OIL AND GAS 

RESOURCES

Actions Needed for 

Interior to Better 

Ensure a Fair Return

Report to the Chairman, Committee on 

Energy and Natural Resources, U.S. 

Senate

December 2013

GAO-14-50

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-50, a report to the 

Chairman, Committee on Energy and Natural 

Resources, U.S. Senate

December 2013

OIL AND GAS RESOURCES

Actions Needed for Interior to Better Ensure a Fair 

Return

Why GAO Did This Study

In fiscal year 2012, companies 

received over $66 billion from the sale 

of oil and gas produced from federal 

lands and waters, and they paid $10

billion to the federal government for 

developing these resources according 

to the Department of the Interior. The 

federal government seeks a fair return 

on its share of revenue from leasing 

and production activities on federal 

lands and waters through the federal 

oil and gas fiscal system. Under the 

fiscal system, companies pay royalties, 

rents, and other payments—payments 

generally specified in lease terms—

and taxes on profits from the sale of oil 

and gas produced from federal leases. 

In May 2007, GAO found, based on 

several studies, that the government 

received one of the lowest percentages 

of value of oil and gas produced in the 

world. In September 2008, GAO found 

that Interior had not evaluated the 

federal oil and gas fiscal system for 

over 25 years and recommended that 

a periodic assessment was needed.

GAO was asked to review Interior’s 

collection of oil and gas revenues. This 

report examines steps Interior has 

taken to ensure the public receives a 

fair return on oil and gas resources 

since 2007. GAO reviewed applicable 

law and regulations; examined prior 

GAO studies, Interior policies and 

documents; and interviewed officials.

What GAO Recommends

GAO recommendations include that

Interior establish documented 

procedures for (1) periodically 

assessing the fiscal system and (2) 

determining whether and how to 

change new offshore lease terms. 

Interior concurred with GAO’s 

recommendations.

What GAO Found

Interior has taken some steps intended to help ensure a fair return on federal oil 

and gas resources but does not have documented procedures for periodically 

conducting assessments of the fiscal system. Specifically, Interior has taken the 

following steps: 

• Changed offshore lease terms and considered but has not changed 

onshore lease terms. Interior changed certain offshore lease terms—

including raising royalty rates twice in response to changing market 

conditions. For onshore resources, which are subject to many of the 

same market conditions, Interior has considered but not made changes 

to royalty rates. Interior officials are currently unable to make timely 

adjustments to onshore royalty rates. Current regulations generally 

provide for a fixed onshore royalty rate that limits Interior’s flexibility to 

make timely adjustments. 

• Contracted for studies of various aspects of the fiscal system. Interior 

contracted for three studies examining its fiscal system including a study

done in 2011, in response to GAO’s September 2008 report that 

compared the U.S. government’s oil and gas fiscal system to other 

resource owners. Interior officials said the reports provided some useful 

information such as how fiscal terms in the United States compared to 

other resource owners. 

• Interior is examining potential regulatory changes that could simplify 

royalty payments. Interior is examining potential regulatory changes that 

could simplify royalty payments. GAO found in the past that complex 

valuation regulations can result in inaccurate royalty payments made by 

industry, and this could increase costs to ensure accurate royalty 

payments because of the need for potentially detailed and timeconsuming audits of records. In May 2011, Interior published the 

Advance Notice Of Proposed Rulemaking for a proposed rule currently 

undergoing internal review. According to officials, the proposed rule is 

expected to be published in 2014, and officials explained that it took 

several years due to factors including the complexity of oil and gas 

valuation.

Interior does not have documented procedures in place for determining when to 

conduct periodic assessments of the fiscal system. Although Interior recently 

contracted for such an assessment, it was the first in well over 25 years. Without 

documented procedures, Interior will not have reasonable assurance that it will 

consistently conduct such assessments in the future and, without periodically 

conducting such assessments, Interior cannot know whether there is a proper 

balance between the attractiveness of federal leases for investment and 

appropriate returns for federal oil and gas resources, limiting Interior’s ability to 

ensure a fair return. Further, Interior does not have documented procedures for 

determining whether and how to make changes to new offshore lease terms. 

Without documented procedures for determining whether and how to make 

changes to new offshore lease terms, Interior’s rationale is not transparent and

may result in inconsistent decisions. Such inconsistencies would undermine 

Interior’s credibility and ability to better ensure a fair return on federal oil and gas 

resources.

View GAO-14-50. For more information, 

contact Frank Rusco at (202) 512-3841 or 

ruscof@gao.gov.
Page i GAO-14-50 Oil and Gas Resources

Letter 1

Background 4

Interior Has Taken Some Steps to Help Ensure a Fair Return but 

Does Not Have Procedures for Periodically Conducting 

Assessments of the Fiscal System 11

Conclusions 27

Recommendations for Executive Action 29

Agency Comments 30

Appendix I Comments from the Department of the Interior 31

Appendix II GAO Contact and Staff Acknowledgments 33

Tables

Table 1: History of Lease Terms for Gulf of Mexico Outer 

Continental Shelf Oil and Gas Leases 2005-2013 16

Table 2: Interior-Contracted Studies of the Oil and Gas Fiscal 

System 2009-2013 20

Figures

Figure 1: Royalty Rates and Oil Prices, January 2000 through July 

2013 12

Figure 2: Royalty Rates and Gas Prices, January 2000 through July 

2013 13

Contents
Page ii GAO-14-50 Oil and Gas Resources

Abbreviations

BLM Bureau of Land Management

BOEM Bureau of Ocean Energy Management

MMS Minerals Management Service

ONRR Office of Natural Resources Revenue

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Page 1 GAO-14-50 Oil and Gas Resources

441 G St. N.W.

Washington, DC 20548

December 6, 2013 

The Honorable Ron Wyden

Chairman

Committee on Energy and Natural Resources

United States Senate

Dear Mr. Chairman:

Production of oil and natural gas from leases on federal lands and waters 

is an important part of the nation’s energy portfolio and a significant 

source of revenue for the federal government. Domestic and foreign 

companies received over $66 billion from the sale of oil and gas produced 

from federal lands and waters in fiscal year 2012, according to the 

Department of the Interior. Interior reported collecting about $9.7 billion in 

2012 from royalties and other payments from these companies, making 

oil and gas resources one of the federal government’s largest nontax 

sources of revenue. The terms and conditions under which the 

government collects these revenues are referred to as the “oil and gas 

fiscal system” and generally include royalties and other payments for the 

rights to explore, develop, and sell oil and gas resources. However, over 

the past several decades, we, and others, have identified problems with 

Interior’s management of the federal oil and gas fiscal system. For 

example, in 1982, a task force convened by Interior found that 

management of the fiscal system needed a thorough overhaul and 

provided 60 recommendations for improving the fiscal accountability of 

the nation’s onshore and offshore resources.1 Upon the completion of the 

task force’s work, the Secretary of the Interior informed Congress, in 

March 1983, that Interior had refined the system and that a “full and fair 

return” to the American people would be assured. In May 2007, we found 

that, based on the results of a number of studies, the government 

receives one of the lowest government takes—commonly understood to 

be the total revenue, as a percentage of the value of oil and natural gas 

 1

Fiscal Accountability of the Nation’s Energy Resources (January 1982).
Page 2 GAO-14-50 Oil and Gas Resources

produced—in the world.

2 In addition, in September 2008, we found that 

Interior did not routinely evaluate the federal oil and gas fiscal system and 

suggested that Congress should consider directing the Secretary of the 

Interior to (1) convene an independent panel to conduct a comprehensive 

review of the oil and gas fiscal system and (2) establish procedures to 

periodically evaluate the state of the fiscal system.

3 In 2011, in part 

because of the challenges identified in our past work concerning Interior 

not having reasonable assurance that it is collecting its share of revenue 

from oil and gas produced on federal lands, we added Interior’s 

management of federal oil and gas resources to GAO’s list of programs at 

high risk of fraud, waste, abuse, and mismanagement.4

Interior has oversight responsibility for the development of federal oil and 

gas resources located under over 260 million surface onshore acres, 700 

million subsurface onshore acres, and more than 1.7 billion offshore 

acres in the waters of the outer continental shelf.5 Companies that 

develop and produce oil and gas from these federal lands and waters do 

so over a specified period of time under leases obtained from and 

administered by agencies of Interior––the Bureau of Land Management 

(BLM) for onshore leases and the Bureau of Ocean Energy Management 

(BOEM) for offshore leases. Interior’s Office of Natural Resources 

Revenue (ONRR) is responsible for collecting revenues from onshore and 

offshore leases. 

