<DOC>
[110 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:42512.wais]
S. Hrg. 110-386
OVERSIGHT OF THE OIL, GAS, AND MINERAL REVENUE PROGRAMS MANAGED BY THE
DEPARTMENT OF THE INTERIOR
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
FEBRUARY 26, 2008--WASHINGTON, DC
__________
Printed for the use of the Committee on Appropriations
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COMMITTEE ON APPROPRIATIONS
ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont TED STEVENS, Alaska
TOM HARKIN, Iowa ARLEN SPECTER, Pennsylvania
BARBARA A. MIKULSKI, Maryland PETE V. DOMENICI, New Mexico
HERB KOHL, Wisconsin CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington MITCH McCONNELL, Kentucky
BYRON L. DORGAN, North Dakota RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California JUDD GREGG, New Hampshire
RICHARD J. DURBIN, Illinois ROBERT F. BENNETT, Utah
TIM JOHNSON, South Dakota LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island SAM BROWNBACK, Kansas
FRANK R. LAUTENBERG, New Jersey WAYNE ALLARD, Colorado
BEN NELSON, Nebraska LAMAR ALEXANDER, Tennessee
Charles Kieffer, Staff Director
Bruce Evans, Minority Staff Director
------
Subcommittee on Department of the Interior, Environment, and Related
Agencies
DIANNE FEINSTEIN, California, Chairman
ROBERT C. BYRD, West Virginia WAYNE ALLARD, Colorado
PATRICK J. LEAHY, Vermont LARRY CRAIG, Idaho
BYRON L. DORGAN, North Dakota TED STEVENS, Alaska
BARBARA A. MIKULSKI, Maryland THAD COCHRAN, Mississippi
HERB KOHL, Wisconsin PETE V. DOMENICI, New Mexico
TIM JOHNSON, South Dakota ROBERT F. BENNETT, Utah
JACK REED, Rhode Island JUDD GREGG, New Hampshire
BEN NELSON, Nebraska LAMAR ALEXANDER, Tennessee
Professional Staff
Peter Kiefhaber
Ginny James
Rachel Taylor
Scott Dalzell
Chris Watkins
Leif Fonnesbeck (Minority)
Rebecca Benn (Minority)
Rachelle Schroeder (Minority)
Administrative Support
Katie Batte (Minority)
C O N T E N T S
----------
Page
Opening statement of Senator Dianne Feinstein.................... 1
Question submitted by........................................ 23
Opening statement of Senator Wayne Allard........................ 2
Statement of Senator Larry Craig................................. 4
Statement of C. Stephen Allred, Assistant Secretary for Lands and
Minerals Management, Minerals Management Service, Department of
the Interior................................................... 5
Prepared statement of C. Stephen Allred...................... 8
1998/1999 Leases--Kerr-McGee..................................... 5
Royalty Policy Subcommittee...................................... 6
1998-1999 OCS Leases Without Price Thresholds for Royalty Relief. 8
Royalty Policy Committee Report.................................. 8
Implementation of Subcommittee Recommendations................... 10
Statement of Randall Luthi, Director, Minerals Management
Service, Department of the Interior............................ 12
Royalty Policy Subcommittee Report............................... 12
1998/1999 Leases................................................. 14
Royalty Policy Subcommittee Recommendations...................... 15
Automated Billing................................................ 15
Lease Sales...................................................... 17
Losses From Barring Companies.................................... 17
Status of 1998/1999 Royalty Rate Relief Negotiations............. 18
Kerr-McGee Litigation............................................ 19
Status of 1998/1999 Royalty Rate Relief Negotiations............. 20
Processing fee................................................... 21
Royalty Policy Subcommittee Trust Fund........................... 21
Debt Collection Improvement Act.................................. 22
Closure of Audit Recommendations................................. 22
Noncompliance C, Finding: Debt Collection Improvement Act of 1996 22
Recommendation................................................... 22
Implementation of Recommendation................................. 22
1998-1999 Deepwater OCS Leases................................... 23
Royalty Revenue Report........................................... 24
1998-1999 Oil/Gas Leases/Kerr-McGee Case......................... 30
Kerr-McGee Case.................................................. 30
Naval Oil Shale Reserve.......................................... 33
Administrative Fees on Onshore Leases............................ 34
OVERSIGHT OF THE OIL, GAS, AND MINERAL REVENUE PROGRAMS MANAGED BY THE
DEPARTMENT OF THE INTERIOR
----------
TUESDAY, FEBRUARY 26, 2008
U.S. Senate,
Subcommittee on Department of the Interior,
Environment, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 9:28 a.m., in room SD-124, Dirksen
Senate Office Building, Hon. Dianne Feinstein (chairman)
presiding.
Present: Senators Feinstein, Bennett, Craig, and Allard.
opening statement of senator dianne feinstein
Senator Feinstein. I want to begin by thanking the ranking
member for his cooperation in being able to begin this hearing
early on. We have a number--as many as five--stacked votes,
which will begin sometime after 10 o'clock, which will make
holding the hearing extraordinarily difficult.
So thank you very much Senator Allard for allowing us to
move this up to 9:30.
Senator Allard. You're welcome. I appreciate you
recognizing a problem and addressing it quickly.
Senator Feinstein. Thank you, thank you. Mr. Secretary,
we'd both like to thank you for your cooperation in making this
extra effort in being here a half-hour early. I know other
members may be coming along and I hope they can come along
shortly, so that we can conclude this in about 45 minutes, if
possible.
The Minerals Management Service is responsible for managing
the Federal Government's oil and gas royalty programs on public
lands and waters. Last year, MMS collected $11.4 billion in
royalties and rents associated with 29,000 onshore and offshore
oil and gas leases.
Of that amount, $2.5 billion was distributed to State and
tribal governments, while the Federal share was used to fund
the Land and Water Conservation Fund, the Historic Preservation
Fund, and the Reclamation Fund, in addition to general
government operations.
Mr. Allred, we've asked you to address three specific
subjects this morning in your testimony.
First, we'd like you to update the committee on the status
of your negotiations with the oil companies holding leases
issued in 1998 and 1999 for which MMS is not collecting
royalties due to the United States. This is potentially, as you
well know, a $10 billion loss to the taxpayer. We need to know
what the Department is doing to make the Treasury whole.
Second, we've asked you to address the ongoing litigation
between Kerr-McGee, which is now Anadarko Oil, and the Interior
Department over the legality of price thresholds for all 1996
to 2000 leases. We're aware of the recent District Court
decision that went against the government, but the Committee is
eager to hear the status of the case and the Department's
outlook on its final outcome. As I understand, this is another
potential loss of $21 billion should this judgment be
sustained.
Finally, we've asked you to speak to the findings and
recommendations contained in a December 17 report from the
Royalty Policy Committee concerning mineral revenue collection
on Federal lands. As you know, this report was authored by our
former colleagues, Senator Bob Kerrey and Jake Garn, who co-
chaired the Special Committee that investigated and reported on
nearly every aspect of Federal performance in carrying out its
oversight and revenue collection duties. We do have the 100
recommendations that the report made. I've read them, so I am
somewhat aware of what they have proposed.
I also see we're joined by Mr. Lufti--Excuse me, Luthi--I
want to thank you for making the effort. I know you came in on
a plane, and I really appreciate you're being here. So thank
you very much.
Mr. Luthi. Thank you, Senator. It's my pleasure to be here.
Senator Feinstein. You're welcome. And now, I'll turn to
the ranking member Senator Allard, for any opening statement
you may have.
opening statement of senator wayne allard
Senator Allard. Well, thank you, Chairwoman Feinstein, for
your leadership. I want to thank the witnesses, along with the
Chairwoman, for adjusting your schedule to meet our change in
schedule here. What have we got? Oh, okay, we're getting some
feedback. All right. Now that we've got that taken care of.
