Oil and Gas Management: Past Work Offers Insights to Consider in Restructuring Interior's Oversight
Published: 2010-07-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The catastrophic oil spill in the Gulf of Mexico has drawn attention to the exploration and production of oil and gas from leases on federal lands and waters. The Department of the Interior oversees oil and gas activities on federal lands and waters. Onshore, the Bureau of Land Management (BLM) has oversight responsibilities. Offshore, the newly created Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE), has oversight responsibilities. Prior to BOEMRE, the Minerals Management Service's (MMS) Offshore Energy and Minerals Management oversaw offshore oil and gas activities, while MMS's Minerals Revenue Management collected revenues from oil and gas produced. For the purposes of our testimony today, we present our findings in accordance with Interior's organizational structure prior to establishing BOEMRE. Over the past 5 years, GAO has issued numerous recommendations to the Secretary of the Interior to improve the agency's management of oil and gas resources--most recently in two reports issued in March 2010. Overall, GAO's work in this area can be useful in evaluating potential strategies for reorganizing and improving oil and gas management at Interior. Specifically, GAO's work can assist the Secretary and Congress as they are considering restructuring Interior's oversight of oil and gas development and production, revenue collection, and information technology (IT) systems.
section_title: What GAO Found
paragraphs: GAO's recent evaluations of federal oil and gas management have identified key areas where Interior could provide more effective oversight. In October 2008, GAO reported that Interior policies and practices for leasing offshore and onshore oil and gas differed in key ways. Considering the ways that areas are selected for leasing, GAO found that MMS sets out a 5-year strategic plan identifying both a leasing schedule and the offshore areas it will lease. In contrast, BLM relies on industry and others to nominate onshore areas for leasing, then selects lands to lease from these nominations and from areas it has identified. Oil and gas activity has generally increased in recent years, and Interior has at times been unable to meet its legal and agency mandated oversight obligations in key areas. For example, in a June 2005 report, GAO found that Interior was unable to complete its environmental inspections because of increased onshore drilling activity. GAO also found in a September 2008 review that Interior was not consistently completing inspections to verify oil and gas volumes produced from federal leases. GAO found in a March 2010 report that MMS faces challenges conducting required environmental reviews in Alaska. In particular, MMS has no handbook providing guidance on how to conduct these reviews, although Interior policy directs it to prepare one. Interior may be missing opportunities to fundamentally shift the terms of federal oil and gas leases and increase revenues. In a September 2008 report, GAO reported that, compared to other countries, the United States receives one of the lowest shares of revenue for oil and gas. In addition, Interior's royalty rate, which does not change to reflect changing prices and market conditions, has at times led to pressure on Interior and Congress to periodically change royalty rates in response to market conditions. Interior also has done less than some states and private landowners to encourage lease development and may be missing opportunities to increase production revenues. Interior began studying ways to improve revenue collection and leasing practices earlier this year. Interior's oil and gas IT systems lack key functionalities. A September 2008 GAO review found that MMS's ability to maintain the accuracy of oil and gas production and royalty data was hampered by two key limitations in its IT system: (1) it did not limit companies' ability to adjust self-reported data after MMS had audited them and (2) it did not identify missing royalty reports. More recently, a March 2010 report found that Interior's long-standing efforts to implement two key technologies for verifying oil and gas production are behind schedule and years from widespread adoption.

section_title: Letter
paragraphs: We appreciate the opportunity to participate in this hearing to discuss the  Department of the Interior’s management of federal oil and gas leases and  its proposed reorganization. Effective management and oversight of our  nation’s oil and gas resources is critical, especially in light of the tragic  loss of life, damage to natural resources, loss of livelihoods, and harm to  local economies that resulted from the explosion, fire, and catastrophic oil  spill in the Gulf of Mexico. Additionally, ensuring royalties are accurately  paid on oil and gas production is increasingly important as our country  faces serious fiscal challenges.
Interior plays an important role in managing federal oil and gas resources.  Under the current organizational structure, its bureaus are responsible for  regulating the processes that oil and gas companies must follow when  leasing, drilling, and producing oil and gas from federal leases as well as  ensuring that companies comply with all applicable requirements.  Specifically, the Bureau of Land Management (BLM) oversees onshore  federal oil and gas activities, and the newly created Bureau of Ocean  Energy Management, Regulation, and Enforcement (BOEMRE) oversees  offshore oil and gas activities. Prior to BOEMRE, the Minerals  Management Service’s (MMS) Offshore Energy and Minerals Management  (OEMM) oversaw offshore oil and gas activities. Additionally, MMS’s  Minerals Revenue Management (MRM) was responsible for collecting  royalties on oil and gas produced from both onshore and offshore federal  leases. For the purposes of our testimony today, we present our findings in  accordance with Interior’s organizational structure prior to the  establishment of BOEMRE. In fiscal year 2009, Interior reported collecting  over $9 billion in royalties for oil and gas produced on federal lands and  waters, purchase bids for new oil and gas leases, and annual rents on  existing leases, making revenues from federal oil and gas one of the largest  nontax sources of federal government funds.
