The Government Accountability Office (GAO) just released a damning report of the Minerals Management Service's (MMS) Royalty-In-Kind (RIK) program, accusing the agency of "forgoing revenues for gas royalties owed to the federal government because it does not provide reasonable assurance that it accurately and promptly identifies and collects on RIK gas imbalances." The GAO identifies several risk factors in the program, which allows oil companies to pay royalties in the form of actual product — "in kind" crude oil or natural gas — rather than in cash ("in value"):
1. While MMS estimates that it is owed $21 million for natural gas imbalances, it doesn't have enough information to verify the accuracy of that amount — it could be much more;
2. MMS doesn't audit RIK gas operators' self-reported production and allocation data, so it cannot verify that it receives the correct volumes of RIK gas;
3. When they do find imbalances, RIK program officials lack adequate policies and procedures to reconcile and resolve the imbalances; and
4. MMS lacks the staff and training necessary to administer the program efficiently.
In short, they can't adequately identify problems, don't have the necessary procedures in place to solve problems they might identify, and even if they had the right procedures, they lack the staff and training to implement them.
The GAO notes that MMS isn't even pursuing all of the known imbalances in payments — RIK officials admitted to purposely avoiding debt collections because the process is "onerous" and they were waiting for the Solicitor to resolve a year-long inter-agency controversy over how to charge interest on underpayments. And in the imbalances they are tracking, the GAO found that their spreadsheets tracking imbalance statements from January 2007 to June 2008 demonstrated that at least 35 percent of the statements were received late, and about 10 percent were missing altogether. But even if they contained all of the information they needed, the GAO notes, MMS must frequently convert these statements manually, since MMS lacks a standardized policy on how companies should submit this information. Not only does this increase the chances of errors when determining royalties owed, the lack of a standardized policy takes time away from checking for imbalances.
The schedule of payments to MMS may also be depriving taxpayers of revenue, the GAO notes:
Section 115 of the Federal Oil and Gas Royalty Management Act, as amended, provides that a lessee’s obligation does not become “due” until the end of the month following the month in which the gas is produced. In its guidance letter to operators, MMS requests that deliveries be made on a daily basis equal to the royalty percentage. Because the statute authorizes MMS to enforce operator obligations only on a monthly basis, MMS believes it appropriate to calculate and monitor imbalances owed solely on a monthly rather than daily basis. However, this leaves open the possibility that some companies that owe RIK gas could provide less gas to MMS on days when gas prices are relatively high, and make up the difference by providing more gas on days when prices are relatively low...In contrast, industry officials we spoke with said that they monitor imbalances daily to ensure their companies do not lose revenue from daily imbalances. (Emphasis POGO's)
When the GAO analyzed a sample of leases to determine whether this practice was resulting in revenue shortfalls, they found that on average MMS received 15.9 percent of total production, even though their royalty percentage was 16.67 percent. To give you an idea of what this might mean financially, if MMS received $12 billion in FY2008, it's possible that they should've brought in $12.58 billion — potentially a difference of $580 million to taxpayers.
Despite the extensive criticism of the RIK program and its oversight weaknesses, the Department of the Interior still seems to be resistant to independently verifying the data industry reports to MMS about quantities of oil or gas owed to taxpayers. They only partially concurred with the GAO's recommendation that they should create and implement a risk-based auditing program — they said they'd conduct an analysis of what benefits might accrue from conducting risk-based audits — and Interior also was not sure if they should require operators to submit imbalance statements in a standardized format.
This Wednesday and Thursday the House Natural Resources Committee is holding a hearing to discuss the Consolidated Land, Energy, and Aquatic Resources (CLEAR) Act of 2009 (H.R. 3534), which includes a provision to end the RIK program. POGO Executive Director Danielle Brian will be testifying on Thursday about the proposed legislation. Needless to say, these debilitating oversight and management weaknesses in MMS only strengthen POGO's position that it's time to stop drilling the taxpayer and end the RIK program once and for all, and return to a system that will bring in the royalties due to them.
-- Mandy Smithberger
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