Oil and Gas Management: Continued Attention to Interior's Revenue Collection and Human Capital Challenges Is Needed
Published: 2013-05-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Interior issues permits for the development of new oil and gas wells on federal lands and waters; inspects wells to ensure compliance with environmental, safety, and other regulations; and collects royalties from companies that sell the oil and gas produced from those wells. In recent years, onshore and offshore federal leases produced a substantial portion of the oil and gas produced in the United States. In fiscal year 2012, Interior collected almost $12 billion in mineral revenues including those from oil and gas development, making it one of the largest nontax sources of federal government funds. Previous GAO work has raised concerns about Interior's management and oversight of federal oil and gas resources.
This testimony focuses on (1) Interior's oversight of offshore oil and gas resources, (2) Interior's collection of oil and gas revenues, and (3) Interior's progress to address concerns that resulted in its inclusion on GAO's High Risk List in 2011. This statement is based on prior GAO reports issued from September 2008 through February 2013.
GAO is making no new recommendations. Interior continues to act on the recommendations that GAO has made to improve the management of oil and gas resources. GAO continues to monitor Interior's implementation of these recommendations.
section_title: What GAO Found
paragraphs: Interior's oversight of offshore resources . In July 2012, GAO reported on changes to the Department of the Interior's oversight of offshore oil and gas activities in the Gulf of Mexico following the Deepwater Horizon incident. Specifically, GAO reported that Interior had established two new bureaus, separating resource management oversight activities from safety and environmental oversight activities. GAO also reported that new requirements and policy changes designed to mitigate risk of a well blowout or spill had initially required additional resources and increased permit approval times, but that approval times decreased as Interior staff and oil and gas companies became more familiar with the new requirements. GAO also found that Interior's inspections of offshore Gulf of Mexico drilling rigs and production platforms routinely identified violations, but that Interior's database was missing data on when violations were identified and corrected. GAO made 11 recommendations aimed at improving Interior's oversight activities. Interior generally agreed with the recommendations and plans to implement them.
Interior's collection of oil and gas revenues. In September 2008, GAO reported that Interior collected lower levels of revenues 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 in other countries and some states. In July 2009, GAO reported on problems with Interior's efforts to collect data on oil and gas produced on federal lands, including missing and erroneous data. In March 2010, GAO reported that Interior was not taking needed steps to ensure that oil and gas produced from federal lands was accurately measured and was not consistently meeting its goals for oil and gas production verification inspections. GAO made numerous recommendations aimed at improving Interior's revenue collection policies, including oversight of production verification activities and controls on the accuracy and reliability of royalty data. Interior generally agreed with these recommendations and has implemented many of them.
Interior's oil and gas management on GAO's high risk list . In February 2011, GAO added Interior's management of federal oil and gas resources to its list of federal programs and operations at high risk for waste, fraud, abuse, and mismanagement or needing broad-based transformation. GAO added this high risk area because Interior (1) did not have reasonable assurance that it was collecting its share of revenues; (2) continued to experience problems hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations; and (3) was engaged in a broad agency reorganization that could adversely impact its ability to effectively manage oil and gas during the crisis following the Deepwater Horizon incident. In February 2013, after Interior completed its reorganization, GAO narrowed the oil and gas high-risk area to focus on revenue collection and human capital challenges and is currently examining these issues. While Interior has begun to implement many of GAO's recommendations, it has yet to fully implement a number of others, including recommendations intended to (1) provide reasonable assurance that oil and gas is accurately measured, and that the public is getting an appropriate share of revenues, and (2) address its long-standing human capital issues.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Department of the Interior’s  management and oversight of federal oil and gas resources and  collection of associated mineral revenues. Interior plays an important role  in permitting the development of new oil and gas wells on federal lands  and waters; inspecting those wells to ensure compliance with  environmental, safety and other regulations; and collecting royalties from  the companies that sell the oil and gas produced from those wells.