In recent years, we and others, including Interior’s Office of Inspector  General (OIG) have conducted numerous evaluations of federal oil and gas  management and revenue collection processes and practices and have  found many material weaknesses (see app. II for related GAO reports).  Our work has included reviews of Interior’s oversight practices,  operations, and rules, and our conclusions have been remarkably  consistent: the agency has not done enough to meet the challenges it faces.  Others, including the Interior OIG and a panel of experts convened by  Interior have drawn similar conclusions. As a result, Interior staff are in  the midst of attempting to implement over 100 recommendations spanning  the scope of the department’s operations. We acknowledge Interior’s  efforts to reassess key oil and gas policies addressing revenue collection  and rates of development on federal lands and waters as an important first  step to address material weaknesses. In addition, the Secretary of the  Interior announced several changes to BLM’s leasing process in May 2010,  and has also announced plans to restructure MMS.
In this context, my testimony today discusses findings from our past work  on (1) differences in Interior’s policies and practices for offshore and  onshore oil and gas leasing, (2) Interior’s oversight of oil and gas  production, (3) Interior’s policies to encourage revenues from oil and gas  development, and (4) Interior’s oil and gas information technology (IT)  systems. This statement is based on our extensive body of work on  Interior’s oil and gas leasing and royalty collection programs issued from  June 2005 through March 2010, as well as preliminary results from our  ongoing review on public challenges to federal onshore oil and gas leasing  decisions, to assist the committee as it investigates Interior’s oversight of  oil and gas leasing, drilling, and production.  We developed these  preliminary results from June 2009 through July 2010 by reviewing federal  laws, regulations, and guidance; analyzing data from Interior on the four  Mountain West states (Colorado, New Mexico, Utah, and Wyoming)  responsible for 69 percent of the oil and 94 percent of the natural gas  produced on federal lands during fiscal years 2007 to 2009; and  interviewing BLM officials and stakeholder groups—including  representatives from the energy industry, state government, and  nongovernmental organizations representing environmental, hunting,  fishing, and recreational interests. We conducted the performance audit  work that supports this statement in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to produce 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 statement today.
subsections: section_title: Interior’s Policies and Practices for Offshore and Onshore Oil and Gas Leases Differ in Key Ways
paragraphs: In October 2008, we reported that Interior’s policies and practices for  identifying and evaluating lease parcels and bids differ in key ways  depending on whether the lease is located offshore—and therefore  overseen by OEMM—or onshore—and therefore overseen by BLM.
Identifying lease parcels. OEMM’s and BLM’s methods for identifying  areas to lease vary significantly. Specifically:    For offshore leases, OEMM—pursuant to the Outer Continental Shelf  Lands Act—lays out 5-year strategic plans for the areas it plans to lease  and establishes a schedule for offering leases. In addition, OEMM offers all  leases for competitive bidding, and all eligible companies may submit  written sealed bids, referred to as bonus bids, for the rights to explore,  develop, and produce oil and gas resources on these leases, including  drilling test wells.
For onshore leases, BLM—which must follow the Federal Onshore Oil and  Gas Leasing Reform Act of 1987—is not required to develop a long-term  leasing plan and instead relies in part on the industry and the public to  nominate areas for leasing. In some cases, BLM, like OEMM, offers leases  through a competitive bidding process, but with bonus bids received in an  oral auction rather than in a sealed written form.
Evaluating bids. OEMM and BLM differ in their regulations and policies  for evaluating whether the bids received for areas offered for lease are  sufficient.
For offshore leases, OEMM compares sealed bids with its own  independent assessment of the value of the potential oil and gas in each  lease. After the bids are received, OEMM—using a team of geologists,  geophysicists, and petroleum engineers assisted by a software program— conducts a technical assessment of the potential oil and gas resources  associated with the lease and other factors to develop an estimate of their  fair market value. This estimate becomes the minimally acceptable bid and  is used to evaluate the bids received. The bidder submitting the highest  acceptable bonus bid that meets or exceeds OEMM’s estimate of the fair  market value of a lease is awarded the lease. The primary term of the  lease, which may be 5, 8, or 10 years, depends on the water depth of the  leased area. If no bids equal or exceed the minimally acceptable bid, the  lease is not awarded but is offered at a subsequent lease sale. According to  OEMM, since 1995, the practice of rejecting bids that fall below the  minimally acceptable bid and re-offering these leases at a later sale has  resulted in an overall increase in bonus receipts of $373 million between  1997 and 2006.
