Report to the Royalty Policy Committee
Mineral Revenue Collection from
Federal and Indian Lands and the
Outer Continental Shelf
Submitted by:
The Subcommittee on Royalty Management
with staff support from
U. S. Department of the Interior
Office of Policy Analysis ( Office of the Secretary)
and the Bureau of Land Management
December 17, 2007
Members of the Subcommittee on Royalty Management
Co- Chairs:
Bob Kerrey former U. S. Senator Jake Garn former U. S. Senator
Vice Chair:
David Deal Member, Royalty Policy Committee
Members:
Cynthia Lummis former State Treasurer, State of Wyoming
Mario Reyes Professor of Finance, University of Idaho
Perry Shirley Assistant Director, Minerals Department, Navajo Nation
Bob Wenzel former Deputy Commissioner, Internal Revenue Service
Staff:
Larry Finfer Staff Director and Deputy Director, Office of Policy Analysis,
Department of the Interior
Bob Anderson Deputy Assistant Director, Minerals, Realty, and Resource Protection,
Bureau of Land Management
John Broderick Economist, Bureau of Land Management
Christian Crowley Economist, Office of Policy Analysis, Department of the Interior
Alicia Kaiser Program Analyst, Office of Policy Analysis, Department of the Interior
Alan Rabinoff Deputy State Director, Minerals and Lands, Bureau of Land
Management, Wyoming
Benjamin Simon Economist, Economics Staff Director, Office of Policy Analysis,
Department of the Interior
Loretta Beaumont Special Assistant to Subcommittee Co- chairs
J. Wiley Westall Special Assistant to the Assistant Secretary for Land and Minerals
Management
Table of Contents
i
Table of Contents
Table of Contents...................................................................................................... i
List of Figures ......................................................................................................... iv
List of Tables........................................................................................................... iv
Executive Summary............................................................................................... vii
1. Introduction ..................................................................................... vii
2. Charge of the Subcommittee on Royalty Management.................. viii
3. Subcommittee on Royalty Management— Activities and Data
Gathering ....................................................................................... viii
4. Coordination of Royalty Management Activities ............................. viii
5. Findings and Recommendations...................................................... ix
Summary of Major Recommendations................................................................. xv
I. Collections and Production Accountability ................................................... xv
II. Audit, Compliance, and Enforcement.......................................................... xvi
III. Coordination among MMS, BLM, and BIA ................................................. xvii
IV. Royalty in Kind .......................................................................................... xviii
V. Lack of Price Thresholds in Offshore Oil and Gas Leases – 1998 and
1999 Lease Sales in the Gulf of Mexico...................................................... xxi
Chapter 1 Introduction and Charge to the Subcommittee................................ 2
I. Introduction ................................................................................................... 2
II. Subcommittee Data- Gathering Process........................................................ 3
A Brief History of Royalty Management ..................................................................... 5
Chapter 2 A Brief History of Royalty Management ........................................... 6
Chapter 3 Collections and Production Accountability ................................... 16
I. Subcommittee Charge ................................................................................ 16
II. Introduction ................................................................................................. 16
III. Background................................................................................................. 17
IV. Findings and Recommendations................................................................. 19
A. Federal and Indian Oil and Gas............................................................ 19
1. Accurate Reporting of British Thermal Unit ( BTU) Values.............. 19
Report to the Royalty Policy Committee
ii
2. Collections Complexities under the Royalty Simplification and
Fairness Act of 1996....................................................................... 23
3. Electronic Data Submittals, Data Exchange, and Accounting
Tools............................................................................................... 24
4. Gas Plant Efficiency ....................................................................... 28
B. Policy and Guidance for Production Accountability Activities................ 30
C. Personnel Issues for Production Accountability and Revenue
Collection Activities ............................................................................... 33
1. BLM Staffing for Production Accountability Activities...................... 33
2. MMS Staffing Levels for Revenue Collection Activities .................. 36
3. Training for BLM Production Accountability Staff............................ 38
Chapter 4 Audits, Compliance, and Enforcement ........................................... 46
I. Subcommittee Charge................................................................................. 46
II. Introduction.................................................................................................. 46
III. Background ................................................................................................. 46
A. Compliance and Enforcement— Process and Tools.............................. 46
B. Audits and Compliance Reviews........................................................... 52
1. Compliance and Enforcement Activity ............................................ 52
2. Risk- Based Compliance Strategy ................................................... 54
C. Staffing and Resources Available for Compliance Activities ................. 55
D. Inspector General Reports.................................................................... 56
E. Royalty Collections As a Result of Audit and Compliance
Activities................................................................................................ 57
IV. Findings and Recommendations ................................................................. 59
Chapter 5 Coordination, Communication, and Information Sharing
among MMS, BLM, and BIA ............................................................. 77
I. Introduction.................................................................................................. 77
II. Background ................................................................................................. 77
1. Roles and Responsibilities of the Federal Agencies....................... 77
2. Mineral Leases on Indian Lands..................................................... 78
3. Decentralization of Mineral Leasing Responsibilities...................... 79
4. Geospatial Information ................................................................... 80
III. Findings and Recommendations ................................................................. 81
A. Indian Mineral Leases........................................................................... 81
B. Interagency Coordination...................................................................... 82
Chapter 6 The Royalty in Kind Program........................................................... 91
Table of Contents
iii
I. Subcommittee Charge ................................................................................ 91
II. Introduction ................................................................................................. 91
III. Background................................................................................................. 91
A. Advantages Associated with Royalty in Kind Compared to
Royalty in Value.................................................................................... 93
B. Statistics and Program Administration.................................................. 94
1. RIK Volumes and Revenues .......................................................... 94
2. RIK Administrative Costs................................................................ 97
3. Comparison between Crude Oil and Natural Gas Sales ................ 98
4. Competition for RIK Volumes ....................................................... 100
IV. Findings and Recommendations............................................................... 105
A. Growth of the RIK Program ................................................................ 105
B. Market Position, Organizational Structure, and Incentives ................. 109
C. Crude Oil Program.............................................................................. 115
2. Onshore RIK Oil ........................................................................... 115
3. Small Refiner Program................................................................. 117
4. Strategic Petroleum Reserve ....................................................... 120
D. RIK Personnel Breadth and Depth ..................................................... 122
E. Performance measures ...................................................................... 126
F. RIK Auction Procedures ..................................................................... 129
Chapter 7 OCS Royalty Relief: Lack of Price Thresholds in Offshore
Oil and Gas Leases – 1998 and 1999 Lease Sales in the Gulf
of Mexico......................................................................................... 135
I. Background............................................................................................... 135
II. Findings and Recommendations............................................................... 136
A. Findings .............................................................................................. 136
B. Recommendations.............................................................................. 138
Appendices .......................................................................................................... 141
Appendix 1 Complete List of Recommendations ............................................ 142
Appendix 2 Risks Facing the RIK Program ..................................................... 160
Appendix 3 Price Trends for Oil and Natural Gas, 1990- 2006. ....................... 161
Appendix 4 RIK Volume Data, FY 2004- FY2010 ( historical and estimated) ... 162
Appendix 5 Credit Scoring Models.................................................................. 163
Report to the Royalty Policy Committee
iv
List of Figures
Figure 1 BLM Staffing Levels for Production Accountability Functions ( FY
2006) ............................................................................... 34
Figure 2 Minerals Revenue Management FTEs, FY 2001 Compared to
FY 2006........................................................................... 37
Figure 3 Annual RIK Natural Gas Volumes, 2004- 2010.................................... 96
Figure 4 Annual RIK Oil Volumes, 2004- 2010 .................................................. 97
Figure 5 Federal Offshore Gulf of Mexico Natural Gas Marketed
Production, 1997- 2006 .................................................... 99
Figure 6 MMS Marketing Strategy .................................................................. 110
Figure 7 Disposition of RIK Crude Oil ............................................................. 116
Figure 8 Minerals Revenue Management FTEs, FY 2001 Compared to
FY 2006 Source: MRM FTE and Payroll Summary
FY 2001- 2006................................................................ 123
Figure 9 U. S. Natural Gas Wellhead Price; Federal Offshore U. S. Gulf
Coast Crude Oil Wellhead Acquisition Price by First
Purchasers .................................................................... 161
List of Tables
Table 1 Mineral Lease Revenue Collections, FY 2007 ...................................... 7
Table 2 Mineral Lease Revenue Disbursements, FY 2007................................ 7
Table 3 Total Royalty Revenues Associated with Producing Leases for
FY 2007 ( Accounting Year) ............................................. 18
Table 4 Reported Royalties and Revenues, FY 2001 – FY 2007 ($
millions) ........................................................................... 25
Table 5 MMS Compliance and Asset Management Activities.......................... 49
Table 6 Internal Revenue Service Compliance Activities................................. 50
Table 7 Audits and Compliance Reviews by Compliance Office, FY
2005- 06 ........................................................................... 54
Table 8 Leases and Revenues by State, FY 2006........................................... 56
Table 9 Reported Royalty Revenue and Royalty Collections As a Result
of Compliance Activities, FY 2003 – FY 2006 ($
millions) ........................................................................... 58
Table 10 Total Cost by Compliance Office, FY 2003– FY 2006 ($ millions) ....... 58
List of Tables
v
Table 11 Total Cost of Compliance Activities and Revenue Collections by
Compliance Activity ($ millions)....................................... 59
Table 12 Data Fields in Various Compliance Information Systems................... 69
Table 13 Management of Federal and Indian Mineral Resources: Roles
and Responsibilities ........................................................ 78
Table 14 RIK Volumes FY 2004- 2006............................................................... 95
Table 15 RIK Oil and Gas Revenues ( from RIK Auctions), FY 2004- 2006
($ millions)....................................................................... 96
Table 16 Administrative Costs for RIK and RIV: $ per Barrel of Oil
Equivalent ( BOE) ............................................................ 98
Table 17 Comparison of RIK Sales for Crude Oil and Natural Gas ................. 100
Table 18 RIK Gas Sale Statistics, 2005- 2007 ................................................. 101
Table 19 RIK Oil Sale Statistics, 2005- 2007 ................................................... 102
Table 20 MMS Classification of Crude Types.................................................. 104
Table 21 Comparison of Average RIK Prices Received with Market Index
Prices ............................................................................ 105
Table 22 Comparison of RIK Oil and Natural Gas Marketing Flexibility .......... 107
Table 23 RIK Royalty Volumes, FY 2006 ........................................................ 116
Table 24 Small Refiner RIK Sales, 2001- 2007................................................ 119
Table 25 MMS costs related to SPR Obligations, ($ millions) ......................... 120
Table 26 Change in BOEs per FTE 2004- 2006............................................... 123
Table 27 Risks facing the RIK Program .......................................................... 160
Table 28 Qualified Bidders for RIK Auctions Companies ................................ 166
Report to the Royalty Policy Committee
vi
Executive Summary
vii
Executive Summary
1. Introduction
The Minerals Management Service ( MMS) administers and enforces the financial
terms for all Federal mineral leases: onshore, offshore, and on Indian lands. In
Fiscal Year 2007, over 2,000 companies reported and paid royalties totaling
approximately $ 10.3 billion from approximately 30,000 producing Federal and Indian
leases. Additionally, MMS and the Bureau of Land Management ( BLM) have
leasing, permitting, inspection and enforcement responsibilities, including conducting
production accountability reviews. MMS’s and BLM’s responsibilities apply to
offshore leases, onshore Federal leases, and leases on Indian Lands.
On March 22, 2007, the Subcommittee on Royalty Management (“ the
Subcommittee”) was appointed by the Secretary of the Interior (“ the Secretary”) to
conduct an independent prospective examination of the MMS’s minerals revenue
management program. The Subcommittee was appointed following the publication
a report by the Department of the Interior ( DOI) Office of the Inspector General1 ( IG)
that raised concerns about the audit and compliance program, as well as other
issues separately raised by the IG related to employee misconduct. These reports
led to increased public concern and heighted scrutiny by members of Congress. As
a result of these concerns, the Secretary determined that a fully independent
examination of the program was warranted, and necessary to restore credibility to
this important revenue- generating program, and to the staff who support.
The Subcommittee reports to the Royalty Policy Committee, which is chartered
under the Federal Advisory Committee Act ( FACA) to provide advice to the
Secretary and other Departmental officials responsible for managing mineral leasing
activities. The Royalty Policy Committee further serves as a forum for individual
States, American Indian tribes, individual Indian mineral lease holders, industry,
government agencies, other stakeholders, and the general public who wish to voice
their viewpoints on pertinent royalty policy issues. The Subcommittee on Royalty
Management consists of seven members, chosen for their broad expertise and
knowledge of public policy concerns, or for their experience managing mineral
leasing and revenue management programs.
1 Minerals Management Service’s Compliance Review Process. Report No. C- IN- MMS- 006- 2006.
Department of the Interior Office of Inspector General. December 2006. Also see
Minerals Management Service, False Claims Allegations, Redacted Report of Investigation. U. S.
Department of the Interior, Office of Inspector General, September 7, 2007.
