United States Government Accountability Office

Washington, DC 20548 

September 12, 2008 

Congressional Requesters 

Subject: Mineral Revenues: Data Management Problems and Reliance on SelfReported Data for Compliance Efforts Put MMS Royalty Collections at Risk 

The Department of the Interior’s (Interior) Minerals Management Service (MMS) collected 

the equivalent of over $9 billion in oil and gas royalties in fiscal year 2007, more than $5 

billion of which it deposited in the U.S. Treasury; it dispersed the remaining approximately 

$4 billion to other federal, state, and tribal accounts. These royalties—payments made to 

the federal government for the right to produce oil and gas from federal lands and 

waters—represent one of the country’s largest nontax sources of revenue. The amount of 

oil and gas royalties MMS collects may increase if the price of energy increases and 

industry’s demand to drill on lands and in waters controlled by the federal government 

continues to trend upward. For example, the price of West Texas Intermediate—a type of 

oil commonly used as a benchmark—has risen by more than 100 percent since January 

2007 and recently exceeded $140 per barrel, a price that, when adjusted for inflation, is at 

the highest level since 1980. Moreover, applications for onshore drilling permits at 

Interior’s Bureau of Land Management (BLM) continue to increase, from approximately 

4,000 in 2001 to more than 10,000 in 2007. Similarly, offshore leasing activity overseen by 

MMS’s Offshore Energy and Minerals Management (OEMM) has also generally increased 

since 2001. 

Companies that develop and produce oil and gas resources from federal lands and waters 

do so under leases obtained from and administered by Interior—BLM for onshore leases 

and MMS’s OEMM for offshore leases. Together, BLM and OEMM are responsible for 

ongoing oversight of oil and gas operations on more than 28,000 producing leases to help 

ensure that oil and gas companies comply with applicable laws, regulations, and agency 

policies. Among other things, BLM and OEMM staff inspect leases to verify that oil and gas 

production is accounted for as required by the Federal Oil and Gas Royalty Management 

Act of 19821

 and agency regulations and policies. These inspections typically include an 

examination of the meters and their calibration records. Additionally, BLM inspectors 

may review production records, forwarding any discrepancies to MMS for resolution. 

OEMM has a slightly different process; after reviewing all production records, its 

production verification team addresses any gas volume discrepancies itself, forwarding oil 

 1

Pub. L. No. 97-451, § 101 (1983). 

 GAO-08-893R Mineral Revenues 
volume discrepancies to MMS. The results of these inspections and reviews are recorded 

in the agencies’ management databases.2

As a condition of producing oil and gas under federal and Indian leases, companies are 

required to file two key monthly reports with MMS—one specifying the total production 

and disposition of oil and gas and the other stating the royalties due on that production. 

However, because of various leasing and development arrangements made by companies, 

these two reports are often submitted by different companies. The companies physically 

developing the lease, or the operators, are responsible for reporting the production 

volumes to MMS in their monthly production reports.3

 The companies with a financial 

interest in that lease, or the payors, are responsible for reporting the cash royalty owed on 

the federal and Indian oil and gas production in their monthly royalty reports.4

 Each 

month, payors calculate the royalty payment they owe to the federal government using the 

four key variables illustrated in the following equation: 

Royalty payment = (sales volume x sales price - deductions) x the royalty rate5

Companies enter the monthly production and royalty reports via a Web-based portal to 

MMS’s royalty information technology (IT) system and may make adjustments to those 

entries for up to 6 years after the initial reporting date.6

 In addition to filing the royalty 

report with MMS, payors typically make the actual cash royalty payment via an electronic 

fund transfer to an account at the Department of the Treasury (Treasury). Once MMS 

reconciles the self-reported royalty payment data from the monthly royalty reports with 

the payments submitted to Treasury, MMS disburses the royalties from the Treasury 

account to the appropriate federal, state, tribal, and allotted accounts.7

 All of these 

transactions are recorded and stored in MMS’s current royalty IT system, which went on 

line in 2001. Since then, MMS’s IT system has experienced several problems but has 

continued to improve. For example, MMS has worked for the past several years to 

 2

BLM records inspection information in its Automated Fluid Minerals Support System, while OEMM records

its inspection information in its Technical Information Management System. 

3

Companies are required to self-report monthly production volumes to MMS on an Oil and Gas Operations

Report (OGOR) form. 

4

Companies are required to self-report monthly royalty payments to MMS on the Report of Sales and Royalty 

Remittance Form, Form 2014. 

5

The royalty rate varies somewhat but is typically in the range of 12.5 percent to 18.75 percent. In other

words, the federal government typically receives between 12.5 percent and 18.75 percent of revenue less 

allowable deductions, for oil and gas produced on federal lands and waters. Allowable deductions include 

payments to pipeline companies and other shipping costs required to transport the commodity to a market

center, as well as adjustments made for the costs of processing natural gas. 

6

This system, also known as the Minerals Revenue Management Support System, is designed to store and 

support the collection, verification, and disbursement of royalty revenues from federal and Indian mineral 

leases. Indian leases do not have time restrictions on making adjustments. 

7

An allotted account is an account set up to receive royalties for any land held in trust or restricted status by

the Secretary of the Interior, on behalf of one or more Indians.

