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

Letter

Interior’s Oversight of Offshore Oil and Gas Resources

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.

Interior’s Collection of Oil and Gas Revenues

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.

Interior’s Oil and Gas Management on the High Risk List

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.

GAO Contact and Staff Acknowledgments

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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