Report to the Royalty Policy Committee
viii
2. Charge of the Subcommittee on Royalty Management
The Subcommittee on Royalty Management was initially charged with reviewing:
• The extent to which existing procedures and processes for reporting and
accounting for Federal and Indian mineral revenues are sufficient to ensure
that the Minerals Management Service receives the correct amount;
• The audit, compliance, and enforcement procedures and processes of the
Minerals Management Service to determine if they are adequate to ensure
that mineral companies are complying with existing statutes, lease terms, and
regulations as they pertain to payment of royalties; and
• The operations of the Royalty in Kind program to ensure that adequate
policies, procedures, and controls are in place so that decisions to take
Federal oil and gas royalties in kind result in net benefits to the American
people.
Subsequently, in September 2007, Assistant Secretary C. Stephen Allred asked the
Subcommittee to review procedures promulgated by the Department in response to
the lack of price thresholds in Gulf of Mexico leases from 1998 and 1999 sales.
3. Subcommittee on Royalty Management— Activities and Data Gathering
The Subcommittee secured staff assistance from DOI’s Office of Policy Analysis ( a
staff office within the Office of the Secretary) and from the Bureau of Land
Management. Minerals Management Service staff provided briefings, data and
information as requested by the Subcommittee and its staff. MMS staff did not
participate in the deliberations of the Subcommittee nor did it prepare or review any
portions of this report.
The Subcommittee held two face- to- face meetings and numerous teleconferences to
develop and discuss issues and recommendations. In addition to briefings and
information received from MMS, Subcommittee members and/ or staff consulted with
several entities, including:
• Various U. S. States and the Province of Alberta ( on Royalty in Kind issues);
• Consultants with expertise in specific areas;
• The Department of Energy; and
• The Internal Revenue Service.
Staff and Members conducted field visits to offshore and onshore operations, and
initiated an effort to gather information from the BLM offices that manage onshore
minerals leases. Furthermore, the Subcommittee and staff found several recent
reports issued by the Department’s Office of Inspector General to be especially
valuable, including those addressing MMS’s audit and compliance program and
events pertaining to Gulf of Mexico leases issued between 1998 and 1999.
4. Coordination of Royalty Management Activities
Three DOI bureaus have important roles in royalty management – the Minerals
Management Service ( MMS), the Bureau of Land Management ( BLM), and the
Bureau of Indian Affairs ( BIA). The table below identifies the major roles and
Executive Summary
ix
responsibilities of the DOI bureaus, and the significant information sharing and
coordination required at each step in the royalty management process.
Table ES- 1. Management of Federal and Indian Mineral Resources: Roles and Responsibilities
Location of Mineral Resource
Function Offshore FederOanl shorIen dian
Information necessary for effective
coordination
Develop and
implement
Management
Plans*
MMS BLM BIA Land status, areas available for
leasing, stipulations
Lease parcels MMS BLM BIA Lease terms and conditions, royalty
rate, distribution of revenue
Permit/ inspect
operations/ enforce
ment
MMS BLM BLM Well/ lease operating and production
status, information on operations
Production
verification
MMS BLM BLM Production information generated by
agency field measurements and
inspections
Production reports MMS MMS MMS Operator reported production
Production
accountability
( compare
measurements to
reports)
MMS BLM BLM Production information reported by
operators; production information from
agency information systems
Royalty payment
compliance
MMS MMS MMS Compliance status
Royalty
collections/
enforcement
MMS MMS MMS Compliance status
Revenue
distribution
MMS MMS MMS Revenue distribution information
* BLM is responsible for Resource Management Plans on BLM- managed lands. Other Federal
agencies are responsible for surface management on lands they manage ( e. g., Forest Service,
Department of Defense., Fish and Wildlife Service).
Source: Subcommittee.
While communication among MMS, BLM, and BIA is critical to effective royalty
management, internal communication within each bureau is also necessary to
ensure that leasing and royalty management program managers and compliance
staffs are able to work effectively together.
5. Findings and Recommendations
In general, the Subcommittee concludes that the Minerals Management Service is
an effective steward of the Minerals Revenue Management program, and that MMS
employees are genuinely concerned with fostering continued program
improvements. The Subcommittee members unanimously agree that that MMS is
the Federal agency best suited to fulfill the stewardship responsibilities for Federal
and Indian leases. This includes the RIK program, which has grown under MMS’s
Report to the Royalty Policy Committee
x
management from a small pilot to a major component of the royalty management
program. However, a number of aspects of royalty management activities
administered by MMS and the Bureau of Land Management require prompt, and in
some cases, significant management attention to ensure public confidence. The
Subcommittee’s recommendations are intended to help achieve this end, and
address a variety of policy, management and technical concerns.
In this report, the Subcommittee makes over 100 recommendations related to the
charges in the Subcommittee charter. These recommendations concern the
activities of all three of DOI bureaus involved in royalty management. Most of the
recommendations in the report can be implemented through administrative action by
the Department and the relevant Bureaus. Many of them can be accomplished in a
relatively short period of time.
The Subcommittee’s recommendations include several major issues that will require
further study and, in some cases, legislative action. These include:
• MMS should explore the feasibility of establishing a “ trust fund” within
Treasury, the interest from which could be used to fund DOI activities,
particularly those related to royalty management. ( see Chapter 6)
• MMS should evaluate the benefits and costs of alternative governance
arrangements for the RIK program. ( see Chapter 6)
• The Department of the Interior should support amending the Royalty
Simplification and Fairness Act ( RSFA) to permit MMS to collect debts by
pursuing the royalty payor rather than the operating rights owner. ( see
Chapter 3)
• MMS should consider establishing a “ whistleblower” program to strengthen
production accountability and compliance efforts. ( see Chapter 4)
Some recommendations will require long- term and continuing effort to achieve
successful implementation. These include:
• MMS should implement a risk- based strategy for identifying companies and
properties for audits and compliance reviews. This effort will require
developing, testing and refining various strategies over the next several
years, as well as providing the information systems support needed to
achieve a fully functional risk- based approach. The Subcommittee expects
this to be an evolving process but it also expects MMS to take aggressive
action to make significant progress over the short- and mid- term. The Internal
Revenue Service ( IRS) has spent many years perfecting its audit strategy,
and continues to make improvements. MMS should work with the IRS to
benefit from the lessons IRS has learned over the years. ( see Chapter 4)
• MMS should strengthen the oversight of the Royalty in Kind ( RIK) program.
In the short- term, this can be addressed by establishing a subcommittee to
the existing Royalty Policy Committee. ( see Chapter 6)
Executive Summary
xi
• MMS should implement improvements to the information systems that are
critical to royalty management, with the goal of eliminating redundant
systems, improving the ability of all systems to share data easily, and moving
to an all- electronic format for data submissions. ( see Chapter 3 and Chapter
4)
Many of the Subcommittee’s recommendations can be easily implemented. Some
examples include:
• MMS should amend Form MMS- 2014 to record natural gas BTU values,
which form the basis for required royalty payments. This will require adding a
second column to the form: the new column will report BTU value, and the
original column will still report volume times BTU value ( total mmBTU). ( see
Chapter 3)
• MMS’s Offshore Minerals Management division ( OMM) should phase in a
requirement for offshore lease operators to submit all oil and gas volume and
quality statements electronically, in an automated file format. Once electronic
reporting of quality information is established, MMS should modify the Gas
and Liquid Verification Systems ( GVS and LVS) to compare information
submitted via GVS/ LVS to information submitted via Oil and Gas Operations
Reports ( OGORs). ( see Chapter 3)
• MMS and BLM should convene an annual workshop for BLM Petroleum
Engineering Technicians and Petroleum Accountability Technicians and
equivalent MMS Offshore Minerals Management ( OMM) personnel to share
applicable best practices and identify and propose resolutions to common
production accountability concerns. ( see Chapter 3)
• MMS should automate the data entry process for all compliance management
information systems and establish a schedule for completing this effort, with a
completion date of not later than June 2009. This will keep data current,
improve data quality and consistency, and improve the reliability of the
information used in decision- making and performance tracking and
evaluation. ( see Chapter 4)
• MMS should establish an RIK Subcommittee to the Royalty Policy Committee
( RPC). Issues that should be addressed include performance benchmarks,
volume verification and market positioning. ( see Chapter 6)
Several important recommendations cut across all of the Subcommittee’s charges.
These include:
• Recommendations to update, consolidate and make more transparent
policies and guidance in a number of areas, including production
Report to the Royalty Policy Committee
xii
accountability, compliance reviews, and the Royalty in Kind program.
Examples include:
􀂃 The Department of the Interior should finalize the “ technical changes”
Indian oil valuation rule in order to address a long standing concern of
Indian tribes. ( see Chapter 4)
􀂃 MMS should compile and publish a guidebook of RIK procedures and
policies, which should be made available to the public. ( see Chapter
6)
􀂃 BLM should update all policy and guidance on production
accountability, including any expired and current instruction
memoranda, the “ Redbook,” and any relevant pre- 1983 USGS
guidance. ( see Chapter 3)
• The Department of the Interior must improve communication among the
bureaus involved in royalty management, and must improve internal
communication within each bureau. One of the problems found by the
Subcommittee was that even when well defined roles, procedures, and data
standards existed, a common set of information was not available to all of the
relevant entities involved. Improved communication across bureaus will
strengthen royalty management in general; improved communication within
bureaus will improve data handling and allow compliance and royalty
management staffs to better coordinate their efforts. A particular emphasis
should be placed on facilitating communication across the production
accountability staffs in BLM and MMS. ( see Chapter 5)
• MMS should increase the resources devoted to production accountability;
MMS and BLM should strengthen the training provided to their production
accountability staffs. ( see Chapter 3)
• The Department of the Interior should target and strengthen the ethics
training required for all staff involved in royalty management. This is
particularly important for staff whose responsibilities involve frequent
interactions with private sector entities, such as the staff of the Royalty in Kind
program. This training should include guidance on public- private sector
interactions, use of official and/ or proprietary data, and prohibitions on the use
of public office for private gain. ( see Chapter 6 and Chapter 7)
With respect to price threshold concerns related to certain Gulf of Mexico leases
issued during 1998- 1999, the Subcommittee has determined that the Secretary’s
February 2007 memorandum appears to provide adequate policy guidance.
However, to be effective, the Subcommittee recommends that this guidance be
supported by documented, detailed and rigorous procedures and guidelines, as well
as periodic and comprehensive reviews to ensure that the guidelines are being
implemented.
Executive Summary
xiii
Another factor affecting royalty revenues and the royalty management program is
the use of RIK oil to fill the Strategic Petroleum Reserve ( SPR). The Department of
the Interior has entered into an agreement with the Department of Energy that
provides for using RIK oil to fill the SPR. The current agreement is for MMS to
provide sufficient volumes to add 27 million barrels to the SPR. This effort began in
July 2007 with deliveries of 50,000 bbl/ day and is expected to be completed in 2008,
with MMS delivering 70,000 bbl/ day.
While the current targeted SPR capacity of 727 million barrels is expected to be
reached by 2009, there are also plans for expanding SPR capacity to 1 billion
barrels. An issue that will require attention is the timing of SPR capacity expansion,
and the impact of that expansion on the Royalty in Kind program, in particular, the
extent to which RIK oil will intermittently be needed to fill the SPR in the future.
The Subcommittee’s major recommendations are summarized below. The full report
provides greater details on these and other recommendations, as well as related
findings. Included at the front of each chapter is a list of major recommendations for
that chapter. In addition, the full set of the Subcommittee’s recommendations is
provided in Appendix 1.
Report to the Royalty Policy Committee
xiv
Summary of Major Recommendations
xv
Summary of Major Recommendations
I. Collections and Production Accountability
Legislative Changes
• The Department of the Interior should support amending the Royalty
Simplification and Fairness Act ( RSFA). The Energy Policy Reform and
Revitalization Act of 2007 ( HR 2337) introduced in the 110th Congress contains
language in Section 215 (“ Liability for Royalty Payments”) simplifying the RSFA
collection requirements by restoring MMS’s ability to pursue the “ payor” for debts,
as was done prior to the enactment of RSFA. The Subcommittee recommends
separating Section 215 from HR 2337, if necessary, for passage as a stand-alone
piece of legislation. This RSFA amendment would allow for more timely
and less costly collection of MMS’s unsettled royalty debts. ( see
Recommendation 3- 8 on page 23)
Verification of BTU Values
• MMS should amend Form MMS- 2014 to record natural gas BTU values, which
form the basis for required royalty payments. This will require adding a second
column to the form: the new column will report BTU value, and the original
column will still report volume times BTU value ( total mmBTU). ( see
Recommendation 3- 6 on page 22)
• MMS should modify the Gas and Liquid Verification Systems ( GVS and LVS), or
develop an equivalent, automated system to compare BTU values and oil quality
data in submitted product quality statements to information in Oil and Gas
Operations Reports ( OGORs) ( see also recommendations under Electronic Data
Submittals, Data Exchange, and Accounting Tools, beginning on page 27). ( see
Recommendation 3- 7 on page 23)
Training and Human Resource Improvements
• BLM should develop estimates of the number of hours required to complete
simple and complex reviews ( described in the findings above). These estimates
should be used to help determine appropriate staffing levels, closely
corresponding to oil or gas activity in a given field office. In the interim, BLM
should reallocate its FY 2008 funding for oil and gas activities to place greater
emphasis on the timely hiring of additional Production Accountability Technicians
( PATs) sufficient to meet current and expected workloads. ( see
Recommendation 3- 25 on page 36)
• BLM should assess the training needs for Petroleum Engineering Technicians
and Production Accountability Technicians ( see Recommendation 3- 32 on page
40)
• MMS and BLM should establish standardized position descriptions for Production
Accountability Technicians in order to consistently define the roles and
responsibilities of these individuals ( see Recommendation 3- 30 on page 40)
Report to the Royalty Policy Committee
xvi
Technological Improvements
• BLM should establish and maintain a gas measurement team of specialists to
assess new gas measurement technologies. This team should provide
recommendations to BLM by June 2008. Following the development of an initial
set of recommendations, the team should meet on an annual basis to evaluate
the extent to which new technologies should be considered in BLM’s guidance.