In recent years federal leases onshore and in offshore federal waters  produced a substantial portion of the natural gas and oil produced in the  United States. In 2012, onshore federal leases produced 13 percent of  domestic natural gas and 5 percent of domestic oil, while in 2011—the  most recent year for which data are available—offshore federal leases  produced almost 24 percent of domestic natural gas and over 6 percent  of domestic oil. In fiscal year 2012, the federal government collected  almost $12 billion in mineral revenues, including those from oil and gas  produced from federal lands and waters, bonus bids for new oil and gas  leases, and annual rents on existing leases. Revenues from federal oil  and gas are one of the largest nontax sources of federal government  funds—and, as we have previously reported, improvements in the  management of federal oil and gas resources could provide an important  source of potential revenue enhancements as the government faces fiscal  challenges.
Several Interior 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. The bureaus are also responsible for  ensuring that companies comply with all applicable requirements.  Historically, Interior’s Bureau of Land Management (BLM) managed  onshore federal oil and gas activities, while the Minerals Management  Service (MMS) managed offshore activities and collected royalties on  federal leases.incident, the Secretary of the Interior announced plans to reorganize  MMS and divide its responsibilities among separate bureaus. The  Secretary stated that this division of responsibilities would help ensure  that each of the newly established bureaus would have a distinct and  independent mission. Since the reorganization, BLM continues to oversee  onshore federal oil and gas activities, the Bureau of Ocean Energy  Management oversees offshore oil and gas leasing, the Bureau of Safety  and Environmental Enforcement reviews drilling permits and conducts  inspections for offshore oil and gas activities, and the Office of Natural  Resources Revenue is responsible for collecting royalties on oil and gas  produced from both onshore and offshore federal leases.
In May 2010, in the aftermath of the Deepwater Horizon  Interior’s management of federal oil and gas activities has been a focus of  a large body of our work over the past several years. In our resulting  reports, we noted numerous weaknesses and challenges, and we made  specific recommendations to Interior for addressing them. In February  2011, we added Interior’s management of federal oil and gas resources to  our list of federal programs and operations at high risk for waste, fraud,  abuse, and mismanagement or needing broad-based transformation. Since that time, Interior has taken significant steps to address identified  weaknesses and modify its practices for managing oil and gas resources  but, as of May 2013, many of our recommendations remained  unimplemented.
In this context, my testimony today discusses findings from our past work  on three broad areas: (1) Interior’s oversight of offshore oil and gas  resources, (2) Interior’s collection of oil and gas revenues, and                (3) Interior’s progress to address concerns that resulted in its inclusion on  our High Risk List in 2011. This statement is based on our extensive body  of work on Interior’s oil and gas leasing and royalty collection programs,  including reports issued from September 2008 through February 2013.  We conducted the performance audit work that supports this statement in  accordance with generally accepted government auditing standards.
GAO, High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011).
Additional information on our scope and methodology is available in each  issued product.
subsections: section_title: Interior’s Oversight of Offshore Oil and Gas Resources
paragraphs: In July 2012, we reported on changes Interior made to its oversight of  offshore oil and gas activities in the Gulf of Mexico in the aftermath of the  Deepwater Horizon incident. Specifically, we reported that
On October 1, 2011, Interior officially established two new bureaus,  separating offshore resource management oversight activities, such  as reviewing oil and gas exploration and development plans, from  safety and environmental oversight activities, such as reviewing  drilling permits and inspecting drilling rigs. Because the  responsibilities of these new bureaus are closely interconnected, and  carrying them out will depend on effective coordination, Interior  developed memoranda and standard operating procedures to define  roles and responsibilities and facilitate and formalize coordination.