Page 2 GAO-08-893R Mineral Revenues 
enhance the royalty IT system by both refining and increasing the number of edit checks 

designed to prevent companies from entering incorrect royalty and production data. 

As an additional check on the accuracy of both the company-reported production and 

royalty data, MMS conducts either audits or compliance reviews on these data within 3 

years of their submission. For example, during fiscal year 2008, MMS is conducting 

compliance work on calendar year 2005 payments. Audits are an assessment of the 

accuracy and completeness of the self-reported production and royalty data compared 

against third-party documents, such as sales contracts and oil and gas sales receipts from

pipeline companies. By contrast, compliance reviews assess the data’s reasonableness—a 

quicker, more limited check of the accuracy and completeness of a company’s selfreported data—and they do not include a systematic examination of underlying third-party 

documentation. In addition, some states and tribes that receive royalties collected by MMS 

have agreements with MMS authorizing them to conduct either audits or compliance 

reviews on federal and Indian producing leases within their jurisdictions.8

 Under current 

law, MMS has 7 years in which to make monetary demands on federal royalty payors.9

Historically, MMS has annually assessed its overall compliance performance on the basis 

of whether it has conducted compliance activities—either full audits or compliance 

reviews—on leases or companies that are responsible for generating a predetermined 

percentage of royalty payments within 3 years after the royalty payment is due. This 

approach resulted in MMS auditing many of the same high royalty paying companies and 

leases year after year, while conducting only limited compliance work on other companies 

during that same time period. To ensure greater compliance coverage on both companies 

and leases, MMS is now in the process of implementing a new risk-based compliance 

approach that will assist in selecting companies to audit or review based on factors in 

addition to royalties paid. 

Given the financial importance of royalty management, MMS has been the subject of 

considerable scrutiny through the years by entities such as GAO; Interior’s Inspector 

General (IG); and the Royalty Policy Committee (RPC), a group empanelled by the 

Secretary of the Interior and charged with providing advice on managing federal and 

Indian leases and revenues. For example, the RPC issued a report in December 2007 that 

included more than 100 recommendations to strengthen Interior’s royalty collections by 

improving BLM’s and OEMM’s production accountability practices, MMS’s compliance 

efforts, and MMS’s and BLM’s interagency coordination. As part of Interior’s response to 

these recommendations, it convened staff from the relevant agencies and developed 

detailed plans for addressing these recommendations, some of which it has already 

implemented. In addition, in March 2008, we testified before the House Committee on 

Natural Resources, Subcommittee on Energy and Mineral Resources, on our preliminary 

findings on Interior’s royalty collection program. This report follows up on our prior work

and includes recommendations to strengthen Interior’s royalty collections program. 

Specifically, you asked us determine (1) whether Interior has adequate assurance that 

 8

Eleven states (Alaska, California, Colorado, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, 

Texas, Utah, and Wyoming) and seven tribes (Blackfeet Nation, Jicarilla Apache Tribe, Navajo Nation, 

Shoshone and Arapaho Tribes, Southern Ute Indian Tribe, Ute Mountain Ute Tribe, and the Ute Indian Tribe) 

conducted compliance work under cooperative agreements with MMS in fiscal year 2007. 

9

Indian leases are not subject to the same 7-year time restriction for making monetary demands. 

Page 3 GAO-08-893R Mineral Revenues 
federal oil and gas are measured accurately, (2) whether MMS’s royalty IT system and 

royalty collection and verification processes provide sufficient assurance that all royalties 

are being collected, and (3) the extent to which MMS’s compliance efforts provide an 

adequate check on industry’s self-reported data. 

To address Interior’s oil and gas production measurement accountability practices, we 

reviewed OEMM’s and BLM’s documentation on policies and procedures for conducting 

production inspections and production verification work. In addition, we interviewed 

MMS inspectors in the Gulf of Mexico, Pacific, and Alaska regional offices and toured oil 

and gas production facilities in the Gulf of Mexico. We further interviewed BLM state 

officials in five states with significant federal oil and gas production and interviewed BLM 

officials from five BLM field offices selected from a nonprobability sample of the 27 BLM 

field offices overseeing oil and gas production in those five states. The BLM field offices 

were selected based on geographic location, the number of violations of regulations, and 

the number of oil and gas volume errors identified during production inspections. We also

toured oil and gas production facilities in Wyoming and Colorado. To assess MMS’s royalty 

IT system and royalty collection and verification processes, we reviewed MMS’s 

documentation and processes for collecting royalty and production data and examined 

how that information is stored and manipulated in MMS’s royalty IT system. We also 

interviewed MMS staff regarding these processes. Finally, to assess MMS’s compliance 

efforts, we reviewed MMS’s audit and compliance manuals and its newly revised 

procedures, interviewed compliance staff, and attended several demonstrations of MMS’s 

compliance IT system. We also sent questionnaires addressing production, royalty data, 

and compliance issues to the 11 state and 7 tribal members of the State and Tribal Royalty 

Audit Committee; 9 states and 5 tribes responded. We conducted this work from April 2007 

to July 2008 in accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

Summary 

Neither BLM nor OEMM is meeting statutory obligations or agency targets for conducting 

inspections of certain leases and metering equipment used to measure oil and gas 

production, raising uncertainty about the accuracy of oil and gas measurement. Moreover, 

when these inspections have been conducted, BLM and OEMM have at times recorded 

inspections inaccurately in their databases. Specifically, although BLM and OEMM are 

statutorily required to annually inspect leases producing “significant quantities of oil or 

gas” and those with a “history of noncompliance,” the Secretary has defined these terms 

for onshore leases but not for offshore leases. Understanding the meaning of these terms 

is necessary to implement the act and is critical to the agencies’ ability to prioritize 

inspections. Although BLM is able to prioritize its inspections, according to BLM officials, 

they are not completing all of the inspections required by law and agency policy, in part 

because their workload has substantially grown because of increased onshore drilling. 