( see Recommendation 3- 23 on page 33)
• BLM should work with MMS’s Minerals Revenue Management ( MRM) division to
develop and implement a system that electronically transmits information on
lease establishment and any follow- up leasing actions affecting lease status.
( see Recommendation 3- 9 on page 27)
• MMS’s Minerals Revenue Management division ( MRM) should phase in a
requirement that all payors submit their payments electronically, with a goal of full
implementation in five years. ( see Recommendation 3- 13 on page 27)
• MMS’s Offshore Minerals Management division ( OMM) should phase in a
requirement for offshore lease operators to submit all oil and gas volume and
quality statements electronically, in an automated file format. Once electronic
reporting of quality information is established, MMS should modify the Gas and
Liquid Verification Systems ( GVS and LVS) to compare information submitted via
GVS/ LVS to information submitted via Oil and Gas Operations Reports
( OGORs). ( see Recommendation 3- 13 on page 27)
Budget and Performance
• BLM should add an action code in its LR2000 records tracking system to allow
each production accountability review to be tracked for management and
performance monitoring purpose. ( see Recommendation 3- 24 on page 36)
II. Audit, Compliance, and Enforcement
Regulatory Changes
• MMS should finalize the “ technical changes” Indian oil valuation rule immediately,
and forward it to the Office of Management and Budget. The rulemaking process
to change to Indian oil valuation methodology to provide greater certainty for all
parties and address a long standing concern of Indian tribes should commence
as soon as possible once the proposed rule has been forwarded to OMB. ( see
Recommendation 4- 24 on page 72)
Compliance Strategy
• MMS should complete its risk- based compliance pilot project and develop a plan
for implementing a risk- based compliance strategy on an MMS- wide basis, using
an incremental approach to ensure that essential data and related management
information systems are validated and ready for wider application. The first
phase of this effort should be completed by the end of FY 2008 and should
address the offshore program. ( see Recommendation 4- 9 on page 65)
• MMS should develop a new set of Government Performance and Results Act
goals and measures based on the recently completed analysis of the benefits
and costs of different compliance tools and the risk- based compliance process
Summary of Major Recommendations
xvii
pilot ( a risk- based pilot is scheduled for completion in February 2008). MMS
should establish final goals and measures by the end of February 2008. ( see
Recommendation 4- 13 on page 67)
Process Improvements
• MMS should place a high priority on improving the processes and procedures
associated with calculating interest on royalty payments. ( see Recommendation
4- 16 on page 69)
• MMS should eliminate duplicate data by consolidating several databases,
including databases for the Compliance Information Management system ( CIM),
the Performance Tracking Tool ( PTT), and the Government Performance and
Results Act ( GPRA). ( see Recommendation 4- 17 on page 69)
• MMS should require electronic submission of all offshore run tickets for input to
Liquid Verification System and Gas Verification System. ( see Recommendation
4- 21 on page 70)
• By the end of FY 2008, MMS should publish proposed revisions to the gas
valuation regulations and guidelines to address the cost- bundling issue, and to
facilitate the calculation of gas transportation and gas processing deductions.
MMS should consider incorporating into the proposed revisions the use of market
indices for gas valuation in the context of non- arm’s length transactions in lieu of
the benchmarks that have been employed since 1988. ( see Recommendation 4-
26 on page 73)
• By the end of FY 2008 MMS should review, and ( as appropriate) revise and
implement the regulations and guidance for calculating prices used in checking
royalty compliance for solid minerals, with particular attention to non- arms- length
transactions ( see Recommendation 4- 27 on page 73)
III. Coordination among MMS, BLM, and BIA
• By June 2008, the Department should establish a Coordinating Committee with
representatives from the senior management level in MMS, BLM, and BIA.
Bureau representatives should have the authority to ensure decisions and
recommendations are implemented in their respective bureaus. ( see
Recommendation 5- 9 on page 85)
• To support the Departmental Coordinating Committee described in
Recommendation 5- 9, each Bureau should establish procedures for
strengthening intra- Bureau coordination. ( see Recommendation 5- 10 on page
86)
• MMS and BLM should secure appropriate access to the Indian lease system.
This is necessary to prevent delays in approving lease activity and to ensure
MMS has the correct information for managing revenue from Indian leases. ( see
Recommendation 5- 2 on page 84)
• DOI should work to reconnect the systems containing Indian data after
appropriate security measures are in place. The Indian Automated Fluid Mineral
Support System ( IAFMSS) and the Indian Well Information System ( IWIS) should
be restarted appropriate access to IAFMSS for MMS and Indian contract
inspectors should be provided. In addition, once appropriate security measures
Report to the Royalty Policy Committee
xviii
are in place, MMS should provide BLM users with the ability to query these
systems by any parameter ( e. g., lease number). ( see Recommendation 5- 3 on
page 84)
• DOI should establish standards for geospatial data regarding Indian leases that
facilitate management of Indian resources while still meeting DOI’s Trust
responsibilities. ( see Recommendation 5- 7 on page 85)
• DOI should seek a review of the decision classifying boundary information for
Indian allotments, leases, and agreements as Trust information. Any solution
should satisfy Trust responsibilities and allow the DOI bureaus to carry out their
management responsibilities efficiently. ( see Recommendation 5- 8 on page 85)
IV. Royalty in Kind
Governance ( Short- Term)
• MMS should establish an RIK Subcommittee to the Royalty Policy Committee
( RPC). Issues that should be addressed include performance benchmarks,
volume verification and market positioning. ( see Recommendation 6- 1 on page
108)
• MMS should issue new or revised regulations and/ or guidelines that would offer
MMS, the public, and potential RIK purchasers or providers of
transportation/ processing services additional certainty concerning program
administration. Additional certainty for these parties may assist in providing
greater transparency for MMS business practices. ( see Recommendation 6- 3 on
page 108)
• By the end of FY 2008, MMS should clarify the extent to which Federal
Acquisition Regulations ( FAR) apply. If the FAR is found to apply, MMS should
place a high priority on identifying contracting arrangements least likely to impair
the program. ( see Recommendation 6- 7 on page 114)
• MMS should amend the Memorandum of Understanding with the Department of
Energy to include reimbursement for administrative and contract costs incurred in
transferring RIK oil to the Strategic Petroleum Reserve. Additional
reimbursement should not result in a reduction in MMS’s base budget. ( see
Recommendation 6- 14 on page 122)
Governance ( Medium- Term)
• MMS should explore the feasibility of establishing a “ trust fund” within Treasury,
the interest from which could be used to fund DOI activities, particularly those
related to royalty management. Priority for funding should be given to activities
required for addressing the Subcommittee’s recommendations related to
production accountability, audit, collections and enforcement ( as noted above,
RIK administrative costs are already funded by a share of RIK revenues).
Legislation would be required to establish this fund. If this option is pursued, it is
essential that these funds should be available without subsequent appropriation.
It is important to “ hold harmless” the base budgets for fund- supported activities to
ensure net increases in support for them; otherwise there will be no net increase
in program support. ( see Recommendation 6- 6 on page 108)
Summary of Major Recommendations
xix
• MMS should conduct a cost- benefit analysis of various governance
arrangements for the RIK program to determine the organizational structure that
will best and most cost effectively align incentives with programmatic goals and
provide the institutional flexibility necessary to function in a commercial
environment. Alternatives should include but not be limited to: the status quo;
contracting out marketing functions; an FFRDC model or some variation thereof;
and the status quo with some legislative exemptions from the FAR and personnel
regulations. Any such arrangement should maintain institutional oversight by the
Department of the Interior and MMS, and also provide the additional oversight
mechanism suggested in Recommendation 6- 10 ( see Recommendation 6- 9 on
page 114)
• If an alternative governance structure is established for the RIK program, an
independent oversight board should be established. This board should include
experts in marketing and management, and representatives of the public interest.
The board should periodically evaluate the RIK program, to assess balance
sheets and other “ business- like” performance measures. The board should have
the ability to recommend program expansion or contraction ( onshore or offshore
and by commodity) based on market trends and other concerns, and to address
specific concerns such as the small refiner program. Furthermore, the Secretary
could respond to the Board’s recommendations with on- the- record findings. ( see
Recommendation 6- 10 on page 115)
• MMS should explicitly recognize ( e. g., in a charter or mission statement) that the
RIK program is a commercial activity, and should treat the program accordingly.
Consistent with this, MMS should seek to operate the program as close to how a
private business would operate as possible, including establishing a sole
objective to maximize net revenue within risk parameters established by program
executives. A business model should apply to all aspects of the RIK program,
including identifying potential properties where royalties might be taken in kind,
pre- sale bidder qualification procedures, the sales themselves, and performance
measurement. ( see Recommendation 6- 8 on page 114)
• MMS should undertake a concerted effort to provide outreach to States, Industry,
and the public to assist in communicating RIK’s inner workings ( e. g., seminar
courses, workshops). This will clarify MMS’s role in administering royalties, and
facilitate understanding and confidence for clients and partners of MMS. ( see
Recommendation 6- 5 on page 108)
• MMS should discontinue its onshore RIK crude oil program until it can be
determined to be in the best financial interest of the government. While MMS
has realized sizable revenue gains relative to RIK on crude oil sales in the past,
there has been no systematic evaluation of onshore crude oil costs. Any
decision to restart the onshore program should consider administrative cost
implications. This will ensure that the government is collecting onshore royalties
in the most beneficial manner. ( see Recommendation 6- 11 on page 121)
• The Subcommittee finds no strong justification for the small refiners’ set- aside,
and recommends discontinuing the program as soon as possible. The program
should not be resumed until the Secretary makes a new determination of need.
( see Recommendation 6- 13 on page 122)
Report to the Royalty Policy Committee
xx
Human Resource Issues
• MMS should immediately take steps to ensure that the RIK program has
sufficient personnel depth to maintain an expanding trading operation and to
ensure that RIK staff have a solid understanding of existing ethics guidelines.
MMS should develop and implement a Personnel Plan by June 2008 to
strengthen those areas requiring additional personnel with industry expertise.
( see Recommendation 6- 16 on page 125)
• MMS should streamline the process for announcing and filling vacancies. Priority
should be given to filling the asset manager vacancies for oil and gas. ( see
Recommendation 6- 18 on page 125)
• MMS should secure dedicated legal support for the RIK program, ideally
stationed within the program in Denver, Colorado, or otherwise in the Regional or
Washington, DC Office of the Solicitor. Securing dedicated legal support should
improve the ability of RIK personnel to interact with their industry counterparts
and with industry lawyers. ( see Recommendation 6- 19 on page 125)
Performance Measurement
• MMS should recognize, and annually report on, the opportunity costs associated
with transfers of oil to the SPR using the performance measures established for
the RIK program. ( see Recommendation 6- 15 on page 122)
• MMS should carry the range- of- values methodology associated with benchmarks
through to the reporting of performance measures based on those benchmarks.