Interior acts on behalf of the American people to manage the federal oil 

and gas system to ensure a fair return to the public for the development 

 2

GAO, Oil and Gas Royalties: A Comparison of the Share of Revenue Received from Oil 

and Gas Production by the Federal Government and Other Resource Owners, 

GAO-07-676R (Washington, D.C.: May 1, 2007). The government take, which accrues to 

any government, is largely determined by the government’s oil and gas fiscal system. In 

the United States, this fiscal system consists of both terms specified in the lease, such as 

the royalty rate and rent, as well as the corporate taxes paid by the company on profits 

from the sale of oil and gas produced from federal leases.

3

GAO, Oil and Gas Royalties: The Federal System for Collecting Oil and Gas Revenues 

Needs Comprehensive Reassessment, GAO-08-691 (Washington, D.C.: Sept. 3, 2008). 

The status of these actions is discussed later in this report.

4

GAO, High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: Feb. 16, 2011). 

5

The outer continental shelf (submerged lands) is outside the territorial jurisdiction of all 50 

states but within U.S. jurisdiction and control and consists of submerged federal lands, 

generally extending seaward between 3 and 200 nautical miles off the U.S. coastline. 
Page 3 GAO-14-50 Oil and Gas Resources

of oil and gas resources. For offshore resources, one of the stated 

purposes of the Outer Continental Shelf Lands Act, as amended—which 

governs the management of oil and gas resources—is to ensure the 

public “a fair and equitable return” on the resources on the outer 

continental shelf. The law directs the Secretary of the Interior to conduct 

leasing activities to assure receipt of fair market value for the lands 

leased and the rights conveyed by the federal government. Further, for 

onshore resources, Interior relies on the competitive leasing process 

required by the Mineral Leasing Act, as amended, to ensure fair market 

value for onshore oil and gas resources. Broadly, we refer to the 

government collecting an appropriate share of revenue from leasing and 

production activities on federal lands and waters as ensuring a fair return. 

Because the revenues these leases generate depend, in part, on the 

amounts of oil and natural gas that companies produce from them, the 

federal government has sought to design fiscal systems that balance the 

goal of providing a fair return with sufficient financial incentives for 

companies to commit resources to exploring, developing, and producing 

oil and gas from their leases. 

You asked us to review Interior’s collection of oil and gas revenues as 

part of our ongoing efforts to support congressional oversight of GAO’s 

high-risk areas. This report examines the steps Interior has taken to 

ensure that the public receives a fair return on federal oil and gas 

resources since 2007. To conduct this work, we reviewed applicable law, 

regulations, and guidance that govern Interior’s management of oil and 

gas resources including the Outer Continental Shelf Lands Act, the 

Mineral Leasing Act, and the Federal Onshore Oil and Gas Leasing 

Reform Act; examined our prior reports and Interior leasing program 

policies and documents; and interviewed Interior officials from BOEM, 

BLM, ONRR, and the Solicitor’s Office. We also conducted a high-level 

review of the Interior-contracted studies of the fiscal system in order to 

summarize the studies’ purpose and goals. We also compared actions 

that Interior took to standards for internal control in the federal 

government.

6

 

We conducted this performance audit from October 2012 to December 

2013 in accordance with generally accepted government auditing 

 6

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 

(Washington, D.C.: November 1999). 
Page 4 GAO-14-50 Oil and Gas Resources

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.

This section describes (1) the federal oil and gas fiscal system, (2) 

leasing processes, and (3) the history of oil and gas management 

challenges. Created by Congress in 1849, Interior oversees the nation’s 

publicly owned natural resources including parks, wildlife habitat, and 

crude oil and natural gas resources on millions of acres onshore and 

offshore in the waters of the outer continental shelf. With regard to oil and 

gas in particular, Interior leases federal lands and waters (also referred to 

as submerged lands), issues permits for oil and gas drilling, and is 

responsible for ensuring that the federal government receives payment 

from the private companies that extract oil and gas from federal leases.

The oil and gas fiscal system defines the applicable payments to the 

government from companies that lease federal lands and waters for oil 

and gas development. These payments include royalties, rents, and 

other payments—items generally specified within the lease terms. The 

revenues collected by the federal government on oil and gas 

development are shared with states, as directed by statute, and the 

remaining funds are deposited in the U.S. Treasury. In addition to the 

collection of these payments by Interior, the federal government assesses 

taxes on the profits companies earn on the sale of oil and gas produced 

from federal leases. Under the oil and gas fiscal system, companies bid 

on leases that Interior makes available. Interior awards the lease to the 

highest bidder generally based on a lump-sum payment called a bonus 

bid that is due when the lease is issued. The lease is a contract and 

conveys the rights to explore for and produce the oil and gas in a 

specified area to a company that holds the lease. The company is then 

subject to the payment of rental rates until production begins and then to 

payment of royalties on any oil and gas that is eventually produced on the 

lease. The royalty rate is a percentage of the value of production, and the 

royalty owed is the volume of production times the unit value of 

production times the royalty rate. The federal government receives royalty 

payments once production starts. In fiscal year 2012, the $9.7 billion in oil 

Background

The Federal Oil and Gas 

Fiscal System 
Page 5 GAO-14-50 Oil and Gas Resources

and gas revenue collected included royalties (about $8.5 billion or 87 

percent), bonus bids (about $947 million or 10 percent),7 and rental fees 

(about $272 million or 3 percent). 

Currently Interior has the authority to change certain lease terms—such 

as the duration of the lease, royalty rates, and rental fees—within the 

overall oil and gas fiscal system. For new offshore leases, Interior is 

allowed by statute to change the lease terms for the bonus bid structure, 

rent, and royalty rates.8 For new onshore leases, Interior is generally 

allowed by statute to change these same lease terms but with certain 

limits on flexibility. For onshore leases, Interior’s regulations—issued in 

the 1980s—currently establish a royalty rate of 12.5 percent.9 As such, 

changes to onshore royalty rates would require Interior to revise its 

regulations. With regard to taxes on corporate profits, only Congress may 

change the tax components of the oil and gas fiscal system as Interior 

does not have the authority to do so.

For both offshore and onshore leases, ONRR collects revenue from 

companies for the royalties, rents, bonuses, and other revenues 

generated throughout the leasing process. In this regard, ONRR has the 

responsibility to ensure that these revenues are accurately reported and 

paid in compliance with laws, regulations, and lease terms. ONRR 

establishes the regulations for how oil and gas are valued for royalty 

purposes, which affects the royalties that companies pay.

Interior’s processes for issuing federal leases vary depending on whether 

they are offshore or onshore. 

 7

Lease sale 222 was held in June 2012 and resulted in bonus revenues of $1.68 billion; 

however, since certain bid review procedures were not completed by the end of the fiscal 

year, not all of these bonuses are included in the revenue amount for bonus bids. 

8

43 U.S.C. §1337 provides that Interior can make changes so long as there is only one bid 

variable or “flexible” term. The bid variable or “flexible” term does not fluctuate over the life 

of the lease but is the term on which bidders compete for the award through the level of 

the bid made. 

9

By statute, the Secretary of the Interior must first offer parcels at competitive lease sales 

and may only issue noncompetitive leases after the department has offered the lands 

competitively at an oral auction and not received a bid. For onshore leases issued 

noncompetitively, the Mineral Leasing Act sets a 12.5 percent royalty rate by statute.

Leasing Processes
Page 6 GAO-14-50 Oil and Gas Resources

For offshore leases, management of oil and gas resources is primarily 

governed by the Outer Continental Shelf Lands Act, which sets forth 

procedures for leasing, exploration, and development and production of 

those resources. BOEM is the bureau within Interior responsible for 

implementing these requirements of the act related to preparing the 

leasing program. The act calls for the preparation of an oil and gas 

leasing program designed to best meet the nation’s energy needs while 

also taking into account a range of principles and considerations specified 

by the act. Specifically, the act provides that “[m]anagement of the outer 

Continental Shelf shall be conducted in a manner which considers 

economic, social, and environmental values of the renewable and 

nonrenewable resources contained in the outer Continental Shelf, and the 

potential impact of oil and gas exploration on other resource values of the 

outer Continental Shelf and the marine, coastal, and human 

environments.”10 Furthermore, the act provides that the outer continental 

shelf is a “vital national resource reserve held by the federal government 

for the public, which should be made available for expeditious and orderly 

development, subject to environmental safeguards, in a manner which is 

consistent with the maintenance of competition and other national 

needs.”11 The act grants the Secretary the authority to issue leases and 

states that “leasing activities shall be conducted to assure receipt of fair 

market value for the lands leased and the rights conveyed by the Federal 

Government.”12 

The Outer Continental Shelf Lands Act requires the Secretary of the 

Interior to prepare an oil and gas leasing program that consists of a 5-

year schedule of proposed lease sales that shows the size, timing, and 

location of leasing activity as precisely as possible. Every 5 years, Interior 

selects the areas it will offer for leasing and establishes a schedule for 

individual lease sales. These leases are offered for competitive bidding, 

and all eligible companies are invited to submit written sealed bids for the 

lease and rights to explore, develop, and produce oil and gas resources

on these leases. These rights last for a set period of time, referred to as 

 1043 U.S.C. §1344(a)(1). 

1143 U.S.C. §1332(3).

1243 U.S.C. §1344(a)(4). 

Offshore Leases
Page 7 GAO-14-50 Oil and Gas Resources

the initial period of the lease,13 which varies depending on the water 

depth.14 Interior estimates the fair market value of each lease, and the 

minimally acceptable bid is derived from this estimate. The bidder that 

submits the highest bonus bid that meets or exceeds Interior’s minimum 

bid is awarded the lease. If a high bid does not satisfy any of the required 

conditions, the bid is rejected. In the event that no bid is received or no 

bids equal or exceed the minimum bid, Interior may choose to withdraw 

the lease—possibly offering it again at a future date. 