OEMM, on the other hand, is not able to prioritize its inspections because the statutory 

terms have yet to be defined by the Secretary. Moreover, OEMM is not meeting its agency 

Page 4 GAO-08-893R Mineral Revenues 
targets for inspections because, according to OEMM officials, inspectors are still 

conducting cleanup activities in the Gulf of Mexico—where almost all of the offshore oil 

and gas production occurs—in the wake of Hurricanes Katrina and Rita in 2005. Finally, 

although it is important that data are recorded accurately, when both BLM and OEMM 

conduct production inspections, neither agency is consistently doing so. Officials from 

both BLM and OEMM told us that some inspection and data entry staff are relatively 

inexperienced and do not always record the inspections in their databases as procedures 

require. Accurate data are necessary not only to monitor progress throughout the year to 

determine whether annual goals are achieved, but also to assist MMS in its royalty 

compliance activities. We are making several recommendations to the Secretary of the 

Interior to provide greater certainty that oil and gas produced from federal lands and 

waters are measured accurately. 

MMS’s royalty IT system and processes for collecting and verifying royalty data have 

improved, but they continue to lack several capabilities that would provide greater 

assurance that royalties are being accurately collected. For example, MMS’s royalty IT 

system cannot monitor adjustments made to production and royalty data by companies. 

While MMS is working to address this issue, companies may continue to adjust their 

previously self-reported production and royalty data without prior MMS approval or 

review. This includes adjustments made by companies to data after MMS completes its 

compliance work, meaning that while the royalties paid were accurate at the close of the 

audit, they may not remain accurate. Furthermore, MMS is unable to identify, in a timely 

manner, instances in which a royalty report has not been submitted by a company, and, as 

a result, MMS cannot be entirely confident it is receiving all of the royalties when they are 

due. Finally, MMS lacks a clear process to determine that royalties are accurately paid in 

instances when OEMM or BLM identify volume discrepancies during their production 

inspections and verification work. For example, when BLM identifies an over- or underreporting of production volumes, BLM notifies the production reporting section of MMS. 

While MMS staff may work to correct the production numbers, staff do not relay this 

information to the royalty reporting section so that staff can check that the appropriate 

royalties were paid. To provide greater assurance that MMS is accurately collecting 

royalties in a timely manner, we are making several recommendations aimed at improving 

its royalty IT system and royalty collection and verification processes. 

While MMS continues to strengthen its compliance efforts, MMS’s use of compliance 

reviews, which are more limited in scope than audits, has led to an inconsistent use of 

third-party documents to verify that self-reported industry production and payment data 

are correct, thereby placing royalty collections at risk. MMS has historically relied on 

audits to determine whether a company accurately paid its royalties by examining thirdparty documents that contained information on prices, volumes, and deductions. More 

recently, MMS has transitioned to relying heavily on compliance reviews that assess 

whether the royalties paid by a company are reasonable, and do not always include an 

examination of third-party documents. Furthermore, while MMS’s compliance reviews of 

offshore leases include a systematic comparison between a company’s reported 

production volumes and independent pipeline company documents, an analogous process 

does not exist for onshore leases, in part because of the significantly greater numbers of 

leases and pipelines for which data would have to be collected. The absence of a 

Page 5 GAO-08-893R Mineral Revenues 
consistent check on self-reported data—such as comparing the data with third-party 

documents—when conducting onshore compliance reviews raises questions about the 

accuracy of royalty payments. To address this issue, we are recommending that MMS 

require that third-party documents be reviewed when conducting onshore compliance 

reviews. 

BLM and OEMM Are Not Completing the Required Production Inspections, 

Leaving the Accuracy of Oil and Gas Measurements in Doubt 

Interior lacks adequate assurance that federal oil and gas volumes are being measured 

accurately because neither BLM nor OEMM is fully inspecting leases and metering 

equipment as required by law and agency policies; the agencies also are not always 

entering accurate inspection data into their databases. BLM is charged with inspecting 

approximately 20,000 producing onshore leases annually to ensure that oil and gas 

volumes are accurately measured. However, BLM’s state inspection and enforcement 

coordinators from Colorado, Montana, New Mexico, Utah, and Wyoming, which are 

responsible for more than 95,000 wells, reported that only 8 of the 24 field offices in the 

five states completed both their (1) required annual inspections of leases that are highproducing and those that have a history of violations—terms defined by Interior’s policies 

for onshore leases so that BLM can implement the Federal Oil and Gas Royalty 

Management Act and (2) inspections every third year on all remaining leases as required 

by BLM policy.10 According to the BLM state inspection and enforcement coordinators, the 

number of completed production inspections varied greatly by field office. For example, 

while BLM inspectors were able to complete all of the production inspections in the 

Kemmerer, Wyoming, field office, inspectors in the Glenwood Springs, Colorado, field 

office were able to complete only about one-quarter of the required inspections. Officials 

in three of the five field offices in which we held detailed discussions with inspection staff 

told us that they had not been able to complete the production inspections because of 

competing priorities.11 For example, BLM officials told us activities related to drilling, 

including drilling inspections, take priority over completing production inspections. 