( see Recommendation 6- 23 on page 128)
• MMS should develop a presentation of the benchmarking process that makes it
easier for outsiders to quickly understand the basics of how the benchmarks are
assembled and applied. ( see Recommendation 6- 22 on page 128)
• MMS should evaluate whether performance measures could be enhanced
following standard business practices ( e. g., balance sheet, cash flow statement,
financial ratios). ( see Recommendation 6- 27 on page 128)
• MMS should publish a program cost comparison, comparing the RIK program to
other public- and private- sector efforts toward marketing in- kind royalties ( e. g.,
the Province of Alberta, Texas General Land Office, industry). ( see
Recommendation 6- 28 on page 128)
• MMS should implement a systematic and detailed procedure for handling bid
documents ( including both bids and notices of acceptance) to ensure security
and integrity. In particular, the procedures should address “ refreshing.” In that
regard, the procedures and associated documents used to announce sales and
associated procedures should explicitly lay out the procedures for determining
when and if additional bidding rounds will be held. ( see Recommendation 6- 30
on page 131)
Summary of Major Recommendations
xxi
V. Lack of Price Thresholds in Offshore Oil and Gas
Leases – 1998 and 1999 Lease Sales in the Gulf of
Mexico
• The Department of the Interior should continue its efforts to pursue voluntary
royalty payment agreements with holders of the 1998 and 1999 leases without
price thresholds. ( see Recommendation 7- 1 on page 138)
• Congress and the Secretary of the Interior should continue to explore legislative
options, which could address the loss of royalties without violating legitimately
signed contracts. ( see Recommendation 7- 2 on page 138)
• MMS and the Office of the Solicitor should coordinate to develop new procedures
and guidelines, or revise any existing procedures and guidelines to ensure that
the Secretary’s February 15, 2007 memorandum is effectively implemented. The
revised procedures and guidelines should clearly delineate what constitutes a
thorough review; how MMS will coordinate its clearance procedures internally,
how the Office of the Solicitor will coordinate with MMS. The new procedures
and guidelines should be reviewed by the Inspector General, and they should be
put in place within 60 days of the submittal of the Subcommittee’s report to the
Department. ( see Recommendation 7- 3 on page 138)
• MMS and the Department should establish periodic, comprehensive and formally
structured reviews of the procedures and guidelines to ensure they are being
implemented correctly and successfully. Any necessary remedial actions should
be defined and implemented promptly. ( see Recommendation 7- 4 on page 138)
• Effective implementation of the procedures and guidelines should be
incorporated in the performance standards for key staff, supervisors, and
managers in MMS and the Office of the Solicitor. ( see Recommendation 7- 5 on
page 138).
• In addition to the standard training provided to all Departmental employees, the
Department and MMS should require additional annual ethics training for staff
involved in royalty management ( this includes staff in the Office of the Solicitor).
This training should include guidance on public- private sector interactions, use of
official and/ or proprietary data, and prohibitions on the use of public office for
private gain. ( see Recommendation 7- 6 on page 138).
1
Chapter 1
Introduction and Charge to the
Subcommittee
Report to the Royalty Policy Committee
2
Chapter 1 Introduction and Charge to the
Subcommittee
I. Introduction
The Minerals Management Service ( MMS) administers and enforces the financial
terms for all Federal mineral leases, both onshore and offshore, and on Indian lands.
In Fiscal Year 2007, over 2,000 companies reported and paid royalties totaling $ 10.3
billion from approximately 30,000 producing Federal and Indian leases.
Concerning the accuracy and effectiveness of MMS’s royalty management program,
Department of the Interior Secretary Dirk Kempthorne and Assistant Secretary C.
Stephen Allred determined that an independent panel should be convened to review
the procedures and processes surrounding the management of mineral revenues
and to provide advice to the Department on certain aspects of such management.
Accordingly, on March 22, 2007, the Subcommittee on Royalty Management was
appointed to conduct a prospective examination of MMS’s mineral leasing program
( see Exhibit A). The Subcommittee was commissioned to report to the Royalty
Policy Committee, which is chartered under the Federal Advisory Committee Act
( FACA) to provide advice to the Secretary of the Interior and other Departmental
officials responsible for managing mineral leasing activities, and also to serve as a
forum for individual States, American Indian tribes, individual Indian mineral lease
holders, the industry, government agencies, and the public to voice their viewpoints
on pertinent issues.
Representing a diverse spectrum of interests, abilities, and experience, the
Subcommittee on Royalty Management consists of seven members, who were
chosen because of their broad expertise and knowledge of public policy concerns or
the specific activities associated with managing mineral leasing and revenue
management programs.
The Subcommittee on Royalty Management was charged with reviewing the current
leasing program and providing advice to the Department of the Interior on royalty-management
issues and other mineral- related policies. Specifically, the
Subcommittee was asked to review:
• The extent to which existing procedures and processes for reporting and
accounting for Federal and Indian mineral revenues are sufficient to ensure
that the Minerals Management Service receives the correct amount.
• The audit, compliance, and enforcement procedures and processes of the
Minerals Management Service to determine if they are adequate to ensure
that mineral companies are complying with existing statutes, lease terms, and
regulations as they pertain to payment of royalties.
Chapter 1
3
• The operations of the Royalty in Kind program to ensure that adequate
policies, procedures, and controls are in place to ensure that decisions to take
Federal oil and gas royalties in kind result in net benefits to the American
people.
Subsequently, on September 28, 2007, the Subcommittee was asked by the
Assistant Secretary for Land and Minerals Management to review procedures
promulgated by the Department in response to the lack of price thresholds in Gulf of
Mexico leases from 1998 and 1999 sales.
This report provides the Subcommittee on Royalty Management’s findings and
recommendations to the Royalty Policy Committee. In general, the Subcommittee
concludes that MMS is an effective steward of the minerals revenue management
program. However, the minerals revenue management program has some flaws
that require prompt management attention, and distinct improvements must occur to
ensure public confidence. The Subcommittee’s recommendations, which are
intended to help achieve this end, address a variety of policy, program management
and technical concerns that impact all three of the Department of the Interior
bureaus that are involved in royalty management.
II. Subcommittee Data- Gathering Process
The Subcommittee held two face- to- face meetings and numerous teleconferences to
discuss the issues and recommendations.
The Subcommittee and staff reviewed information provided by MMS; met with MMS
management and staff in Lakewood, Colorado in January and July 2007; attended a
Royalty in Kind ( RIK) crude oil sale in August, 2007; consulted with various RIK
practitioners including staff of the Alberta Petroleum Marketing Commission
( Province of Alberta Department of Energy), the New Mexico State Land Office, the
Alaska Department of Natural Resources, the Texas General Land Office, the
University of Texas Lands Office, and several major domestic oil and gas producers;
and held discussions with Lukens Energy ( consultants to MMS on various aspects of
royalty management), the Internal Revenue Service, and the Department of Energy.
In addition, the Subcommittee and staff found several recent reports issued by the
Department’s Office of Inspector General to be especially valuable, including those
addressing MMS’s audit and compliance program and events pertaining to Gulf of
Mexico leases during 1998- 99.
In June 2007, Subcommittee staff visited an offshore operation in the Gulf of Mexico,
accompanied by an inspector from the Office of Minerals Management ( OMM). The
staff also had discussions with accounting employees at OMM, in Metairie,
Louisiana regarding MMS procedures for verifying production and reported heat
content values. To better understand gas processing and measurement,
Subcommittee staff visited two gas plants near Metairie handling gas from offshore
production. Subcommittee staff also visited conventional and coal bed gas
operations in the Atlantic Rim area south of Rawlins, Wyoming, and an oil operation
Report to the Royalty Policy Committee
4
in Baroil, north of Rawlins, Wyoming. They were accompanied by Petroleum
Engineering Technicians ( PETs) from two Bureau of Land Management ( BLM) field
offices: Rawlins and Cheyenne. While in Rawlins, the staff interviewed the PETs as
well as a Production Accountability Technician ( PAT) on production verification and
accountability. Similar visits were made to BLM field offices in Carlsbad, New
Mexico and Pinedale, Wyoming, to examine on- the- ground oil and gas metering
facilities. In addition, Subcommittee staff also held telephone conversations with
PAT staff and Petroleum Engineers in several BLM field offices: Tulsa, Oklahoma;
Farmington, New Mexico; Carlsbad, New Mexico; Hobbs, New Mexico; and Ukiah,
California.
The Subcommittee staff also initiated a data- collection effort to gather additional
information from the 31 BLM offices that manage onshore minerals leases for oil,
gas, and solids. This information led to a number of findings and assisted in
formulating recommendations.
5
Chapter 2
A Brief History of Royalty Management
Report to the Royalty Policy Committee
6
Chapter 2 A Brief History of Royalty Management
The Federal government owns, or is a trustee for, the rights to significant oil, gas,
and other mineral resources located on Federal lands and in offshore locations. In
exchange for leases enabling the exploration, development, and production of those
resources, the government receives specified amounts of compensation in the form
of bonuses, rentals, and royalties. Additionally, the Federal government provides
revenue management services for mineral leases on Indian lands as part of its trust
responsibility.
Royalty payments derived from mineral leases on public and Indian lands have
constituted a major source of revenue for the Federal government, States, and
Indian Tribes and allottees. Table 1 and Table 2 below present information on
mineral revenue collections and disbursement. As shown in Table 1, revenues from
mineral leases totaled $ 11.4 billion in FY 2007. Table 2 shows mineral lease
revenue disbursements. In FY 2007, disbursements totaled about $ 11.7 billion2.
The Minerals Management Service ( MMS) has distributed a cumulative total of
approximately $ 164.9 billion to Federal, State, and Indian accounts, and special
funds since 1982.3 Minerals royalties represent one of the largest sources of non-tax
revenue to the Federal Government.
2 Disbursements can include funds from prior fiscal years
3 Statement of C. Stephen Allred, Assistant Secretary, Land and Minerals Management, U. S.
Department of the Interior, before the Committee on Energy and Natural Resources, U. S. Senate,
Jan. 18, 2006. p. 3 ( available at
http:// energy. senate. gov/ public/_ files/ AllredOilandGasRoyaltyManagmentattheDOI11706TestimonyFi
nal2. doc).
Chapter 2
7
Table 1 Mineral Lease Revenue Collections, FY 2007
Offshore Federal Revenues
Royalties $ 6,441,214,179
Rents $ 200,993,255
Bonuses $ 373,930,998
Other revenues $ 3,166,689
Subtotal $ 7,019,305,121
Onshore Federal Revenues
Royalties $ 3,345,115,685
Rents $ 65,238,025
Bonuses $ 528,705,220
Other revenues $- 4,286,262
Subtotal $ 3,934,772,668
American Indian, Tribal and Allottee Land Revenues
Royalties $ 465,513,833
Rents $ 954,721
Bonuses $ 0
Other revenues $ 8,093,708
Subtotal $ 474,562,262
Total Royalties $ 10,251,843,696
Rents, Bonuses, and Other Revenues $ 1,176,796,354
Total $ 11,428,640,051
SOURCE: U. S. Department of the Interior, Minerals Management Service,
MRM Statistics Home, available at
http:// www. mrm. mms. gov/ MRMWebStats/ Home. aspx.
Table 2 Mineral Lease Revenue Disbursements, FY 2007
American Indian Tribes and Allottees $ 464,998,979
Historic Preservation Fund $ 150,000,000
Land & Water Conservation Fund $ 899,000,000
Reclamation Fund $ 1,469,924,290
State shares
Offshore 8( g) $ 68,874,086
Onshore $ 1,903,448,859
U. S. Treasury $ 6,715,095,418
Total $ 11,671,341,632
SOURCE: U. S. Department of the Interior, Minerals Management Service,
MRM Statistics Home, available at
http:// www. mrm. mms. gov/ MRMWebStats/ Home. aspx.
Report to the Royalty Policy Committee
8
The Mining Law of 1872 includes metallic, gemstones, and some specialty industrial
minerals that can be developed without a royalty to the U. S. The Minerals Leasing
Act of 1920 ( MLA) provided the legislative foundation for the Federal royalty program
for oil, gas, coal, and other minerals. 4 Under the MLA, oil and gas royalties for
production on Federal lands may be collected either “ in value” or “ in kind.” In- value
royalties are taken in cash, as a share of the market value of the mineral production,
while in- kind royalties are a share of the production volume. 5 In 1947, the Acquired
Lands Act extended the leasing authority of the MLA to include properties acquired
from states and individuals, and the Outer Continental Shelf Lands Act of 1953
( OCSLA) further extended this authority to offshore resources. 6 In conjunction with
their implementing regulations, these laws required a royalty payment ( in kind or in
value) of at least 12.5% in exchange for the right to develop Federal and Indian
resources. 7 Developers of common variety minerals, such as sand, gravel, and clay
also pay a fee to BLM for the extraction of those minerals.
The collection, management, and disbursement of the royalties owed under these
laws has proven a major responsibility and, given the substantial sums involved, one
which has attracted a considerable degree of scrutiny through the years. The task of
administering the royalty program was initially delegated to the Department of the
Interior’s U. S. Geological Survey ( USGS). In 1942, USGS promulgated royalty
valuation rules for onshore leases that remained in effect until 1988, and later
promulgated similar rules that governed valuation of production from offshore
leases. 8
However, USGS management of the royalty program was subject to increasing
criticism. Between 1969 and 1977, the Department of the Interior’s Inspector
General issued five reports critical of the program, and in October 1981, a GAO
report entitled Oil and Gas Royalty Collections— Longstanding Problems Costing
Millions was issued. 9 Citing mismanagement, an obsolete accounting system, and
under- collection of royalties, it was the sixth GAO report criticizing the program in 22
years. 10 In July 1981, the media openly accused the USGS of mismanagement
resulting in the theft of “ billions of dollars’ worth of the public’s oil” from Federal and
Indian lands. 11
4 Congressional Budget Office, Reforming the Federal Royalty Program for Oil and Gas, Chapter 1:
Introduction, Nov. 2000 ( available at http:// www. cbo. gov/ showdoc. cfm? index= 2695& sequence= 2# t1).
