2003 and solicited MMS’s assistance in 

understanding the individual activities and in identifying which direct costs 

were attributable to RIK sales and which were attributable to cash royalty 

collections. We also obtained one-time expenditures for MMS’s new 

information systems from MMS officials and supporting documentation 

since not all of these costs were reflected in the fiscal year 2003 ABC data. 

To calculate costs for auditing cash royalty payments and RIK sales 

revenue on a per-lease basis, we used ABC data, together with the numbers 

of the different types of leases that MMS audited in fiscal year 2003, as 

supplied by MMS. We obtained data on additional royalty revenue obtained 

through auditing and compliance activities from MMS’s report entitled 

Report of Royalty Management and Delinquent Account Collection 

Activities, Fiscal Year 2000. We interviewed MMS personnel on the costs 

of appeals, and we interviewed attorneys in the Department of the 

Interior’s Solicitor’s Office to obtain information on the impact of RIK sales 

on litigation. Finally, we audited revenue from all RIK sales during fiscal 

year 2002 to determine the benefit of early collections.

To evaluate all of MMS’s RIK pilot sales, we planned to compare RIK sales 

revenues with cash royalties from comparable federal leases. We started 

with sales in the Gulf of Mexico by attempting to identify comparable 

leases through the electronic matching of attributes, such as type of oil, 

sulfur content, market center, well location, pipeline available for 

shipment, and distance to the nearest market center. To do so necessitated 

combining data on these attributes in MMS’s offshore geographic 

information system with data on sales values, sales volumes, royalty 

values, royalty volumes, transportation deductions, and quality bank 

adjustments in MMS’s financial system. We examined data from January 

1997 through July 2003, but we did not independently verify the integrity of 

MMS’s financial database. Unfortunately, we could not perform the 

intended analysis because of two reasons: (1) we were unable to link the 

data in the financial system with data in the offshore geographic 
Appendix I

Objectives, Scope, and Methodology

Page 24 GAO-04-448 Mineral Revenues

information system, and (2) we identified many data anomalies in MMS’s 

financial database. We were unable to link the financial data with data in 

the offshore geographic information system because the common link—the 

lease number—had been compromised during some RIK gas sales. 

Specifically, MMS personnel who entered these data had combined RIK 

sales revenue from multiple leases and entered these data under a new 

lease number referred to as a “dummy lease number.” We also found that 

some data that would be helpful in identifying comparable oil leases, such 

as the quality of oil and the sulfur content, were not present in MMS’s 

geographic information system. Upon examination of the financial data, we 

discovered many data anomalies that prevented us from reliably and easily 

aggregating the monthly transactions to the same lease and payor. Within 

the data aggregated to the month-lease-payor level, anomalies included 

negative sales volumes, missing sales values, negative sales values, and 

missing quality measures for gas prior to fiscal year 2002. Some of these 

anomalies were obvious errors, but many more appeared to be correct and 

legitimate data entries. With no explanations in the financial data 

documentation to indicate which anomalies were accurate and which were 

not, resolving the anomalies required line-by-line inspection of the data 

and, in some cases, manual checks with other documentation. As a result 

of the large number of data anomalies and the time-consuming process 

required to correct and verify the royalty data, we undertook case studies 

of MMS’s RIK pilots in three sales areas: (1) RIK oil sales in Wyoming, (2) 

RIK oil sales in the Gulf of Mexico, and (3) RIK gas sales on two pipelines in 

the Gulf of Mexico. 

Wyoming Oil In analyzing the integrity and reliability of MMS’s financial data that we 

used to evaluate RIK oil sales in Wyoming, we selected nine properties that 

provided about 47 percent of the oil sold during the RIK sales we analyzed. 