For onshore leases, BLM relies exclusively on competitors, participating in  an oral auction, to determine the lease’s market value. Furthermore, BLM,  unlike OEMM, does not currently employ a multidisciplinary team with the  appropriate range of skills or appropriate software to develop estimates of  the oil and gas reserves for each lease parcel, and thus, establish a market  and resource-based minimum acceptable bid. Instead, BLM has  established a uniform national minimum acceptable bid of at least $2 per  acre and has taken the position that as long as at least one bid meets this  $2 per acre threshold, the lease will be awarded to the highest bidder.  Importantly, onshore leases that do not receive any bids in the initial offer  are available noncompetitively the day after the lease sale and remain  available for leasing for a period of 2 years after the competitive lease sale.  Any of these available leases may be acquired on a first-come, first-served  basis subject to payment of an administrative fee. Prior to 1992, BLM  offered primary terms of 5 years for competitively sold leases and 10 years  for leases issued noncompetitively. Since 1992, BLM has been required by  law to only offer leases with 10-year primary terms whether leases are sold  competitively or issued noncompetitively.
section_title: Interior’s Oversight of Federal Oil and Gas Production Has Not Kept Pace with Increased Activity
paragraphs: Oil and gas activity has generally increased over the past 20 years, and our  reviews have found that Interior has—at times—been unable to adequately  oversee these activities: (1) completing environmental inspections; (2)  verifying oil and gas production; (3) hiring, training, and retaining staff; (4)  using categorical exclusions to streamline environmental analyses  required for certain oil and gas activities; (5) performing environmental  monitoring in accordance with land use plans; (6) conducting  environmental analyses; and (7) responding to onshore lease protests.  Specifically:    Completing environmental inspections. In June 2005, we reported that  with the increase in oil and gas activity, BLM had not consistently been  able to complete its required environmental inspections—the primary  mechanism to ensure that companies are complying with various  environmental laws and lease stipulations. At the time of our review, BLM  officials explained that because staff were spending increasing amounts of  time processing drilling permits, they had less time to conduct  environmental inspections.
Verifying oil and gas production. In September 2008, we reported that  neither BLM nor OEMM was meeting its statutory obligations or agency  targets for inspecting certain leases and metering equipment used to  measure oil and gas production, raising uncertainty about the accuracy of  oil and gas measurement. For onshore leases, BLM only completed a  portion of its production verification inspections because its workload had  substantially grown in response to increases in onshore drilling. For  offshore leases, OEMM only completed about 50 percent of its required  production inspections in 2007 because of ongoing cleanup work related  to Hurricane Katrina and Rita. Additionally, in March 2010, we found that  Interior had not consistently updated its oil and gas measurement  regulations. Specifically, OEMM has routinely reviewed and updated its  measurement regulations, whereas BLM had not. Accordingly, OEMM had  updated its measurement regulations six times since 1998, whereas BLM  had not updated its measurement regulations since 1989. We made a  number of recommendations to the Secretary of the Interior for improving  oil and gas production verification, including providing for more regular  updates of measurement regulations.
Hiring, training, and retaining staff. In March 2010, we reported that  Interior has faced difficulties in hiring, retaining, and training staff in key  oil and gas oversight positions. Specifically, we found that staff within  Interior’s program for verifying that oil and gas produced from federal  leases are correctly measured—including petroleum engineers and  inspectors—lacked critical skills because, according to agency officials,  Interior (1) had difficulty in hiring experienced staff, (2) struggled to retain  staff, and (3) did not consistently provided the appropriate training for  staff. Interior’s challenges in hiring and retaining staff stem, in part, from  competition with the oil and gas industry, which generally pays  significantly more than the federal government. Moreover, key technical  positions responsible for oversight of oil and gas activities have  experienced high turnover rates, which, according to Interior officials,  impede these employees’ capacity to oversee oil and gas activities. These  positions included petroleum engineers, who process drilling permits and  review oil and gas metering systems, and inspection staff—including  BLM’s petroleum engineer technicians and production accountability  technicians onshore—who conduct drilling, safety and oil and gas  production verification inspections (see app. I). For example, we found  that turnover rates for OEMM inspectors at the four district offices we  reviewed between 2004 and 2008 ranged from 27 to 44 percent.  Furthermore, Interior has not consistently provided training to the staff it  has been able to hire and retain. For example, neither onshore nor  offshore petroleum engineers had a requirement for training on the  measurement of oil and gas, which is critical to accurate royalty  collections and can be challenging at times because of such factors as the  type of meter used, the specific qualities of the gas or oil being measured,  and the rate of production. Additionally, although BLM offers a core  curriculum for its petroleum engineer technicians and requires that they  obtain official BLM certification and then be recertified once every 5 years  to demonstrate continued proficiency, the agency has not offered a  recertification course since 2002, negatively impacting its ability to  conduct inspections. It is important to note that BLM’s petroleum engineer  technicians are the eyes and ears for the agency—performing key  functions and also perhaps the only Interior staff with direct contact with  the lease property itself. We recommended that the Secretary of the  Interior improve its training for staff responsible for verifying oil and gas  production and to determine what policies are necessary to attract and  retain qualified measurement staff at sufficient levels to ensure an  effective production verification program.