5 Ibid.
6 Id.
7 Peter J. Schaumberg & Geoffrey Heath, Royalty Valuation and Management 101: A Primer ( Part A),
p. 2A- 1- A- 2.
8 Id. at p. 2A- 4
9 Energy and Materials Program, Office of Technology Assessment, U. S. Congress, The Royalty
Management Program’s Auditing and Financial System: Technical Issues ( Background Paper), Jul.
1990, p. 11 ( available at http:// govinfo. library. unt. edu/ ota/ Ota_ 2/ DATA/ 1990/ 9040. PDF); Government
Accountability Office, Oil and Gas Royalty Collections-- Longstanding Problems Costing Millions,
AFMD- 82- 6, Oct. 1981 ( available at http:// archive. gao. gov/ f0902b/ 116872. pdf).
10 Id.
11 Jack Anderson, Laxity Allows Cheating on Oil Royalties, Washington Post, Jul. 2, 1981, p. B17.
Chapter 2
9
In response, on July 8, 1981, Secretary of the Interior James Watt established the
Commission on Fiscal Accountability of the Nation’s Energy Resources, better
known as the Linowes Commission, to investigate allegations of irregularities in
royalty payments, as well as charges of oil theft from Federal and Indian lands. After
studying the long history of royalty management and previous recommendations for
improvements, the Commission submitted its report entitled Report of the
Commission, Fiscal Accountability of the Nation’s Energy Resources ( Linowes
Commission Report) on January 21, 1982.
The results of the investigation undertaken by the Linowes Commission raised a
number of serious concerns. In its report, the Commission stated that:
“ Management of royalties for the nation’s energy
resources has been a failure for more than 20 years.
Because the Federal government has not adequately
managed this multibillion dollar enterprise, the oil and gas
industry is not paying all the royalties it rightly owes. The
government’s royalty recordkeeping is in disarray. . . .
The results of individual audits, which have often
uncovered large underpayments, suggest that hundreds
of millions of dollars owed to the U. S. Treasury, the
States, and Indian tribes are going uncollected every
year.
In addition, oil thefts are occurring on Federal and Indian
leases. The extent of theft and the amount of royalty
losses from theft are unknown, but it is well- documented
that security at many Federal and Indian lease sites is lax
and is an open invitation to theft.” 12
The report cited an array of specific problems, including:
• The failure to verify data reported by companies;
• Unreliable lease account records;
• Late payments and/ or underpayments; and
• An ineffective audit system. 13
It concluded that, “[ i] n short, the industry is essentially on an honor system.” 14
Accordingly, the Linowes Commission determined that the government’s system of
royalty management was in need of “ a thorough overhaul” in order to ensure that
“ royalties for the Nation’s energy resources were fully and fairly collected on behalf
of the people of the United States,” and detailed 60 specific recommendations for
12 U. S. Department of the Interior, Report of the Commission, Fiscal Accountability of the Nation’s
Energy Resources, David F. Linowes, Chairman, Jan. 1982, p. xv.
13 Id. at p. 15.
14 Ibid.
Report to the Royalty Policy Committee
10
revising and rebuilding the system. 15 The Commission’s findings and
recommendations in many ways signaled the transition to modern royalty valuation
in the U. S., becoming major guideposts as the royalty management program
evolved.
Congress responded to one of the Commission’s recommendations by passing the
Federal Oil and Gas Royalty Management Act of 1982 ( FOGRMA16), which sought
to ensure the prompt and accurate collection of oil and gas royalties. Consistent
with the Linowes Commission’s report, FOGRMA directed the Secretary to establish
a “ comprehensive inspection, collection, and fiscal and production accounting and
auditing system to provide the capability to accurately determine oil and gas
royalties, interest, fines, penalties, fees, deposits, and other payments owed, and to
collect and account for such amounts in a timely manner.” 17 In FOGRMA sections
202 and 205, Congress provided for States and Tribes to assume compliance
activities on leases within their respective jurisdictions. This was to be accomplished
through cooperative audit agreements.
Among the other influential recommendations set forth by the Commission was the
suggestion that an independent royalty and minerals management agency be
created in order to ensure effective accounting, production verification, royalty
collection, and enforcement from that point forward. Secretarial Order 3071 issued
by Secretary Watt on January 17, 1982 created a new bureau, the Minerals
Management Service ( MMS), which assumed responsibility for the nation’s royalty
management program. By creating the MMS, the Secretary of the Interior effectively
elevated royalty management from a program within a division of USGS to a bureau-level
mission, with a sharper focus, a new dedication of purpose, and the means for
streamlining and improving its operations. 18 In December 1982, the production
accountability responsibilities of the United States Geological Survey Conservation
Division were transferred to the Bureau of Land Management.
The newly created MMS was to manage and account for all revenues generated by
onshore mineral leases on Federal and Indian lands, as well as by Federal offshore
leases. Later, in May 1982, MMS was also charged with running the Federal
government’s program for managing mineral resources on the Outer Continental
Shelf ( OCS). 19 Since that time, new legislation, court decisions, agency regulations,
and agency policies and guidance have further altered the landscape of royalty
management.
15 Id. at p. xv.
16 P. L. 97- 451, Jan. 12, 1983.
17 Id. at § 101( a), 96 Stat. 2449.
18 U. S. Department of the Interior Minerals Management Service, Gulf of Mexico Region, About MMS:
Who is the Minerals Management Service?,
http:// www. gomr. mms. gov/ homepg/ whoismms/ mmsfact. html ( Mar. 21, 2001).
19 Id.
Chapter 2
11
Notably, in 1996, the Federal Oil and Gas Royalty Simplification and Fairness Act
( RSFA20) attempted to improve and streamline the Federal royalty program by
expanding the authority of states to share in the responsibility for royalty collection
and accounting, prescribing statutes of limitations for royalty collection and refunds,
and imposing credit interest on overpayments and underpayments of royalties. In
1996 Congress also enacted the Outer Continental Shelf Deep Water Royalty Relief
Act, Public Law 104- 58, offering royalty relief for certain deepwater oil and gas
leases in order to promote deep water exploration and development.
More recently, the Energy Policy Act of 2005 21 featured new incentives for marginal
properties, gas hydrates, CO2 injection production, and deep gas shallow water and
deep water production, as well as several other programs and provisions to increase
the Nation’s energy supplies. 22
MMS’s regulations since passage of FOGRMA in 1982 appear principally at Title 30,
Code of Federal Regulations, Subchapter A. Examples of MMS’s activities since
then include the following:
• MMS promulgated regulations addressing site security23 and expanding the
role of states and Indian tribes in the audit of royalty payments. 24
• MMS convened a Royalty Management Advisory Committee in 1986, which
offered detailed recommendations for the oil and gas valuation regulations
issued in 1988, and later addressed the relative roles of the MMS, State and
Indians. 25
• MMS established the Royalty Policy Committee in 1995.
• MMS promulgated regulations or policy guidance addressing several matters
prescribed by RSFA:
o Period for agency action and appeals ( 30 C. F. R. Part 290);
o Delegation of royalty collection authority to states ( 30 C. F. R. Part 227);
o Marginal properties ( 30 C. F. R. Part 204, Subparts A and C).
20 P. L. Law 104- 185
21 Public Law 109- 58
22 Judith M. Matlock & Deborah Gibbs Tschudy, A Practical Application of the Federal and Indian Oil
and Gas Valuation Regulations, p. 5- 6 ( Feb. 2007).
23 Civil penalty provisions are provided in 30 C. F. R. § 241.60( a)( 2), for failure or refusal “ to permit
lawful entry, inspection, or audit”; and in Section 241.60( b)( 2) for persons who “ Knowingly or willfully
take or remove, transport, use or divert any oil or gas from any lease site without having valid legal
authority to do so”; and in Section 241.60( b)( 2), for persons who “ Purchase, accept, sell, transport, or
convey to another person, any oil or gas knowing or having reason to know that such oil or gas was
stolen or unlawfully removed or diverted.”
24 30 C. F. R. Part 227 (“ Delegation to States” for Federal leases) expanded States’ delegation
activities; Parts 228 and 229 delegated Indian lease audit activities to States, for Indian leases
located in those States.
25 53 FR 1184 ( Jan. 15, 1988) ( oil valuation); 53 FR 1230 ( Jan. 15, 1988).
Report to the Royalty Policy Committee
12
• After issuance of a 1996 Interagency Report critical of oil valuation
standards, 26 MMS undertook two major oil valuation rulemakings leading to
promulgation of regulations, in 2000 and again in 2004 that significantly
changed oil valuation and withstood legal challenge. 27
• In 1997, MMS revised and tightened gas valuation standards for Federal
leases. 28 That regulation also withstood a legal challenge from industry. 29
• In 2005, MMS promulgated regulations clarifying procedures for
transportation deductions in gas valuation. 30
Today, MMS oversees two major programs, the Minerals Revenue Management
( MRM) program and the Offshore Minerals Management ( OMM) program. MMS
shoulders significant responsibilities in managing the natural and economic
resources of the U. S., managing more than a billion acres of offshore public land,
and collecting billions of dollars in mineral revenues annually. 31 Both of these
functions are important to the nation’s economic health, and key to meeting the
nation’s energy needs. 32 With this background in mind, the Subcommittee focused
primarily on reviewing procedures and processes surrounding the management of
mineral revenues derived from royalties on Federal and Indian oil and gas leases at
the Department of the Interior.
The management of Federal and Indian resources continues to be a complex
process. Coordination among Federal, state, and tribal agencies is required to
ensure that resources are available for development and production, the
environment is protected, and royalty revenues are collected and properly
distributed.
26 “ Final Interagency Report on Valuation of Oil Produced from Federal Leases in California,” U. S.
Department of the Interior, U. S. Department of Energy and U. S. Department of Commerce, May
1996.
27 The 2000 Oil Rule, 65 FR 14022 ( March 15, 2000), abandoned the use of posted prices and other
benchmarks in favor of spot price indexing; the 2004 Oil Rule, 69 FR 24959 ( May 5, 2004) shifted
from spot price indexing to NYMEX futures indexing. Although the 2000 Oil Rule was the subject of a
judicial challenge, that challenge was dismissed after settlement negotiations led to the 2004 Oil
Rule.
28 1997 Gas Rule, 62 FR 65753 ( Dec. 16, 1997).
29 IPAA v. DeWitt, 279 F. 3d 1036 ( D. C. Cir. 2002).
30 The 2005 Gas Rule, 70 FR 11869 ( March 10, 2005) clarified and amended the 1997 Gas Rule.
31 Ibid.
32 Allred, supra note 2, at p. 2.
13
Chapter 3
Collections and Production Accountability
14
Chapter 3 Collections and Production Accountability
Summary of Major Recommendations in Chapter 3
( A complete list of all recommendations is provided in Appendix 1)
Legislative Changes
• The Department of the Interior should support amending the Royalty
Simplification and Fairness Act ( RSFA). The Energy Policy Reform and
Revitalization Act of 2007 ( HR 2337) introduced in the 110th Congress contains
language in Section 215 (“ Liability for Royalty Payments”) simplifying the RSFA
collection requirements by restoring MMS’s ability to pursue the “ payor” for debts,
as was done prior to the enactment of RSFA. The Subcommittee recommends
separating Section 215 from HR 2337, if necessary, for passage as a stand-alone
piece of legislation. This RSFA amendment would allow for more timely
and less costly collection of MMS’s unsettled royalty debts. ( see
Recommendation 3- 8 on page 23)
Verification of BTU Values
• MMS should amend Form MMS- 2014 to record natural gas BTU values, which
form the basis for required royalty payments. This will require adding a second
column to the form: the new column will report BTU value, and the original
column will still report volume times BTU value ( total mmBTU). ( see
Recommendation 3- 6 on page 22)
• MMS should modify the Gas and Liquid Verification Systems ( GVS and LVS), or
develop an equivalent, automated system to compare BTU values and oil quality
data in submitted product quality statements to information in Oil and Gas
Operations Reports ( OGORs) ( see also recommendations under Electronic Data
Submittals, Data Exchange, and Accounting Tools, beginning on page 27). ( see
Recommendation 3- 7 on page 23)
Training and Human Resource Improvements
• BLM should develop estimates of the number of hours required to complete
simple and complex reviews ( described in the findings above). These estimates
should be used to help determine appropriate staffing levels, closely
corresponding to oil or gas activity in a given field office. In the interim, BLM
should reallocate its FY 2008 funding for oil and gas activities to place greater
emphasis on the timely hiring of additional Production Accountability Technicians
( PATs) sufficient to meet current and expected workloads. ( see
Recommendation 3- 25 on page 36)
• BLM should assess the training needs for Petroleum Engineering Technicians
and Production Accountability Technicians ( see Recommendation 3- 32 on page
40)
• MMS and BLM should establish standardized position descriptions for Production
Accountability Technicians in order to consistently define the roles and
responsibilities of these individuals ( see Recommendation 3- 30 on page 40)
15
Technological Improvements
• BLM should establish and maintain a gas measurement team of specialists to
assess new gas measurement technologies. This team should provide
recommendations to BLM by June 2008. Following the development of an initial
set of recommendations, the team should meet on an annual basis to evaluate
the extent to which new technologies should be considered in BLM’s guidance.
