Oversight of natural gas royalty collection falls short, GAO finds

The Interior Department's Minerals Management Service could be missing out on royalties because it relies too heavily on companies' self-reported data to track offshore natural gas production, the Government Accountability Office told lawmakers recently.

When energy companies drill for oil on federal land offshore, they tell MMS exactly how much they are producing so the agency can collect royalties on behalf of taxpayers. But agency officials don't simply take the oil companies' word for it, GAO noted in a memorandum released on Wednesday. They compare reported production with data collected by Interior's office of Offshore Energy and Minerals Management through the liquid verification system, which records oil volumes flowing through pipeline metering points.

But when it comes to natural gas production offshore, MMS relies exclusively on data reported by companies, even though OEMM operates a similar gas verification system.

"As a result, MMS's royalty-in-kind program does not have the same level of assurance that it is collecting the gas royalties it is owed," GAO auditors wrote in the memo.

The watchdog agency's criticism applies to in-kind royalty payments, which accounted for about 42 percent of nearly $9.7 billion in oil and gas royalty revenue in 2006; 58 percent of royalties were collected in cash that year.

GAO's analysis of the gas pipeline data collected by OEMM showed that in January 2004, May 2005, July 2005 and June 2006, 25 percent of the pipeline metering points had an outstanding discrepancy between companies' self-reported data and the pipeline data. The discrepancies included both under-reporting and over-reporting.

Auditors also noted that MMS' annual reports to Congress documenting the performance of the in-kind royalty collection program might overstate the program's benefits.

"MMS' calculation that from fiscal 2004 to 2006 MMS sold royalty oil and gas for $74 million more than it would have received in cash was based on assumptions, not actual sales data, about the prices at which royalty payors would have sold their oil or gas had they sold it on the open market," the auditors wrote.

Even a small change in MMS' assumptions could result in very different estimates. For example, GAO noted that a 1 percent error in the estimate of cash payments could change MMS' savings calculation by about $80 million in either direction.

In addition, MMS failed to include administrative costs of the program in its savings calculation. Had the agency applied the same third-party data verification to gas production that it applied to oil, those costs would have been even higher because a bigger staff would have been necessary. The Subcommittee on Royalty Management, a panel appointed by the Interior secretary to assess the royalty program, reported in December 2007 that the agency lacked employees to review data from the gas verification system.

GAO recommended that Interior improve its oversight of natural gas volumes owed to the government by using third-party production data such as that collected by OEMM's gas verification system. Auditors also recommended several ways MMS could improve the calculations of the in-kind royalty program's costs and benefits in an annual report to Congress.

MMS generally concurred with GAO's findings.