Using categorical exclusions. In September 2009, we reported that BLM’s  use of categorical exclusions—authorized under section 390 of the Energy  Policy Act of 2005 to streamline the environmental analysis required under  the National Environmental Policy Act (NEPA)  when approving certain  oil and gas activities—had some benefits but raises numerous questions  about how and when BLM should use these categorical exclusions. First,  our analysis found that BLM used section 390 categorical exclusions to  approve over one-quarter of its applications for drilling permits from fiscal  years 2006 to 2008. While these categorical exclusions generally increased  the efficiency of operations, some BLM field offices, such as those with  recent environmental analyses already completed, were able to benefit  more than others. Second, we found that BLM’s use of section 390  categorical exclusions was frequently out of compliance with both the law  and agency guidance and that a lack of clear guidance and oversight by  BLM were contributing factors. We found several types of violations of the  law, such as approving more than one oil or gas well under a single  decision document and drilling a new well after statutory time frames had  lapsed. We also found examples, in 85 percent of field offices reviewed,  where officials did not comply with agency guidance, most often by failing  to adequately justify the use of a categorical exclusion. While many of  these violations and noncompliance were technical in nature, others were  more significant and may have thwarted NEPA’s twin aims of ensuring  that BLM and the public are fully informed of environmental consequences  of BLM’s actions. Third, we found that a lack of clarity in both section 390  of the act and BLM’s guidance has raised serious concerns. Specifically:  (1) Fundamental questions about what section 390 categorical exclusions  are and how they should be used have led to concerns that BLM may be  using these categorical exclusions in too many—or too few—instances.  For example, there is disagreement as to whether BLM must screen  section 390 categorical exclusions for circumstances that would preclude  their use or whether their use is mandatory. (2) Concerns about key  concepts underlying the law’s description of these categorical exclusions  have arisen—specifically, whether section 390 categorical exclusions  allow BLM to exceed development levels, such as number of wells to be  drilled, analyzed in supporting NEPA documents without conducting  further analysis. (3) Definitions of key criteria in the law and BLM  guidance are vague or nonexistent, which led to varied interpretations  among field offices and concerns about misuse and a lack of transparency.  We recommended that BLM take steps to improve the implementation of  section 390 of the act by ensuring compliance through more oversight,  standardizing decision documentation, and clarifying agency guidance. We  also suggested that Congress may wish to consider amending the Energy  Policy Act of 2005 to clarify and resolve some of the key issues identified  in our report. Since the issuance of our report, BLM has taken steps to  implement some of our recommendations.
Performing environmental monitoring. In June 2005, we reported that  four of the eight BLM field offices we visited had not developed any  resource monitoring plans to help track management decisions and  determine if desired outcomes had been achieved, including those related  to mitigating the environmental impacts of oil and gas development. We  concluded that without these plans, land managers may be unable to  determine the effectiveness of various mitigation measures attached to  drilling permits and decide whether these measures need to be modified,  strengthened, or eliminated. Officials offered several reasons for not  having these plans, including increased workload due to an increased  number of drilling permits, as well as budget constraints.
Conducting environmental analyses. In March 2010, we found that MMS  faces challenges in the Alaska Outer Continental Shelf (OCS) Region in  conducting reviews of oil and gas development under NEPA, which  requires MMS to evaluate the likely environmental effects of proposed  actions, including oil and gas development. Although Interior policy  directed its agencies to prepare handbooks providing guidance on how to  implement NEPA, we found that MMS lacked such a handbook. The lack  of comprehensive guidance in a handbook, combined with high staff  turnover in recent years, left the process for meeting NEPA requirements  ill defined for the analysts charged with developing NEPA documents. It  also left unclear MMS’s policy on what constitutes a significant  environmental impact as well as its procedures for conducting and  documenting NEPA-required analyses to address environmental and  cultural sensitivities, which have often been the topic of litigation over  Alaskan offshore oil and gas development. We also found that the Alaska  OCS Region shared information selectively, a practice that was  inconsistent with agency policy, which directed that information,  including proprietary data from industry, be shared with all staff involved  in environmental reviews. According to regional MMS staff, this practice  has hindered their ability to complete sound environmental analyses under  NEPA. We recommended that the Secretary of the Interior develop and set  a deadline for issuing a comprehensive NEPA handbook providing  guidance on how to implement NEPA.