( see Recommendation 3- 23 on page 33)
• BLM should work with MMS’s Minerals Revenue Management ( MRM) division to
develop and implement a system that electronically transmits information on
lease establishment and any follow- up leasing actions affecting lease status.
( see Recommendation 3- 9 on page 27)
• MMS’s Minerals Revenue Management division ( MRM) should phase in a
requirement that all payors submit their payments electronically, with a goal of full
implementation in five years. ( see Recommendation 3- 13 on page 27)
• MMS’s Offshore Minerals Management division ( OMM) should phase in a
requirement for offshore lease operators to submit all oil and gas volume and
quality statements electronically, in an automated file format. Once electronic
reporting of quality information is established, MMS should modify the Gas and
Liquid Verification Systems ( GVS and LVS) to compare information submitted via
GVS/ LVS to information submitted via Oil and Gas Operations Reports
( OGORs). ( see Recommendation 3- 13 on page 27)
Budget and Performance
BLM should add an action code in its LR2000 records tracking system to allow each
production accountability review to be tracked for management and performance
monitoring purpose. ( see Recommendation 3- 24 on page 36)
Report to the Royalty Policy Committee
16
Chapter 3 Collections and Production Accountability
I. Subcommittee Charge
In the charter creating the Subcommittee on Royalty Management, the Secretary
charged the Subcommittee with reviewing
“ the extent to which existing procedures and processes for
reporting and accounting for Federal and Indian mineral
revenues are sufficient to ensure that MMS receives the correct
amount.”
II. Introduction
Given that Federal and Indian oil, gas and coal make up about 98% of the total
royalties paid in FY 2006, it appeared prudent for the Subcommittee to focus
primarily on these commodities. 33 In the course of investigating issues relating to
collections and production accountability, the Subcommittee gathered data from
MMS in Denver, Colorado and Metairie, Louisiana, as well as a number of BLM
State and field offices.
Production accountability is a function performed by both MMS and BLM, to ensure
that an operator or lessee accurately reports barrels of oil, cubic feet of gas, British
Thermal Units ( BTUs) of gas, tons of coal, tons of rock, etc. produced from Federal
and Indian properties. MMS and BLM currently perform yearly reviews of production
and royalty accountability, and set annual targets for accomplishing production
accountability reviews.
MMS is responsible for collecting all revenue from production, and BLM is
responsible for verifying the onshore portion of this production, including BTU values
for natural gas. MMS’s division of Offshore Minerals Management ( OMM) is
responsible for verifying production from offshore leases. If BLM and OMM find that
the verified production differs what is reported on the Oil and Gas Operations Report
( OGOR) or the Production and Royalty Report for solids minerals, they will notify
MMS’s Minerals Revenue Management division ( MRM). MRM is responsible for
taking action to account for the correct production.
Collections activities are a function of the MMS Financial System and are designed
to account for all the different statutes governing collection and disbursement of
revenues from oil, gas, and solid minerals. When BLM issues onshore leases, each
lease is assigned a specific Treasury fund code relating to the lands where the lease
is located. MRM reviews this data for consistency and inputs the data into the
system with a distribution code instructing the system on how to distribute each
collection. For offshore leases, the MMS Gulf of Mexico region office collects
33 The Subcommittee did gather information on other commodities, including Indian sand and gravel.
Chapter 3
17
information on leased acreage and revenue- sharing requirements with the states
under relevant statues ( Outer Continental Shelf Act of 1978; Gulf of Mexico Energy
Security Act of 2006). Offshore block and boundary data is also collected and
automatically transferred to MRM.
The Subcommittee’s work highlights the importance of production accountability for
efficient royalty management. When problems occur in this area, they can have a
dramatic impact on “ downstream” functions such as audit and compliance.
Production accountability problems may not be apparent to staff involved in the audit
and compliance processes; these problems can make it difficult or impossible for the
audit and compliance processes to ensure that proper payment occurs. 34
III. Background
The leasing program accounted for FY 2007 revenues of over $ 10 billion on a range
of minerals taken from nearly 30,000 onshore and offshore leases. Table 3 reports
mineral leases of record for 2007, as well as the revenue generated from these
leases. 35 The onshore and offshore programs differ in terms of scope and scale,
affecting the impact that these programs have on royalty management. The onshore
program also deals with issues relating to jurisdiction ( e. g., Federal, State, Tribal,
local governments) and land ownership ( e. g., Federal, State, Indian, private lands).
Furthermore, there is a large number of low- producing onshore leases scattered
across the landscape.
The onshore program covers many more jurisdictions than the offshore program. Of
the nearly 30,000 total leases, about 27,300 are associated with onshore minerals.
In FY 2007, these onshore leases accounted for approximately $ 3.8 billion, or 37%
of total royalty revenue. The 2,335 offshore leases accounted for approximately
$ 6.4 billion, or 63% of total royalty revenue.
34 The Subcommittee acknowledges the diligence, and dedication of BLM and MMS staff, who are
charged with managing thousands of leases.
35 Note that Table 3 includes only royalty revenues; Table 1 and Table 2 in Chapter 2 include
royalties, rents, bonuses, and other revenues.
Report to the Royalty Policy Committee
18
Table 3 Total Royalty Revenues Associated with Producing Leases for FY
2007 ( Accounting Year)
Jurisdiction Minerala
Producing
Leases Royalty Revenuesb
Federal
Offshore Oil & Gas 2,330 $ 6,444,367,887
Sulfur 5 $ 12,980
Subtotal 2,335 $ 6,444,380,867
Federal
Onshore Asphalt 4 -
Clay 2 $ 4,510
Coal 250 $ 554,874,658
Copper 1 $ 26,110
Garnet 1 -
Geothermal 134 $ 12,128,433
Gilsonite 15 $ 632,049
Hardrock 41 $ 15,036,237
Oil & Gas 22,608 $ 2,717,175,246
Phosphate 81 $ 2,318,456
Potassium 131 $ 12,234,503
Sand & Gravel 2 -
Sodium 81 $ 14,200,724
Subtotal 23,351 $ 3,328,630,927
Federal/ Indian
( Cook Inlet Leases)
Onshore Oil & Gas 66 $ 14,419,059
Subtotal 66 $ 14,419,059
Indian
Onshore Cinders 1 $ 6,549
Coal 7 $ 87,899,929
Copper 2 $ 5,271,328
Gypsum 2 $ 516,710
Hard Rock 1 -
Mining- Unspecified 2 -
Oil & Gas 3,811 $ 367,821,610
Phosphate 23 $ 1,200
Sand & Gravel 35 $ 9,869,652
Uranium 1 -
Subtotal 3,885 $ 471,386,979
Grand Total 29,637 $ 10,258,817,831
b Royalty revenue does not include bonuses or rents paid.
Source: MMS data.
a Minerals developed under the 1872 Mining Law are not included in this table as
no royalties are paid for them.
Chapter 3
19
IV. Findings and Recommendations
A. Federal and Indian Oil and Gas
1. Accurate Reporting of British Thermal Unit ( BTU) Values
Issue
The Department of the Interior is responsible for ensuring accurate measurement
and reporting of both the volume and heat value of produced gas. Heat value is
commonly measured in British Thermal Units ( BTUs). Incorrect BTU reporting can
adversely affect royalty payments owed to the United States, States and Indian
Tribes and Indian allottees.
Background
Natural gas is typically sold by the mmBTU ( million British Thermal Units). This tally
depends on the volume and BTU value of the gas. Any discrepancy in the reported
BTU value of gas has a direct impact on the sale value and resultant royalty owed.
For example, a volume of 500 million cubic feet ( mmcf) of natural gas with a heat
content of 1,000 BTU per standard cubic foot has a total heat value of 500,000
mmBTU. At a market value of $ 6 per mmBTU, this gas would be worth $ 3,000,000.
If the same 500 mmcf of gas was reported to have a heat content of 1,100 BTU per
standard cubic foot, the total market value at $ 6 per mmBTU would be $ 3,300,000.
The total reported value, and thus the total royalty owed would be 10 percent higher.
The BTU value of natural gas production varies from reservoir to reservoir, and can
vary over time within a single reservoir. Natural gas in “ wet gas reservoirs” ( gas
reservoirs containing natural gas liquids, or NGLs), tends to have a higher BTU
value ( because of those NGLs). Many natural gas reservoirs that initially produce dry
gas flows ( with little or no presence of NGLs) become wet natural gas flows as they
age. 36 Approximately 85% of offshore natural gas production from the Gulf of
Mexico is considered wet gas. 37 Approximately 57% of onshore natural gas
production from the Western United States is wet gas. 38
Factors that may cause variation in the BTU value of a gas reservoir include
• New wells entering the production stream;
• Old wells stopping production;
36 Wet Gas Flow Metering With Gas Meter Technologies, Richard Steven, Colorado Engineering
Experiment Station, Inc, Nunn, Colorado,
http:// www. ceesi. com/ pubs/ 1006_ GasMeterTechnologies. pdf, September 1, 2006.
37 E- mail communication, Petroleum Engineer, MMS, OMM division, based on 2006 Gulf Region
production data, September 13, 2007.
38 Geologist, Wyoming State Office, BLM, E- mail communication, based on IHS Energy Inc
production data for July 2007, October 2, 2007.
Report to the Royalty Policy Committee
20
• Changes in the relative contributions from multiple gas formations in a well;
• Variation in the amount of natural gas liquids ( NGL) in wet gas; and
• The effectiveness of gas separators in removing production liquids after gas
leaves the wellhead.
MMS regulations require offshore producers to sample natural gas to determine its
BTU value on at least a semi- annual basis. MMS previously required the vast
majority of operators to submit monthly gas analysis reports ( GARs) containing the
gas components and BTU value for each gas royalty measurement point. The GAR
submission requirement was discontinued in 1996.39 BLM requires onshore
operators to report BTU values for onshore Federal leases on at least an annual
basis. 40 Although both MMS and BLM regulations address gas sampling frequency,
neither agency has specific requirements for the method of taking samples.
MMS uses the automated Gas Verification System ( GVS) to compare gas volume
statements from producing Federal offshore oil and gas leases to Oil and Gas
Operations Reports ( OGORs) provided by producers from those leases. The GVS
automatically generates reports when reported gas volumes from gas statements do
not match volumes reported on OGORs.
Findings
MMS and BLM do not consistently request gas analysis reports to verify BTU values
reported by oil and gas operators. For example, none of the BLM offices
administering the top fouteen gas- producing onshore Federal leases requested gas
analysis reports for those leases during FY 2005 or FY 2006. Similarly, MMS has
not recently requested gas analysis reports from operators in the Gulf of Mexico. 41
While the Subcommittee has not collected a comprehensive set of information,
anecdotal information suggests that in some instances, BLM offices and the Navajo
Nation have expressed concerns regarding the accuracy of operator- reported BTU
values. 42 The Subcommittee views this as an issue that should be addressed on a
more systematic basis, given the potential royalty collection implications.
Federal regulations for offshore oil and gas ( 30 CFR 250.1203( b)( 5)), and BLM
Onshore Order Number 5 for onshore oil and gas, address a producer’s BTU
sampling frequency requirements. The regulations generally require that certain
39 When MRM redesigned its systems in approximately 1988, it developed a mathematical model to
estimate the volume of gas, to target obvious under- reporting and request plant statements to
corroborate the volumes reported on Form MMS- 2014. This replaced the GAR requirement. E- mail
communication, Supervisory Minerals Revenue Specialist, October 3, 2007.
40 In some instances this may be required on a more frequent basis. See Onshore Oil and Gas Order
No. 5, III C. 23, Federal Register Vol. 54, No. 36, February 24, 1989.
41 Personal communication, Section Chief, Surface Commingling and Production Measurement
Section, MMS, September 26, 2007.
42 For example, BTU values typically vary over time as a reservoir is drained. Reporting the same
monthly BTU value many months in a row, may be an indication of inaccurate reporting. E- mail
communication, Assistant Director, Minerals Department, Navajo Nation, September 26, 2007.
Chapter 3
21
types of samples be taken ( i. e., proportional- to- flow or spot samples), or require the
use of methodologies such as recording calorimeters or compositional analysis.
However, neither the Regulation nor the BLM Order addresses specific standards to
be used to obtain such samples. For example, these regulations do not set
requirements for sampling locations ( upstream or downstream from sales meters), or
indicate how to take samples to avoid biasing the results.
The Gas Verification System ( GVS) does not compare BTU values of offshore
natural gas production reported from gas statements with OGORs at this time,
focusing solely on gas volume. Similarly, the Liquid Verification System ( LVS) does
not compare oil quality from run tickets with OGORs.
Form MMS- 2014 does not require reporting of BTU values for natural gas upon
which royalty payments could be made. MMS staff performing compliance reviews
or audits would benefit from clear reporting of BTU values, rather than having to
manually derive those values from sales volume and total mmBTUs sold.