For onshore leases, BLM’s current leasing process was established in the 

Mineral Leasing Act of 1920, as amended, and the Mineral Leasing Act 

for Acquired Lands of 1947, as amended. Interior relies on the 

competitive leasing process required by the Mineral Leasing Act to 

ensure fair market value for onshore oil and gas resources. In addition, 

the Federal Land Policy and Management Act, though not specific to 

federal oil and gas resources, calls for the management of public lands in 

a manner that protects historical and environmental resources, provides 

for recreational and other uses, and ensures “fair market value” is 

received for their use and resources. BLM offers parcels of land 

nominated by industry and the public, as well as some it identifies. As 

with offshore leases, Interior initially offers onshore leases through a 

competitive bidding process; however, bonus bids are received in an oral 

auction rather than in a sealed written form, and Interior does not 

evaluate bid adequacy on a parcel-by-parcel basis. Instead, by law, it 

requires a uniform national minimum acceptable bid of $2 per acre that

the Secretary has the authority to raise. If Interior receives any bids on an 

offered lease, the lease is awarded to the highest bidder. All onshore 

leases that do not receive any bids in the initial offer must be offered 

noncompetitively the day after and remain available for noncompetitive

 13If a discovery is made within the initial term of the lease, the lease is extended for as 

long as oil and/or natural gas is produced in paying quantities or approved drilling 

operations are conducted. The term of the lease may also be extended if a suspension of 

production or suspension of operations has been granted or directed.

14In the Gulf of Mexico, in a recent notice of sale in 2012, BOEM offered leases with an 

initial term of 5 years extended to 8 years if drilling begins during the initial 5-year period 

targeting hydrocarbons below a depth of at least 25,000 feet subsea for leases in less 

than 400 meters of water. For leases in 400 to 800 meters of water, the initial term was 5 

years extended to 8 years if drilling begins during the initial 5-year period. For leases in 

800 to 1,600 meters of water, the initial period was 7 years extended to 10 years if drilling 

begins during the initial 7-year period. For leases in over 1,600 meters of water, the initial 

period was 10 years. 

Onshore Leases
Page 8 GAO-14-50 Oil and Gas Resources

leasing for a period of 2 years after the competitive lease sale. Any of 

these available leases may be acquired noncompetitively on a first-come, 

first-served basis for the minimum acceptable bid. About 40 percent of 

existing BLM oil and gas leases were issued as noncompetitive leases.15

For all competitively issued leases, the winning bidder must pay Interior 

the full amount of the bonus bid to become the lessee. The lessee then 

pays a fixed amount of rent each year until the lease begins producing or 

the lease terminates, expires, is cancelled, suspended, or relinquished. 

In the 1970s and early 1980s, Interior’s management of the oil and gas 

revenue collection system faced criticism by us and Interior’s Office of the 

Inspector General. Interior’s Inspector General issued five reports critical 

of the program between 1969 and 1977 and, in 1981, we reported that 

Interior was not collecting potentially hundreds of millions in royalties due 

from federal oil and gas leases.16 In response, in 1981, the Secretary of 

the Interior established the Commission on Fiscal Accountability of the 

Nation’s Energy Resources, better known as the Linowes Commission 

named for the chairman of the commission, to investigate allegations of 

irregularities in royalty payments, among other issues. The Linowes 

Commission raised a number of serious concerns and in its report stated 

that “management of royalties for the nation’s energy resources has been 

a failure for more than 20 years. Because the Federal government has 

not adequately managed this multibillion dollar enterprise, the oil and gas 

industry is not paying all the royalties it rightly owes.”17 The report cited a 

range of problems, including the failure to verify data reported by 

companies and late payments and underpayments, and concluded that, 

“[i]n short, the industry is essentially on an honor system.” Among its 60 

 15BLM, Public Land Statistics 2012, Volume 197 (June 2013). As of September 30, 2012, 

BLM reported 27,747 competitive oil and gas leases covering 22.2 million acres and 

18,411 noncompetitive oil and gas leases covering 14.8 million acres.

16GAO, Oil and Gas Royalty Collections: Longstanding Problems Costing Millions,

GAO/AFMD-82-6 (Washington, D.C.: Oct. 29, 1981). In our October 1981 report, we 

recommended that Interior, as part of its efforts to develop a new royalty accounting 

system, should (1) monitor the development of the new system and (2) include as part of 

these redesign efforts a plan for, among other actions, monitoring and reconciling records, 

inspecting leases, and verifying production and sales data. Interior did not take action to 

implement either of these recommendations in part because it had initiated a new review

of its revenue collection system that covered many of the same issues we identified. 

17Fiscal Accountability of the Nation’s Energy Resources (January 1982).

History of Oil and Gas 

Management Challenges
Page 9 GAO-14-50 Oil and Gas Resources

recommendations for improving the fiscal accountability of onshore and 

offshore resources, the commission called for raising onshore royalty 

rates to “appropriate levels.” Specifically, the commission recommended 

that the onshore royalty rate for oil and gas be raised from 12.5 percent to 

16.67 percent generally for new and renegotiated leases consistent with 

offshore royalty rates of 16.67 percent in place at that time. 

Following the work of the commission, Interior and Congress took several 

actions aimed at improving management of revenue collection. In 

particular, the Secretary of the Interior, by secretarial order, reorganized 

the task of administering revenue collection under a new bureau; 

specifically, the Minerals Management Service (MMS) was created within 

Interior, in part, from the division of the U.S. Geological Survey—which 

was originally tasked with administering revenue collection, among other 

duties—to improve management of federal leasing revenues.18 In 

addition, Congress passed legislation aimed at improving the collection of 

revenue including the Federal Oil and Gas Royalty Management Act of 

1982 and the Federal Oil and Gas Royalty Simplification and Fairness Act 

of 1996. 

In 2007, Interior’s Subcommittee on Royalty Management—a 

subcommittee of the Royalty Policy Committee chartered to provide 

advice on royalty management issues and other mineral-related policies 

to the Secretary and other departmental officials responsible for 

managing mineral leasing activities—reported that a number of aspects of 

royalty management activities required prompt and, in some cases, 

significant management attention to ensure public confidence.19 In 

particular, the report included over 100 recommendations to improve 

Interior’s management of oil and gas resources, including those aimed at 

revising its valuation regulations and guidelines that govern the valuation 

 18In 2010, following the explosion of the Deepwater Horizon drilling rig in the Gulf of 

Mexico, Interior announced that it was going to reorganize its offshore oversight and 

revenue collection functions. Specifically, Interior eventually restructured MMS into three 

separate bureaus—BOEM, responsible for offshore leasing and resource management; 

the Bureau of Safety and Environmental Enforcement, responsible for issuing oil and 

natural gas drilling permits, environmental safety and regulation, and conducting 

inspections for offshore leases; and ONRR, responsible for revenue collection for both 

offshore and onshore leases. 

19Subcommittee on Royalty Management, Royalty Policy Committee, Report to the 

Royalty Policy Committee: Mineral Revenue Collection from Federal and Indian Lands 

and the Outer Continental Shelf (Washington, D.C.: 2007).
Page 10 GAO-14-50 Oil and Gas Resources

of oil and gas resources for royalty purposes. According to Interior 

documentation, as of August 2012, 15 recommendations remain open. 