Further, with the significant number of wells being drilled, drilling-related activities 

demand much of the inspectors’ time. BLM officials also discussed the high turnover rate 

for inspection staff caused by the high-pressure work environment, the ability to make 

 10Although we considered the production inspection results from all 27 BLM field offices in these five states, 

we excluded production inspection results from two BLM field offices where BLM state inspection and

enforcement coordinators could not validate production inspection numbers because they felt that the data

in BLM’s Automated Fluid Minerals Support System—the database used to track production inspections—

were unreliable. We excluded one additional BLM field office because it is implementing a pilot project 

inspection program using different selection and prioritization criteria; therefore, it is not comparable with 

the other BLM field offices.

11To gain a balance of perspectives of how BLM field offices conduct production inspections, we chose a 

nonprobability sample of five field office locations—Meeker, Colorado; Vernal, Utah; Farmington, New 

Mexico; Pinedale, Wyoming; and Buffalo, Wyoming. In choosing these field offices we sought to ensure we 

visited BLM field offices that represent a range of BLM state office jurisdictional policies. While this

nonprobability sample allowed us to learn about many important aspects of production inspections, it was 

not designed to be representative of all inspection activities at BLM field offices. As such, the findings cannot

be generalized to sites we did not visit. 

Page 6 GAO-08-893R Mineral Revenues 
more money in the private sector, and the high cost of living in many areas where BLM has 

field offices. Importantly, BLM officials from all five field offices told us that when they 

have conducted production inspections, they have identified numerous violations. For 

example, BLM staff in four of the five field offices identified errors in the oil and gas 

production volumes reported by operators to MMS by comparing production reports with 

third-party source documents. Additionally, BLM staff from one field office we visited 

showed us a bypass built around a gas meter that could allow gas to flow around the meter 

without being measured. BLM staff subsequently ordered the operator to remove the 

bypass but did not fine the operator. Staff from another field office told us of a case in 

which BLM had to remove illegal gas lines that routed gas to private residences. Finally, in 

one of the field offices we visited, BLM officials told us of an instance in which a company 

maintained two sets of conflicting production data—one used by the company and another 

reported to MMS. In this instance, BLM ordered the company to correct and resubmit 

production data to MMS. 

Similarly, OEMM, which is responsible for inspecting offshore production facilities that 

include oil and gas meters, did not complete inspections of offshore oil and gas royalty 

meters as required by its policy or applicable law in 2007. OEMM officials responsible for 

inspecting royalty meters in the Gulf of Mexico—meters that measure oil and gas for 

determining royalty payments—told us they completed about half of the required 2,700 

royalty meter inspections in 2007. This is far less than required under OEMM’s 1994 Gulf of 

Mexico production inspection policy, which requires all oil and gas royalty meters be 

inspected annually. Meter inspections are an important aspect of the offshore production 

verification process because, according to OEMM officials, one of the most common 

violations identified during inspections is missing or broken meter seals. These seals are 

required to be kept in place to prevent tampering with measurement equipment. When 

seals are broken, without closer inspection and testing, it is not possible to determine 

whether the meter is correctly measuring oil or gas production. OEMM officials explained 

that one reason OEMM failed to complete its required inspections was the continuing 

cleanup work related to Hurricanes Katrina and Rita in 2005. Furthermore, the Federal Oil 

and Gas Royalty Management Act instructed the Secretary of the Interior to inspect leases 

annually that are producing or expected to produce significant quantities of oil or gas in 

any year or that have a history of noncompliance with applicable law or regulations. While 

Interior has defined these terms for onshore oil and gas leases, it has not yet done so for 

offshore oil and gas leases. As a result, when production inspectors are unable to inspect 

all royalty meters as required by their policy, they lack the criteria for effectively 

prioritizing inspections based on production volumes or concerns about noncompliance. 

Therefore, the Secretary cannot be assured that federal oil and gas production is being 

measured accurately. 

Moreover, when BLM and OEMM do complete production inspections, staff are not always 

accurately recording this work in their databases. For example, of the 27 BLM field offices 

in five states we reviewed, 2 field offices had fiscal year 2007 production inspection data 

that could not be validated by the state’s inspection and enforcement coordinator, and 6 

field offices had instances of production inspection data changing after the end of the 

fiscal year, in violation of BLM’s policy. For example, Wyoming’s state inspection and 

enforcement coordinator could not validate a field office’s inspection numbers because 

Page 7 GAO-08-893R Mineral Revenues 
the coordinator lacked confidence in that field office’s ability to correctly identify high 

production leases. The coordinator explained that because of MMS and BLM data transfer 

issues caused by ongoing Indian trust fund litigation, BLM staff may not be able to easily 

or accurately identify high producing leases.12 Additionally, 6 field offices revised their 

completed production inspection data after the end of the fiscal year. For example, 

officials in a Montana field office reported that 20 additional inspections were entered into 

the database for fiscal year 2007 because staff identified inspections that had been 

completed and documented in paper files but had not been entered into their database. 