We selected properties that produced the three different types of crude oil 

that MMS sold in its RIK sales—asphaltic, general sour, and Wyoming 

sweet oils. We obtained MMS’s financial data for all nine properties from 

January 1996 through March 2002 and aggregated these 32,823 financial 

transactions to the property-month level rather than the lease level because 

we anticipated that the financial impact of the smaller leases would not be 

as significant. We found that 3.3 percent of property months contained 

erroneous or missing data, but we were able to correct or obtain these data.
Appendix I

Objectives, Scope, and Methodology

Page 25 GAO-04-448 Mineral Revenues

To estimate the revenue impact of Wyoming RIK oil sales, we attempted to 

determine if Wyoming severance tax1

 prices were a good proxy for what 

MMS would have received in cash royalty payments. We first obtained the 

state of Wyoming’s severance tax data for the same nine properties. We 

then proceeded to examine the average sales price per barrel and the 

number of barrels produced from each property during each of the 33 

months immediately preceding the first RIK sale. The Bureau of Land 

Management, which leased the nine federal properties in Wyoming, 

grouped federal leases into these properties based on the geological 

boundaries of the oil fields. Personnel with the state of Wyoming, however, 

group producing leases into clusters for tax purposes. At our request, a 

Wyoming state official attempted to match these clusters as closely as 

possible to the federal properties. However, some clusters included 

additional state or private leases that they could not segregate, and in some 

instances, the state official could not precisely match the properties. We 

then graphed the volumes reported to the state of Wyoming for severance 

taxes and the volumes reported to MMS for cash sales for each of the nine 

properties. The graphs suggested that seven state properties contained 

many of the same federal leases. We then graphed the state severance tax 

prices and MMS’s cash royalty prices for each property. We determined that 

the severance tax prices and MMS’s cash royalty prices are essentially the 

same for eight properties. The severance tax prices for the ninth property 

were on average about 50 cents higher than MMS’s cash royalty prices. See 

figures 1, 2, and 3 for graphs of these prices that aggregate properties 

according to type of oil.

1

Severance taxes are levied by the state as a percentage of the value of the oil or gas that is 

produced, regardless of whether the lease is for federal, state, or private lands.
Appendix I

Objectives, Scope, and Methodology

Page 26 GAO-04-448 Mineral Revenues

Figure 1: Comparison of Weighted Average Monthly Sales Prices Obtained from 

Wyoming Severance Tax Database and MMS’s Financial System for Selected 

Asphaltic Properties Subsequently Included in RIK Sales

Dollars

0.00

5.00

10.00

15.00

20.00

25.00

Source: GAO analysis of MMS and state of Wyoming data.

WY prices

MMS prices

Jan-96

Mar-96

May-96

Jul-96

Sep-96

Nov-96

Jan-97

Mar-97

May-97

Jul-97

Sep-97

Nov-97

Jan-98

Mar-987

May-98

Jul-98

Sep-98
Appendix I

Objectives, Scope, and Methodology

Page 27 GAO-04-448 Mineral Revenues

Figure 2: Comparison of Weighted Average Monthly Sales Prices Obtained from 

Wyoming Severance Tax Database and MMS’s Financial System for Selected General 

Sour Properties Subsequently Included in RIK Sales

Dollars

0.00

5.00

10.00

15.00

20.00

25.00

Source: GAO analysis of MMS and state of Wyoming data.

WY prices

MMS prices

Jan-96

Mar-96

May-96

Jul-96

Sep-96

Nov-96

Jan-97

Mar-97

May-97

Jul-97

Sep-97

Nov-97

Jan-98

Mar-987

May-98

Jul-98

Sep-98
Appendix I

Objectives, Scope, and Methodology

Page 28 GAO-04-448 Mineral Revenues

Figure 3: Comparison of Weighted Average Monthly Sales Prices Obtained from 

Wyoming Severance Tax Database and MMS’s Financial System for Selected Sweet 

Properties Subsequently Included in RIK Sales

Gulf of Mexico Oil To evaluate the integrity and reliability of MMS’s financial data that we used 

to evaluate the second RIK oil sale in the Gulf of Mexico, we examined 

MMS’s financial data from January 1997 through March 2002 for 16 of the 26 

leases in the sale. We removed all transactions involving the SPR and small 

refiners so that we could compare sales from the second RIK sale to cash 

royalty payments only. We found this initial task difficult because MMS 

inconsistently used transaction codes for sales to small refiners and for 

transfers to the SPR during the time frame of our study. We aggregated 

7,725 transactions to the payor-lease-month level and found that 1.9 percent 

of the payor-lease-months contained erroneous or missing data, and about 

9 percent of the aggregated data was compromised by payors using 

multiple payor codes. Payors also inconsistently reported or did not report 

royalty volumes when reporting transportation deductions prior to October 

2001 and inconsistently reported or did not report sales values when 

reporting quality bank adjustments. We subsequently reduced the period of 

our analysis to June 2000 through March 2002, reduced our leases to the 13 

Dollars

0.00

5.00

10.00

15.00

20.00

30.00

25.00

Source: GAO analysis of MMS and state of Wyoming data.