In our May 2007 report, we found that, based on results of a number of 

studies, the government receives one of the lowest government takes in 

the world.20 In September 2008,21 we found that the fiscal system needed 

comprehensive reassessment and that Interior did not routinely evaluate 

the federal oil and gas fiscal system. Interior disagreed with 

recommendations in the draft report that it perform a comprehensive 

review of the fiscal system using an independent panel and adopt policies 

and procedures to keep abreast of important changes in the oil and gas 

market and in other countries’ efforts to adjust their oil and gas 

management practices in light of these changes. Thus, in the final report, 

we suggested that Congress should consider directing the Secretary of 

the Interior to (1) convene an independent panel to perform a 

comprehensive review of the federal system for collecting oil and gas 

revenue and (2) establish procedures for periodically collecting data and 

information and conducting analyses to determine how the federal 

government take and the attractiveness for oil and gas investors in each 

federal oil and gas region compare to those of other resource owners and 

report this information to the Congress. Actions taken in response to this 

suggestion are discussed later in this report. In 2011, in part because of 

the challenges identified in our past work, we added Interior’s 

management of federal oil and gas resources to our list of programs at 

high risk of fraud, waste, abuse, and mismanagement.22 In the 2013 

update of the high-risk list, we found that some progress had been made 

related to Interior’s management of federal oil and gas resources and 

narrowed the federal oil and gas high-risk area to focus, in part, on the 

remaining issues related to revenue collection and ensuring that the 

public is getting an appropriate share of oil and gas revenues.23

 20GAO-07-676R. 

21GAO-08-691. 

22 GAO-11-278. 

23GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: Feb. 14, 2013). 
Page 11 GAO-14-50 Oil and Gas Resources

Interior has taken some steps to help ensure a fair return on federal oil 

and gas resources since our 2007 report, including: (1) changing offshore 

lease terms, while considering but not making changes to onshore lease 

terms; (2) contracting for studies of various aspects of the fiscal system; 

and (3) examining potential regulatory changes that could simplify royalty 

payments and collections. However, Interior does not have documented 

procedures in place for determining when to periodically conduct 

assessments of the fiscal system to ensure a fair return or for determining 

whether and how to make changes to lease terms for new offshore

leases. 

Interior has taken some steps aimed at ensuring a fair return, including 

changing offshore lease terms—such as increasing royalty rates, 

minimum bids, and rental rates—but onshore lease terms have not 

changed in recent years though onshore and offshore leasing programs 

are subject to many of the same market conditions. For example, while 

onshore royalty rates have remained at 12.5 percent, certain offshore 

royalty rates began increasing in 2007 to the current offshore royalty rate 

of 18.75 percent. Figures 1 and 2 depict changes to offshore and onshore 

royalty rates along with oil and gas price fluctuations, respectively, from 

January 2000 through July 2013. In addition, Interior has contracted for 

studies of various aspects of its fiscal system, including an assessment of 

how the federal fiscal system compared with the systems of other oil and 

gas resource owners (including owners in other countries); an analysis of 

policies that affect the pace of leasing in the Gulf of Mexico; and an 

analysis of the benefits, costs, and economic impacts of raising onshore 

royalty rates. Interior is also examining potential regulatory changes that 

could simplify royalty payments and collections.

Interior Has Taken 

Some Steps to Help 

Ensure a Fair Return 

but Does Not Have 

Procedures for 

Periodically 

Conducting 

Assessments of the 

Fiscal System

Interior Has Taken Some 

Steps Aimed at Ensuring a 

Fair Return
Page 12 GAO-14-50 Oil and Gas Resources

Figure 1: Royalty Rates and Oil Prices, January 2000 through July 2013
Page 13 GAO-14-50 Oil and Gas Resources

Figure 2: Royalty Rates and Gas Prices, January 2000 through July 2013

In recent years, Interior changed some offshore lease terms in an effort to 

ensure a fair return on oil and gas resources. Since 2007, Interior 

increased offshore lease terms including royalty rates, rental rates, and 

the minimum bid for certain offshore leases as follows: 

• Increased royalty rates. From 2007 through 2008, Interior increased 

royalty rates for new leases by 50 percent. In 2007, Interior increased 

the royalty rate for new Gulf of Mexico leases from 12.5 percent to 

16.67 percent for new leases in water depths greater than 400 

meters. In 2008, Interior increased the rate again for all Gulf of Mexico

leases to 18.75 percent. As of August 2013, all Gulf of Mexico royalty 

Interior Changed Offshore 

Lease Terms 
Page 14 GAO-14-50 Oil and Gas Resources

rates for new leases are 18.75 percent.24 According to Interior officials 

and documents, incremental increases in royalty rates were instituted 

in response to a variety of factors including (1) increased oil and gas 

prices; (2) perceived improvements in exploration and production 

technologies, especially in deep water; and (3) the competitive market 

for offshore leases. Interior estimated that the royalty rate increase 

from 16.67 percent to 18.75 percent would result in a net increase in 

the total Gulf of Mexico federal revenues from bonuses, rents, and 

royalties from new leases of $4.3 billion, a 5 percent increase from 

$87.4 to $91.7 billion over 30 years.25 After this 2008 royalty rate 

increase, Interior documents stated that demand remained strong for 

newly offered leases in the Gulf of Mexico and that Interior observed 

strong bidding interest in the three subsequent lease sales.26

• Escalating and increased rental rates. Interior established escalating 

rental rates—rates that increase over the duration of the lease—to 

encourage faster exploration and development of leases, or earlier

relinquishment when exploration is unlikely to be undertaken by the 

lessee. Specifically, in 2007, Interior implemented escalating rental 

rates for leases offered in less than 400 meters of water—and in 

2009, for leases offered in at least 400 meters of water.27 Also, in 

 24Although the outer continental shelf leases for the Gulf of Mexico have increased royalty 

rates, the outer continental shelf leases for Alaska have remained at a 12.5 percent 

royalty rate for about 30 years.

25The revenue estimates are nominal dollars unadjusted for inflation.

26Interior’s analysis included estimates for increasing royalty rates beyond 18.75 percent. 

Specifically, it estimated that royalty rate increases from 18.75 to 21.875 percent would 

cause production losses of 2 to 6 percent with royalty revenue increases of 11 to 17 

percent. According to the analysis, the effect of increased royalty rates, depending on the 

size of the change, would be less production, but with the potential for higher revenues 

from royalties in the future. Interior found that a large increase in the royalty rate could 

curtail expected returns to lessees to such a large extent that it might unduly reduce 

leasing and future production by proportions greater than suggested in its analysis. Much 

higher royalty rates could also curtail production from new leases in the future as 

production declines in the later phases of a lease’s productive life.

27Under this change, the prevailing rental rates for new leases in water depths of less than 

200 meters would be $7/acre for the first 5 years with increases to $14/acre in year 6, 

$21/acre in year 7, and $28/acre in year 8. For new leases in water depths from 200 to 

400 meters, rental rates increase from $11/acre to $22/acre in year 6, $33/acre in year 7, 

and $44/acre in year 8. For new leases in water depths from 400 to 800 meters, rental 

rates increase from $11/acre to $16/acre in years 6 through 8. For new leases in water 

depths greater than 800 meters, rental rates increase from $11/acre to $16/acre in years 6 

through 10.
Page 15 GAO-14-50 Oil and Gas Resources

2009, Interior increased rental rates for new Gulf of Mexico leases in 

all water depths. Interior estimated that the increased rental rates and 

escalating rent rates in water depths greater than 400 meters would 

result in five fewer lease tracts receiving bids but an increase in rental 

revenue of $57 million over the initial lease term for leases resulting 

from that sale. $27 million of this $57 million was attributed to the 

increase in base rental rates.28 In addition, the increased rental rates 

did not appear to reduce the number of lease blocks to be explored, 

according to Interior documents.

• Increased minimum bids. In 2011, Interior increased the minimum bid 

for leases offered in at least 400 meters of water in the Gulf of Mexico 

to $100 per acre, up from $37.50 per acre.29 According to Interior’s 

Proposed Final Outer Continental Shelf Oil & Gas Leasing Program 

2012-2017, the minimum bid was raised, in part, to account for 

increases in oil prices and to encourage optimal timing of leasing.

Interior officials told us that a review of the minimum bid was initiated 

because the minimum bid had not been changed in some time. In 

addition, Interior analysis showed that a minimum bid of $100 per acre 

would be generally equivalent to the cost of the minimum bid in the 

past, going back to 1999, adjusted for differences in prices, costs, and 

royalty rates. 

For details on the recent history of lease terms in the Gulf of Mexico, see 

table 1; changes in lease terms are highlighted in gray.

 28The revenue estimates are in nominal dollars unadjusted for inflation for leases resulting 

from sale 208 and the revenue estimates for the increase in base rental rates include 

estimates for the initial lease term. 