Finally, in a number of instances, the inspection priority changed during the year. For 

example, one of the field offices in Montana adjusted the number of high-priority 

inspections downward after staff realized they had initially incorrectly identified the highpriority inspections because of database shutdowns caused, again, by the ongoing Indian 

trust fund litigation. 

Similarly, according to interviews with OEMM officials, OEMM staff do not consistently 

check the accuracy of the production inspection data entered. For example, OEMM data 

indicated that at one facility no meters were available for inspection, yet 16 meter 

inspections had occurred during calendar year 2007, which an OEMM official confirmed 

was an error. An OEMM official explained that one reason for errors may be data entry 

problems (a clerk, not the inspectors themselves, enter the data). OEMM officials state 

they are currently implementing new procedures to ensure that valid data are entered into 

the database. Accurate and timely data are critical for monitoring ongoing progress and 

whether annual goals and targets are met. However, because of the errors identified in 

both BLM’s and OEMM’s data, we cannot report the precise number of production 

inspections completed.

MMS’s Royalty Information Technology System and Processes Are Improving but 

Still Lack Key Functions That Could Provide Greater Assurance on the Accuracy 

of Royalty Collections 

While MMS continues to improve its current royalty IT system, which went online in 2001, 

and its royalty collection processes, it still lacks several key functions and processes that 

could provide greater assurance that royalties are accurately collected, including, (1) the 

ability to maintain the accuracy of production and royalty data entered by companies, (2) 

the ability to identify missing royalty reports in a timely manner, and (3) a process to 

ensure that accurate royalties are paid on volume discrepancies identified by OEMM and 

BLM during their production inspections. 

MMS’s ability to maintain the accuracy of production and royalty data is hampered 

because companies can make adjustments to their previously entered data without prior 

approval. Companies may legally make changes to both royalty and production data in 

 12In the Cobell v. Norton litigation—now Cobell v. Kempthorne—concerning the government’s management

of Native American trust funds, a U.S. District Court judge, on December 5, 2001, ordered the 

Department of the Interior to disconnect from the Internet all information technology systems that house or

provide access to individual Indian trust data. The last of the systems was allowed to reconnect to the 

Internet in May of this year. 

Page 8 GAO-08-893R Mineral Revenues 
MMS’s royalty IT system for up to 6 years after the initial reporting month, and these 

changes may necessitate changes in the royalty payment.13 According to MMS, most 

adjustments are made within the first several years after initial reporting. For example, 

MMS’s analysis of adjustments made to royalty reports in fiscal year 2007 show that 75 

percent of all accepted adjustment lines were reported within 3 years of their 

corresponding sales month. However, MMS’s royalty IT system currently allows 

companies to make adjustments to their data beyond the allowed 6-year time frame. MMS 

examined data from September 2002 through July 2007 to determine the number of 

adjustments made outside the 6-year time frame. The results of this analysis suggested 

that more than 81,000 adjustments were made to data outside the time frame, though 

according to MMS officials, some of these adjustments were retroactively approved. As a 

result of the companies’ ability to make these retroactive changes, within or outside of the 

6-year time frame, the production data and required royalty payments can change over 

time, complicating efforts by agency officials to reconcile production data and ensure that 

the proper royalties were paid. Furthermore, changes made to the data do not necessarily 

trigger a review to determine their reasonableness or whether the adjustments impact the 

royalties due. According to agency officials, these adjustments are investigated by staff 

only if the company or lease is selected for an audit or compliance review. This is 

problematic for several reasons. First, current law is that companies may make 

adjustments to their federal royalty payment data up to 6 years after the production 

reporting month.14 MMS issues monetary demands for unpaid royalties up to 7 years after 

the last adjustment made by a company. However, the law, which provides that a demand 

be made within 7 years from the date an obligation becomes due, could be interpreted as 

giving MMS only 7 years from the initial month of the production reporting date.15 This 

interpretation would, in some cases, allow MMS only 1 year to identify any erroneous 

adjustments and issue a monetary demand for any additional royalties due. Second, 

companies may change production and royalty data after an audit or compliance review 

has been completed, making it unclear whether these audited royalty payments remain 

accurate after they have been reviewed. MMS typically conducts compliance work 

approximately 3 years after companies initially report the data, at which point, according 

to MMS officials, companies have made the majority of their adjustments. However, 

companies have several additional years after MMS typically completes its compliance 

work to adjust their royalty data, and current MMS policies do not require that all 

subsequent postcompliance work adjustments be reviewed. MMS is aware of these issues 

and is in the process of addressing the issues over which it has authority. Specifically, 

MMS is developing requirements to modify its royalty IT system to monitor adjustments. 

