GAO questions federal royalty program

Report criticizes BLM and MMS collection methods for not double checking amounts, doesn’t include Alaska fields in examination

Eric Lidji

Petroleum News

The U.S Department of the Interior may not be getting full compensation from oil and gas development on federal land because of inadequate and incomplete management systems, according to a new review of government collection methods.

The report by the U.S. Government Accountability Office examines the collection methods of the Bureau of Land Management for onshore development and the Minerals Management Service for offshore development. Together, the two agencies within the Interior Department manage royalties from oil and gas development on federal land and water, including millions of acres in Alaska.

“Ultimately the system used by Interior to ensure taxpayers receive appropriate value for oil and gas produced from federal lands and waters is more of an honor system than we are comfortable with,” the GAO report said.

The findings follow several years of criticism leveled at the two agencies, but also an examination of the royalty program released late last year by a subcommittee within the Interior Department.

The subcommittee examination made 110 recommendations for changing the royalty program. The GAO plans to release its own recommendations at some point, according to Frank Rusco, acting director of Natural Resources and Environment for the GAO.

At the Congressional hearing where Rusco testified on the GAO findings, the Interior Department challenged the idea that the royalty program needs to do anything more than address the recommendations of the subcommittee and indicted it had already begun to do so, according to a report from the hearing in Oil and Gas Journal.

Report suggests government might be missing out

MMS brought in more than $9 billion from oil and gas development in fiscal year 2007, and production from federal lands accounted for 35 percent of the oil and 30 percent of the gas produced in the country in 2006, according to the report.

But the GAO report found the agencies had not been conducting as many inspections as the law requires, and that they often did not use third-party data, primarily from pipeline companies, to verify the money and royalty oil and gas received from federal leases.

The GAO report found more issues concerning onshore development than offshore development, and also found issues pertaining to gas production that were not applicable to oil production.

Little impact on current development in Alaska

“We did not look at Alaska,” Rusco said. “We were looking mostly at the states that have the most federal leases.”

In fiscal year 2006, only 41 federal leases were in development in Alaska, less than any other state. However, those leases brought in $60.5 million, making each lease in Alaska worth more on average than the leases in any other state.

Currently in Alaska, production is limited on federal leases. For offshore leases, only the Northstar Unit off the coast of the North Slope is in production. For onshore leases, the BLM manages seven active units and two communization agreements, all in the Cook Inlet basin.

But at a time of declining production from legacy fields on state land, many observers of the oil patch see offshore development in the Beaufort and Chukchi seas, the BP Liberty project, and any onshore development of the National Petroleum Reserve-Alaska and the Arctic National Wildlife Refuge as the future of the industry.

Any changes to federal collection methods could impact how the federal government takes royalties from the development of those areas.

Rusco said the GAO plans to issue its own recommendations for improving the royalty collection programs, which will “differ slightly and be more specific” than the subcommittee recommendations.