So I know you had to adjust your schedules, so Mr. Luthi
and Mr. Allred, I welcome you both to the committee hearing.
I am very excited to have the opportunity to work again, as
the ranking member on the Interior Appropriations Subcommittee.
This subcommittee deals directly with the enormous number of
critical issues that affect my home state of Colorado. I
recognize that during election, your politics can frequently
slow the pace of getting things done around here, but I remain
optimistic that we can accomplish a lot by working together in
a bipartisan fashion which has always been the tradition in
this committee.
I believe the public, which values its public land so
highly, deserves nothing less than our best efforts to do so.
Since this will be my last year in the Senate, I will not have
the opportunity to hold the gavel on this subcommittee. But,
Senator Feinstein, you've been an excellent chairman to work
with----
Senator Feinstein. Thank you.
Senator Allard [continuing]. And I always appreciate your
willingness to reach across the aisle. I'm generally thankful
to finish my tenure here with such a thoughtful and able person
at the helm.
Today we examine the Oil, Gas, and Mineral Revenue programs
managed by the Department of the Interior, most particularly
those overseen by the Minerals Management Service (MMS). The
MMS is a comparatively small agency within the Department of
the Interior, with only about 1,600 people. However, it is also
one of the most important.
Not only does it manage all offshore leasing in Federal
waters, but last year the agency collected and dispersed over
$11 billion to the U.S. Treasury, States, and Tribes. The
amounts collected by MMS for the Federal Treasury are second
only to the Internal Revenue Service. Most of the employees
that are responsible for these activities are located in my
State of Colorado in Denver.
Given the enormous amount of royalties that MMS is
responsible for collecting and distributing to the States and
the Treasury, it is critical that the agency operates as
efficiently as possible. The American people must feel certain
that the amount owed by oil and gas companies for operating on
our public lands and in the outer continental shelf is paid in
full.
In recent months, the MMS has been involved in a number of
complex legal and regulatory issues that concern many of us
here in Congress. Briefly, these included leases that were
issued pursuant to the Deep Water Royal Relief Act during the
Clinton administration in 1998 and 1999, which should not
contain any price thresholds.
The absence of thresholds means that even though oil prices
are approaching $100 per barrel, companies with these leases
are paying no royalties to the Federal Government. While there
were legislative efforts to force companies with these leases
to modify them to include thresholds, I did not support this
approach. I believe in the sanctity of contract.
I also feared the possibility of lengthy litigation that
would jeopardize our entire offshore oil/gas program at a time
when we need to promote additional domestic production to
become less reliant on foreign sources of energy.
I believe that my fears concerning the legality of
legislating on the 1998/1999 leases were borne out. Indeed,
last October, a Federal District Court sided with Kerr-McGee
Company and held that the MMS had no authority to include any
price thresholds in leases issued pursuant to the Deep Water
Royalty Relief Act.
Since the act covers leases in deep water from 1996 to
2000, if the Kerr-McGee case stands, then the government will
lose not only royalty income from the 1998/1999 leases, but
also those from the 1996, 1997, and 2000 years. The most recent
estimates we have from the Department of the Interior indicate
that this could cost the Treasury in excess of $21 billion.
The Kerr-McGee case is currently on appeal to the Fifth
Circuit Court. It is my hope that the lower court decision is
reversed. I believe that it was the intent of Congress to allow
price thresholds to be included in leases under the Deep Water
Royalty Relief Act. However, if the case is reversed, I still
believe that the 1998/1999 leases pose a separate question
about the sanctity of contract and whether the Federal
Government honors its agreements.
Legislation that would coerce companies to modify these
leases will only lead to more litigation and potentially chase
investment in oil and gas production to other places in the
world.
Let me conclude my remarks by applauding your decision, Mr.
Allred, to recommend to Secretary Kempthorne that he appoint an
independent, bipartisan panel to examine MMS's Mineral Revenue
Management Program and issue a report.
I think this was an important response, not only to the
issues raised by the 1998/1999 lease, but also to address
concerns raised by the Inspector General concerning whether the
Department's royalty programs were adequate to assure the
public that it was collecting all the royalties that were due.
The panel included former Senators Bob Kerrey and Jake Garn
and several other distinguished members. The report contains
over 100 recommendations, so we will not be able to get to all
of them at this hearing. But I'll be interested in asking you
some questions about the report and how the Department intends
to implement these recommendations to ensure that the Royalty
Management plan is run as effectively as possible.
Thank you, Madam Chairman. This concludes my opening
statement.
Senator Feinstein. Thank you very much, Senator, and let me
just say, I'm sorry about the retirement. I will certainly miss
you but we have some time left on the year, fortunately. So,
that's a good thing.
Senator Allard. Well, thank you, Madam Chairman. I'm
looking forward to working with you and other members.
Senator Feinstein. Thank you. I want to note that Senator
Craig and Senator Bennett have joined us. Do either of you have
an opening statement?
statement of senator larry craig
Senator Craig. Madam Chair, I'll be brief. I appreciate
having Steve and his colleagues with us.
Let me be brief, but let me be blunt. I'm going at 10
o'clock to a hearing in Energy to deal with SPRO. Are we
putting too much oil in, is it too expensive? Should we or
should we not be? A lot of that oil is royalty in kind oil. Oil
companies pay it in lieu of royalty into the SPRO, and so we
are gaining some advantage there.
You know, I'm a little frustrated that we continue to pick
around the edges of an issue that was created in another
administration. In a presidential year, I could be very, very
political about it, but I won't be, because there was intent at
the time to get us out into the deep water and to give
companies the incentive to go there. Now, we're worried because
we're not filling our pockets.
What we ought to be worried about is a good inventory--and
I'm going to challenge this committee to look at that this
year--of the rest of offshore. Our greatest oil reserves today
are not in SPRO. They're out at our Continental Shelf that
we're not even beginning to look at and/or think about tapping.
Now, that doesn't mean that we don't get it right at Minerals
Management. We need to get it right, and make sure that we
appropriately handle the assets of the public's in this
country--in this case, the citizens of our country.
But the courts are going to solve this in part, if they
can, and we ought to be advancing the greater cause of oil
independence by finding out what the inventory offshore is, and
where we can and can't go, and should or should not go, and
give incentives to get there, instead of doing what I think
we've attempted to do in the last--it really hasn't got us
anywhere.
We talk about money lost. We ought to talk about money and
independence we can create by effectively managing and getting
offshore. We need an inventory, we need it modern, we need to
know where the oil is, and we ought to be after it.
Thank you.
Senator Feinstein. You're welcome. Senator Bennett, do you
have a comment?
Senator Bennett. Yes, Madam Chairman. I know we have a vote
coming, and so I will not make an opening statement and I will
submit my questions for the record. But I do want to take the
opportunity to put on the record, in my statement, our concern
about the Oil Shale Proposal.
Oil shale is potentially very important to the State of
Utah, as it is to Colorado and Wyoming. There's more oil in the
oil shale in those three States than there is in Saudi Arabia.
So we're obviously paying very close attention to that, and my
questions will focus on that, which I will submit for the
record.
Senator Feinstein. Thank you very much, Senator Bennett.
Now, we will turn to our panelists, Secretary Allred and
Mr. Luthi. If I may, could I ask you to summarize your comments
and confine them to 5 minutes? I think we really would like to
engage in a dialogue, and that will perhaps give us some time
to do so.
So, thank you, and we'll proceed. Secretary Allred?