The stated goal is for the royalty IT system to automatically identify adjustments that have 

been made to data outside of the allowable 6-year time frame and to monitor adjustments 

made within the allowable time frame after MMS closes an audit or compliance review. 

 13The Federal Oil and Gas Royalty Simplification and Fairness Act of 1996, Pub. L. No. 104-185, § 5(a) (1996),

provides a 6-year adjustment window. 

1430 U.S.C. § 1721a. 

1530 U.S.C. § 1724(b). 

 

Page 9 GAO-08-893R Mineral Revenues 
Further, MMS’s royalty IT system is unable to automatically detect instances when a 

royalty payor fails to submit the required royalty report in a timely manner. MMS relies on

two critical pieces of data in verifying the accuracy of royalty payments: the production 

report, which operators submit to document the total oil and gas production from a 

particular lease or several combined leases, and the royalty report, payors submit to 

document the royalty paid on oil and gas production. With few exceptions, MMS should 

receive a corresponding royalty report or reports for each production report it receives. 

When MMS’s current royalty IT system went online in 2001, it was not able to reliably 

detect either missing production or royalty data. In 2004, MMS modified its royalty IT 

system to automatically detect missing production data. As a result, MMS has identified a 

backlog of approximately 300,000 missing production data records, which includes both 

entire production reports and missing wells on those production reports. MMS 

subsequently established teams to research the missing records and told us that the goal 

was to resolve all missing record issues older than 90 days by the end of 2008. More 

recently, however, MMS has revised its goal downward to address 80 percent of the 

missing records by the end of 2008. Preliminary results, according to agency staff, suggest 

that many of the issues can be explained by BLM staff delays in entering well and 

production reference data and sharing that data with MMS, and not necessarily by a 

company’s failure to submit the required report. However, MMS’s royalty IT system 

continues to lack the ability to automatically detect cases in which an expected royalty 

report has not been filed in a timely manner. As a result, cases in which a company stops 

filing royalty reports and stops paying royalties may not be detected until more than two 

years after the initial reporting date, when MMS’s royalty IT system completes a 

reconciliation of volumes reported on the production reports with the volumes on their 

associated royalty reports. Therefore, it remains possible under MMS’s current strategy 

that the royalty IT system may not identify instances in which a payor stops reporting until 

several years after the report is due. This creates an unnecessary risk that MMS may not be 

collecting accurate royalties in a timely manner. 

Finally, MMS lacks a consistent process to ensure that the appropriate royalties are paid 

when either OEMM or BLM identifies volume discrepancies while conducting production 

inspections and other production verification activities. To verify that oil and gas 

production is accurately reported to MMS, BLM sometimes and OEMM always compares 

the volumes reported on the production report to other third-party documents that contain 

production information, such as a pipeline statement. When they find discrepancies 

between these two documents, they typically forward the information to MMS, which then 

takes steps to reconcile and correct the discrepancies. For example, BLM’s policy is for 

staff to forward all volume discrepancies to MMS’s royalty reporting section, which then 

attempts to correct the volume error by talking to operators. In some instances, MMS may 

request that the operator submit a corrected production report. However, MMS staff in the 

production reporting section do not automatically notify the royalty reporting staff so that 

they may check to ensure that the correct royalties were paid. In other words, these newly 

reconciled data are not automatically and systematically compared in a timely manner 

with the reported sales volume in the royalty report previously entered into the royalty IT

system. While a comparison between these revised production data and the production 

data included in the royalty report may occur several years later via MMS’s production and 

Page 10 GAO-08-893R Mineral Revenues 
royalty report volume reconciliation process, or if the royalty payor’s property has been 

selected for an audit or compliance review, without a timely systematic comparison of all 

such records, MMS cannot ensure that the initial royalty payment is accurate. 

MMS Does Not Consistently Review Third-Party Documents for Onshore 

Compliance Reviews to Verify Company-Reported Royalty and Production Data 

Are Accurate 

While MMS is currently strengthening its process for selecting companies or leases to 

review, its increased use of compliance reviews—which are more limited in scope than 

audits—has led to an inconsistent use of third-party documents to verify that self-reported 

royalty data are correct, putting accurate royalty collections at risk. According to MMS, 

compliance reviews can be conducted much more quickly and require fewer resources 

than audits, largely because they represent a more limited reasonableness check of the 

accuracy and completeness of a company’s self-reported data and do not include a 

systematic examination of underlying third-party documentation. Audits, on the other 

hand, are more time- and resource-intensive, and they include the review of third-party 

documents, such as sales revenue data, transportation and gas processing costs, and 

production volumes, to verify whether company-reported data are accurate and complete. 

Finally, a 2006 Interior IG audit found that MMS’s data tracking the number of completed 

audits and compliance reviews were inaccurate, and as such, we are unable to provide this 

information. 

Currently, OEMM requires that companies submit pipeline production data for oil and gas 

produced offshore. MMS then uses the data when conducting compliance reviews for 

offshore properties. Additionally, MMS recently assessed the effectiveness of its offshore 

compliance reviews. For calendar year 2002, MMS compared the results of 100 out of 

about 700 compliance reviews of offshore leases and companies with the results of audits 

conducted on those same leases or companies. As a result of this evaluation, MMS now 

plans to improve its compliance review process by, for example, ensuring that it includes a 

step to check that royalties are paid on all royalty-bearing products, including other 

petroleum-based products such as retrograde—a liquid product that condenses out of 

natural gas.