New safety and environmental requirements and policy changes  designed to mitigate the risk of a well blowout or spill initially required  Interior to devote additional resources and time to reviewing certain oil  and gas exploration and development plans and drilling permits for oil  and gas activities in the Gulf of Mexico. Specifically, these policy  changes affected Interior’s (1) environmental analyses, (2) reviews of  oil and gas exploration and development plans, and (3) reviews of oil  and gas drilling permits. Our analysis of drilling permit approval time  frames found that approval times initially increased after the new  requirements went into effect, but as both Interior staff and oil and gas  companies became more familiar with these requirements, the review  times decreased.  Interior’s inspections of offshore Gulf of Mexico oil and gas drilling rigs  and production platforms from January 1, 2000, through September  30, 2011, routinely identified violations. However, Interior’s database  was missing data on when violations were identified, as well as when  they were corrected for about half of the violations issued. As a result,  Interior did not know on a real-time basis whether or when all  violations were identified and corrected, potentially allowing unsafe  conditions to continue for extended periods. During this same period,  Interior issued approximately $18 million in civil penalty assessments.  At the time of our report, Interior had begun implementing a number of  policy changes to improve both its inspection and civil penalty  programs—but had not assessed how these changes would affect its  ability to conduct monthly drilling rig inspections.  Interior continued to face challenges following its reorganization that  may affect its ability to oversee oil and gas activities in the Gulf of  Mexico. Specifically, Interior’s capacity to identify and evaluate risks  associated with drilling remained limited, raising questions about the  effectiveness with which it allocated its oversight resources. Interior  also experienced difficulties in implementing effective information  technology systems, such as those that aid its reviews of oil and gas  companies’ exploration and development plans. It also continued to  face workforce planning challenges, including hiring, retaining, and  training staff. Moreover, Interior did not have current strategic plans to  guide its information technology or workforce planning efforts.
Our July 2012 report resulted in 11 recommendations for specific  improvements to Interior’s oversight of offshore oil and gas activities,  including those intended to improve its drilling inspection program and  human capital planning. Interior generally agreed with our  recommendations and has committed to implementing them.
section_title: Interior’s Collection of Oil and Gas Revenues
paragraphs: Federal oil and gas resources generate billions of dollars annually in  revenues that are shared among federal, state, and tribal governments;  however, in several reviews over the past 5 years we found Interior may  not be properly assessing and collecting these revenues.
In September 2008, we reported that Interior collected lower levels of  revenues for oil and gas production in the deepwater of the U.S. Gulf of  Mexico than all but 11 of 104 oil and gas resource owners in other  countries, as well as in some states whose revenue collection systems  were evaluated in a comprehensive industry study.significant changes in the oil and gas industry over the past several  decades, we found that Interior had not systematically reexamined how  the U.S. government is compensated for extraction of oil and gas in over  25 years. We recommended Interior conduct a comprehensive review of   In addition, despite  the federal oil and gas fiscal system using an independent panel. After  Interior initially disagreed with our recommendations, we recommended  that Congress 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 establish procedures to periodically  evaluate the state of the fiscal system. In response to that  recommendation, Interior commissioned a study that compared the U.S.  government’s fiscal system with that of other resource owners. We are  currently conducting work to assess how Interior plans to use the results  of this study to inform decisions about its fiscal system.
Furthermore, we reported, in July 2009, on numerous problems with  Interior’s efforts to collect data on oil and gas produced on federal lands  and waters, including missing data, errors in company-reported data on  oil and gas production, and sales data that did not reflect prevailing  market prices for oil and gas. As a result of its lack of consistent and  reliable data on the production and sale of oil and gas from federal lands  and waters, Interior could not provide reasonable assurance that it was  assessing and collecting the appropriate amount of royalties on this  production. We made a number of recommendations to Interior to  improve controls on the accuracy and reliability of royalty data. Interior  generally agreed with our recommendations and has implemented the  majority of them.
We also reported, in March 2010, that Interior was not taking the steps  needed to ensure that oil and gas produced from federal lands and   For example, we found that neither waters was accurately measured. BLM nor MMS had consistently met their agency goals for oil and gas  production verification inspections, intended to examine, among other  things, whether lessees were taking steps to ensure that the amount of oil  and gas produced from federal lands and waters was being accurately  measured. Without such verification, Interior cannot provide reasonable  assurance that the public is collecting its share of revenue from oil and  gas development. We also raised concerns over Interior’s efforts to  develop software to allow inspection staff to remotely monitor gas  production. Specifically, we found that BLM’s Remote Data Acquisition for  Well Production program—a program designed to provide industry and  government with common tools to validate production and to view  production data in near real-time—had shown few results, despite 10  years of development and costs of over $1.5 million. Our March 2010  report identified 19 recommendations for specific improvements to  oversight of production verification activities, including recommendations  intended to strengthen BLM’s production inspection program and its  ability to obtain near real-time gas production data. Interior generally  agreed with our recommendations; it has already implemented many of  them and continues to work on the remainder.