STATEMENT OF C. STEPHEN ALLRED, ASSISTANT SECRETARY FOR
LANDS AND MINERALS MANAGEMENT, MINERALS
MANAGEMENT SERVICE, DEPARTMENT OF THE
INTERIOR
1998/1999 leases--kerr-mc gee
Mr. Allred. Thank you, Madam Chairman, Senator Allard,
Senator Craig, and Senator Bennett. It's a pleasure to be here
and to talk about these issues.
I think we have come a long way in the last year.
When I first came into the Department of the Interior, the
Minerals Management Service was under heavy fire for a number
of items. Looking back, I think wrongly so. I'll tell you why
as we go forward.
First of all, let me talk a little bit about the 1998/1999
leases, as you've requested, and the Kerr-McGee litigation. The
1998/1999 lease issue, at this point in time, is a subset of
the Kerr-McGee, because it involves the same real questions
about authority within the Department, under the Deep Water
Royalty Relief Act.
Essentially, that case--and I'm not an attorney, so I'm not
going to get into details--but that case involves two sections,
one of which gave the Department authority to condition leases
with price thresholds, and a second provision, which provided
for mandatory royalty relief.
The court has found at the district level that the first
did not apply to the second. We think that is wrong. We intend,
within the Department, to go forward in challenging that
decision. As you indicated, the Department of Justice has filed
a notice of appeal. So, we will be proceeding as the Department
of Justice thinks best in that process.
As you also indicated, the monies that are involved are
about $9 billion as of our last evaluation of what may be
involved in the 1998/1999 lease issue. Going forward about $1.5
billion of that is already foregone.
Senator Feinstein. I beg your pardon. Was already?
Mr. Allred. Foregone.
Senator Feinstein. Foregone?
Mr. Allred. About $19 to $20 million in additional foregone
revenues, if the----
Senator Feinstein. Billion.
Mr. Allred. Billion, excuse me.
Senator Feinstein. You said million.
Mr. Allred. Billion, excuse me. In the 1995 through 2000
leases that the Kerr-McGee case stands, as the District Court
has indicated.
In the 1998/1999 leases, I and MMS had discussed issues and
our desire to negotiate price thresholds on that. Six companies
came forward and did agree to that. The rest did not. I think
there's little chance of any additional movement until the
Kerr-McGee case is resolved.
I want to point out, though, that beyond that period of
time, there is no question about the Department's legal
authority to impose price thresholds. In every case since 2000,
leases have been conditioned if there was royalty relief with
price threshold information. The last sale that comes up in
March, one of those sales has mandatory relief and one does
not. In the case that does not, we did not offer royalty
relief.
royalty policy subcommittee
Now, if I could talk a little bit about the Royalty Policy
Subcommittee report. One of the concerns I indicated as I took
office 1\1/2\ years ago, was that there was not a real
objective look at what was going on through Minerals Management
Service. I, as many, was very concerned about the reports that
were coming out. So I undertook my own review of Minerals
Management Service, and traveled to the various offices, and
got to know the processes.
After I did that, I did not feel there was a significant
fatal flaw in the programs of the Minerals Management Service,
and that the royalties that were due to the United States were
being collected. However, as with any complex operation--and
that is a very complex operation--there were numerous areas
that could be improved. So I suggested to the Secretary, as you
indicated--or Senator Allard indicated--that we put together a
committee that had two purposes.
One of them was to give an in-depth look, probably the most
in-depth look of the processes of any agency, certainly that
I'm familiar with. Second, we needed, if there was not a
problem, to help restore the credibility of the Minerals
Management Service in the eyes of the public.
I think that what came out was very successful in meeting
those objectives. First of all, they found a lot of reasons for
improvement. Most of those can be implemented by the Minerals
Management Service, and Director Luthi is here to tell you how
he is going forward doing that. But also, it did not find any
serious--what I'll call fatal flaws. In fact, it was very
encouraging in things like the RIK Program, and found that it
was a very innovative, very progressive program that they
encouraged.
Now, there are some things that they've identified that
need to be done to improve the program, but I think it pretty
well justifies my early conclusions that it is a good
operation. As with any, it can be improved, but it is a good
operation, and it's going forward, and I think that it's, as
they indicate, collecting the revenues that are due to the
United States.
We might just quickly touch on what we asked the
subcommittee to do. We asked them to look at the procedures and
processes, and make sure that MMS was collecting the amounts
that were due. We asked them to look at the audit and
compliance program and to make recommendations as to what
should be done with regard to improve that. We asked them to
look specifically at the royalty in kind.
The people who were on the committee, Senator Bob Kerrey
and Senator Jake Garn, did an excellent job. I just can't tell
you how much I appreciate the time and effort they put in at no
cost to the U.S. Government to do this.
But there were some other very helpful people. Cynthia
Lummis, who is the former Wyoming State Treasurer, and probably
Wyoming is one of the largest recipients of royalty money, also
participated in many of the royalty audit programs that we
conduct. Perry Shirley, who's with the Navajo Nation had
certainly good insight into the monies that are being paid to
the Indian Royalty Program.
Of most importance, I think, was Robert Wenzel. This was a
very excellent opportunity for us to look at how other agencies
do this stuff. Robert Wenzel was the highest ranking career
official in the Internal Revenue Service from 1998 to 2003,
when he retired. As you can imagine, his insight into this
program--because it is to some extent similar to what the IRS
does--was very valuable.
We had Dr. Mario Reyes, who is an academic, so we brought
that side of the view here. Dr. David Deal, because this was a
subcommittee of an established committee and there had to be a
committee member on it. He also has had much background in oil
and in the royalty programs.
Those were the five, and I think we were very lucky to have
that quality of people on it. I really appreciate, again, the
tremendous effort. They were meeting very frequently, many
hours, and did an excellent job.
What I would like to do now, if we could, is to turn to Mr.
Luthi, and to talk about how we are going about implementing
the 100 recommendations that you referred to.
Senator Feinstein. Thank you very much, Mr. Secretary.
[The statement follows:]
Prepared Statement of C. Stephen Allred
Madame Chairman and members of the committee, we appreciate the
opportunity to testify today. This Committee has been instrumental in
shaping our domestic energy program, particularly with regard to the
sound development of our domestic oil and gas resources on the Outer
Continental Shelf (OCS) and the management of mineral revenues from the
OCS and from onshore Federal and Indian lands.
Today's testimony will focus on three areas:
1. The OCS leases that were issued in 1998 and 1999 without price
thresholds.
2. The recent District Court decision in the Kerr-McGee litigation.
3. The recently issued report from the Subcommittee on Royalty
Management and our subsequent implementation efforts.
The Department of the Interior and its agencies serve the public
through careful stewardship of our Nation's natural resources. The
Department also plays a vital role in domestic energy development:
Approximately one third of all energy produced in the United States
comes from resources managed by the Interior Department. The
Department, through MMS, is also responsible for managing and providing
the American people with an accurate and transparent accounting of the
revenue this production generates. For example, since 1982 MMS has
distributed approximately $176.6 billion to Federal, State, and Indian
accounts and special funds, including the following:
--$107.8 billion to the U.S. Treasury and other Federal agencies;
--$22.6 billion to the Land and Water Conservation Fund;
--$22.3 billion to States;
--$14.7 billion to the Reclamation Fund;
--$5.7 billion for American Indian Tribes and allottees; and
--$3.5 billion for the Natural Historic Preservation Fund.
1998-1999 ocs leases without price thresholds for royalty relief
The Deep Water Royalty Relief Act of 1995 (DWRRA) required deep
water leases issued from 1996-2000 to include a royalty incentive that
allowed companies to produce a set volume of oil and gas before they
began paying royalties. Price thresholds, which limit royalty relief
when oil and gas prices are high, were included in leases issued in
1996, 1997 and 2000. However, they were not included in leases issued
in 1998 and 1999.