In contrast, because of the significantly greater number of onshore leases and pipelines, 

BLM collects only a limited amount of pipeline and other third-party data for onshore 

production. Furthermore, because MMS itself does not routinely request these data from 

the companies, it does not systematically use third-party data when conducting onshore 

compliance reviews. In 2006, Interior’s IG reviewed MMS’s compliance process and made 

a number of recommendations to strengthen it. The IG recommended, among other things, 

that MMS examine 1 month of third-party documentation as part of each compliance 

review to provide greater assurance that both the production and allowance data are 

accurate. To address this recommendation, MMS revised its compliance review guidance 

to include suggested steps for reviewing third-party source production data, when 

available, for both offshore and onshore oil and gas. However, the revised guidance falls 

short of making these steps a requirement for onshore compliance reviews. And while 

MMS completed a study comparing the results of compliance reviews with those of audits 

Page 11 GAO-08-893R Mineral Revenues 
for offshore properties and leases, MMS could not provide us with a similar study for 

onshore properties and leases. 

Moreover, as noted above, as of 2001, MMS began using compliance reviews in addition to 

audits to meet its performance goal of completing compliance activities on a specified 

percentage of royalty payments within 3 years of the initial royalty payment. For example, 

in 2006, MMS reported that it had achieved its goal by confirming reasonable compliance 

on 72.5 percent of all calendar year 2003 royalties.16 However, Interior’s IG found in a 2006 

audit that MMS did not track the extent to which it achieved its performance goal through 

audits that systematically rely on third-party documents, as opposed to compliance 

reviews that do not. Additionally, the IG found that MMS’s data on completed audits and 

compliance reviews were inaccurate and incomplete. When we examined MMS’s 

compliance program in 2007, MMS did not yet have reliable data on either the numbers of 

audits and compliance reviews completed or their respective contribution to the annual 

performance goal. MMS is now in the process of implementing Interior’s IG 

recommendation and should have these data available for reporting purposes in 2009. 

During the same audit, Interior’s IG also found that to help meet its performance goal, 

MMS had historically conducted compliance reviews or audits on the leases and 

companies that generated the most royalties, with the result that the same leases and 

companies were reviewed year after year. Accordingly, many leases and companies have 

gone years without having been audited, though some were subject to a more limited 

review. To address this compliance gap, Interior’s IG recommended that MMS develop risk 

criteria for selecting leases and companies to conduct either compliance reviews or audits. 

MMS responded by working with a contractor to identify the necessary criteria for 

developing a risk-based approach for selecting companies and leases for either audits or 

compliance reviews. MMS is now implementing a pilot project, after which it will assess 

the results to further refine its new compliance approach. 

Finally, representatives from the states and tribes who are responsible for conducting 

compliance work under agreements with MMS have expressed concerns about the quality 

of self-reported production and royalty data they use in their reviews. As part of our work, 

we sent questionnaires to all 11 states and 7 tribes that conducted compliance work for 

MMS in fiscal year 2007. Of the 9 state and 5 tribal representatives who responded, 7 

reported that they lack confidence in the accuracy of the royalty data. For example, 

several representatives reported that because of concerns with MMS’s production and 

royalty data, they routinely look to other sources of corroborating data, such as 

production data from state oil and gas agencies and tax agencies. Finally, several 

respondents noted that companies frequently report production volumes to the wrong 

leases and that they must then devote their limited resources to correcting these reporting 

problems before beginning their compliance reviews and audits. 

 16MMS conducts other types of compliance work, such as limited scope compliance reviews, which examine, 

among other things, one or more of the variables—sales price, sales volume, and royalty rate—of the royalty

equation. MMS did not count these reviews towards its performance goal. 

Page 12 GAO-08-893R Mineral Revenues 
Conclusions 

Interior has been subject to significant examination and oversight of its royalty 

management programs over the years, which has resulted in GAO, Interior’s Inspector 

General, and the Royalty Policy Committee issuing numerous recommendations to 

improve royalty collections. So far, Interior has been responsive to these 

recommendations and, as an example, is currently implementing an action plan to address 

the Royalty Policy Committee’s recently issued recommendations. As a result, many of 

Interior’s processes and systems are in flux, and the outcome of these potential 

improvements will not be known for some time. However, given high oil and gas prices 

and the increased interest on the part of oil and gas companies in the nation’s oil and gas 

resources, it is important that we have a royalty collection system going forward that can 

assure the American public that the government is receiving accurate and timely royalty 

payments. Critical to this is that both BLM and OEMM complete and accurately document 

their production inspection and verification work. Furthermore, collections of accurate 

royalties will remain at risk as long as companies may make unverified adjustments to 

royalty and production data after MMS completes its compliance activities. Increasing this 

risk is uncertainty regarding the statutory time frames for MMS to collect unpaid royalties, 

which under one interpretation may leave just 1 year for MMS to identify an improper 

adjustment. Ultimately, Interior’s royalty IT system and policies should provide adequate 

assurance that the federal government receives appropriate value for oil and gas produced 

from federal lands and waters. This royalty collection process should also rely less on 

companies providing accurate information on production and royalties owed, and more on 

a system with the ability to conduct thorough and independent verification of what is 

owed to the government, using third-party data where available at reasonable cost, and 

more systematically examining company source documentation.

