Indian Energy Development: Interior Could Do More to Improve Its Process for Approving Revenue-Sharing Agreements
Released: 2016-06-14T00:00:00

Letter

Background

Development of Indian energy resources is a complex process that may involve a range of stakeholders, including federal agencies, state agencies, tribal governments, individual Indian mineral owners, and private oil and gas operators. When an operator seeks to develop land that includes Indian resources, the operator must identify ownership of surface and subsurface resources and acquire a lease for the right to drill for oil and gas resources, among other things. BIA maintains these surface and mineral ownership records, including lease information. There are several ways in which Indian oil and gas resources can be leased. For example, oil and gas resources can be nominated for lease by operators, the tribe, or an individual Indian mineral owner. BIA then reviews nominated oil and gas resources to determine ownership, and in some cases, BLM may assist with identifying ownership of the proposed parcels. If the resources are not already leased, BIA may advertise and conduct competitive lease sales where operators can bid on nominated leases. BIA reviews the bids, identifies the highest bidder, notifies the operator whether its bid was accepted, and issues the lease.

An Indian lease document comprises a primary term and a secondary term, both of which are negotiated as part of the lease agreement. The primary term is the time frame in which the company has to begin drilling or the lease will expire. The length of this term varies, but it usually ranges from 2 to 10 years for Indian leases, according to Interior officials. The secondary term is established after production begins and remains in effect as long as the well is producing in paying quantities. The lease also consists of three payment types between the operator and the tribe or Indian mineral owner: (1) a onetime bonus payment paid per acre following lease approval, (2) an annual rental payment for the leased land, and (3) ongoing royalty payments for development of the resource.

If an Indian lease cannot be independently developed in conformity with well spacing requirements set by the state and BLM, the operator developing an area including Indian mineral interest must request approval of a CA from BIA. Production from a well located within the CA is attributed to the entire area—meaning that all owners share a percentage of the royalties based on their percentage of surface ownership, regardless of where the well is located. According to BIA’s Fluid Mineral Estate Procedural Handbook, communitization serves a conservation function by eliminating excessive drilling and minimizing surface disturbance, while protecting adjoining properties from drainage of their minerals. Figure 1 illustrates a hypothetical example in which three leases are included in an approved CA. The example shows how royalties are allocated among each lessor.

A CA must be approved before operators can distribute royalty payments for Indian leases to the appropriate mineral owners. BIA, through several divisions and its various regional and agency offices, has primary authority for managing Indian energy development and has ultimate approval authority for Indian CAs. BIA may approve a CA if it determines that approval “is advisable and in the best interest of the Indian mineral owner”. However, other offices within Interior also have a role in the development and accounting of Indian energy resources in regard to CAs. For example, BLM reviews a CA application and recommends to BIA whether to approve an Indian CA based on the engineering and technical aspects. Operators send royalty payments from the production of Indian mineral leases to ONRR. Once the CA is approved by BIA and production has been established, payments are made to ONRR, unless otherwise provided for by the lease. ONRR transfers royalty payments to the appropriate Indian accounts, and the Office of the Special Trustee for American Indians (OST) makes the royalty payments to Indian mineral owners based on instructions from BIA. An approved CA is effective on either the date of first production or the date the CA is approved, whichever is earlier. Traditionally, Interior encouraged the operator to submit an Indian CA before the well was drilled, but it was common for operators to wait until the results of the well were known before submitting the CA application, according to Interior officials.

In recent years, some offices within Interior have taken actions to address the backlog of CAs in their regions. For example, we previously reported that in North Dakota the BLM Dickinson field office, BIA Fort Berthold agency office, and ONRR created a preliminary CA process in March 2011 to address the backlog of CAs in their region. According to Interior officials, the preliminary CA process was used by some BIA and BLM offices as an interim step to ensure the timely collection and distribution of royalties while operators prepared the required documents for a complete CA application. However, in early 2015 Interior’s Office of the Solicitor instructed BIA and BLM to cease using this process. The Office of the Solicitor determined that preliminary CAs were not legally binding because documents used in the process were not formally reviewed, approved, and signed by the Secretary of the Interior or the Secretary’s designee.