A recent Federal District Court decision has called into question
MMS's authority to establish price thresholds under the authority of
the DWRRA. In the Kerr-McGee case, the District Court for the Western
District of Louisiana ruled that MMS did not have the authority to
apply price thresholds to the royalty relief provided in the deepwater
leases issued in 1996-2000. On December 21, 2007, the Department of
Justice filed a timely notice of appeal with the 5th Circuit Court of
Appeals to protect the interests of the United States in the Kerr-McGee
litigation. The 1998-1999 lease issue and the question of price
thresholds is a sub-issue of the larger Kerr-McGee case.
The question of whether the Department has the authority to include
price thresholds in royalty relief provisions for leases issues after
2000 is not at issue in the Kerr-McGee litigation. All leases issued
after 2000 that include royalty relief also include price thresholds,
and there is no dispute that MMS has the authority to condition this
relief on the prices of oil and gas.
In an attempt to address the missing price thresholds in the OCS
oil and gas leases issued during 1998 and 1999, early in my tenure as
Assistant Secretary, I met with several oil companies. As a result of
those meetings, voluntary agreements were reached with six companies,
each of which has been paying royalties consistent with the terms of
the agreement. We remain open and willing to discuss agreements with
the remaining companies that hold leases issued without price
thresholds.
If the District Court's decision in Kerr-McGee is not reversed,
whether the leases issued in 1998-1999 contain price thresholds becomes
moot. While we have had at least preliminary discussions with all
companies holding leases issued in 1998-1999, I do not believe that any
additional lessees will agree to price thresholds until they see the
outcome of the Kerr-McGee case.
royalty policy committee report
As you know, we recently received a report that contains
recommendations developed by the Royalty Policy Committee's
Subcommittee on Royalty Management. I would like to discuss how the
subcommittee came to be established, its composition, and areas of
responsibility. Director Luthi will address the current status of our
efforts to implement the recommendations contained in the report.
On March 22, 2007, upon my recommendation, Secretary Kempthorne
appointed the Subcommittee on Royalty Management (``the Subcommittee'')
to conduct an independent examination of MMS's minerals revenue
management program. As you are aware, reports from the Department's
Office of Inspector General and others questioned whether the
Department's royalty programs were adequate to assure that the public
received the royalties that Congress had intended. While I had
concluded at the time that there were not major problems in the royalty
program, I felt there were many opportunities to improve those
operations. As a result, the Secretary determined that a fully
independent examination of the program was warranted, both to restore
credibility to this important revenue-generating program, and to focus
on the improvements that were needed.
Specifically, we asked the Subcommittee to review:
--the extent to which existing procedures and processes for reporting
and accounting for Federal and Indian mineral revenues are
sufficient to ensure MMS receives the correct amount;
--MMS's audit, compliance and enforcement procedures and processes to
determine if they are adequate to ensure mineral companies are
complying with existing statutes, lease terms, and regulations
as they pertain to payment of royalties; and
--the operations of the Royalty in Kind Program to ensure that
adequate policies, procedures, and controls are in place to
ensure the decisions to take Federal oil and gas royalties in
kind result in net benefits to the Federal government.
Subsequently, the Subcommittee was also asked to review procedures
promulgated by the Department in response to the lack of price
thresholds in Gulf of Mexico leases from 1998 and 1999 sales to ensure
that future leases include price thresholds.
The panel, which was organized as a Subcommittee of the Royalty
Policy Committee (RPC), a Federal Advisory Committee Act (FACA) body
that advises the Secretary on matters related to mineral revenues, was
comprised of seven distinguished members:
--Former U.S. Senator and Nebraska Governor Bob Kerrey and former
U.S. Senator Jake Garn, of Utah;
--Cynthia Lummis, a former Wyoming official who served as State
Treasurer, and as a member of the Wyoming House and Senate,
concentrating on natural resource and taxation issues;
--Perry Shirley, Assistant Director of the Navajo Nation's Minerals
Department, who serves as the Principal Investigator
responsible for administering a Cooperative Agreement between
the Navajo Nation and the Minerals Management Service;
--Robert Wenzel, the highest ranking career official in the Internal
Revenue Service from 1998 to 2003, whose responsibilities
included the day-to-day operation and strategic management of
the United States tax administration system;
--Dr. Mario Reyes, Associate Dean for Administrative Affairs and
Director of Business Economics Programs in the College of
Business and Economics at the University of Idaho; and
--David Deal, who serves as the vice-chair of the full Royalty Policy
Committee.
To ensure independence, the subcommittee staff came primarily from
the Department's Office of Policy Analysis, but also included Bureau of
Land Management staff and an independent staff member, Loretta
Beaumont, who was selected by the co-chairs. MMS played no role in the
subcommittee's work beyond responding to requests for information.
I want to express my deep appreciation to each member of the
subcommittee and staff for their hard work in the preparation and
completion of this thorough report.
The subcommittee issued its report on December 17, 2007, as a
public document and in a public meeting on January 17, 2008, the RPC
voted to accept the subcommittee's report. By letter dated January 25,
2008, the RPC Chairman transmitted the report to the Secretary.
The subcommittee concluded that MMS is an effective steward of the
Minerals Revenue Management Program, and that MMS employees are
genuinely concerned with fostering continued program improvements. The
subcommittee members unanimously agreed that MMS is the Federal agency
best suited to fulfill the stewardship responsibilities for Federal and
Indian leases. However, as we expected, the report identified many
areas that warranted management attention to ensure public confidence.
The report contains 110 recommendations, including 35
recommendations related to Collections and Production Accountability;
30 regarding the Royalty in Kind (RIK) Program; 27 on Audits Compliance
and Enforcement; 10 related to Coordination, Communication, and
Information Sharing among MMS, the Bureau of Land Management (BLM) and
the Bureau of Indian Affairs (BIA); and 5 on OCS Royalty Relief (See
Attachment #1). At least three of the recommendations would require
legislative action. Notably, the Report concluded, ``the advantages of
including an RIK approach among MMS asset management options are clear
and MMS's process for evaluating the feasibility of RIK versus Royalty
in Value (RIV) appears to be rigorous and effective. Nevertheless, in
order to ensure the program's successful operation, a number of
challenges must be addressed.''
The report's recommendations span the responsibilities of all three
Departmental Bureaus involved in royalty management--MMS, BLM, and BIA
(See Attachment #2). Of the 110 recommendations, MMS is solely
responsible for 73 and BLM is solely responsible for 15. The remaining
22 recommendations require coordination among the Bureaus. We are in
the process of establishing a Production Coordination Committee with
representatives from the BLM, MMS, and BIA whose task will be not only
to coordinate and implement the cross cutting recommendations contained
in the subcommittee's report, but to also provide on-going coordination
of issues related to the management of Federal and Indian mineral
leases as suggested by one of the recommendations contained in the
Report.
implementation of subcommittee recommendations
In a memorandum dated January 14, 2008, Secretary Kempthorne asked
the Department to review the report, develop an action plan, and begin
implementing the subcommittee's recommendations. I am pleased to report
that as of February 11, 2008, 16 of the 110 recommendations are already
complete (See Attachment #3). Of the remaining 94 recommendations, 29
are underway. We have developed a Joint Action Plan to address all of
the report's recommendations.