WY prices

MMS prices

Jan-96

Mar-96

May-96

Jul-96

Sep-96

Nov-96

Jan-97

Mar-97

May-97

Jul-97

Sep-97

Nov-97

Jan-98

Mar-987

May-98

Jul-98

Sep-98
Appendix I

Objectives, Scope, and Methodology

Page 29 GAO-04-448 Mineral Revenues

that accounted for about 89 percent of the oil sold during the sale, and 

corrected the single significant error that we found in this data set. 

To estimate the revenue impact of the October 2001 through March 2002 

RIK oil sale in the Gulf of Mexico, we first chose a sample of leases 

included in the RIK sale and determined the relationship of their cash sales 

prices before the RIK sale to the prices as prescribed by MMS’s royalty 

valuation regulations for sales to affiliated companies (also known as 

transactions not at arm’s length). We analyzed only those leases that 

produced Mars and Eugene Island sweet oil because these two oil grades 

collectively accounted for 96 percent of the production. We then selected 

only the Mars and Eugene Island leases that had cash royalty sales during 

at least 8 of the 16 months between June 2000—the first month that the 

current oil valuation regulations became effective, and September 2001—

the month immediately preceding the RIK sale. These selection criteria 

produced the 13 leases for our detailed analysis. Eleven of the 13 leases had 

cash royalty sales during all 16 months. For each of the 13 leases, we then 

calculated the average monthly cash sales price (net of any transportation 

allowances and quality bank adjustments) from data in MMS’s financial 

database for each of the 16 months preceding the RIK sale. Next, we 

obtained the average monthly price from MMS for Mars and Eugene Island 

sweet oils as prescribed in MMS’s oil valuation regulations for sales not at 

arm’ length at the market center for the same time period. We then 

subtracted these monthly prices from the average monthly cash prices and 

multiplied this difference by the barrels of oil sold each month to yield 

monthly revenue for each lease relative to MMS’s regulations. Next, we 

summed these monthly revenues and divided the sum by the total barrels of 

oil sold to obtain a weighted average difference per barrel for the entire 16-

month period. This value, -$1.36, indicates that MMS received on average 

$1.36 less than the market center price for each barrel of royalty oil 

produced from these 13 leases from June 2000 through September 2001. We 

attribute most of this difference to the payors’ costs of transporting the oil 

to market. Finally, for the 6-month term of the RIK sale, we calculated a 

weighted average difference per barrel between the RIK sales price and the 

price as prescribed by MMS’s valuation regulations for transactions not at 

arm’s length. This value, -$2.24, indicates that MMS received on average 

$2.24 less than the average market center price for each barrel of oil that 

MMS sold during its RIK sale from October 2001 through March 2002. We 

then assumed that if MMS had not conducted this RIK sale, it would have 

received cash royalty payments that on average would have been $1.36 less 

than the market center price as we previously computed. We subtracted 

$2.24 from $1.36 to estimate that MMS lost on average $0.88 on every barrel 
Appendix I

Objectives, Scope, and Methodology

Page 30 GAO-04-448 Mineral Revenues

that MMS sold during this RIK sale. Since MMS sold 8.2 million barrels 

during this sale, MMS lost approximately $7.2 million.

Gulf of Mexico Gas In analyzing MMS’s financial data on gas sales in the Gulf of Mexico, we 

discussed with MMS officials the financial data limitations that they 

identified while conducting their analysis of RIK gas sales—limitations that 

prompted MMS personnel to use invoice prices rather than the sales data in 

MMS’s financial database. We then obtained 19,211 financial transactions 

for all the cash and RIK sales on the Blessing and Matagorda Offshore 

Pipeline Systems (MOPS) from January 1997 through December 2001. 