In addition, Interior officials said that they signed a contract with Lockheed Martin in October 2011 that included providing technical assistance and additional staff to help expedite the processing and approval of CA packages at the BIA Fort Berthold agency office. We previously reported that some BIA offices did not have adequate staff resources or staff with the skills needed to effectively evaluate energy-related documents, including the large number of CAs. According to Interior officials, the additional staff and technical resources that the Lockheed Martin contract provided allowed the office to review and approve more CAs than it otherwise could have. However, Interior officials told us that because the contract is scheduled to end in September 2016, some of these functions will subsequently be administered directly by Interior’s recently established Indian Energy Service Center. As of March 2016, according to Interior officials, the Service Center has some funding available for fiscal year 2016 and is in the process of hiring a director, identifying overall staffing needs, and defining its roles and responsibilities. We are examining the roles and responsibilities of the Indian Energy Service Center in a separate ongoing review.

Interior Has Taken Actions to Streamline the Review and Approval Process, but Three Weaknesses Will Effect Its Ability to Assess the Results of Its Actions

In the summer of 2015, BIA and BLM issued guidance in an effort to streamline the CA review and approval process and address the backlog of Indian CAs awaiting review and approval. The guidance seeks to shorten the time required to review and approve a CA by, among other things, reducing paperwork, eliminating duplicative reviews, and expediting the review of key information early in the process. However, Interior does not have plans to set time frames for CA reviews, systematically collect data on review times, or assess the effect of its revised guidance. As a result, Interior will be unable to determine whether the resulting actions have had a positive effect on the CA review and approval process.

BIA and BLM Issued Guidance Intended to Streamline the CA Review and Approval Process

In 2015, BIA and BLM worked collaboratively to develop guidance intended to streamline the CA review and approval process and help address the current backlog of Indian CAs awaiting approval. Specifically, in July 2015, BLM issued guidance that called for the CA approval process to be streamlined to ensure the more timely payment of royalties to Indian mineral owners. Approximately one month later, BIA issued corresponding guidance to ensure the timely review, adjudication, and approval of Indian CAs.

The guidance for both BIA and BLM, which we refer to in this report as the revised guidance, was developed through a collaboration between BLM, BIA, ONRR, and OST senior officials who attend biannual meetings of the Indian Energy and Minerals Steering Committee (IEMSC). According to Interior officials, the revised guidance incorporates best practices of individual offices and standardizes the CA review and approval process to better ensure consistency of approval methods in offices across the country. The guidance also helps to clarify and delineate the responsibilities of BIA, BLM, and the operators.

Based on our review of Interior’s former and revised guidance and supporting documents, the revised process includes approximately the same number of steps as the former process. However, as shown in figure 2, the revised process includes various steps designed to reduce paperwork, eliminate duplicative reviews, and expedite the review of key information early in the process, which, according to the guidance, should dramatically reduce CA adjudication and processing times.

Specifically, Interior took the following actions in an effort to streamline the CA process:

Reducing paperwork: The new guidance reduces and simplifies the information required to be submitted to BIA and BLM as part of a the CA package by, among other things, allowing operators to combine all nonfederal and non-Indian ownership interests, such as private and state interests, into a single entry representing total acreage. As a result, information such as the individual lease date, lease term, and lessor is no longer required by BIA and BLM. According to the revised guidance, BLM now verifies the total acreage and land description of the proposed CA. One operator told us that this change will significantly reduce the amount of paperwork submitted to BIA and BLM for review. For example, according to the operator, BIA and BLM used to review CAs with attachments numbering approximately 400 pages of lease information, often in hardcopy; in contrast, the attachments may now be as few as 10 pages of lease information. In addition, the revised guidance states that BIA and BLM should already have the necessary information for Indian and federal leases. According to officials, BIA and BLM used to verify the signatures of all interest owners that were party to the CA but did not have the staff to accomplish this task in a timely manner. The revised guidance allows operators to self-certify that they have collected the necessary signatures, including signatures from private and state interests, which, according to officials, further decreases the amount of information federal officials are responsible for reviewing and places the burden on operators to collect such information. The reduction in paperwork submitted is expected to reduce the workload for both BIA and BLM offices.

Eliminating duplicative reviews: According to several BLM officials, BLM’s technical review of an Indian CA traditionally involved the adjudication of federal, Indian, state and private interests, which required the individual verification of acreage, ownership, and operating rights, resulting in lengthy reviews of the CA package. After BLM’s technical review, according to officials, BIA would adjudicate ownership of the same Indian leases, duplicating BLM’s efforts and the review time. However, under the revised process, BIA is to adjudicate only Indian interests and BLM is to adjudicate only federal interests within the proposed CA. The revised guidance places responsibility for adjudication with the agency that has the expertise to verify the necessary information. For example, the new guidance makes BIA responsible for information it currently maintains and is independently knowledgeable of, such as lease records for Indian interests. While it is too soon to determine the extent to which reducing duplication of effort will reduce the time needed to review and approve Indian CAs, the new guidance appears to more clearly define the separate roles of BIA, BLM, and the operators in the CA process.