Recommendations for Executive Action 

To help provide greater assurance that federal oil and gas is being measured accurately, 

we recommend the Secretary of the Interior take the following three actions: 

• Report to Congress any year in which OEMM and BLM have not met their legal and 

agency requirements for completing production inspections, along with the cause and a 

plan for achieving compliance. 

 

• Define the terms “lease sites producing or expected to produce significant quantities of 

oil or gas in any year” and “lease sites which have a history of noncompliance with 

applicable provisions of law or regulations” for offshore oil and natural gas leases. 

• Direct BLM and OEMM to evaluate both the accuracy and completeness of production 

inspection data in their databases, including the timeliness of data entry, and amend 

relevant policies and procedures as necessary. 

Page 13 GAO-08-893R Mineral Revenues 
In addition, we recommend that the Secretary of the Interior direct MMS to take the 

following three actions to improve its royalty IT system and royalty collection and 

verification processes: 

• Conduct a study on the Federal Oil and Gas Royalty Simplification and Fairness Act’s 

effect on MMS’s capacity to efficiently and accurately collect federal royalties due by 

analyzing both the (1) 6-year timeframe for allowing companies to make adjustments to 

their federal royalty data and (2) MMS’s 7-year time frame for issuing monetary 

demands for additional royalties. This study should identify an appropriate time period 

cutoff for allowing companies to make adjustments without MMS’s prior approval to 

their royalty and production data and related payments, address the need for 

clarification on when the 7-year time period begins for issuing a monetary demand, and 

report the findings to Congress. 

• Finalize the adjustment line monitoring specifications for modifying its royalty IT 

system and fully implement the IT system so that MMS can monitor adjustments made 

outside the legal 6-year time frame, and ensure that any adjustments made to 

production and royalty data after compliance work has been completed are reviewed 

by appropriate staff. 

• Develop processes and procedures by which MMS can automatically identify when an 

expected royalty report has not been filed in a timely manner, and contact the company 

to ensure it is complying with both applicable laws and agency policies. 

Finally, to improve its compliance program, we recommend that the Secretary of the 

Interior direct MMS to require that the onshore compliance review process include the 

review of a sample of third-party documentation in instances when BLM has not already 

collected this information to provide additional assurance that self-reported data are 

correct. 

Agency Comments and our Evaluation 

We provided a draft of this report to the Department of the Interior for review and 

comment. The Department of the Interior provided written comments that are presented 

in Enclosure I. DOI generally agreed with our findings and conclusions. In addition, they 

concurred with six of the seven recommendations, and partially concurred with the other 

recommendation. For the recommendation on which they partially concurred regarding 

reporting to Congress on production inspections annually, DOI agreed with the need to 

report to Congress when production inspections were not completed as required, but 

disagreed on the nature of the reporting we recommended in our draft report. Specifically, 

Interior commented that it would be more useful to provide Congress with a report only in 

years in which they fail to meet their inspection requirements rather than providing 

Congress with an annual report on whether production inspections were completed along 

with an explanation as to the why the inspections were not completed. We modified the 

recommendation in response to this comment. 

Page 14 GAO-08-893R Mineral Revenues 
- - - - - - - - - - - - - - - 

-

We are sending copies of this report to the Secretary of the Interior, appropriate 

congressional committees, and other interested parties. We will also make copies available 

to others on request. In addition, this report will be available at no charge on the GAO Web 

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

If you or your staffs have any questions about this report, please contact either Frank 

Rusco at (202) 512-3841 or ruscof@gao.gov, or Jeanette Franzel at (202) 512-9471 or 

franzelj@gao.gov. Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this report. Contributors to this report include 

Jon Ludwigson (Assistant Director), Paul Kinney (Assistant Director), Ron Belak, Ben 

Bolitzer, Lisa Brownson, Melinda L. Cordero, Nancy Crothers, Glenn C. Fischer, Cindy 

Gilbert, Tom Hackney, Barbara Kelly, Sandra Kerr, Jennifer Leone, Barbara Timmerman, 

and Mary Welch. 

Frank Rusco 

Acting Director, Natural Resources 

 and Environment 

Jeanette Franzel 

Director, Financial Management 

 and Assurance 

Page 15 GAO-08-893R Mineral Revenues 
List of Requesters 

The Honorable Jeff Bingaman 

Chairman 

Committee on Energy and Natural Resources 

United States Senate 

The Honorable Nick J. Rahall, II 

Chairman 

Committee on Natural Resources 

House of Representatives 

The Honorable Tom Davis 

Ranking Member 

Committee on Oversight and Government Reform 

House of Representatives 

The Honorable Darrell Issa 

Ranking Member 

Subcommittee on Domestic Policy 

Committee on Oversight and Government Reform 

House of Representatives 

The Honorable Carolyn Maloney 

House of Representatives 

Page 16 GAO-08-893R Mineral Revenues 
Enclosure I 

Page 17 GAO-08-893R Mineral Revenues 
(360834) 

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