GAO: Interior can’t guarantee accurate oil and gas royalty payments

Two weeks after the White House announced its intention to increase offshore oil and gas drilling, auditors at the Government Accountability Office have concluded the Interior Department cannot provide taxpayers with any reasonable assurance that officials are accurately measuring energy production, both onshore and offshore.

The watchdog agency's highly critical report, released on Wednesday, raises doubts that companies are paying adequate royalties owed to the U.S. Treasury. Oil and natural gas produced from federal leases generated more than $6.5 billion in royalties in 2009.

GAO cataloged a litany of problems, including regulations that haven't been updated for 20 years, despite significant changes in measurement technologies in the interim. In addition, key staff responsible for verifying energy production from federal leases received training only once during the last decade.

Nonetheless, despite significant and obvious failings, officials at Interior recently lowered the department's estimation of the risks in the oil and gas program from medium to low, exempting it from more rigorous internal oversight, GAO reported.

"Interior has not consistently met its inspection goals; offshore inspectors met program goals once between fiscal years 2004 and 2008, and onshore inspectors met program goals about one-third of the time over the past 12 years," the report said.

To ensure that accurate royalties are paid, Interior is responsible for measuring the volume and quality of oil and gas produced on federal land. That responsibility falls to the Offshore Energy and Minerals Management Service and the Bureau of Land Management. GAO found major shortcomings in the regulations and policies governing the programs, and in the agencies' ability to conduct reliable measurements in the field.

"Little coordination has occurred between OEMM and BLM, resulting not only in inefficient and duplicative efforts in reviewing and assessing new measurement technologies and practices, but a missed opportunity to take advantage of measurement expertise across agencies," GAO said.

In addition, Interior officials have not determined the extent of the department's authority over two key areas of oil and gas production infrastructure -- meters in gas plants and those owned by pipeline companies. This failure has limited the department's oversight, raising doubts that gas production is being accurately measured at those sites.

Staffing shortages also present a significant problem, especially for onshore production verification. "BLM officials told us that the low pay, when compared with industry, and the high housing costs in energy boom towns were major factors affecting hiring and staff turnover," the report said.

A 2007 BLM study found that starting salaries for petroleum engineers were between $10,000 and $35,000 below private sector wages, making it difficult for the agency to attract a sufficient number of qualified candidates. That pay disparity has contributed to turnover rates for petroleum engineers ranging from 33 percent to 100 percent at eight field offices between fiscal 2004 and 2008, GAO found. Turnover rates for other critical specialties, such as engineer technicians and production accountability technicians also were high.

What's more, neither BLM nor OEMM provide engineers and technicians with adequate training to perform official job duties, GAO found.

The department has made efforts to improve production verification, notably through the use of remote monitoring technology. But GAO found the efforts yielded little in the way of results and were years away from widespread use.

Interior concurred with many of GAO's recommendations to update regulations and policies and improve coordination between BLM and OEMM.