The plan identifies by recommendation the responsible Bureau,
estimated timeframes for completion, and status. Points of contact are
designated within each Bureau to monitor implementation and report on
progress on a monthly basis. Many of the recommendations require
further evaluation, and to that end, teams are being formed to
determine appropriate actions and schedules. Likewise, many
recommendations will need to be explored further through consultations
with State and Tribal officials, and other organizations before they
can be adequately implemented. We have developed a tracking system and
have been and will continue to hold regular meetings to assess progress
on the implementation of each action item.
Examples of the major focus areas contained in our Joint Action
Plan include the following:
--Ensuring collection of sufficient data to make certain that
royalties are being paid on the correct volume of oil and gas
from Federal and Indian lands.
--Improving the coordination, collaboration, communication, and
information sharing between BLM, MMS, and BIA.
--Requiring more reporting of data electronically and ensuring that
bureaus have easy access to each other's systems.
--Implementing a risk-based compliance strategy and determining the
extent to which a more flexible approach to audits, similar to
that used by the IRS, is feasible.
--Ensuring the RIK program has the right personnel with the right
skills to get the job done.
--Ensuring that all staff receive ethics training, including training
focusing on public-private sector interactions.
--Ensuring that we have sufficient staff to support the Department's
onshore and offshore royalty management activities.
Secretary Kempthorne and I are grateful to the subcommittee for the
time and energy it devoted in its review. The Department is committed
to working with our stakeholders to implement the recommendations
contained in the report. We agree with the statement of the
subcommittee that implementing the recommendations in this report will
greatly strengthen the management of the program, will restore public
confidence, and will ensure maximum value for the U.S. taxpayer.
conclusion
I am pleased with the results of our efforts thus far, but
recognize that there is much more work to be done. MMS will continue to
review and improve its royalty program. I have every confidence that
MMS will successfully implement the Subcommittee on Royalty
Management's recommendations which will assist MMS in ensuring that the
American people receive a fair return from the important public
resources the Department manages. I welcome your input on all of these
initiatives, and we look forward to working with you.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Feinstein. Mr. Luthi, I know you made an effort to
be here under trying circumstances. I want you to know it is
very much appreciated. I think the subcommittee knows Mr. Luthi
is the Director of the Minerals Management Service, so we're
very pleased to have you here. Thank you.
STATEMENT OF RANDALL LUTHI, DIRECTOR, MINERALS
MANAGEMENT SERVICE, DEPARTMENT OF THE
INTERIOR
Mr. Luthi. Thank you, Madam Chairman, and Senator Allard,
and Senator Bennett. I am a native of Wyoming, an old
legislator from Wyoming, and it's nice to have neighbors. I
think--we'll see before the morning is over. I appreciate the
opportunity to be here.
I've just passed the 7-month mark as the Director of MMS.
You have your eyes opened as to what you read in the press. My
predecessor, Johnnie Burton, was also from Wyoming. I knew her
to some degree. I wished her well, and frankly, wished she was
still Director of MMS.
Senator Feinstein. That means the honeymoon is over.
Mr. Luthi. The honeymoon is over, I fear. But one of the
first things I did was try and get out and visit our people in
the field. We have several regional offices, district offices,
and I've just about completed that. In fact, last week I was in
our Farmington, New Mexico office, which serves the Indian
country very well in the Four Corners area.
ROYALTY POLICY SUBCOMMITTEE REPORT
I agree with the report that this subcommittee came up
with. I believe we have the best people we can find to work on
royalty management. I believe they're dedicated to it. I
believe they want to do the right thing. That's what I've
found, and that's what I'm here to do, to try and make sure
that they have the tools to do the right thing.
As you have mentioned, we do collect a lot of money. I
think whenever you collect money, there is always the scrutiny
that, ``Maybe you could collect more money.'' As I said, I'm a
legislator. I know what it's like when that check comes from
the Federal Government. We always want to have more. But
there's always ways we can improve the way we collect money,
the way to improve the way we do business.
To get to the report's recommendations, as you've mentioned
there are over 100. In fact, there are 110 recommendations.
Most of them involve MMS, but they also involve the Bureau of
Land Management and the Bureau of Indian Affairs, as well.
As of February 11, 16 of the 110 recommendations are
already complete. That's a good start. But frankly, as you
might guess, Madam Chairman, those are the easy ones. Those are
the ones that we largely had underway while the report was
ongoing, and therefore, we were able to wrap them up in a
hurry.
Right now, 29 are currently in the process of being
implemented. Those are ones that are requiring coordination
between BLM and MMS. When you're in an agency for awhile, we
get somewhat in our stove-piped bureaucracy, and that's one
thing the subcommittee did so well to point out, ``You have to
open up. Make sure those communication lines are open between
the various state agencies.''
For example, the BLM gives us information about a lease.
Based on that information is how we collect the royalties. The
same is true of information from the BIA. We collect the money
and we distribute the money. Often, particularly on the area of
Indian allotees, we may have a lease that may have 30 or 40
different recipients, based upon the age of the lease and
what's been done within that particular lease, to make sure we
give that money to. We need to get it to them accurately, and
we need to get them to them as quickly as possible.
What we've done is developed a Joint Action Plan. It
involves all three Bureaus. The heads of all three Bureaus are
involved, because we want to make sure this is completed upon
our watch and we feel strongly about it. We have points of
contact within every Bureau. We are monitoring it on a monthly
basis, and we believe that we are going to be able to proceed
and implement many of those evaluations.
Some of those recommendations, of course, we're going to
talk about. Will they work? How do we make them work? A few of
them could involve legislation. In that case, we wanted to take
time and make sure we work closely with the Members of Congress
to see if that's a good idea from your point, as well.
We've developed a tracking system. I've had two meetings on
this since February 11, and it's interesting. It's exciting.
I'd say it's exciting to have people call in or be at the
meetings and say, ``This is what we've got done. This is how
we're going to do it. This is what we can do.''
Basically, the recommendations focused in on a few areas,
and I think they make sense, and it's to assure the accuracy of
the process, assure the communications of the process. It also
asks to bring us into the modern world of technology. A lot of
our reports have been, and some still are, largely on paper,
and only on paper. In some instance, we've been collecting
checks, which is almost unheard of in today's world, with
electronic transfer of funds available now.
So what we will do is eventually--and we're almost there in
many areas--have a better electronic system that, as reports
come in, they will be better identified, if there could be
errors, and we can deal directly with the companies, possibly
as an electronic method. That's one of the things that they
recommended.
The other area was the RIK, which we are moving to assure
that we're getting the value that's necessary for that oil and
gas, and that we're doing that program as efficiently as
possible.
Just to sum up, Madam Chairman, RIK's actually been a very
positive thing. We actually bring more money in than we do when
we collect money from the Royalty in Value Program. But it's
also a program that we need to keep an eye on, because it's a
little different for government to be in that business.
With that, as the Assistant Secretary just nudged me, and
reminded me that old politicians seldom can keep their comments
under 5 minutes. But I am available for questions and would be
glad to answer them.
Senator Feinstein. Well, thank you very much, and you both
did very well. It's appreciated.
1998/1999 LEASES
Mr. Allred, you will recall that I proposed legislation
last year that would have required all companies that hold oil
and gas leases without the requirement to pay royalties to
either start paying voluntarily or be blocked from future
leases.
I came within one vote of having that passed on the
Appropriations Committee. You testified to this subcommittee
last year that the Interior Department was opposed to that
requirement. You told us that you were in the process of
negotiating with the 39 companies, and that you'd already
gotten six holding the 1998/1999 Deep Water leases to
voluntarily pay royalties.
You have, in your opening comments, mentioned that no
others have come forward and you didn't believe, or you don't
believe, that others will come forward until the litigation is
settled.