Expediting the review: Several BIA and BLM officials noted that under the former process, operators often submitted proposed CAs in an incomplete form or to the wrong office, which ultimately led to review and approval delays. Under the revised process, operators must submit the proposed CA directly to the BIA Regional Director or Superintendent of the Agency with jurisdiction over the lands included in the CA. BIA has noted that an operator’s failure to file an Indian CA with the appropriate BIA office puts the company at risk of not complying with regulation and not having an approved CA in place before expiration of the Indian lease(s). In addition, according to the revised guidance, BIA is now tasked with performing a “quick review” early in the process to determine if there are problems with the information provided by the operator that could ultimately delay CA approval. The revised guidance notes that BIA will take the lead in documenting potential errors in the proposed package, such as potential acreage errors that could affect royalty payments, and if necessary, will quickly notify BLM and the operator. The guidance also notes that this is an important step considering the length of time it takes for CAs to be adjudicated and recommended for approval. Again, it is too soon to determine the extent to which the earlier submission of a complete CA by the operator to the appropriate BIA office may help ensure the timely review of an Indian CA and ultimately the more timely payment of royalties to Indian mineral owners.

The revised guidance also includes BIA’s and BLM’s new goals for streamlining the CA review process. BIA’s guidance states that its goal is to address, devise, and implement a solution when there are problems with a CA before the well is completed and any royalty payments are made. Similarly, BLM’s guidance states that its goal is to have an approved CA in place before the date of first production in order to allow the operator to pay royalties to the mineral owner from the start of production. According to Interior officials, under the former process, CAs were sometimes approved years after production began, leading to accounting challenges to recoup and distribute royalties to Indian mineral owners at a later date. It is Interior’s goal, as noted in the revised guidance, to identify and address any problems that may exist with an Indian CA early in the review process to help ensure the more timely approval of the CA, ideally before oil and gas development begins.

Interior Will Not Be Able to Fully Assess the Results of Its Recent Actions to Streamline the CA Process without Required Time Frames and a Systematic Tracking Mechanism

BIA and BLM developed the revised guidance with the intent to expedite the review and approval of CAs and ensure the more timely payment of royalties to Indian mineral owners, but Interior has established few time frames for the BIA and BLM offices that perform tasks during the review and approval process and BIA has no mechanism in place to track Indian CAs. In addition, the revised guidance does not include plans to assess whether its efforts to streamline the CA review and approval process result in the more timely review of Indian CAs.

Standards for Internal Control in the Federal Government states that management should define objectives to include what is to be achieved, who is to achieve it, how it will be achieved, and the time frames for achievement. However, no statute, regulation, or internal procedures specify a time frame by which BIA, as the approving office for an Indian CA, is required to review or approve an Indian CA. In contrast, according to statute, BLM is to review CAs and issue determinations of allocation within 120 days of a request. Interior’s standard operating procedures that govern energy development of federal and Indian resources note that BLM is to review and recommend whether to approve an Indian CA within 30 days of BIA’s request; again, these procedures do not include a time frame for BIA’s role in the review and approval of an Indian CA. Many Interior officials we spoke with stated that some BLM offices treat the 30- day time frame as a suggestion rather than a requirement and said that offices within their regions rarely meet the time frame because of overwhelming workloads and staffing shortages, which is consistent with the findings in our May 2014 report. Senior BIA officials told us that establishing time frames for BIA could help ensure a more transparent and efficient Indian CA review and approval process. Without required time frames, Interior is limited in its ability to ensure that BIA and BLM reviews of Indian CAs help the agency meet its objective to provide for a more timely CA review and approval process.