Upon aggregating these data to the payor-lease-month level and 

researching anomalous data, we found that 6 percent of the RIK summary 

data remained anomalous. Consequently, we decided to use the RIK invoice 

data, adjusted for transportation costs, to compute net unit prices for the 

RIK transactions.

To estimate the revenue impacts of RIK gas sales in the Gulf of Mexico, we 

relied on financial data aggregated to the lease-month for all cash sales on 

the Blessing Pipeline System and on MOPS from January 1997 through 

December 2001.2

 On each of the pipeline systems, MMS determined that the 

leases from which it received cash royalty payments were comparable to 

the leases from which it collected RIK. For each lease connected to the 

Blessing Pipeline System, we calculated the average cash sales price net of 

all reported transportation costs per MMBtu for each month and subtracted 

it from the average RIK sales price net of all transportation costs per 

MMBtu for each month.3

 We then multiplied these figures by the quantity of 

royalty gas (in MMBtu) sold in kind each month to obtain the monthly 

revenue impacts, and we then summed the monthly revenue impacts to 

yield total revenue impacts of the RIK sales on the Blessing Pipeline 

System. To determine the revenue impacts of RIK sales on MOPS, we 

followed the same procedure as that on the Blessing Pipeline System, using 

data specific to sales on that pipeline. We then summed the revenue 

impacts from RIK sales on both systems to yield the total estimated 

revenue gain of about $4 million on sales of about $210 million.

2

Unlike RIK transactions, data from cash sales could be manually reviewed and adjusted to 

achieve an anomalous financial data rate of less than 1 percent.

3

MMBtu (one million British thermal units) is a measure of the heating quality of the gas 

equal to 1,000 cubic feet of gas at a Btu quality of 1,000.
Appendix I

Objectives, Scope, and Methodology

Page 31 GAO-04-448 Mineral Revenues

Other Factors May 

Affect Revenue 

Analysis 

Our case studies did not include other overall factors that may affect 

revenues from RIK sales. First, differences in the timing of royalty 

collections can affect total revenue collections because an earlier 

collection of these revenues allows the Treasury to earn interest on the 

funds collected. Revenues from the sale of royalty oil are due 10 days 

earlier than cash royalties, while revenues from the sale of gas are due 5 

days earlier than cash royalties. We reviewed MMS’s revenue collections 

from all RIK pilot sales during fiscal year 2002 and determined that 98 

percent of the oil and 92 percent of the gas revenues were collected 

according to this early schedule. For fiscal year 2002, we calculated the 

combined benefit to be about $128,500, or about 0.03 percent on a total of 

$454 million collected in RIK pilot sales.4

 MMS may have also realized 

relatively small amounts of money from interest on those revenues that 

were late. Future benefits will depend upon the amount of oil and gas sold 

in kind, interest rates, and the sales prices of oil and gas. Secondly, during 

the time frame of our revenue analysis, data were not available on a leaseby-lease basis that would enable us to estimate how much additional 

revenue had accrued to MMS as the result of the audit process. Hence, we 

could not determine whether any additional funds collected as a result of 

auditing were included in MMS’s financial data. For example, Wyoming 

state auditors who audit the federal leases in Wyoming that we included in 

our revenue analysis stated that they audited some of these leases for some 

of the time frame. While any additional audit collections would be expected 

to affect unit prices in both MMS’s financial database and the state’s 

severance tax database, additional collections were not necessarily 

recorded for every lease. We did not examine how any additional 

collections resulting from audits were recorded for oil and gas leases in the 

Gulf of Mexico because of the difficulty in accessing individual leases in the 

information system that tracks auditing efforts. In addition, some of the 

time frame that we included in our revenue analyses had not yet been 

audited by MMS when we initiated our work.

4

To make this calculation, we used the federal funds rate, which is the rate that banks charge 

each other for short-term loans during the Federal Reserve Bank check clearing process. 
Page 32 GAO-04-448 Mineral Revenues

Appendix II

Comments from the Department of the 

Interior ApendxiI

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.
Appendix II

Comments from the Department of the 

Interior

Page 33 GAO-04-448 Mineral Revenues
Appendix II

Comments from the Department of the 

Interior

Page 34 GAO-04-448 Mineral Revenues

See comment 1.

See comment 2.
Appendix II

Comments from the Department of the 

Interior

Page 35 GAO-04-448 Mineral Revenues

See comment 3.