You indicated that you estimate that about $1.3 billion has
been lost--or foregone, as you put it--by the end of 2007, and
that that figure could grow to $10 billion by the time the
leases expire.
Now, you also, I think--and this is what I wanted to clear
up--mentioned that the Kerr-McGee or the Anadarko suit does not
really go to your ability to charge royalties, if I understood
you correctly. That some $20 billion is at stake in this case.
You've mentioned that the intent to file an appeal has been
made. This Senator believes that it is extraordinarily
important that that appeal be carried out.
I also believe that the American people believe that
royalty payments are appropriate, considering the nature of the
waters and the lands. I guess what I want you to know is that I
intend to persevere, and hopefully you do, as well. If I don't
win this year, there will be next year. If I don't win next
year, there'll be the year after.
ROYALTY POLICY SUBCOMMITTEE RECOMMENDATIONS
But I think that this is, to the extent that I've seen it,
one of the largest sources of revenue for the Federal
Government at a time when all these programs are really
stressed for dollars. Now, my question really goes to asking
you your Department's response on one of the recommendations of
the Kerrey-Garn Commission, and that concerns the 30 percent of
offshore natural gas royalties paid at the wellhead, 70 percent
paid at the gas plant. MMS relies on the gas plant's efficiency
data to determine these royalties. But the report recommends
that MMS should establish a prioritized gas plant compliance
review or audit schedule to examine gas plant efficiency. Will
you follow that recommendation?
Mr. Allred. Madam Chairman, yes, we do. As you can imagine,
the gas plants handle a lot more material than just that which
we produce--these are gas plants on lines that handle all of
the gas within the United States.
But it is our intention--and Mr. Luthi perhaps can talk
more about it--to try to do that. That also relates to our
Risk-Based Audit Program that we're implementing.
Senator Feinstein. So the answer is ``yes.''
Mr. Allred. Yes. The answer is ``yes.''
Senator Feinstein. All right. Let me go on. The report
states on page 20 that, ``MMS and BLM do not consistently
request gas analysis reports to verify Btu values that are
reported by oil and gas operators.''
If these Bureaus are not verifying production, how can we
be sure that the operators are paying the royalties that are
due? What do you intend to do about it?
Mr. Allred. Madam Chairman, again, I'll refer to what
Director Luthi is doing. But when we talk about the production,
it's not of the quantity. It is of the quality of the gas. We
need to do more of that. This is just one of the examples of
where we need to fill in the kinds of things that we audit.
Senator Feinstein. So if we follow up next year, you will
have progress.
AUTOMATED BILLING
The report also says, on page 25, that ``MMS computer
systems are unable to automatically import volume statements
from Federal onshore and offshore Gulf of Mexico gas
producers.''
Why is MMS still using manual data reporting with all the
room for error that that includes?
Mr. Allred. Madam Chairman, I wish we had all of our
systems up to what I think is state of the art. We're trying to
get there, but it is a long process. As you have, I'm sure,
observed in several budget requests, it requires dollars to do
that. This committee has given us resources to do that, and
we're trying to do that as quickly as possible.
With regard to this specific implementation of this
specific recommendation, it's our intent to try to do all of
these.
Senator Feinstein. All right. Let me make clear that you
have never made a request for funds of this subcommittee to
carry out this mission. I've just been informed by the chief
clerk. So I view it as an extraordinarily important mission.
Mr. Allred. Madam Chairman, we have both money in the 2008
and the 2009 request. It's characterized as to upgrade, for
example, our ability to----
Senator Allard. Madam Chairman, may I add to this
discussion at this point?
Senator Feinstein. Certainly, go ahead.
Senator Allard. We have information that in the 2007/2009
budget, there was $1.7 million.
Senator Feinstein. The majority says that's not right.
Senator Allard. Oh, it's not enough.
Senator Feinstein. So what we need to do----
Senator Allard. It's not enough.
Senator Feinstein. Or it's not enough.
Senator Allard. Oh, it's not enough. Okay.
Senator Feinstein. Well, then I think we need to perhaps
work together to try to get a fixed amount. If there is--
because this should be a priority.
Mr. Allred. Yes, we agree.
Senator Feinstein. If you agree, both sides will work with
you to try to get it done, so that funding is adequate, to the
extent we can.
Mr. Allred. Madam Chairman, we would appreciate that. I
have a copy, which I'll be glad to give you, of what's in the
2008 and the 2009 budget request.
Senator Feinstein. But is it true that this is the first
time that you've asked for that money?
Mr. Allred. No. Madam Chairman, in the 2008 increases,
there's $1.4 million for interactive payment reconciliation of
billing, which is part of what you're talking about. There is
$940,000 for adjustment line monitoring initiative, which again
is part of what you're talking about. Now, that is not
sufficient to do everything we ought to be doing.
In the 2009 budget request, there are increases of $1.7
million for the improved automated interest billing, and $2
million to implement compliance and audit recommendations of
this case, the OIG, but those are also some of the
recommendations that were in the subcommittee report.
Senator Feinstein. So is it fair to say you have $3.7
million now, on hand, to carry this out?
Mr. Allred. Madam Chairman, in the 2009 request it's an
increase of $3.7 million.
Senator Feinstein. Well, if----
Mr. Allred. In the 2008 increases that you've given us,
it's about $2.3 million for improved MRM systems.
Senator Feinstein. So the money on hand is how much?
Mr. Allred. In the 2008 approved budget, it would be about
$203 million--$2.3 million, excuse me.
Senator Feinstein. $2.3 million?
Mr. Allred. $2.3 million.
Senator Feinstein. Okay. All right. So we know where we
are. Thank you very much. Senator Allard?
LEASE SALES
Senator Allard. You bet. Thank you, Madam Chairman. I want
to follow up a little bit on the 1998/1999 leases, and I admire
your tenacity, Madam Chairman, on this issue. But I do want to
get one thing cleared up.
I'm told that in the bid, in October 3, 2007, on the Gulf
of Mexico lease sale, that there were a number of companies
that participated that would not be able to participate if we
had the 1998/1999 group of companies embargoed, so they
couldn't bid on future sales.
In that sale alone, the Government received $2.9 billion in
high bids. I know that you testified at previous hearings of
the potential loss to the Government if a producer were to
challenge the statute and the Court were to enjoin future
leases.
My question to you, do you have an estimate of what the
Government could lose in reduced bonuses if the companies
subject to the lease bar were not able to participate in future
lease sales?
Mr. Allred. Mr. Chairman, Senator Allard, I don't have an
estimate of that, but it would be a large amount of money. Even
in the Chukchi sale, we were surprised by what the bonus bids
here just last week. We estimated originally that it might be
about less than $100 million and it ended up being two point--
--
Senator Feinstein. Six.
Senator Allard. Six.
Mr. Allred [continuing]. $2.6 billion, just in the bonus
bids.
Senator Allard. Can you get us some kind of an estimate for
the subcommittee?
Mr. Allred. Sir, we will try. We'll get you an estimate. I
don't know how good it will be.
Senator Feinstein. The names of the companies, please.
Senator Allard. Yeah, that's the next question I was going
to have. If we could have the names of the companies, of the
six companies that are participating in the sale, I think would
be helpful on that.
Senator Feinstein. Yes. But the six companies that you
refer to here----
Senator Allard. Yeah. Well----
Senator Feinstein [continuing]. That won't bid, I would be
curious----
Senator Allard. Oh, okay. Yeah. Okay. That's another six
companies.
Senator Feinstein. Yes.
[The information follows:]
Losses From Barring Companies
Although there is considerable uncertainty in trying to predict
bidder behavior, as evidenced by the unexpectedly large bonus bids
received in recent lease sales, the government's losses from barring
certain companies from bidding in future sales could be substantial. If
realized, the proportional losses would likely vary through time and
across OCS regions.