29The Gulf of Mexico minimum bid remains at $25 per acre in water depths of less than 

400 meters. The most recent minimum bids in Alaska were $25 per hectare (about $10 

per acre) in the Chukchi Sea, Cook Inlet, and in Zone B (deeper water areas) of the 

Beaufort Sea; and $37.50 per hectare (about $15 per acre) in Zone A (near shore areas) 

of the Beaufort Sea.
Page 16 GAO-14-50 Oil and Gas Resources

Table 1: History of Lease Terms for Gulf of Mexico Outer Continental Shelf Oil and Gas Leases 2005-2013

Lease 

sale Sale date Lease terms

Water depth (meters)

0-200 200-400 400-800 800-1,600 1,600-2,000 >2,000

196 8/17/2005 Rent ($/acre) 6.25 9.50 9.50 9.50 9.50 9.50

Minimum bid ($/acre) 25.00 25.00 37.50 37.50 37.50 37.50

Royalty rate 16.67%a 16.67% 12.50%a 12.50%a 12.50%a 12.50%a

198 and 

200

3/15/2006 -

8/16/2006

Rent ($/acre) 6.25 9.50 9.50 9.50 9.50 9.50

Minimum bid ($/acre) 25.00 25.00 37.50 37.50 37.50 37.50

Royalty rate 16.67%a 16.67%a 12.50%a 12.50%a 12.50%a 12.50%a

204 and 

205

8/22/2007 -

10/3/2007

Rent ($/acre) 6.25b 9.5b 9.50 9.50 9.50 9.50

Minimum bid ($/acre) 25.00 25.00 37.50 37.50 37.50 37.50

Royalty rate 16.67%a 16.67%a 16.67%a 16.67%a 16.67%a 16.67%a

224 3/19/2008 Rent ($/acre) 9.50 9.50 9.50

Minimum bid ($/acre) 37.50 37.50 37.50

Royalty rate 18.75% 18.75% 18.75%

206 and 

207

3/19/2008 -

8/20/2008

Rent ($/acre) 6.25b 9.5b 9.50 9.50 9.50 9.50

Minimum bid ($/acre) 25.00 25.00 37.50 37.50 37.50 37.50

Royalty rate 18.75%a 18.75%a 18.75%a 18.75%a 18.75%a 18.75%a

208 3/18/2009 Rent ($/acre) 7.00b 11.00b 11.00b 11.00b 11.00b 11.00b

Minimum bid ($/acre) 25.00 25.00 37.50 37.50 37.50 37.50

Royalty rate 18.75%a 18.75%a 18.75%a 18.75%a 18.75%a 18.75%a

210 and 

213

8/19/2009 -

3/17/2010

Rent ($/acre) 7.00b 11.00b 11.00b 11.00b 11.00b 11.00b

Minimum bid ($/acre) 25.00 25.00 37.50 37.50 37.50 37.50

Royalty rate 18.75%a 18.75%a 18.75%a 18.75%a 18.75%a 18.75%a

218 to 229 12/14/2011 -

3/20/2013

Rent ($/acre) 7.00b 11.00b 11.00b 11.00b 11.00b 11.00b

Minimum bid ($/acre) 25.00 25.00 100.00 100.00 100.00 100.00

Royalty rate 18.75%a 18.75%a 18.75% 18.75% 18.75% 18.75%

233 8/28/2013 Rent ($/acre) 7.00b 11.00b 11.00b 11.00b 11.00b 11.00b

Minimum bid ($/acre) 25.00 25.00 100.00 100.00 100.00 100.00

Royalty rate 18.75%a 18.75%a 18.75% 18.75% 18.75% 18.75%

Source: GAO analysis of Interior data.

Note: One meter equals about 3.28 feet.

a

Leases may be eligible for royalty relief. Certain leases include royalty relief provisions for shallow 

water deep gas, and other leases may be eligible to apply for shallow water deep gas royalty relief. 

Leases resulting from sales held after 2000 may be issued with certain royalty relief provisions, and 

all leases obtained after 2000 in water depths greater than 200 meters are also eligible to apply for

royalty relief.

b

Rent per acre is for years 1 through 5 of the lease; then the rental rate escalates in year 6 and, in 

some cases, increases again in subsequent years as well.
Page 17 GAO-14-50 Oil and Gas Resources

Interior has also taken actions to encourage the development of oil and 

gas resources, which reduces the time from when federal leases are 

issued and the federal government receives its share of revenue from 

them, in response to our October 2008 recommendation that the 

Secretary of the Interior develop a strategy to evaluate options to 

encourage faster development of its oil and gas leases.30 Specifically, in 

2010, Interior shortened lease terms by reducing the duration of the initial 

period for Gulf of Mexico leases in water depths of 400 to less than 800 

meters from an 8-year initial period to a 5-year initial period. For water 

depths of 800 to less than 1,600 meters, it reduced leases from a 10-year 

initial period to a 7-year initial period. According to Interior documents, 

these lease terms can generally be extended if the lessee begins drilling 

a well during the initial period. 

For onshore resources, Interior has considered, but not made, changes to 

onshore lease terms in order to provide greater assurance that the public 

is getting a fair return on federal oil and gas resources. Interior acts on 

behalf of the American people to manage the federal oil and gas system 

to ensure a fair return to the public for the development of oil and gas 

resources. Interior officials told us that since 2009 the department has 

been considering increasing the onshore royalty rate—which is currently 

established in its regulations at 12.5 percent for both oil and gas.31

According to the officials, several factors prompted efforts to consider 

changing the royalty rates, including our September 2008 report,32 oil and 

gas prices, and Office of Management and Budget initiatives calling for 

increased revenue from onshore royalties.33 Although both onshore and 

 30GAO, Oil and Gas Leasing: Interior Could Do More to Encourage Diligent Development, 

GAO-09-74 (Washington, D.C.: Oct. 3, 2008). 

31For onshore leases issued noncompetitively, the Mineral Leasing Act sets a 12.5 

percent royalty rate by statute.

32GAO-08-691.

33According to Interior’s Fiscal Year 2014 Budget Justifications and Performance 

Information, the administration proposed a package of legislative and administrative 

proposals to reform the management of Interior’s onshore and offshore oil and gas leasing 

programs, with a key focus on improving the return to taxpayers from the sale of these 

federal resources and on improving transparency and oversight. Proposed changes 

included advancing royalty reforms such as evaluating minimum royalty rates for oil, gas, 

and similar products; adjusting onshore royalty rates; analyzing a price-based tiered 

royalty rate; and repealing legislatively-mandated royalty relief. The budget proposals for 

the past 4 years have included the goal of increasing onshore royalty rates. 

Interior Has Considered but 

Has Not Changed Onshore 

Lease Terms
Page 18 GAO-14-50 Oil and Gas Resources

offshore leasing programs are subject to many of the same market 

conditions, Interior officials are currently unable to make timely 

adjustments to onshore royalty rates because BLM’s regulations 

generally establish a set royalty rate of 12.5 percent. This limits the 

bureau’s flexibility because making adjustments to that rate require going 

through the rulemaking process, and the process can take several years 

according to Interior officials. Specifically, officials said that the public 

notice and comment period required as part of the rulemaking process 

could take 1 to 2 years, and proposed rules must also undergo review by 

the Office of Management and Budget.

Interior officials told us that the department planned to publish a notice of 

proposed rulemaking in July 2012 to change BLM’s regulations to set an 

onshore royalty rate of 18.75 percent for oil production on new federal 

competitive leases but leave the royalty rate for gas production 

unchanged at 12.5 percent. The planned regulatory revisions would have 

allowed the Secretary to review and revise royalty rates for new 

competitive leases as appropriate—similar to the authority that the 

Secretary has for revising offshore royalty rates. Officials told us that 

including the requirement for periodic review and revision of royalty rates 

would have given the Secretary greater flexibility to go forward with such 

reviews and revisions in the future. 

Interior discontinued its efforts to pursue the revised regulations because, 

according to Interior officials, the department does not have enough 

information to determine how to adjust onshore royalty rates. Rather, 

Interior plans to ask the public to comment on whether and how royalty 

rates for new federal onshore competitive oil and gas leases should be 

revised to better ensure a fair return to the public. Specifically, Interior 

officials told us they plan to ask for comments on the types of royalty rate 

structures that should be considered, such as whether BLM should 

develop a uniform rate for all leases or different rates by region, state, 

geologic formation, or resource type. Furthermore, Interior officials told us 

they would also ask for comments on whether sliding scale royalty 

rates—or rates that vary with the price of the commodity—might be 

appropriate in specific circumstances. An Advance Notice Of Proposed 

Rulemaking is under development, but officials told us that higher priority 

rulemaking initiatives, such as regulations for hydraulic fracturing and 

revisions to its oil and gas measurement regulations, precede it and that 

limited resources constrain their ability to meet program demands. As a 

result of not successfully changing federal regulations to provide itself 

with the flexibility needed to make timely adjustments to onshore lease 

terms, Interior’s ability to ensure that the public is receiving a fair return is 
Page 19 GAO-14-50 Oil and Gas Resources

limited. Moreover, Interior continues to offer onshore leases with lease 

terms—terms lasting the life of the lease—that have not been adjusted in 

response to changing market conditions, potentially foregoing a 

considerable amount of revenue. For example, in 2011, Interior estimated 

that onshore royalty rate changes could increase revenue collections by 

about $1.25 billion over 10 years.34

Interior contracted for several studies—including a study of how the 

federal oil and gas fiscal system compared with fiscal systems of other 

resource owners—that reviewed various aspects of the federal oil and 

gas fiscal system since 2007. In our September 2008 report,35 we found 

that Interior collected a lower government take for oil and gas production 

in the deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil and 

gas resource owners whose revenue collection systems were evaluated 

in a comprehensive industry study, which included other countries as well 

as some states.36 We also found that Interior had not routinely evaluated 

the federal oil and gas fiscal system, monitored what other governments 

or resource owners were receiving for their resources, or evaluated and 

compared the attractiveness of federal lands and waters for investment 

 34According to officials, Interior developed this estimate in support of the budget in 2011. 

