Poor Oversight by the DOI and MMS

A complex regulatory structure coupled with an under-performing oversight body has created a system that incentivizes oil and gas companies to under-pay royalties due to the federal government for the extraction of natural resources from public lands. As a result, these companies gain excessive profits at a cost to the general treasury and the public at large.

In exchange for producing gas and gas products from federal and Indian lands, oil companies pay royalties to the U.S. government based on the gross proceeds of production. The amount of royalties is determined by federal regulations and payment is monitored by the Department Of Interior’s Minerals Management Service (MMS) and its Minerals Revenue Management (MRM) branch. These regulations are technically complex which leads to disputes on interpretation and implementation.

A number of recent events highlight the weakness of MMS and MRM monitoring scheme. For example, this August Burlington Resources agreed to pay the United States $97.5 million to resolve claims that it underpaid royalties owed on natural gas produced from federal and Indian leases. The suit had originally been filed by a whistleblower on behalf of the federal government.

In its 2006 assessments, the Office of Management and Budget (OMB) scored MMS overall as "not performing." Specifically: Strategic Planning at 60%, its Program Management at 66% and its Program Results and Accountability at 32%. In 2007, after firing and replacing MMS Director Johnnie Burton in July, the OMB glossed over the structural problems at MMS with a superficial score of "performing" despite the fact that even in the 2007 edition, OMB rates MMS "Accountability" at 62%--a substandard grade by any system.

In describing ethical lapses and bungling of revenue collection, the Department of Interior’s own Inspector General, Earl Devaney, said "Short of crime, anything goes at the highest levels of the Department of Interior.” In December, 2006 Devaney issued a highly critical audit of MMS’ compliance program.

This long-running record of incompetence has brought increased scrutiny from Congress. Both the House Natural Resources and Senate Energy and Natural Resources Committees have held hearings critical of MMS’s revenue collection and audit policies this year. The Senate Energy Committee has also requested a GAO report on the Royalty in Kind Program.

In response, MMS has pledged to issue a strategic plan detailing how royalty collection and ethical considerations will be improved and pledged to create an independent board to revue compliance issues within MRM. However, given MMS’s abysmal record of implementing these regulations, Congress must remain vigilant in its oversight and protect both our natural resources and the public treasury.

To address the egregious lapses in oversight and lost revenue, Congress should:

• Ensure that MMS vigorously implements its reform plan through on-going requests for briefings with senior officials, hearings and third-party (GAO) evaluations.
• Alter the incentive structure of the current regulatory scheme to minimize a company’s willingness to manipulate reporting information for financial advantage.
• Consider simplifying the MMS regulations to limit a company’s ability to manipulate its reporting data.
• Provide thorough analysis and evaluations of the new independent panel under the Royalty Policy Committee.