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Project on Government Oversight

Written Testimony of POGO's Danielle Brian on "Getting Royalties Right: Recent Recommendations for Improving the Federal Oil & Gas Royalty System"

Related Content: Oil & Gas Royalty Revenue
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March 11, 2008 | By: Danielle Brian
Written Testimony of Danielle Brian, Executive Director
The Project On Government Oversight
before the
House Resources Committee
Subcommittee on Energy and Mineral Resources:
"Getting Royalties Right: Recent Recommendations for Improving the Federal Oil & Gas Royalty System"
 
The Project on Government Oversight (POGO) has long worked for accountability and honesty within the federal government. By that standard, we applaud the Royalty Policy Committee’s report shedding light on the many problems inherent within the royalty collection systems at the Department of Interior’s Minerals Management Service (MMS) and encouraging reform, oversight, and transparency. However, much of what we know about the agency from its own Inspector’s General reports, press reports, Congressional oversight, state and tribal auditors, and whistleblowers leads us to believe that the Committee’s report does not go far enough. 

Rather than depicting MMS as “an effective steward"1 of the nation’s oil and gas royalty collection program, the report is a damning picture of the inability of the program to effectively collect the taxpayers’ money. Combined with a recent report by the Department of Interior’s Inspector General that found that the agency was collecting the largest share of non-tax revenue within the government using a “band-aid” approach, it is easy to conclude that MMS and its revenue collection agency, Minerals Revenue Management (MRM), are failing to effectively collect taxpayer money.2

Despite having spent close to $150 million over the last several years on information technology, the report finds that MMS’ technology systems, as well as MMS strategies for using those systems are failing in a multitude of areas.3 It is critical the agency have an effective strategy for determining which companies to audit.4 It is also critical that the agency have information technology systems that collect the appropriate information.5 It is critical that the agency know for certain how much royalty is owed to the government.6

The Committee’s report recommends 110 ways that improvements should be made. Many of the Committee’s recommendations are straightforward common sense strategies for good management. It is easy for POGO to support making manuals and procedures available to the public, increasing communication among agencies, enhancing performance measures, conducting more studies, and ensuring better reporting for all endeavors at the agency. For instance, mandatory electronic reporting for all lessees would reduce manual entry errors, speed up calculation, and ease auditing and compliance reviews.7 Additionally, POGO always supports systems that encourage whistleblowers. We urge adoption of a whistleblower hotline combined with incentives to encourage whistleblowers to come forward.8

While these nuts and bolts recommendations are key to begin reforming the ailing systems within the agency, they fail to address important questions of independence, oversight, and transparency. The Committee was charged with determining if royalty collection and audit, compliance, and enforcement systems and procedures are adequate, as well as reviewing the operations of the program to take royalties in the form of product, rather than cash. While they may have discovered 110 ways to improve these systems, avoiding reforms that target larger systemic problems will only lead to continued skepticism of the agency’s ability to effectively steward the program. 

Following are the four larger issues connected to reforming the agency we believe the Congress should address, as well as two areas raised by the Committee to which we are vigorously opposed.

Additional Reforms:

    1. Presidential appointment and Congressional confirmation for the Director of the Minerals Management Service would provide additional oversight and scrutiny of the agency, as well as elevate the status of one of the largest non-tax revenue operations within the federal government.

    2. Moving the compliance and audit function out of MMS is a critical step to improving the independence of the agency from oil and gas companies and reducing conflict of interest within the agency. The same people responsible for working with companies to see that federal lands are used to their greatest leasing potential and working in partnership with those companies to sell royalty oil should not also be in charge of auditing those companies.

    3. Transparency of MMS leases, contracts, documents, and procedures is paramount to reducing opportunities for fraud and increasing public confidence in the agency.

    4. An independent and public study of the royalty in kind program and its use to fill the nation’s Strategic Petroleum Reserve should be commissioned to determine if this is in the best interest of the taxpayers. While this program may have many benefits, evidence is mounting that it compromises the integrity of the agency and squanders taxpayer money through inefficiencies.   

Areas of Concern:

    1. POGO urges the Congress to reject the Committee’s recommendation that a trust fund be established and the interest used to fund audit and compliance activities without Congressional approval.9 Rather we urge the Congress to reign in all spending activities outside the annual Congressional appropriations process.

    2. POGO urges that any consideration of moving to market indices for gas valuation, whether for affiliated transactions or not, be carefully considered in light of continuing court cases proving manipulation by oil and gas companies.10

While this list is by no means exhaustive, it represents significant opportunities to reform the agency by taking an expansive view on what it means to be an effective steward of federal lands and funds. We are preparing in-depth comments on our primary policy objectives and concern as well as on individual chapters of the Royalty Policy Committee report, and will supply the document to the Committee when it is complete. We appreciate the Chairman’s interest in this critically important area and trust you will find our comments helpful.

We would like to sincerely thank the Royalty Policy Committee for its thoughtful and expansive work on this critical issue. We believe this report, combined with others generated in the recent past, are an urgent call for reform of the royalty system. We hope that this report will be used to springboard the agency into action so that the taxpayers are assured of receiving their fair share from the nation’s mineral rich lands. 


Endnotes

1 Report to the Royalty Policy Committee, Mineral Revenue Collections from Federal and Indian Lands and the Outer Continental Shelf, Submitted by: the Subcommittee on Royalty Management, with staff support from the Department of Interior, Office of Policy Analysis (Office of the Secretary) and the Bureau of Land Management, December 17, 2007, page ix. (Referred to as Report to the Royalty Policy Committee from this point forward.)

2 Department of Interior.  Memorandum from Earl E. Devaney, Inspector General, to Secretary Kempthorne and C. Stephen Allred, Assistant Secretary, Land and Minerals Management, September 19, 2007, page 1.

3 United States Department of Interior, Office of Inspector General, “Minerals Management Service: False Claims Allegations,” Transmitted on September 19, 2007, page 38.

4 Report to the Royalty Policy Committee, Recommendations 4-1, 4-9, 4-19.

5 Report to the Royalty Policy Committee, Recommendations 3-6, 3-10, 4-10, 4-16, 4-17, 4-18, 4-22.

6 Report to the Royalty Policy Committee, Recommendations 3-1, 3-14, 3-15.

7 Report to the Royalty Policy Committee, Recommendations 3-7, 3-11, 3-13, 3-16, 4-8, 4-21, 4-22.

8 Report to the Royalty Policy Committee, Recommendations 4-6.

9 Report to the Royalty Policy Committee, Recommendation 6-6.

10 Report to the Royalty Policy Committee, Recommendation 4-26.
 

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