The composition of the barred companies will change over the next
few years as leases expire upon reaching the end of their 10-year
primary terms in 2008 and 2009. A recent count identified 44 companies,
as listed on the original enclosure, which could be subject to being
barred. We estimate this number would be reduced to about 28 companies
by the time all of the 1998 and 1999 leases reach the end of their
primary terms, around the beginning of fiscal year 2010, leaving only
leases in development or in production still active.
We analyzed the results of central Gulf of Mexico Sale 205, held in
October, 2007, under two scenarios to obtain a future baseline. The
first scenario assumed that the 44 companies noted above were barred
from bidding, while the second scenario assumed that the reduced set of
28 companies was barred. In both cases, we stipulated that: (1) bidding
by other companies would not have changed in the presence of certain
companies being barred, (2) in the case of a multiple bid tract with
the high bid submitted by a barred company, the revised hypothetical
high bid would be the next highest bid submitted by a non-barred
company, and (3) in the case of a joint high bid involving one or more
barred companies, the high winning bid would have remained the same as
long as the barred companies' share of the joint bid was less than 50
percent; otherwise, the bid would not have been made.
We found that under these assumptions, the sum of the resulting
high bids in Sale 205 would have fallen by 51.5 percent if the 44
companies had been barred and by 29.6 percent if the identified reduced
set of 28 companies had been barred. We then applied the proportional
losses in high bids for the 44 company case to the next three Gulf of
Mexico sales beginning with the western Gulf of Mexico sale in August,
2008, and applied the proportional losses in high bids for the 28
company case to the subsequent six Gulf of Mexico sales ending with the
western Gulf of Mexico sale in August, 2012.
We previously estimated for the President's budget that absent any
Congressional action to bar companies, the sum of the high bids in
these nine sales would amount to $2.7 billion. Our analysis showed that
in the presence of Congressional action barring certain companies from
bidding in future sales, the sum of the high bids would be reduced by
$1.1 billion, equal to 40 percent.
In contrast, barring the same set of companies from offshore sales
in Alaska would appear to have a far more modest effect on bidding
results. For example, in the Chukchi sale 193, which had high bids of
$2.6 billion, the direct losses from barring the same set of 44
companies would only have been $30 million, or slightly more than one
percent of the high bids.
It is reasonable to think that the effects on bonus bids from
barring companies could be even greater than estimated here. For one
thing, the remaining bidders may well lower their bids in the
expectation of less competition. For another, when we analyze the four
Gulf of Mexico sales held prior to Sale 205 in the scenario where 44
companies are barred, the results show losses of about 60 percent,
instead of losses around 50 percent (actually, 51.5 percent) that we
found in Sale 205. Finally, the specification of the 28 company case
reflects a limited assessment of leases that will be held beyond their
primary terms--more leases will likely be held, but their identity and
the lease owners cannot be currently determined. So, for those reasons,
we believe the $1 billion loss over the next 5 years calculated here is
a conservative estimate of the adverse fiscal effects from
Congressional restrictions on bidding and competition in future OCS
sales.
Status of 1998/1999 Royalty Rate Relief Negotiations
companies with signed agreements \1\
---------------------------------------------------------------------------
\1\ Agreement signed December 2006.
---------------------------------------------------------------------------
BP Exploration & Production Inc.; Conoco Phillips & Burlington
Resources Offshore, Inc.; Marathon; ShelI; Walter Hydrocarbons; and
Walter Oil & Gas.
companies without signed agreements \2\
---------------------------------------------------------------------------
\2\ List of companies holding interests in subject leases as of
January 2008.
---------------------------------------------------------------------------
Anadarko-Kerr-McGee Oil & Gas; ATP Oil & Gas Corporation; BHP
Billiton; Callon Petroleum Operating Company; Challenger Minerals Inc.;
Chevron U.S.A./Union Oil; Cobalt International Energy, L.P.; Devon
Energy Production Company; El Paso E&P Company, L.P.; Energy Partners,
Ltd; Energy Resource Technology; Energy XXI GOM, LLC; Eni Petroleum;
EOG Resources, Inc.; Explore Louisiana LLC; Exxon Mobil Corporation;
HE&D Offshore, L.P.; Hess Corporation; LLOG Exploration Offshore;
Maersk Oil Gulf of Mexico Two LLC; Mariner Energy, Inc.; Marubeni Oil &
Gas (USA) Inc.; Maxus (U.S.) Exploration; MitEnergy Upstream LLC;
Murphy Exploration & Production; Newfield; Nexen Petroleum Offshore;
Nippon Oil Exploration; Noble Drilling Exploration; Noble Energy, Inc.;
OXY USA Inc.; PALACE EXPLORATION; Petrobras America Inc.; Plains
Exploration & Production; Red Willow Offshore, LLC; Repsol E&P USA
Inc.; Samson Offshore Company; Statoil/Hydro; Stephens Production
Company, LLC; Tana Exploration Company LLC; Teikoku Oil (North America)
Co., Ltd.; TOTAL E&P USA, INC.; W&T Offshore, Inc.; and Woodside Energy
(USA) Inc.
KERR-MC GEE LITIGATION
Senator Allard. Okay, very good. All right. That'd be good.
All right, now, while this case is being appealed, and this
is the--I'm going to go to the Kerr-McGee litigation now--while
this case is being appealed is there anything the Department
can do to encourage more companies to participate to the table
and pay royalties on the 1998/1999 leases?
Mr. Allred. Mr. Chairman, Senator Allard, there are in-
force contracts that we have written, and we are doing that
against those companies who did sign contracts that might be
affected by the Kerr-McGee.
But in the case of the 1998/1999 lease issue, when those
contracts were signed, they did not include that provision. So
we have little ability to enforce against anyone with that
issue. We continue to talk with these people, but it's not very
serious. They're not serious about it until such time as, I
think, as this issue is resolved by both the Courts and, to
some extent, by Congress.
Senator Allard. So on the Kerr-McGee litigation, the
companies that are holding leases in 1996, 1997, and 2000, what
is happening to them? Have they indicated they're not going to
continue to pay?
Mr. Allred. Madam Chairman, Senator Allard, for the most
part, they are paying. The ones that are involved in the
specific litigation, that have challenged the rulings--and
that's just a few of them--I don't believe are paying, but we
are enforcing against them.
Now, we probably won't be able to resolve that until the
underlying case is resolved.
Senator Allard. Okay. As you know, there have been
legislative efforts to force those oil companies to negotiate
their contracts. Can you give us a better idea of what the
impact of any future legislators would likely have on those,
while the Kerr-McGee case remains on appeal?
Mr. Allred. Madam Chairman, Senator Allard, we're not
opposed to congressional action at all. As I cautioned the
committee, and have done so with others, is we have to be
careful that there are not unintended consequences to what we
do. I think we have to be good business partners. There are
some contract sanctity questions that are extremely important.
Because if we don't, they will be litigated. If these sales
are in any way impeded, then you face the loss to the Federal
Treasury of not only the royalty revenues, but also the bonus
bids, which is huge. More importantly, if we don't go forward,
you'll see a big impact upon our energy security.
Senator Allard. Now, you still have to make a final
decision whether you're going to appeal this decision. Is that
correct?
Mr. Allred. Senator Allard, I believe we have to appeal it.
The Department of Justice has filed a Notice of Appeal. The
Department of the Interior can't make that final decision. It's
made by the Solicitor General of the Department of Justice. I
think they clearly understand the need to appeal this.