See comment 1.

See comment 1.

See comment 1.

Now on p. 10.

See comment 4.

Now on p. 19.

See comment 5.

Now on page 6.
Appendix II

Comments from the Department of the 

Interior

Page 36 GAO-04-448 Mineral Revenues

The following are GAO’s comments on the Department of the Interior’s 

letter dated April 5, 2004.

GAO Comments 1. We clarified our report to reflect these comments.

2. We included the costs of $496,000 for auditing leases and reconciling 

volumes because MMS reported it as a direct cost of the RIK pilot sales, 

and because it is unknown how many of these leases would have been 

selected for auditing if they had not been in the RIK Program. 

3. We acknowledge that there are considerable costs for systems that 

support financial and compliance activities. However, the financial 

system supports both the collection of cash royalty payments and RIK 

payments, so its costs are incurred regardless of whether royalties are 

collected in cash or in kind. We acknowledge MMS’s observation that 

the compliance system has associated costs and that these costs are 

incurred predominantly with the collection of cash royalties. However, 

it was not our intent to compare systems costs under different methods 

of collecting royalties. We intended only to mention the incremental 

costs associated with collecting royalties in kind because MMS will 

continue to incur costs associated with collecting cash royalty 

payments.

4. We clarified the report by stating that there is only one staff 

independent of the RIK Program whose duties involve analyzing RIK 

sales results. We acknowledge that additional RIK Program staff and 

managers analyze sales results. However, we believe that proper 

management controls require that staff independent of the RIK 

Program should analyze sales results for MMS management. We also 

acknowledge and state in this report that an independent contractor 

has assisted with developing a strategy for analyzing sales. We believe 

that this is a significant step towards comprehensively and 

systematically analyzing RIK sales results.

5. MMS’s technical comments on its Gulf oil sale related to two issues: (1) 

removing the effect of quality bank adjustments and (2) the validity of 

extending its analysis for an additional 12 months. Because of the 

variability of quality bank adjustments, MMS stated that it is necessary 

to remove these adjustments before conducting an analysis, and MMS 

believes that it has done so. We acknowledge the variability of quality 

bank adjustments and also note that transportation allowances 
Appendix II

Comments from the Department of the 

Interior

Page 37 GAO-04-448 Mineral Revenues

associated with the leases that we reviewed are also variable, albeit to a 

lesser degree. However, when we conducted our analysis, there was 

insufficient data on quality bank adjustments for the time period prior 

to the second RIK sale to effectively remove their effect from our 

analysis. To compensate for the variability of both quality bank 

adjustments and transportation allowances among the 13 leases we 

examined, we chose to establish our relationship between cash royalty 

payments and MMS’s royalty valuation regulations for a relatively long 

time period prior to the 6-month RIK sale. We assumed that the effects 

of variability would be minimized over the 16-month period for which 

we established our relationship. Concerning the validity of extending 

the time period of analyzing the Gulf of Mexico oil sale, MMS restated 

its belief that analyzing the transfer of oil to the SPR during the 

subsequent 12 months is a valid technique. We already discussed the 

limitations of using this technique in the report.
Page 38 GAO-04-448 Mineral Revenues

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contacts Jim Wells (202) 512-3841

Mark Gaffigan (202) 512-3168

Acknowledgments In addition to those named above, Ron Belak, Robert Crystal, Art James, 

Lisa Knight, Jonathan McMurray, Franklin Rusco, Dawn Shorey, and Maria 

Vargas made key contributions to this report.

(360304)
GAO’s Mission The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal government 

for the American people. GAO examines the use of public funds; evaluates federal 

programs and policies; and provides analyses, recommendations, and other 

assistance to help Congress make informed oversight, policy, and funding 

decisions. GAO’s commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail this 

list to you every afternoon, go to www.gao.gov and select “Subscribe to 

e-mail alerts” under the “Order GAO Products” heading.

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. A check 

or money order should be made out to the Superintendent of Documents. GAO 

also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single 

address are discounted 25 percent. Orders should be sent to:

U.S. General Accounting Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Public Affairs Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Service Requested

Presorted Standard

Postage & Fees Paid

GAO

Permit No. GI00