In addition, according to the revised guidance, it is BIA’s responsibility to monitor the review and approval times for Indian CAs; however, BIA currently has no systematic mechanism in place to track an Indian CA through the review and approval process and the revised guidance did not establish such a mechanism. BIA officials in some field offices told us that they maintain an informal tracking document, typically a spreadsheet, to track the CAs their office is reviewing; however, this document is usually not accessible by officials outside their field office, including coordinating agency officials and headquarters staff. An interagency plan created in May 2014 in response to Executive Order 13604 notes that the ability to track and monitor the review of permits and applications is a best practice to improve the federal review process. In our June 2015 report, we found that BIA did not have a process to track its review and response times for energy-related documents, including CAs. In our report, we recommended that, to improve the efficiency and transparency of its review process, BIA should develop a documented process to track its review and response times. Interior did not fully concur with our recommendation, but in an August 2015 letter to us noted that BIA intends to enhance its national database—the Trust Asset and Accounting Management System (TAAMS)—by improving the tracking and monitoring of oil and gas leasing documents by the end of fiscal year 2017. According to officials, BIA does not currently enter CAs into TAAMS until after the CAs are approved because the system is not used to track oil and gas documents through the review process. BIA officials told us that a subject matter expert group was formed in July 2015 to evaluate the need for system updates to TAAMS, but that the group has no specific plans to include recommendations associated with the tracking of Indian CAs. The revised guidance does not explain how BIA will monitor the review and approval times of Indian CAs without information on the length of time BIA and BLM offices are taking to review and approve these CAs. Without a systematic tracking mechanism to collect information that is accessible by coordinating officials and headquarters staff, Interior will be unable to fulfill its objective to ensure that Indian CAs are being reviewed and approved in a timely manner.

In addition, although the revised guidance states that the proposed actions should “dramatically reduce” adjudication and processing times to ensure the more timely review and approval of CAs, it does not include a plan to assess the process to determine if Interior has met this policy objective. A senior BIA official confirmed that the agency has no plans to track the results and assess the time-saving elements included in the revised CA process. Instead, according to this official, BIA’s current focus is to work through the existing backlog of Indian CAs and complete the review and approval of these applications. However, Standards for Internal Controls in the Federal Government states that management should compare actual performance to expected results and analyze significant differences. Without a plan to assess the effect of its revised guidance on the Indian CA review and approval process, Interior will not be able to compare actual performance against the objective of a more timely process, which may also prevent it from identifying further improvements, if needed, to the process in the future.

Conclusions

BIA and BLM issued revised guidance in an effort to streamline the review and approval process for Indian CAs. However, a number of factors will limit BIA’s ability to ensure that the resulting actions have had a positive effect on the process and lead to the more timely review and approval of Indian CAs. Specifically, as Interior has not established required time frames by which an Indian CA should be reviewed and approved, BIA will be limited in its ability to hold offices accountable to ensure that Indian CAs are reviewed and approved in a timely manner. In addition, because BIA does not have a systematic mechanism to track an Indian CA through the process, it will be unable to fulfill its monitoring role to ensure that CAs are reviewed and approved in a timely manner. Finally, because Interior does not have a plan to assess the results of its revised guidance on the Indian CA process, the agency will be unable to determine whether it has achieved its policy objectives, such as decreasing the time needed to review and approve Indian CAs, designed to result in the more timely disbursement of royalties to Indian mineral owners. Without the ability to assess the effect of its revised guidance on the Indian CA review and approval process, Interior may not have enough information to make further improvements, if needed, to the process.

Recommendations for Executive Action

We recommend that the Secretary of the Interior direct the Director of the Bureau of Indian Affairs and, as appropriate, the Director of the Bureau of Land Management to take the following three actions:

Establish required time frames for the review and approval of Indian CAs to ensure a more timely CA process.

Develop a systematic mechanism for tracking Indian CAs through the review and approval process to determine, among other things, whether the revised CA process meets newly established time frames.

Assess whether the revised CA process is achieving its objective to improve the timeliness of the review and approval of Indian CAs, and if not, make changes as appropriate.

Agency Comments

We provided Interior with a draft of this report for review and comment. In its written comments, reproduced in appendix I, Interior concurred with our recommendations. In response to our recommendation about establishing required time frames for the review and approval of Indian CAs, Interior stated that BIA will issue a National Policy Memorandum that establishes such time frames. In response to our recommendation about developing a systematic mechanism for tracking Indian CAs, Interior stated that BIA will develop such a mechanism in TAAMS, and until that modification is made, BIA and BLM will use a centralized tracking spreadsheet. Finally, in response to our recommendation about assessing the revised CA process, Interior stated that both BIA and BLM will use the tracking spreadsheet, and, upon completion, the enhanced TAAMS, to monitor and assess the results of the efforts to streamline the process, and establish a process for review of the collected data to identify and implement any necessary process modifications.

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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. Key contributors to this report are listed in appendix II.

Appendix I: Comments from the Department of the Interior

Appendix II: GAO Contact and Staff Acknowledgements

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Christine Kehr (Assistant Director), Patrick Bernard, Richard Burkard, Patricia Chen, Cindy Gilbert, Alison O’Neill, Dan C. Royer, Jay Spaan, and Amy Ward-Meier made key contributions to this report.