Responding to lease protests. In preliminary results from our ongoing  work on public challenges to BLM’s federal oil and gas lease sale decisions  in the four Mountain West states responsible for most onshore federal oil  and gas development, we found the extent to which BLM made publicly  available information related to public protests filed during the leasing  process varied by state and was generally limited in scope.  We also found  that stakeholders—nongovernmental organizations representing  environmental, recreational, and hunting interests that filed protests to  BLM lease offerings—wanted additional time to participate in the leasing  process and more information from BLM about its leasing decisions. In  May 2010, the Secretary of the Interior announced several agencywide  leasing reforms that are to take place at BLM, some of which may address  concerns raised by these stakeholder groups. For instance, BLM state  offices are to provide an additional public review and comment  opportunity during the leasing process. They are also required to post on  their Web sites their responses to letters filed in protest of state office  decisions to offer specific parcels of land for oil and gas development.
section_title: Interior May be Missing Opportunities to Fundamentally Shift the Terms of Federal Oil and Gas Leases to Increase Revenues
paragraphs: In our past work, we have identified several areas where Interior may be  missing opportunities to increase revenue by fundamentally shifting the  terms of federal oil and gas leases. As we reported in September 2008, (1)  federal oil and gas leasing terms currently result in the U.S. government  receiving one of the smallest shares of oil and gas revenue when compared  to other countries and (2) Interior’s inflexible royalty rate structure has  put pressure on Interior and Congress to periodically change royalty  rates. We also reported that Interior is doing far less than some states to  encourage development of leases. Specifically:    The U.S. government receives one of the lowest shares of revenue for oil  and gas resources compared with other countries and resource owners.  For example, we reported the results of a private study in 2007 showing  that the revenue share the U.S. government collects on oil and gas  produced in the Gulf of Mexico ranked 93rd lowest of the 104 revenue  collection regimes around the world covered by the study. Further, the  study showed that some countries recently increased their shares of  revenues as oil and gas prices rose and, as a result, will collect between an  estimated $118 billion and $400 billion, depending on future oil and gas  prices. However, despite significant changes in the oil and gas industry  over the past several decades, we found that Interior has not  systematically re-examined how the U.S. government is compensated for  extraction of oil and gas for over 25 years.
Since 1980—in part due to Interior’s inflexible royalty rate structure— Congress and Interior have been pressured, with varying success—to  periodically adjust royalty rates to respond to current market conditions.  For example, in 1980, a time when oil prices were high compared to  today’s prices, in inflation-adjusted terms, Congress passed a windfall  profit tax, which it later repealed in 1988 after oil prices fell significantly  from their 1980 level. Later, in November 1995—during a period with  relatively low oil and gas prices—the federal government enacted the  Outer Continental Shelf Deep Water Royalty Relief Act (DWRRA) which  provided for “royalty relief,” the suspension of royalties on certain  volumes of initial production, for certain leases in the Gulf of Mexico in  depths greater than 200 meters during the 5 years after passage of the  act—1996 through 2000. For leases issued during these 5 years, litigation  established that MMS lacked the authority under the act to impose  thresholds. As a result, companies are now receiving royalty relief even  though prices are much higher than at the time the DWRRA was enacted.  In June 2008, we estimated that future foregone royalties from all the  DWRRA leases issued from 1996 through 2000 could range widely—from a  low of about $21 billion to a high of $53 billion. Finally, in 2007, the  Secretary of the Interior twice increased the royalty rate for future Gulf of  Mexico leases. In January, the rate for deep-water leases was raised to 16- 2/3 percent. Later, in October, the rate for all future leases in the Gulf,  including those issued in 2008, was raised to 18-3/4 percent. Interior  estimated these actions will increase federal oil and gas revenues by $8.8  billion over the next 30 years. The January 2007 increase applied only to  deep-water Gulf of Mexico leases; the October 2007 increase applied to all  water depths in the Gulf of Mexico.
We concluded that these royalty rate increases appeared to be a response  by Interior to the high prices of oil and gas that have led to record industry  profits and raised questions about whether the existing federal oil and gas  fiscal system gives the public an appropriate share of revenues from oil  and gas produced on federal lands and waters. Furthermore, the royalty  rate increases do not address industry profits from existing leases.  Existing leases, with lower royalty rates, will likely remain highly  profitable as long as they produce oil and gas or until oil and gas prices fall  significantly. In addition, in choosing to increase royalty rates, Interior did  not evaluate the entire oil and gas fiscal system to determine whether  these increases were sufficient to balance investment attractiveness and  appropriate returns to the federal government for oil and gas resources.  On the other hand, according to Interior, it did consider factors such as  industry costs for outer continental shelf exploration and development,  tax rates, rental rates, and expected bonus bids. Further, because the new  royalty rates are not flexible with respect to oil and gas prices, Interior and  Congress may again be under pressure from industry or the public to  further change the royalty rates if and when oil and gas prices either fall or  rise. Finally, these past royalty changes only affect Gulf of Mexico leases  and do not address onshore leases. To address weaknesses in Interior’s  royalty program, we suggested that Congress may wish to consider  directing the Secretary of the Interior to    convene an independent panel to perform a comprehensive review of the  federal oil and gas fiscal system and    direct MMS and other relevant agencies within 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 to those of other resource owners and report this  information to Congress.