The estimate is based on a royalty rate of 18.75 percent for oil and gas. Actual changes in 

revenue collections resulting from a royalty rate increase would be highly dependent on 

market prices and production.

35GAO-08-691.

36Wood Mackenzie, Government Take: Comparing the Attractiveness and Stability of 

Global Fiscal Systems (June 2007). 

Interior Contracted for Studies 

of Various Aspects of the Fiscal 

System
Page 20 GAO-14-50 Oil and Gas Resources

with that of other regions.37 In response to our 2008 findings, Interior 

contracted for a study—the 2011 Comparative Assessment of the Federal 

Oil and Gas Fiscal System study—that compared the federal oil and gas 

fiscal systems of selected federal oil and gas regions to that of other

resource owners. In addition, Interior contracted for two other studies on 

the effect of different leasing and royalty rate policies on revenue, 

exploration, and production. See table 2 for a description of these studies.

Table 2: Interior-Contracted Studies of the Oil and Gas Fiscal System 2009-2013

Study Description of analysis conducted

Comparative Assessment of the Federal 

Oil and Gas Fiscal System (October 2011)a Examines 29 fiscal systems—including the current systems relating to federal offshore 

oil and gas resources in the Gulf of Mexico and onshore gas resources in Wyoming—

and describes the impact of various lease term changes on other aspects of the system 

such as the system’s stability and competitiveness, pace of leasing, and revenue. The 

study provided information on fiscal system components, such as royalty rates and 

taxes, for specific areas within the United States and other countries.

Identifies four fiscal-related factors—government take, internal rate of return, profitinvestment ratio, and progressivity—and constructs a hypothetical, composite index 

using these measures to compare fiscal systems. The report provides an assessment of 

how changes to the royalty rate could potentially affect industry interest in federal 

offerings. 

Benefit-Cost and Economic Impact 

Analysis of Raising the Onshore Royalty 

Rates Associated with New Federal Oil and 

Gas Leasing (April 2011)b

Assesses the impacts of raising onshore royalty rates associated with new competitive 

leases and considers both fixed and sliding scale royalty rates. The study also addresses 

changes to the net economic benefits to the states and federal government, changes to 

the demand for federal leases and changes to production. 

Estimates the impact of royalty rate changes—including sliding scale scenarios—on 

revenue and other parts of the revenue stream, such as bonus bids, and analyzes high 

and low price scenarios for oil and gas. 

 37In the draft of our September 2008 report that we sent to Interior for comment, we made 

recommendations to address these issues. In its response, Interior stated that it did not 

fully concur with our recommendations because it had already contracted for a study that 

would address many of the issues we raised. However, because Interior’s ongoing study 

was limited in scope and to a specific region in the Gulf of Mexico, rather than a review of 

the entire federal oil and gas fiscal system as we recommended, we did not find the 

department’s stated rationale for not agreeing fully with our recommendations to be 

convincing. After Interior disagreed with our draft recommendations, for our final report we 

changed our recommendation to Interior into a “Matter for Congressional Consideration”

that Congress should consider directing the Secretary of the Interior to (1) convene an 

independent panel to perform a comprehensive review of the federal system for collecting 

oil and gas revenue and (2) establish procedures for periodically collecting data and 

information and conducting analyses to determine how the federal government take and 

the attractiveness for oil and gas investors in each federal oil and gas region compare to 

those of other resource owners and report this information to Congress. Although Interior 

initially disagreed with this recommendation, in 2010, it contracted for the study comparing 

the federal oil and gas fiscal systems with those of other countries.
Page 21 GAO-14-50 Oil and Gas Resources

Study Description of analysis conducted

Policies to Affect the Pace of Leasing and 

Revenues in the Gulf of Mexico (August 

2009/December 2010)c

Examines alternative leasing policies for outer continental shelf oil and gas resources in 

the Central and Western Gulf of Mexico. The study focuses on tracts to be leased in the 

Central and Western Gulf of Mexico planning areas over the 50-year period from 2010 –

2060.

Considers several leasing policies and estimates the impact on exploration, production, 

and revenues. The study analyzes alternative leasing systems and describes the goals 

and criteria for assessing alternative leasing systems. The study models the various 

potential leasing systems and compares them with the status quo. Leasing systems’

alternatives considered include slowing the pace of leasing, changing royalty rates,

raising minimum bids, profit sharing, raising area rental payments, using different bidding 

systems, implementation of work commitments, and reducing the length of the primary 

lease period.

Source: GAO analysis of Interior-contracted studies.

a

IHS Cambridge Energy Research Associates, Comparative Assessment of the Federal Oil and Gas 

Fiscal System (October 2011).

b

Enegis, LLC, Benefit-Cost and Economic Impact Analysis of Raising the Onshore Royalty Rates 

Associated with New Federal Oil and Gas Leasing (April 2011). This report was contracted by BLM to 

help guide the decision-making process with regards to a proposed royalty rate rulemaking. The 

rulemaking is still under deliberation by the agency, and all materials related to this process are 

considered pre-decisional in nature by Interior.

c

Economic Analysis, Inc. and Marine Policy Center, Policies to Affect the Pace of Leasing and 

Revenues in the Gulf of Mexico (August 2009/December 2010). Each version of this study evaluates 

the same policy alternatives under different assumptions about the basic conditions for future 

development in the Gulf of Mexico such as the ultimate resource size in the Gulf of Mexico and

lessee actions related to potential future effective tax rates. 

According to Interior officials, the study conducted in response to our 

2008 findings—the 2011 Comparative Assessment of the Federal Oil and 

Gas Fiscal System—provided some useful information about the fiscal 

system such as how fiscal terms in the United States compared with other 

resource owners, but it has not directly led to any changes to the fiscal 

system or lease terms for new federal oil and gas leases. Similarly, 

Interior officials told us that the other two studies have not yet led to 

revisions to the fiscal system or lease terms for new offshore or onshore 

leases. Rather, according to officials, additional internal analyses and 

modeling, as well as consultation with stakeholders—including oil and gas 

companies and the public—will continue to primarily inform future 

changes to the fiscal system. Moreover, Interior did not document any 

internal discussions or analysis of the three studies’ findings. As part of 

the 2011 Comparative Assessment of the Federal Oil and Gas Fiscal 

System study, officials said that they obtained a model that can be 

employed in the future to conduct comparative analyses but currently 

have no plans to update the model or the data inputs used by the model. 

Officials told us that the study’s findings reassured them that their own 

internal assessment related to the competitiveness of the offshore fiscal 

system was appropriate. In addition, officials said that the study provided 
Page 22 GAO-14-50 Oil and Gas Resources

additional information—mainly raising the issue of whether an appropriate 

return was being received for onshore resources—but that the study was

not adequate to determine next steps for onshore lease terms. 

Interior is examining potential regulatory changes that could simplify 

royalty payments and collections. As we found in our past work,38

complex valuation regulations can result in inaccurate royalty payments 

made by industry, and this could increase ONRR’s costs to ensure 

accurate royalty payments because of the need for potentially detailed 

and time-consuming audits of records. In May 2011, Interior published an

Advance Notice Of Proposed Rulemaking requesting comments to inform 

potential changes to regulations intended to simplify royalty payments 

and collections. In addition to our work, others have identified numerous 

shortcomings in ONRR’s royalty collection programs, in part because of 

its valuation regulations’ complex requirements for calculating the value of 

oil and gas and associated deductions and allowances for activities such 

as transportation. 

In December 2007, Interior’s Subcommittee on Royalty Management

recommended that, by the end of fiscal year 2008, Interior publish 

proposed revisions to the gas valuation regulations to, among other 

goals, simplify the calculation of royalties and deductions for gas 

transportation and processing. Interior did not meet this time frame due to 

several factors including the complexity of oil and gas valuation, 

according to Interior officials. In May 2011, Interior published the Advance 

Notice Of Proposed Rulemaking in the Federal Register for the proposed 

rule, which according to Interior documents is intended, in part, to provide 

greater simplicity, certainty, clarity, and consistency in production 

valuation; decrease ONRR’s costs to ensure compliance; decrease 

industry’s compliance costs; and provide more certainty to ONRR and 

industry that companies pay every dollar due to the government.39

According to ONRR officials, the proposed regulations were undergoing 

internal review as of September 2013 and are expected to be published in 

the Federal Register in 2014.

