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Project on Government Oversight

Mineral Royalties Hearing: Data Reliability is a Major Risk Factor

Related Content: Oil & Gas Royalty Revenue
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March 14, 2008

From POGO's blog:

One fundamental conclusion could be drawn from Tuesday's House subcommittee hearing on federal oil and gas royalties - the Department of Interior cannot certify the reliability of information used to determine royalty payments. In testimony before the subcommittee, the Government Accountability Office (GAO), Interior Inspector General (IG), and North Dakota auditor and State and Tribal Royalty Audit Committee Chairman Dennis Roller all agreed that serious flaws exist in the Minerals Management Service's (MMS's) computer systems used to process federal lease production data and determine royalties owed to the government. This could render MMS's plans to institute a risk-based auditing and compliance strategy virtually meaningless since a lack of reliable data would make accurate risk determinations impossible.

The GAO also revealed some preliminary findings (pdf) from its investigation of the royalty collection program. Nick Snow, with the Oil and Gas Journal, reported:

Franklin Rusco, acting director of GAO's natural resources and environment program, said that data management problems and reliance on data reported by the lessees themselves has put MMS royalty collections at risk. Financial management systems are inadequate and lack key internal controls, he said, while compliance efforts do not consistently examine data from third parties to verify whether self-reported royalty-in-value payments are complete and accurate.

Not only do companies self-report royalty-in-value payments, which could hypothetically be sufficient if they were checked against various source data, but, as Rusco described at the hearing, companies also have the ability to enter MMS computer systems and change royalty amounts for up to six years. If the amounts are decreased, then MMS is required to payback the difference with interest. Furthermore, the system has long been unable to detect missing royalty reports.

MMS has spent the past eight years attempting to implement an automated computer system after awarding a contract to Accenture for the task in 1999. Accenture has since received $150 million and may have the contract extended for 10 more years, despite the fact that the current system was launched in 2001. If a private company were to face a similar situation, it would have long ago closed its doors, unable to accurately determine its revenues.

Most private companies would also depend on independent auditors to certify that their books are accurate and in order. This serves as a back-end check on operations. However, at the Department of Interior, the royalty auditing division is placed under the same leadership that leases to companies and markets royalty oil and gas. POGO has recommended, in prepared testimony submitted to the subcommittee, that all auditing and compliance functions be relocated to a new bureau independent of MMS in order to curtail possible interference and conflicting priorities. 

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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