30 CFR 250.1203( b)( 5) and BLM Onshore Order Number 5 require operators to take
natural gas samples, but these regulations do not require submittal of gas analysis
reports based on these samples to MMS or BLM.
As used in this report, a Production Accountability Review does not include oil or gas
taken or lost before it reaches metering points within individual leases, units or
communization agreement areas. 43 BLM regulations allow for certain unmetered
uses of gas on- site at a lease, 44 and oil or gas may be lost as a result of leaks in
infrastructure or outdated equipment. However, losses are considered more likely to
result from inadequate site security, allowing resources to be taken illegally before
reaching a metering point, such as a Lease Automated Custody Transfer ( LACT)
unit, or orifice plate/ Electronic Flow Computer. Quantifying these losses is
extremely difficult.
The Subcommittee received anecdotal reports of producing leases ( Federal and
Indian) where MMS has not received required reports ( i. e., the 2014 royalty report
and the OGOR) from the responsible party ( operator, lessee or payor). Although the
issue is beyond the scope of this review, the Subcommittee wishes to bring it to the
Secretary’s attention.
43 See 43 CFR 3105.2- 2: “ When a lease or a portion thereof cannot be independently developed and
operated in conformity with an established well- spacing or well- development program, the authorized
officer may approve communitization or drilling agreements for such lands with other lands, whether
or not owned by the United States, upon a determination that it is in the public interest. Operations or
production under such an agreement shall be deemed to be operations or production as to each
lease committed thereto.”
44 BLM performs some production accountability to verify that the amount of unmetered gas used can
be considered reasonable.
Report to the Royalty Policy Committee
22
Accurate determination and reporting of BTU values for natural gas produced from
all oil and gas leases will help to ensure accurate royalty payments to the United
States, States and Tribes. 45
Recommendations
By June 2008, MMS and BLM should implement the following recommendations:
Recommendation 3- 1 MMS and BLM should develop a procedure to determine
the potential BTU variability of produced natural gas on a by- reservoir or by-lease
basis, and estimate the implications for royalty payments.
Recommendation 3- 2 MMS and BLM should adjust BTU frequency
requirements for sampling and reporting on a case- by- case basis, or consider
other regulatory requirements.
Recommendation 3- 3 MMS and BLM should establish consistent guidelines for
requesting BTU information from gas producers, and should systematically
examine the validity of that information.
Recommendation 3- 4 MMS and BLM should establish procedures to
systematically compare the BTU values reported on the Oil and Gas
Operations Reports ( OGORs) with gas analysis reports ( GARs) to determine
whether BTU reporting is accurate.
By December 2008, MMS and BLM should implement the following
recommendations:
Recommendation 3- 5 MMS should revise 30 CFR 250.1203( b)( 5) (“ Oil and Gas
and Sulfur Operations in the Outer Continental Shelf— Gas Measurement.”
Similarly, BLM should revise BLM Onshore Order Number 5. Both revisions
should reflect BTU sampling requirements deemed necessary by the agency
to ensure accurate BTU sampling frequency, methodology, and reporting.
Revisions on methodology should include requirements for sampling location
( e. g., immediately upstream or downstream of natural gas sales meters).
MMS’s Offshore Minerals Management ( OMM) office and BLM should
consider adopting the gas sampling standard of the American Petroleum
Institute, Chapter 14, Section 1, Collecting and Handling of Natural Gas
Samples for Custody Transfer, February 2006, or a similar standard. Both
agencies should consider requiring certified ( ISO) lab testing of natural gas
samples.
Recommendation 3- 6 MMS should amend Form MMS- 2014 to record natural
gas BTU values, which form the basis for required royalty payments. This will
require adding a second column to the form: the new column will report BTU
45 The “ whistleblower” program discussed in Chapter 4 is also relevant with respect to efforts to
improve production accountability.
Chapter 3
23
value, and the original column will still report volume times BTU value ( total
mmBTU).
Recommendation 3- 7 MMS should modify the Gas and Liquid Verification
Systems ( GVS and LVS), or develop an equivalent, automated system to
compare BTU values and oil quality data in submitted product quality
statements to information in Oil and Gas Operations Reports ( OGORs) ( see
also recommendations under Electronic Data Submittals, Data Exchange,
and Accounting Tools, beginning on page 27).
2. Collections Complexities under the Royalty Simplification and Fairness
Act of 1996
Issue
The Royalty Simplification and Fairness Act of 1996 ( RSFA) prevents MMS from
pursuing the “ payor” for payments of royalties owed. Amending RSFA would reduce
time, effort, and cost associated with collecting unpaid royalties from oil and gas
operators.
Background
MMS’s division of Minerals Revenue Management ( MRM) uses a financial system
based on reporting and paying by “ payors” ( entities that report and pay royalties).
RSFA requires that MRM pursue the operating rights owner ( primarily), or the lessee
( secondarily), for any unsettled debts, rather than simply pursuing the entity
reporting and paying MRM ( the “ payor”).
Findings
MRM does not have a system in place to track the identity of operating rights
owners. If MMS were to enforce the obligation against a lessee, the result could be
an extremely costly and lengthy process involving collection actions against
hundreds of entities. In addition, under the Debt Collection Improvement Act MMS
has only 180 days to collect payments. Because debt collection under RSFA is such
a slow process, a 2006 Inspector General audit46 concluded that MMS was not in
compliance with the Debt Collection Improvement Act of 1996, by failing to identify
delinquent receivables to the U. S. Department of the Treasury in a timely manner.
Recommendation
Recommendation 3- 8 The Department of the Interior should support amending
the Royalty Simplification and Fairness Act ( RSFA). The Energy Policy
Reform and Revitalization Act of 2007 ( HR 2337) introduced in the 110th
Congress contains language in Section 215 (“ Liability for Royalty Payments”)
simplifying the RSFA collection requirements by restoring MMS’s ability to
pursue the “ payor” for debts, as was done prior to the enactment of RSFA.
46 Draft Independent Auditors’ Report on the Minerals Management Service Financial Statements for
Fiscal years 2006 and 2005 ( Assignment No. X- IN- MMS- 0019- 2006).
Report to the Royalty Policy Committee
24
The Subcommittee recommends separating Section 215 from HR 2337, if
necessary, for passage as a stand- alone piece of legislation. This RSFA
amendment would allow for more timely and less costly collection of MMS’s
unsettled royalty debts.
3. Electronic Data Submittals, Data Exchange, and Accounting Tools
Issue
Royalty collection operations offer opportunities for substantial efficiency
improvements, especially in areas of coordination between MMS and BLM:
• Automated lease information data exchange;
• Electronic payments;
• Automated accounting tools; and
• Electronic volume or quality reporting by oil and gas producers.
Non- electronic ( i. e., manual or paper) lease status and production information, non-electronic
rental payments, non- electronic royalty payments, and inefficient
accounting tools can result in:
• Errors in determining whether Federal leases meet all statutory and
regulatory requirements;
• Inefficiencies in production accountability; and
• Delays or erroneous royalty distributions from MRM to States.
Background
In FY 2007, over 2,000 companies reported and paid royalties totaling $ 10.25 billion
from approximately 29,600 producing Federal and Indian leases. Table 4 shows
that in FY 2007, MMS collected about a further $ 1.17 billion in non- royalty revenues,
including bonus, rents, and other revenues. Total collections for FY 2007 ( royalties
plus revenues) were $ 11.4 billion.
There are currently about 1,100 offshore Federal oil and gas sales locations on
platforms in the Gulf of Mexico. When an offshore lease is established MMS’s
division of Offshore Minerals Management ( OMM) sends data electronically to
Minerals Revenue Management ( MRM). This is timed to coincide with MRM
receiving the first year’s rental payment and any lease bonus. All post- lease-establishment
actions, such as notification that leases have started producing
Federal oil and gas, are also sent electronically by OMM to MRM.
BLM’s management challenges differ from those of MMS in several respects. First,
the onshore program has considerably more leases and more wells than the
offshore Federal oil and gas program: there are currently about 27,000 onshore
Federal and Indian oil and gas leases with approximately 70,700 producing wells.
Second, leases administered by decentralized BLM offices are spread throughout
the western States and Alaska. MRM receives manual transmissions from BLM
offices regarding notification of onshore Federal oil and gas lease establishment, as
well as follow- up lease actions, such as notices of first production.
Chapter 3
25
Table 4 Reported Royalties and Revenues, FY 2001 – FY 2007 ($ millions)
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Royalties ( by Mineral)
Gas $ 5,358 $ 2,749 $ 4,235 $ 4,770 $ 5,151 $ 5,766 $ 4,644
Oil $ 2,363 $ 1,872 $ 1,553 $ 1,539 $ 2,594 $ 3,977 $ 4,401
Coal $ 399 $ 503 $ 463 $ 521 $ 542 $ 597 $ 634
NGL $ 206 $ 156 $ 183 $ 240 $ 286 $ 285 $ 368
Other $ 641 $ 59 $ 118 $ 66 $ 133 $ 106 $ 204
Royalty Total $ 8,967 $ 5,339 $ 6,551 $ 7,136 $ 8,706 $ 10,732 $ 10,252
Revenue Source
Bonus $ 799 $ 331 $ 1,399 $ 709 $ 1,298 $ 1,586 $ 903
Rents $ 232 $ 189 $ 309 $ 264 $ 284 $ 285 $ 267
Other $ 5 $ 15 $ 8 $ 19 $ 5 $ 14 $ 7
Revenue Total $ 1,036 $ 535 $ 1,716 $ 992 $ 1,587 $ 1,885 $ 1,177
Grand Total $ 10,003 $ 5,874 $ 8,267 $ 8,128 $ 10,293 $ 12,616 $ 11,429
Source: MMS data.
Post- lease- establishment actions affect lease status, including whether a lease is
meeting all statutory and regulatory requirements. For example, until a lease enters
producing status, the operator must submit rental payments. Once a lease enters
producing status, royalty payments required instead. MRM must have up- to- date
information to avoid erroneous follow- up actions, such as sending improper rental-bill
notices to a payor entitled to stop making rental payments.
MMS computer systems are unable to automatically import volume statements from
Federal onshore and offshore ( Gulf of Mexico) gas producers. This is a major
impediment to efficient royalty collection operations. In the early 1990s, BLM and
MRM were developing an electronic system for sharing lease data. However, that
system was never completed. 47
While MRM receives over 90% of royalty payments electronically, approximately
40% of rental payments are received non- electronically. In FY 2007 electronic
submissions totaled $ 9.3 billion in royalty payments and $ 107 million in rental
payments,
Prior to 2001, MRM used an automated tool known as the Accounting and Financial
System/ Production Auditing and Reporting System ( AFS/ PAAS). The AFS/ PAAS
system would compare of Federal oil and gas production volume reports to the
royalties paid. Upon finding inconsistencies, the system would generate automatic
exception reports. These exception reports, numbering in the thousands every
47 Issues contributing to the abandonment of this system include difficulties with migrating data
systems for concerns related to “ Y2K,” competing priorities relating to the Automated Land and
Minerals Record System implementation effort, and agencies’ failure to reach consensus on the use
of “ company codes” to identify lessees in data transmittals to MRM. Personal communication,
Manager, Reporting Services, MMS. September 18, 2007 and November 14, 2007.
Report to the Royalty Policy Committee
26
month, identified royalty payment discrepancies which could warrant follow- up action
by MRM. This system was terminated during an MRM software migration, and has
not been replaced.
Findings
For onshore and offshore Federal oil and gas leases, BLM manually transmits
information on lease establishment and follow- up lease actions ( e. g., notices of first
production) to MRM. This manual process is a major impediment to efficient royalty
collection operations.
When operators manually submit oil and gas volume and quality statements, OMM
personnel manually enter volume statements to the Liquid Verification System ( LVS)
and Gas Verification System ( GVS). LVS and GVS then automatically compare the
volume data to the volumes reported in Oil and Gas Operations Reports ( OGORs).
Manual entry by operators and OMM staff is inefficient and introduces potential for
reporting errors.
Neither MMS’s OMM division nor BLM receive Federal natural gas production
volume data in a form that can be automatically imported into MMS computer
systems. If volume reporting were automated, MMS and BLM would have a far
more efficient system for reviewing the accuracy of Federal gas production data.
BLM is currently developing a system for near real- time production data collection
and auditing. The Remote Data Acquisition for Well Production system ( RDAWP) is
a secure, automated system being implemented in two BLM pilot offices established
under Section 365 of the Energy Policy Act of 2005.48 RDAWP will allow BLM and
industry to access current production data and other information necessary for timely
production accountability assessments.
As described in the MRM Strategic Business Plan 2007- 2012, submission of non-electronic
rental and royalty payments to MRM can introduce errors as well as
delays in distribution payments to States. 49 For example, payors may submit
payments for several leases without clearly or accurately indicating how to allocate
the payment among the leases. This, in turn, makes it difficult for MRM to match
payments to leases.