 38GAO, Mineral Revenues: MMS Could Do More to Improve the Accuracy of Key Data 

Used to Collect and Verify Oil and Gas Royalties, GAO-09-549 (Washington, D.C.: July 

15, 2009). 

3976 Fed. Reg. 30878 (May 27, 2011).

Interior Is Examining Potential 

Regulatory Changes that Could 

Simplify Royalty Payments and 

Collections 
Page 23 GAO-14-50 Oil and Gas Resources

Interior does not have documented procedures in place for determining 

(1) when to conduct periodic assessments of the overall fiscal system or 

(2) whether and how to make changes to lease terms for new offshore

leases.

Interior does not have documented procedures in place for determining 

when to periodically conduct assessments of the overall fiscal system as 

a whole. Although Interior recently contracted for such an assessment, it 

was the first in well over 25 years. Without documented procedures, 

Interior cannot ensure that it will consistently conduct such assessments 

in the future, and without periodically conducting such assessments,

Interior cannot know whether there is a proper balance between the 

attractiveness of federal leases for investment and appropriate returns for

federal oil and gas resources, limiting Interior’s ability to ensure a fair 

return on federal oil and gas resources. Internal control standards in the 

federal government call for agencies to clearly document internal controls 

and the documentation is “to appear in management directives, 

administrative policies, or operating manuals.”

40 Documented procedures 

of when Interior is to conduct such assessments—whether within specific 

time frames or the occurrence of certain market or industry changes—

could help provide the department with reasonable assurance that its staff 

knows when to conduct assessments of the overall fiscal system to help 

ensure those reviews are conducted systematically and consistently.

In our September 2008 report, we found that the last time Interior 

conducted a comprehensive assessment of the federal oil and gas fiscal 

system was over 25 years ago. Additionally, we reported that, without 

routinely evaluating the federal oil and gas system as a whole, including 

monitoring what other resource owners worldwide are receiving for their 

energy resources or evaluating and comparing the attractiveness of the 

United States for oil and gas investment with that of other oil and gas 

regions, Interior cannot provide reasonable assurance that the public is 

getting an appropriate share of revenues.41 As mentioned previously, in 

 40GAO/AIMD-00-21.3.1. 

41GAO-08-691. 

Interior Does Not Have 

Documented Procedures 

for Conducting Periodic 

Assessments of the Fiscal 

System or for Supporting 

Potential Changes to New 

Lease Terms

Interior Does Not Have 

Documented Procedures for 

Determining When to Conduct 

Periodic Assessments of the 

Overall Fiscal System
Page 24 GAO-14-50 Oil and Gas Resources

response to our 2008 findings, Interior contracted for a study that 

compared the federal oil and gas fiscal system to that of other resource 

owners. As part of this study, officials said that they obtained a model that 

can be employed in the future to conduct comparative analyses; however, 

there are currently no plans to update the model or the data inputs used 

by the model. Interior officials told us that this type of comprehensive 

assessment would only be undertaken if fundamental shifts in the market 

occurred. According to officials, however, Interior does not have 

procedures or criteria in place for determining when such an assessment 

of the fiscal system should take place or what changes in the market or 

industry would signal that such a study should be done. Without 

procedures for determining when to conduct periodic assessments of the 

fiscal system as a whole, Interior cannot be reasonably assured that it will 

consistently conduct such assessments in the future, limiting its ability to 

be confident that the system is ensuring a fair return on federal oil and 

gas resources. According to the Office of Management and Budget, 

rigorous program evaluations can help determine whether government 

programs are achieving their intended outcomes to the extent possible.42

Moreover, Interior’s oversight of federal land and waters is subject to the 

federal government’s multiple, diverse objectives—fair return, protection 

of historical and environmental resources, and expeditious and orderly 

development, among other goals. Thus, Interior is confronted with

evaluating these objectives in light of a complex set of factors—including 

market prices and how development opportunities in the United States 

compare with those of other resource owners. By having documented 

procedures, the department could help ensure that its evaluations take all 

of these factors into consideration. Further, these factors may change 

over time as the market for oil and gas changes, the technologies used to 

explore and produce oil and gas change, or as the broader economic 

climate changes, making it even more important that Interior has

documented procedures for conducting periodic assessments of the 

federal oil and gas fiscal system. 

In addition, Interior has conducted some analyses to support changes to 

offshore lease terms in advance of offshore lease sales, which typically 

occur a few times a year—but the analyses conducted to support these 

 42Office of Management and Budget, Increased Emphasis on Program Evaluations, M-10-

01, Memorandum for the Heads of Executive Departments and Agencies (Washington, 

D.C.: The White House, Oct. 7, 2009). 
Page 25 GAO-14-50 Oil and Gas Resources

changes are not a substitute for periodically assessing the oil and gas 

fiscal system as a whole. Since 2007, Interior has conducted some 

analyses for offshore lease sales in support of changes to royalty rates, 

rental rates, and the minimum bid. Based on our review of Interior 

documents from several lease sales from 2007 to 2011, we found that the 

analyses the department conducted to support proposed changes to 

offshore lease terms generally involved estimating the impacts of a 

proposed change on revenue, bidding activity, and potential oil and gas 

production. In addition, Interior’s documentation shows that the 

department took into consideration technological and market conditions; 

policy goals, such as promoting development or enhancing revenues; and 

administrative benefits, such as making lease terms consistent across 

water depths. However, these analyses did not include an evaluation of 

what other resource owners worldwide are receiving for their energy 

resources or a comparison of the attractiveness of the United States for 

oil and gas investment with that of other oil and gas resource owners. In 

our September 2008 report, we suggested that Congress should consider 

directing the Secretary of the Interior to establish procedures for 

periodically collecting data and information and conducting analyses to 

determine how the federal government take and the attractiveness for oil 

and gas investors in each federal oil and gas region compare with those 

of other resource owners and report this information to Congress.

Moreover, Interior has not conducted similar analysis for onshore lease 

sales. Interior officials explained that the mechanism for determining the 

value of onshore resources is directed by statute to be market-driven.43

Specifically, officials stated that fair market value for onshore lease sales 

is determined through the oral competitive bidding process required by 

the Mineral Leasing Act, rather than an evaluation of the geology and 

 43The Federal Onshore Oil and Gas Leasing Reform Act of 1987 requires that all public 

lands available for oil and gas leasing be offered first by competitive leasing. BLM is 

required to accept the highest bid received that exceeds the minimum bid value of $2 per 

acre or fraction thereof. 30 U.S.C. § 226(b)(1). The law allows the Secretary to increase 

the $2 an acre minimum bid and directs that the House and Senate Committees on 

Natural Resources be notified 90 days before doing so. By statute, the Secretary of the 

Interior must first offer parcels at competitive lease sales and may only issue 

noncompetitive leases after the department has offered the lands competitively at an oral 

auction and not received a bid. The annual rental rate is $1.50 per acre for the first 5 years 

and $2.00 per acre each year thereafter. Royalty rates for onshore are generally 12.5 

percent for both competitive and noncompetitive leases. However, there are a few 

exceptions such as sliding scale royalties on older leases and reduced royalty rates on 

certain oil leases with declining production and reinstated leases. See 43 C.F.R. § 3103.2-

3. 
Page 26 GAO-14-50 Oil and Gas Resources

potential value of the oil and gas resource.44 Because the leasing process 

is established by statute, Interior officials told us that it has not recently 

examined whether alternative leasing systems might be more effective in 

ensuring fair market value.

Interior does not have documented procedures for determining whether 

and how to make changes to new offshore lease terms—which are 

specified a few times per year ahead of each lease sale—consistent with 

federal standards for internal control. Without documented procedures for 

determining whether and how to make changes to new offshore lease 

terms, Interior is at risk of making inconsistent determinations about lease 

terms. Such inconsistent determinations would undermine its credibility 

and its ability to better ensure a fair return on oil and gas resources.