Additionally, we reported, in October 2010, that Interior’s data likely  understated the amount of natural gas produced on federal leases,  because the data did not quantify the amount of gas released directly to  the atmosphere (vented) or burned (flared) during the production  process. This vented and flared gas represents lost royalties to the  government and contributes to greenhouse gases. We recommended that  Interior improve its data and address limitations in its regulations and  guidance to reduce this lost gas. Interior generally agreed with our  recommendations and is taking steps to implement them.
section_title: Interior’s Oil and Gas Management on the High Risk List
paragraphs: In February 2011, we added Interior’s management of federal oil and gas  resources to our list of federal programs and operations at high risk for  waste, fraud, abuse, and mismanagement or needing broad-based  transformation. We added Interior to the list because the department:  (1) did not have reasonable assurance that it was collecting its share of  revenue from oil and gas produced on federal lands; (2) continued to  experience problems in hiring, training, and retaining sufficient staff to  provide oversight and management of oil and gas operations on federal  lands and waters; and (3) was engaged in a broad reorganization of both  its offshore oil and gas management and revenue collection functions,  leading to concerns about whether Interior could provide effective  program oversight while undergoing such a broad reorganization.
In the February 2013 update to our High Risk list,federal oil and gas management high-risk area to focus on revenue  collection and human capital challenges because Interior had completed  its reorganization.
In order for GAO to remove the high-risk designation, Interior must  successfully address the challenges we have identified, implement open  recommendations, and meet its responsibilities to manage federal oil and  gas resources in the public interest. While Interior recently began  implementing a number of GAO recommendations, including those  intended to improve the reliability of data necessary for determining  royalties, the agency has yet to implement a number of other  recommendations, including those intended to help the agency               (1) provide reasonable assurance that oil and gas produced from federal  leases is accurately measured and that the public is getting an  appropriate share of oil and gas revenues and (2) address its long- standing human capital issues.
We are currently engaged in two reviews examining the remaining two  high-risk issues. First, we are conducting a follow up review of Interior’s  collection of revenues from the production of oil and gas on federal lands  and waters. As part of this review, we will examine Interior’s progress, if  any, in (1) ensuring the government is getting a fair return for federal oil  and gas resources, (2) meeting agency targets for conducting oil and gas  production verification inspections, and (3) providing greater assurance  that oil and gas production and royalty data are consistent and reliable.  Second, we are reviewing the extent to which Interior continues to face  problems hiring, training, and retaining staff, and how any remaining  problems affect Interior’s ability to oversee oil and gas activities on federal  lands and waters. As part of this effort, we will focus on the causes of  Interior’s human capital challenges, actions taken, and Interior’s plans for  measuring the effectiveness of corrective actions. In addition, while we  have narrowed the focus of the high-risk area to revenue collection and  human capital issues, we will, in the course of ongoing work on these  issues, continue to consider Interior’s reorganization and its affect on the  agency’s ability to oversee federal lands and waters.
In conclusion, Interior’s management of federal oil and gas resources is in  transition. Our past work has found a wide range of weaknesses in  Interior’s oversight of federal oil and gas resources, ultimately resulting in  its inclusion on our High Risk List in 2011. Since then, Interior has  successfully implemented many recommendations and resolved one of  the three concerns that led to its inclusion on the high risk list—the  challenges associated with its reorganization. We remain hopeful that  Interior will continue to implement the many remaining recommendations  we have made, thereby providing greater assurance of effective oversight  of federal oil and gas resources.
Chairman Lankford, Ranking Member Speier and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to answer any questions that you or other Members of the  Subcommittee may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you have any questions concerning this testimony, 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 statement. Other individuals who made key contributions include  Jon Ludwigson, Assistant Director; Christine Kehr, Assistant Director;  Janice Ceperich; Glenn Fischer; Cindy Gilbert; Alison O’Neill; and  Barbara Timmerman.
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