Interior officials recently reported that the department is currently  undertaking an examination of this issue.
OEMM and BLM vary in the extent to which they encourage development  of federal leases, and both agencies do less than some states and private  landowners to encourage lease development. As a result, we concluded  that Interior may be missing opportunities to increase domestic oil and gas  production and revenues. Specifically, in the Gulf of Mexico, OEMM varies  the lease length in accordance with the depth of water over which the  lease is situated. For example, leases issued in shallow water depths  typically have terms of 5 years, whereas leases in the deepest areas of the  Gulf of Mexico have 10-year primary terms. This is because shallower  water tends to be nearer to shore and to be adjacent to already developed  areas with pipeline infrastructure in place, while deeper water tends to be  further out, have less available infrastructure to link to, and generally  present greater challenges associated with the depth of the wells  themselves. In contrast to OEMM’s depth-based lease terms, BLM issues  leases with 10-year primary terms, regardless of whether the lease is  adjacent to a fully developed field with the necessary pipeline  infrastructure to carry the product to market or in a remote location with  no surrounding infrastructure. Furthermore, BLM also uses 10-year  primary terms in the National Petroleum Reserve-Alaska, where it is  significantly more difficult to develop oil fields because of factors  including the harsh environment.
We also examined selected states and private landowners that lease land  for oil and gas development and found that some do more than Interior to  encourage lease development. For example, to provide a greater financial  incentive to develop leased land, the state of Texas allows lessees to pay a  20 percent royalty rate for the life of the lease if production occurs in the  first 2 years of the lease, as compared to 25 percent if production occurs  after the 4th year. In addition, we found that some states and private  landowners also do more to structure leases to reflect the likelihood of  finding oil and gas. For example, New Mexico issues shorter leases and  can require lessees to pay higher royalties for properties that are in or near  known producing areas, and allow longer leases and lower royalty rates in  areas believed to be more speculative. Officials from one private  landowners’ association told us that they too are using shorter lease terms,  ranging from 6 months to 3 years, to ensure that lessees are diligent in  developing any potential oil and gas resources on their land. Louisiana and  Texas also issue 3-year onshore leases. While the existence of lease terms  that appear to encourage faster development of some oil and gas leases  suggests a potential for the federal government to take steps, it is  important to note that it can take several years to complete the required  environmental analyses needed in order to receive approval to begin  drilling on federal lands. To address what we believe are key weaknesses  in Interior’s royalty program while acknowledging potential differences  between federal, state, and private leases, we recommended that the  Secretary of the Interior develop a strategy to evaluate options to  encourage faster development of oil and gas leases on federal lands,  including determining whether methods to differentiate between leases  according to the likelihood of finding economic quantities of oil or gas and  whether some of the other methods states use could effectively be  employed, either across all federal leases or in a targeted fashion. In so  doing, Interior should identify any statutory or other obstacles to using  such methods and report the findings to Congress. Interior officials  recently reported that the department is currently undertaking an  examination of this issue.
section_title: Weaknesses Exist in Interior’s IT Systems for Managing Oil and Gas Royalty and Production Information
paragraphs: Our past work has identified shortcomings in Interior’s IT systems for  managing oil and gas royalty and production information. In September  2008, we reported that Interior’s oil and gas IT systems did not include  several key functionalities, including (1) limiting a company’s ability to  make adjustments to self-reported data after an audit had occurred and (2)  identifying missing royalty reports.
MMS’s ability to maintain the accuracy of production and royalty data  has been hampered because companies can make adjustments to their  previously entered data without prior MMS approval. Companies may  legally make changes to both royalty and production data in 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. However, at the  time of our review, MMS’s royalty IT system allowed companies to make  adjustments to their data beyond the allowed 6-year time frame. 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 could change over time—even after MMS completes an  audit—complicating efforts by agency officials to reconcile production  data and ensure that the proper royalties were paid.
MMS’s royalty IT system’s inability to automatically detect instances  when a royalty payor fails to submit the required royalty report in a  timely manner. Because MMS’s royalty system did not detect instances  when a payor failed to submit a payment in a timely manner, we found that  cases in which a company stops filing royalty reports and stops paying  royalties may not be detected until more than 2 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 was possible under MMS’s  strategy that the royalty IT system would not identify instances in which a  payor stopped reporting until several years after the report is due. This  created an unnecessary risk that MMS was not collecting accurate  royalties in a timely manner.
To address these weaknesses, we recommended that the Secretary of the  Interior, among other things  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 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, and    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.
Since September 2008, MMS has made improvements in its IT systems for  identifying missing royalty reports, but it is too early to assess their  effectiveness.
