Reports slam Minerals Management Service handling of royalties

The Interior Department's beleaguered Minerals Management Service took new hits Friday in two Government Accountability Office reports faulting the agency for failing to adjust or ensure the accuracy of royalties collected from oil and gas companies.

In a draft report expected to be released Friday or Monday, GAO faults MMS for failing to conduct enough inspections to ensure companies drilling under federal leases, many in the Gulf of Mexico, are accurately reporting production volumes on which royalties are based. The firms are required to self-report production to MMS.

In another report, GAO says inflexible royalty rates, set while industry profits were lower, may have cost the government "billions of dollars in forgone revenue."

The findings follow a jaw-dropping report released Wednesday by the department's inspector general, which said 13 officials in MMS' royalty-in-kind program took improper trips and gifts from and engaged in sex and drug use with industry representatives. The GAO findings cover different ground.

"How many more reports need to be issued on the Interior Department's sheer inability to manage America's energy resources before this agency truly buckles down and gets its house in order?" asked House Natural Resources Committee Chairman Nick Rahall, D-W.Va., who faulted the department for its "faith in Big Oil to pay royalties on the honor system."

House Oversight and Government Reform ranking member Tom Davis, R-Va., called the agency's royalty program "a last-century system of self-policing, weak inspections and cozy relationships that lacks modern transparency and accountability."

Amid a congressional fight over offshore drilling, the reports quickly factored in the debate. Democrats cited problems with offshore drilling procedures as evidence of problems with Republican plans to increase production. Rahall said an energy package he is cosponsoring, expected on the floor early next week, will "ensure Americans are receiving a fair return for the resources they own."

According to a 23-page draft GAO report, Interior's Bureau of Land Management and Offshore Energy and Minerals Management office have not met a statutory requirement to annually inspect leases and equipment used to measure production at drilling sites from which MMS collects royalties. The agencies said they fell short due to growing workloads linked to increased offshore drilling and ongoing cleanup from hurricanes in 2006, GAO said.

The GAO found MMS cannot monitor firms' adjustments of production data or ensure that companies have paid all royalties due because its information technology system cannot effectively track instances where companies did not submit production reports. MMS also "lacks a clear process for ensuring royalties are accurately paid," when inspections identify discrepancies in companies' reported production, the report says.

In a separate report, GAO said "a lack of price flexibility in royalty rates and inability to change fiscal terms for existing leases have put pressure on Interior and on Congress to change royalty rates on future leases in an ad hoc basis."

The report says a 1995 bill granting royalty relief on certain leases in the Gulf between 1996 and 2000 could cost the government up to $53 billion. GAO urged Interior to review the royalty system as a whole. The Interior Department and MMS did not response to inquiries by presstime.