When payors make electronic payments for Federal solid minerals production ( i. e.,
coal, potash, etc.) using the Solid Minerals Production and Royalty Report Form
( MMS- 4430), the electronic interface performs up- front error correction. For
example, when payors enter payment data, the data entry screens check for
erroneous or prohibited data. Electronic payments could be matched to other
information submitted on production volumes and royalties as well. The electronic
Report of Sales and Royalty Remittance form ( MMS- 2014) is used for Federal oil
48 Section 365 establishes a Federal Permit Streamlining Pilot Project (“ Pilot Project”) with the intent
to improve the efficiency of processing oil and gas use authorizations on Federal lands.
49 See http:// www. mrm. mms. gov/ StudyRepts/ PDFDocs/ MRMSP0712. pdf.
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and gas production payments, and includes error correction for some, but not all,
data entry.
Prior to 2001, AFS/ PAAS automatically generated exception reports that might
warrant follow- up action by MRM staff to ensure that correct royalty was paid on
produced Federal oil and gas. The new system replacing AFS/ PAAS does not
generate exception reports. As a result, MRM staff must use other tools to
determine which royalty cases to investigate.
Increased sharing of electronic information between BLM and MRM, as well as
between OMM and MRM, would dramatically increase the consistency of Federal
lease status and production information across these agencies. In turn, this would
help ensure timely and accurate royalty payments to the United States.
Recommendations
Recommendation 3- 9 BLM should work with MMS’s Minerals Revenue
Management ( MRM) division to develop and implement a system that
electronically transmits information on lease establishment and any follow- up
leasing actions affecting lease status.
Recommendation 3- 10 MMS and BLM should require gas analysis reports from
all operators, at a frequency to be determined by the agencies.
Recommendation 3- 11 MMS’s Offshore Minerals Management division ( OMM)
should phase in a requirement for offshore lease operators to submit all oil
and gas volume and quality statements electronically, in an automated file
format. Once electronic reporting of quality information is established, MMS
should modify the Gas and Liquid Verification Systems ( GVS and LVS) to
compare information submitted via GVS/ LVS to information submitted via Oil
and Gas Operations Reports ( OGORs).
Submittal of gas analysis reports to MMS’s OMM division and BLM would
enable these agencies to more readily verify the reasonableness of reported
BTU values.
Recommendation 3- 12 BLM should complete the pilot effort on Remote Data
Acquisition for Well Production, and determine whether the system can be
implemented for all Federal and Indian onshore oil and gas production.
Recommendation 3- 13 MMS’s Minerals Revenue Management division ( MRM)
should phase in a requirement that all payors submit their payments
electronically, with a goal of full implementation in five years.
Recommendation 3- 14 As outlined in the Minerals Revenue Management ( MRM)
Strategic Business Plan 2007– 2012, MMS’s MRM division should complete
the process of adding up- front error correction to the electronic interface for
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Form MMS- 2014. This will reduce errors received by MRM, by up- front
checks to a payor’s entry to the electronic royalty payment system.
Completion of the system allowing these up- front edits would ultimately save
staff resources at MRM.
Recommendation 3- 15 MMS’s Minerals Revenue Management division ( MRM)
should develop and implement software to perform the function of the
Accounting and Financial System/ Production Auditing and Reporting System
in automatically generating exception reports. This system should work in
conjunction with MMS’s Compliance Program Tools to automatically generate
exception reports requiring follow- up gas plant compliance reviews or audits.
MRM would need to establish a system to prioritize cases for follow- up, to
ensure proper royalties are being paid.
This recommendation will also assist in addressing the Gas Plant Efficiency
issues discussed below
4. Gas Plant Efficiency
Issue
For Federal leases, MMS’s Minerals Revenue Management division ( MRM)
reconciles payments reported on Form MMS- 2014 ( for individual component gases)
with reported production in Oil and Gas Operations Reports ( OGORs) ( for
unprocessed natural gas). This process depends on the accuracy of gas plant data,
and is necessary for checking the accuracy of royalties paid on gas- plant products
( i. e. valuable liquids extracted during processing).
Background
Royalties are paid at the wellhead for 30 percent of offshore natural gas, and for 63
percent of conventional ( non- coalbed methane) Federal onshore natural gas.
Royalties are paid after gas- plant processing for the remainder: 70 percent of
Federal offshore natural gas, and 37 percent of conventional ( non- coalbed methane)
Federal onshore natural gas production. 50 Volumes reported at the wellhead differ
from the volumes reported after gas- plant processing, following compression and
removal of valuable natural gas liquids, such as ethane, propane, and butane. Thus
for royalties paid after processing, MRM must rely on gas- plant efficiency data to
determine whether payments are reasonable.
BTU values and gas volumes must be reported on OGORs for both offshore and
onshore natural gas. In instances where such gas is sold at the lease, MMS
compares the production reported on the OGOR to the royalty paid for the gas,
reported on Form MMS- 2014. In cases where royalty is paid on gas after
processing at a gas plant, MRM looks at gas- plant efficiency to predict expected
50 Data from Supervisory Minerals Revenue Specialist, MMS- MRM, December 7, 2007
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volumes of gas components such as residue gas ( methane) and natural gas liquids
for which royalty should be paid. MRM then reviews the natural gas volumes
reported on OGORs for Federal oil and gas leases feeding the gas plant.
For example, an OGOR may report 100 mcf of natural gas transferred to a gas
processing plant, while a Form MMS- 2014 reports 75 mcf of residue gas and 100
gallons of NGLs. If gas- plant efficiency data ( factors) indicate that 75 mcf of residue
gas and 100 gallons of NGLs would be the expected products from 100 mcf of
unprocessed gas, then MMS would conclude that the volumes reported on Form
MMS- 2014 are reasonable. If the gas plant factors were inaccurate, the calculated
volume would be either overstated or understated, and MMS would not be aware of
a possible underpayment of royalties.
Gas plant factors may change for various reasons such as upgrades to the gas
plant, a change in the makeup of the incoming gas stream from the wells, or a
change in processing requirements. Furthermore, gas- plant efficiency may change
over time as a plant ages. It is important that MRM maintain current gas- plant
efficiency data. If the gas- plant efficiency factors used by MRM in calculating
expected volumes are inaccurate, MMS will not receive the correct royalty.
In the past, all offshore ( and some onshore) gas- plant operators were required to
submit Gas Plant Operations Reports ( GPORs) to MRM on a monthly basis. The
monthly GPOR filing requirement was terminated in 2001 and was not reinstated.
MRM may still request information about gas plant operations, and use the response
to calculate plant efficiency.
Prior to 2001, MRM used an automated tool known as the Accounting and Financial
System/ Production Auditing and Reporting System ( AFS/ PAAS). 51 AFS/ PAAS
imported gas plant efficiency data from Form MMS- 2014 when it was submitted for
royalties paid on gas plant products.
MRM currently uses a suite of automated tools known as Compliance Program
Tools ( CPTs) in performing compliance reviews. Such tools can help calculate
expected volumes of natural gas fed to a gas plant when assessing the accuracy of
royalties paid on gas plant products.
Findings
MMS relies on the efficiency data from natural gas processing plants to determine
expected volumes of processed gas and natural gas liquids, and ultimately the
royalties owed. Accurate gas plant efficiency data are critical for making this
determination. In general, gas plant efficiency data used by MRM are not current.
Such data may change through time as plants age or are modified, potentially losing
or gaining efficiency.
51 See discussion under Electronic Data Submittals, Data Exchange, and Accounting Tools beginning
on Page 24.
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The Compliance Program Tools ( CPTs) used by MRM in performing compliance
reviews are targeting tools for estimating gas volume discrepancies. However,
CPTs must be invoked by MRM staff; there is no automatic check for discrepancies.
These tools can help calculate expected volumes of natural gas fed to a gas plant
when assessing the accuracy of royalties paid on gas plant products.
Recommendations
Recommendation 3- 16 MMS should reinstate periodic reporting of gas plant
efficiency data by plant operators, similar to Gas Plant Operations Reports
( GPORs). The reporting period should be consistent with established audit
schedules.
( see below) Compliance reviews and audits using up- to- date gas plant
efficiency data would help ensure that proper royalties for gas plant products
are being paid to the United States.
Recommendation 3- 17 MMS should establish a prioritized gas- plant compliance
review or audit schedule to examine gas- plant efficiency. This schedule could
be based on factors such as plant processing capacity, age of the plant and
age of the efficiency data.
B. Policy and Guidance for Production Accountability
Activities
Issue
Written guidance regarding BLM’s and MMS’s production accountability
responsibilities is unconsolidated, outdated, and sometimes insufficient. This results
in inconsistent and outmoded approaches to production accountability tasks, and
potential reductions in royalty revenue.
Background
BLM has promulgated regulations and established guidance to manage programs on
public lands. These become outdated over time with changes in laws,
Congressional appropriations, administrative policy, and new technology. For
example, the use of a plane table for surveying the volume of rock taken from a mine
has been replaced with the use of automation software, with increased accuracy and
less time required for these measurements.
Policy and guidance play a critical role in oil and gas production accountability, both
onshore and offshore. Guidance for the oil and gas program tends to be more
complicated than that of the solid minerals program, as oil and gas leases are
located both offshore and onshore, and are managed by two agencies: MMS for
offshore leases and BLM for onshore leases. This responsibility fell to BLM
following the merger of the United States Geological Survey Conservation Division
with BLM in 1982.
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Information collected from the BLM field offices indicate that they continue to rely on
guidance from the now defunct USGS Conservation Division, some of which is
outdated. BLM utilizes other forms of guidance to administer its production
accountability responsibilities, including its Manual guidance systems and Onshore
Orders. Nevertheless, the agency’s policy and guidance have not kept pace with the
rapid changes in technology in the oil and gas industry, or shifts in law,
administrative policy, and procedure. Similarly, MMS’s Offshore Minerals
Management ( OMM) division has limited written guidance or manuals to guide their
performance of production accountability tasks, and instead relies primarily on
informal on- the- job training.
BLM’s most recent guidance for solid minerals operations, including production
verification, was released in 1985, in what is called the “ Redbook.” Portions of this
guidance are sufficient, but much of it is now outdated.
Findings
Updated policy and guidance is critical for BLM and MMS field personnel in
implementating their production verification and accountability duties. It is equally
important for the minerals industry, as they need certainty and consistency in their
interactions with BLM and MMS.
BLM policy and guidance have not been consolidated in a single document or
publication. As a result, BLM’s 31 oil and gas field offices use varying policy and
guidance to address or correct oil and gas protocol because the policy and guidance
is not consolidated. Some BLM policy and guidance is outdated or non- existent
( e. g., policy and guidance for non- metered “ beneficial use” of natural gas at the
lease), and some policies issued by memoranda have expired. As there is no
national on- lease policy, some BLM State Offices ( e. g., Wyoming) have issued their
own. For the solid minerals most BLM field offices rely on the “ Redbook” ( last
revised in 1985), which appears to never have been placed in BLM’s record library
as an official document.
In addition, some BLM state offices have issued their own “ Notices to Lessees” for
oil and gas operations. 52 While such Notices to Lessees may impact oil and gas
field operations in a positive manner, they nevertheless lack a national perspective
and may introduce inconsistencies among states. One field office reported that
“ over the last 20 years, field offices have had to set standards for everything from
Electronic Flow Computers to V- cone/ wafer cone measurement. As a result,
national consistency in measurement standards has been an issue.” Operators
regularly question why BLM has not updated its policy and guidance to reflect new
technology and standards.
52 Notices to Lessees and Operators ( NTLs) are written notices issued by BLM to implement oil and
gas regulations and operating orders, and serve as instructions on specific items of importance within
a State or field office.
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Consistent policy and guidance would provide consistency in regulating mineral
producers and monitoring production accountability. Updated guidance and policy
would ensure consistency in application of methodology for minerals resources
removed from Federal and Indian lands, and provide for more timely and thorough
review of production records. Revenue collection from oil and gas production would
be enhanced through up- to- date, consolidated, and consistent guidance.
Recommendations
BLM and MMS should undertake a number of actions to update and consolidate
existing policy and guidance. These include the following:
Recommendation 3- 18 BLM should update all policy and guidance on production
accountability, including any expired and current instruction memoranda, the
“ Redbook,” and any relevant pre- 1983 USGS guidance. The updated
material should be incorporated into the BLM Manual System. 53 Specific
policy and guidance updates include the following:
• Require that commingling requests identify allocation between zones.
• Re- evaluate the policies and guidance for onsite beneficial use of gas..
• Remove references to the Solid Leasable Minerals System, which ceased
to exist in the early 1990’ s.
• Include the use of tools such as “ BRIO” to access MMS reports. 54
• Require entry into LR2000 ( BLM’s records tracking system) no later than
30 days after an inspection, using the Action Code of 411 for production
verification inspections.
• Require that BLM Inspectors obtain copies of the state certification of
weight scales, whenever it is required by the state.
• Update requirements for certification of BLM mine inspectors.
Recommendation 3- 19 BLM and MMS should develop timelines and standards
for communicating and providing feedback to each other on production
accountability issues.
Recommendation 3- 20 MMS should provide BLM an updated MMS personnel
contact list for production accountability issues, by operator.
Recommendation