Additionally, in July 2009, we reported that MMS’s IT system lacked  sufficient controls to ensure that royalty payment data were accurate.  While much of the royalty data we examined from fiscal years 2006 and  2007 were reasonable, we found significant instances where data were  missing or appeared erroneous. For example, we examined gas leases in  the Gulf of Mexico and found that, about 5.5 percent of the time, lease  operators reported production, but royalty payors did not submit the  corresponding royalty reports, potentially resulting in $117 million in  uncollected royalties. We also found that a small percentage of royalty  payors reported negative royalty values, something that should not  happen, potentially costing $41 million in uncollected royalties. In  addition, royalty payors claimed gas processing allowances 2.3 percent of  the time for unprocessed gas, potentially resulting in $2 million in  uncollected royalties. Furthermore, we found significant instances where  royalty payor-provided data on royalties paid and the volume and or the  value of the oil and gas produced appeared erroneous because they were  outside the expected ranges. To address control weaknesses, we made a  number of recommendations to MMS intended to improve the quality of  royalty data by improving its IT systems’ edit checks, among other things.
Moreover, in our March 2010 report, we found that Interior’s longstanding  efforts to implement two key IT systems for facilitating verification of  produced volumes of oil and gas from federal leases were behind schedule  and years from widespread adoption. For example, Interior’s efforts to  provide its inspection staff with mobile computing capabilities for use in  the field are moving slowly and are years from full implementation.  Interior inspectors continue to rely on documenting inspection results on  paper, and later reentering these results into Interior databases.  Specifically, BLM and OEMM are independently developing the capacity  for inspection staff to (1) electronically document inspection results and  (2) access reference documents, such as American Petroleum Institute  standards and measurement regulations, via laptops while in the field.  BLM initiated work on developing this capacity in 2001, whereas OEMM is  now in the preliminary planning stages of a similar effort. According to  Interior officials, widespread implementation of a mobile computing tool  to assist with production verification and other types of inspections,  potentially including drilling and safety, is still several years away. Interior  officials said having such a tool would allow inspection staff to not only  easily reference technical documents while conducting inspections to  verify compliance with regulations but also to document the results of  those inspections while in the field and subsequently upload them to  Interior databases. Similarly, BLM’s efforts to use gas production data  acquired remotely from gas wells through its Remote Data Acquisition for  Well Production (RDAWP) program to facilitate production inspections  have shown few results after 5 years of funding and at least $1.5 million  spent. At the time of our review, we found that BLM was only receiving  production data from approximately 50 wells via this program, and it had  yet to use the data to complete a production inspection, making it difficult  to assess its utility. To address these shortcomings, we made a number of  recommendations to the Secretary including that BLM reassess its current  commitment to the RDAWP program in light of other commercially  available software and to implement a mobile computing solution for the  onshore inspection and enforcement staff and to coordinate with the  offshore inspection and enforcement staff as appropriate.
In conclusion, over the past several years, we and others have found  Interior to be in need of fundamental reform. This past work has found  weaknesses across a wide range of Interior’s oversight of onshore and  offshore oil and gas development. Secretary Salazar has taken notable  steps to begin comprehensive evaluations of leasing rules and practices as  well as the amount and ways in which the federal government collects  revenues. Interior is also currently implementing a number of our  recommendations aimed at making improvements within the existing  organization of Interior’s functions.
As the Secretary and Congress consider what fundamental changes are  needed in how Interior structures its oversight of oil and gas programs, we  believe that our and others’ past work provides a strong rationale for  broad reform of the agency’s oil and gas oversight functions—at MMS to  be sure, but also across other parts of Interior, including those responsible  for oversight of onshore areas. If steps are not taken to ensure effective  independent oversight, we are concerned about the agency’s ability to  manage the nation’s oil and gas resources, ensure the safe operation of  onshore and offshore leases, provide adequate environmental protection,  and provide reasonable assurance that the U.S. government is collecting  the revenue to which it is entitled. Reorganization and fundamental change  can be very difficult for an organization. We believe that regardless of how  MMS is ultimately reorganized, Interior’s top leadership must also address  the wide range of outstanding recommendations for any reorganization  effort to be effective.
Mr. Chairman, this completes my prepared statement. I would be happy to  respond to any questions that you or other Members of the Committee  may have at this time.
section_title: GAO Contact and Staff Acknowledgement
paragraphs: For further information on this statement, please contact Frank Rusco at  (202) 512-3841 or ruscof@gao.gov. Contact points for our Congressional  Relations and Public Affairs offices may be found on the last page of this  statement. Other staff that made key contributions to this testimony  include, Ron Belak, Glenn C. Fischer, Jon Ludwigson, Ben Shouse, Kiki  Theodoropoulos, and Barbara Timmerman.
section_title: Appendix II: Related Prior GAO Reports
paragraphs: Oil and Gas Management: Key Elements to Consider for Providing  Assurance of Effective Independent Oversight, GAO-10-852T,  (Washington, D.C.: June 17, 2010).
Oil and Gas Management: Interior’s Oil and Gas Production  Verification Efforts Do Not Provide Reasonable Assurance of Accurate  Measurement of Production Volumes, GAO-10-313, (Washington, D.C.:  Mar. 15, 2010).