Officials told us Interior does not have documented procedures or criteria 

for determining whether and how to make changes to offshore lease 

terms. Rather Interior officials said that they follow an informal process 

and establish offshore lease terms for each sale but that they do not have 

the time or resources to evaluate each lease term prior to each lease 

sale. However, based on our review of Interior documents, the analyses 

the department conducted to support proposed changes to offshore lease 

terms were inconsistent in the array of conditions and factors the 

department considered, and the level of analysis conducted in support of 

decisions to change lease terms varied and was not consistently or 

clearly documented. For example, as mentioned previously, escalating 

rental rates were implemented in two different sales—first, in 2007, in 

water depths less than 400 meters and then, in 2009, in water depths 

greater than 400 meters. The rationale provided for the first change was 

the policy goal to expedite drilling and compensate Interior, while the 

rationale in 2009 included specific estimates of the effects of an 

escalating rental rate on potential revenue and bidding, as well as 

consideration of market conditions. While both justifications may be 

warranted, because Interior does not have documented procedures

 44Interior is prohibited by statute from evaluating the value of the lands proposed for lease 

onshore. 30 U.S.C. §226(b)(1). Concerned that BLM’s onshore leasing system was not 

generating revenues comparable to what might be obtained through competitive leasing, 

Congress passed the Federal Onshore Oil and Gas Leasing Reform Act of 1987, which 

amended the Mineral Leasing Act of 1920. This act significantly changed the way BLM 

issues leases. Prior to the act, BLM was required to evaluate federal lands for oil and gas 

potential. The act requires the market, rather than administrative determinations, to set the 

value of leases by making all leases available for competitive leasing.

Interior Does Not Have 

Documented Procedures for 

Determining Whether and How 

to Make Changes to New 

Offshore Lease Terms
Page 27 GAO-14-50 Oil and Gas Resources

specifying whether and how to support changes to its lease terms, 

Interior’s approach to revising its lease terms appears to be inconsistent. 

In addition, our review of documents supporting two separate royalty rate 

changes in 2007 and 2008—the first in 25 years—found that Interior did 

not consistently document the justifications and analysis supporting the 

increases. Specifically, Interior documents for the 2008 royalty rate 

increase cite reasons similar to the 2007 royalty rate increase—generally 

significant changes in market conditions—but because the second 

increase took place less than a year after the implementation of the first 

increase, it is unclear what significant changes in market conditions 

occurred to prompt the consideration of the second increase in royalty 

rates. Internal control standards in the federal government call for

agencies to clearly document transactions and other significant events

and that documentation should be readily available for examination.45

While both royalty rate increases may have been warranted, clear 

documentation of the justifications and analysis supporting royalty rate 

increases would make Interior’s decisions to change the royalty rates 

transparent and could inform future decision making related to changing 

rates. Such transparency can be particularly helpful in the event that key 

staff retire or leave federal service. Documentation of internal discussions 

that took place prior to the second royalty rate increase show that prior to 

being able to assess the impacts of increasing the royalty rate from 12.5 

percent to 16.67 percent in 2007, Interior was considering an additional 

royalty rate increase. In addition, Interior documents show Interior 

program officials’ concerns about an additional increase in royalty rates; 

specifically, officials urged the need to analyze the impact of the first 

increase, and they also noted potential negative effects of an increase 

including delaying investment and production in certain areas of the Gulf 

of Mexico. By having documented procedures for determining whether 

and how to make future changes to offshore leasing terms, Interior could 

increase its consistency and thus enhance its credibility in the conditions 

and factors the department considered and the level of analysis 

conducted.

Interior has taken several steps intended to help ensure that the public 

receives a fair return on oil and gas produced from federal leases. 

 45GAO/AIMD-00-21.3.1.

Conclusions
Page 28 GAO-14-50 Oil and Gas Resources

However, even with these recent steps, it is not clear that Interior’s 

efforts, by themselves, provide long-lasting assurance that federal 

resources will provide a fair return. This is especially true in light of the 

absence of documented procedures for Interior to determine when it will

periodically conduct assessments of the overall federal oil and gas fiscal 

system and whether and how to make changes to new offshore lease 

terms, as well as Interior’s limited flexibility to make changes to new 

onshore lease terms. Ensuring that the federal government is obtaining 

fair return for the resources it manages on behalf of its citizens is 

especially important as the country faces ongoing fiscal challenges. 

Although leasing programs for both onshore and offshore areas are 

subject to many of the same market conditions, and Interior has 

increased offshore royalty rates, officials overseeing onshore leasing are 

currently unable to make timely adjustments to onshore royalty rates 

because, in general, BLM’s regulations fix the rate at 12.5 percent,

potentially limiting Interior’s ability to ensure that the public is receiving a 

fair return and potentially resulting in foregone revenue. In particular, 

while Interior has changed offshore lease terms several times over the 

past few years in response to changes in market conditions—many of 

which also affect onshore areas—to better ensure a fair return, Interior 

has not successfully changed BLM’s regulations to provide itself with the 

flexibility needed to change onshore lease terms in a timely manner 

despite considering increasing the onshore royalty rate since 2009. As a 

result, Interior continues to offer onshore leases with lease terms—terms 

lasting the life of the lease—that have not been adjusted in response to 

changing market conditions, potentially foregoing a considerable amount 

of revenue.

Key among Interior’s efforts to ensure a fair return, to address a GAO 

recommendation, Interior completed an assessment—the Comparative 

Assessment of the Federal Oil and Gas Fiscal System—which examined 

how the fiscal system of selected federal oil and gas regions compared 

with fiscal systems of other resources owners. Interior officials told us, 

however, that it has no plans to update the assessment, increasing the 

risk that this progress may be fleeting and that, as we found in 2008, it 

could be years before another assessment is completed during which 

time there could be significant changes in market conditions. 

Furthermore, without documented procedures in place for conducting 

periodic assessments of the fiscal system—such as when such an 

assessment of the fiscal system should take place or what changes in the 

market or industry would signal that such a study should be done, Interior 

cannot know whether there is a proper balance between the 
Page 29 GAO-14-50 Oil and Gas Resources

attractiveness of federal leases for investment and appropriate returns for 

federal oil and gas resources, limiting Interior’s ability to ensure a fair 

return.

Finally, while Interior has made changes to its offshore lease terms, for 

example increasing royalty rates in some instances from 12.5 percent to 

18.75 percent, Interior does not have documented procedures for 

determining whether and how to make changes to lease terms for new 

offshore leases. Without such documented procedures, Interior’s rationale 

is not transparent, and it is at risk of making inconsistent determinations 

about lease terms. Such inconsistency would undermine its credibility and 

ability to better ensure a fair return on oil and gas resources. Additionally, 

Interior has not clearly documented the justifications and analysis 

supporting changes to lease terms, including royalty rate increases. As a 

result, the department’s decisions to change lease terms are not 

transparent and, without documentation of these decisions, its future 

efforts to change rates may be impeded. 

To better ensure that the government receives a fair return on its oil and 

gas resources, we recommend that the Secretary of the Interior take the 

following three actions:

• Take steps, within existing authority, to revise BLM’s regulations to 

provide for flexibility to the bureau to make changes to onshore royalty 

rates, similar to that which is already available for offshore leases, to 

enhance Interior’s ability to make timely adjustments to the terms for 

federal onshore leases. 

• Establish documented procedures for determining when to conduct 

periodic assessments of the overall fiscal system. Such procedures 

should identify generally when such an assessment should be done or 

what changes in the market or industry would signal that such an 

assessment should be done. Additionally, the assessment should

include determining how the government’s share of revenue from the 

federal oil and gas fiscal system and the attractiveness for oil and gas 

investors in each federal oil and gas region compare with those of 

other resource owners. 

• Establish documented procedures for determining whether and how to 

adjust lease terms for new offshore leases, including documenting the 

justification and analysis supporting any adjustments.

Recommendations for 

Executive Action
Page 30 GAO-14-50 Oil and Gas Resources

We provided a draft of this report to Interior for review and comment.

Interior generally agreed with our findings and concurred with our 

recommendations.

As agreed with your office, unless you publicly announce the contents of 

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

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

Secretary of the Interior, the appropriate congressional committees, and 

other interested parties. In addition, this report will be available at no 

charge on the GAO website at http://www.gao.gov. 

If you or your staff members have any questions about this report, please 

contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff members who made major 

contributions to this report are listed in appendix II.

Sincerely yours,

Frank Rusco

Director,

Natural Resources and Environment

Agency Comments 
Appendix I: Comments from the Department of 

the Interior

Page 31 GAO-14-50 Oil and Gas Resources

Appendix I: Comments from the Department 

of the Interior
Appendix I: Comments from the Department of 

the Interior

Page 32 GAO-14-50 Oil and Gas Resources
Page 33 GAO-14-50 Oil and Gas Resources

Frank Rusco, (202) 512-3841 or ruscof@gao.gov

In addition to the individual named above, Jon Ludwigson (Assistant 

Director), Janice Ceperich, Glenn Fischer, Cindy Gilbert, Michael Kendix, 

Alison O’Neill, Dan Royer, Kiki Theodoropoulos, and Barbara Timmerman

made key contributions to this report. 

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(361453)
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