Offshore Oil and Gas Development: Additional Guidance Would Help  Strengthen the Minerals Management Service’s Assessment of  Environmental Impacts in the North Aleutian Basin, GAO-10-276,  (Washington, D.C.: Mar. 8, 2010).
Energy Policy Act of 2005: Greater Clarity Needed to Address  Concerns with Categorical Exclusions for Oil and Gas Development  under Section 390 of the Act, GAO-09-872, (Washington, D.C.: Sept. 26,  2009).
Federal Oil and Gas Management: Opportunities Exist to Improve  Oversight, GAO-09-1014T, (Washington, D.C.: Sept. 16, 2009).
Royalty-In-Kind Program: MMS Does Not Provide Reasonable  Assurance It Receives Its Share of Gas, Resulting in Millions in Forgone  Revenue, GAO-09-744, (Washington, D.C.: Aug. 14, 2009).
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).
Strategic Petroleum Reserve: Issues Regarding the Inclusion of  Refined Petroleum Products as Part of the Strategic Petroleum Reserve,  GAO-09-695T, (Washington, D.C.: May 12, 2009).
Oil and Gas Management: Federal Oil and Gas Resource Management  and Revenue Collection In Need of Stronger Oversight and  Comprehensive Reassessment, GAO-09-556T, (Washington, D.C.: Apr. 2,  2009).
Oil and Gas Leasing: Federal Oil and Gas Resource Management and  Revenue Collection in Need of Comprehensive Reassessment,  GAO-09-506T, (Washington, D.C.: Mar. 17, 2009).
Department of the Interior, Minerals Management Service: Royalty  Relief for Deepwater Outer Continental Shelf Oil and Gas Leases— Conforming Regulations to Court Decision, GAO-09-102R, (Washington,  D.C.: Oct. 21, 2008).
Oil and Gas Leasing: Interior Could Do More to Encourage Diligent  Development, GAO-09-74, (Washington, D.C.: Oct. 3, 2008).
Oil and Gas Royalties: MMS’s Oversight of Its Royalty-in-Kind  Program Can Be Improved through Additional Use of Production  Verification Data and Enhanced Reporting of Financial Benefits and  Costs, GAO-08-942R, (Washington, D.C.: Sept. 26, 2008).
Mineral Revenues: Data Management Problems and Reliance on Self- Reported Data for Compliance Efforts Put MMS Royalty Collections at  Risk, GAO-08-893R, (Washington, D.C.: Sept. 12, 2008).
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).
Oil and Gas Royalties: Litigation over Royalty Relief Could Cost the  Federal Government Billions of Dollars, GAO-08-792R, (Washington, D.C.:  June 5, 2008).
Strategic Petroleum Reserve: Improving the Cost-Effectiveness of  Filling the Reserve, GAO-08-726T, (Washington, D.C.: Apr. 24, 2008).
Mineral Revenues: Data Management Problems and Reliance on Self- Reported Data for Compliance Efforts Put MMS Royalty Collections at  Risk, GAO-08-560T, (Washington, D.C.: Mar. 11, 2008).
Strategic Petroleum Reserve: Options to Improve the Cost- Effectiveness of Filling the Reserve, GAO-08-521T, (Washington, D.C.: Feb.  26, 2008).
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).
Oil and Gas Royalties: Royalty Relief Will Cost the Government  Billions of Dollars but Uncertainty Over Future Energy Prices and  Production Levels Make Precise Estimates Impossible at this Time,  GAO-07-590R, (Washington, D.C.: Apr. 12, 2007).
Royalties Collection: Ongoing Problems with Interior’s Efforts to  Ensure A Fair Return for Taxpayers Require Attention, GAO-07-682T,  (Washington, D.C.: Mar. 28, 2007).
Oil and Gas Royalties: Royalty Relief Will Likely Cost the Government  Billions, but the Final Costs Have Yet to Be Determined, GAO-07-369T,  (Washington, D.C.: Jan. 18, 2007).
Strategic Petroleum Reserve: Available Oil Can Provide Significant  Benefits, but Many Factors Should Influence Future Decisions about  Fill, Use, and Expansion, GAO-06-872, (Washington, D.C.: Aug. 24, 2006).
Royalty Revenues: Total Revenues Have Not Increased at the Same Pace  as Rising Oil and Natural Gas Prices due to Decreasing Production  Sold, GAO-06-786R, (Washington, D.C.: June 21, 2006).
Oil and Gas Development: Increased Permitting Activity Has Lessened  BLM’s Ability to Meet Its Environmental Protection Responsibilities,  GAO-05-418, (Washington, D.C.: June 17, 2005).
Mineral Revenues: Cost and Revenue Information Needed to Compare  Different Approaches for Collecting Federal Oil and Gas Royalties,  GAO-04-448, (Washington, D.C.: Apr. 16, 2004).
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