Senator Allard. Okay. So let's just suppose that there is
an effort to appeal, and then the United States loses that
appeal. What sort of congressional remedies do you see in this
particular case? Are there any remedies that the Government can
take? This is on Kerr-McGee litigation.
Mr. Allred. Senator, probably--I'm not sure I could
identify a path forward, because I don't know what the Courts
are going to say and I would not expect that the Courts are
going to be black or white. They're going to have some dictum
that will give us guidance as to what could be done or could
not be done.
As much as I dislike being in this hiatus, as you can
probably tell, I don't like not being able to do things. I'm
not sure that we know what to do until the Courts finally make
a decision. What I'm hoping, obviously, is the Courts say that
those two provisions have to be read together, in which case
the contracts that we signed are enforceable.
Senator Allard. Okay. Now, I want to wrap this up, Madam
Chairman. On the 1998/1999 leases, those six companies we had
there, can you share those names of those companies with us
that had those contracts?
Mr. Allred. Yes. Madam Chairman, Senator, the companies
that signed were BP Exploration and Production, Conoco Phillips
and Burlington Resources Offshore, Marathon, Shell, Walter
Hydrocarbons, and Walter Oil & Gas.
Then, I also have--I won't read them--but I also have the
list of all of the companies that did not sign, and many of
those companies are current bidders in these offshore leases.
Senator Allard. We'd appreciate if you'd share that.
Senator Feinstein. Yes. We could have a list sent to the
subcommittee----
Senator Allard. Yeah.
Senator Feinstein [continuing]. Of all that. That would
be----
Senator Allard. Yeah.
[The information follows:]
Status of 1998/1999 Royalty Rate Relief Negotiations
companies with signed agreements \1\
---------------------------------------------------------------------------
\1\ Agreement signed December 2006.
---------------------------------------------------------------------------
BP Exploration & Production Inc.; Conoco Phillips & Burlington
Resources Offshore, Inc.; Marathon; ShelI; Walter Hydrocarbons; and
Walter Oil & Gas.
companies without signed agreements \2\
---------------------------------------------------------------------------
\2\ List of companies holding interests in subject leases as of
January 2008.
---------------------------------------------------------------------------
Anadarko-Kerr-McGee Oil & Gas; ATP Oil & Gas Corporation; BHP
Billiton; Callon Petroleum Operating Company; Challenger Minerals Inc.;
Chevron U.S.A./Union Oil; Cobalt International Energy, L.P.; Devon
Energy Production Company; El Paso E&P Company, L.P.; Energy Partners,
Ltd; Energy Resource Technology; Energy XXI GOM, LLC; Eni Petroleum;
EOG Resources, Inc.; Explore Louisiana LLC; Exxon Mobil Corporation;
HE&D Offshore, L.P.; Hess Corporation; LLOG Exploration Offshore;
Maersk Oil Gulf of Mexico Two LLC; Mariner Energy, Inc.; Marubeni Oil &
Gas (USA) Inc.; Maxus (U.S.) Exploration; MitEnergy Upstream LLC;
Murphy Exploration & Production; Newfield; Nexen Petroleum Offshore;
Nippon Oil Exploration; Noble Drilling Exploration; Noble Energy, Inc.;
OXY USA Inc.; PALACE EXPLORATION; Petrobras America Inc.; Plains
Exploration & Production; Red Willow Offshore, LLC; Repsol E&P USA
Inc.; Samson Offshore Company; Statoil/Hydro; Stephens Production
Company, LLC; Tana Exploration Company LLC; Teikoku Oil (North America)
Co., Ltd.; TOTAL E&P USA, INC.; W&T Offshore, Inc.; and Woodside Energy
(USA) Inc.
Senator Feinstein. Thank you very much, Senator. The
rollcall vote has just begun. It will go on for 20 minutes. I
think we should give Senator Bennett an opportunity, and then
wrap this up in, say, about----
Senator Bennett. I will----
Senator Feinstein [continuing]. 10 minutes.
PROCESSING FEE
Senator Bennett. I will be very quick, Madam Chairman. You
know, the 2009 budget calls for a $4,150 processing fee for
each new oil and gas drilling permit application. That sounds
fairly benign, except that the BLM already passes on to the
industry the costs of archeological surveys, wildlife studies,
and preparing third-party NEPA documents.
So this is an additional cost on--not a new cost in a
vacuum, but an additional cost on a pile of costs that are
already there. The budget request directs that the $4,150 fee
go into ``service charges, deposits, and forfeitures account.''
My question is how these funds are going to be used. Will
they be used to increase staff to meet the workloads? In which
case, I think some people will say, ``Well, as big a problem as
it is to get things moving more rapidly, we're willing to pay
it.'' Or will they simply go to the General Fund of the
Treasury?
Mr. Allred. If I could, Madam Chairman, Senator Bennett, if
I could just ask the question of my budget people. I'm not
familiar with that.
Senator Bennett. You can supply that for the record, if you
don't have it currently here.
Mr. Allred. Okay. Just a quick note she passed me, is they
do support the processing of the APDs, and I know that within
the BLM's budget there are some increases in the leasing
program.
Senator Bennett. You understand how strongly we hope that
that is where it goes. Thank you, Madam Chairman.
Mr. Allred. I might say that we'll shortly deliver to you a
progress report on the pilot offices, and very happily, I think
it shows a lot of progress.
ROYALTY POLICY SUBCOMMITTEE TRUST FUND
Senator Feinstein. Thank you very much. If I may quickly,
the report, as you know, has two recommendations that are of
particular interest, because they would require legislative
action.
One of those is to establish a trust fund for royalty and
rental receipts, which could earn interest to help offset the
cost of the Royalty Program. Would you support that Mr. Allred?
Mr. Allred. Madam Chairman, I would say that that's
something that we've got to look at. There are a number of
these items that we've really got to look to see what the
impact of it is. Not only of the Department of the Interior and
MMS, but----
Senator Feinstein. Could you do so----
Mr. Allred. We will do so.
DEBT COLLECTION IMPROVEMENT ACT
Senator Feinstein [continuing]. And let us know on that
point? The other one would be the compliance with the Debt
Collection Improvement Act of 1996. Apparently, the Inspector
General reported in 2006 that MMS was not in compliance with
the act, because the agency failed to identify delinquent
receivables to the Treasury in a timely manner.
That's of great concern to me. So I would like some
assurances that the agency is now in compliance with the Law in
this regard.
Mr. Luthi. Madam Chairman, if I might--and I apologize for
sitting here probably more silent than I should, but I wanted
to take advantage of the honeymoon.
We are in compliance. If memory serves me correctly, that's
a pretty short timeframe when once we know the debt has not
been paid and when we report it, too. I believe it's 90 days.
And that's one of the things that we have improved through the
automated process, is being able to identify those earlier and
turn those over to the Department of the Treasury.
The 2006 report? I will verify this, but my memory is,
since I've looked into this, is we are compliant with that.
Senator Feinstein. If you would, it is the Inspector
General's report of 2006. If you would please respond to us in
writing, I would appreciate that very much.
Mr. Luthi. Absolutely, Madam Chairman.
[The information follows:]
Closure of Audit Recommendations
As of June 30, 2007, the Minerals Management Service (MMS) has
implemented Noncompliance C, relating to Debt Referral to Treasury to
close an audit recommendation. This item relates to the fiscal year
2006 and fiscal year 2005 audits of the MMS financial statements
conducted by KPMG and coordinated by the Office of the Inspector
General (OIG).
A summary of the finding, recommendation, and the MMS
implementation follow:
noncompliance c, finding: debt collection improvement act of 1996
The MMS did not properly identify delinquent receivables for
referral to the U.S. Department of the Treasury (Treasury) for
collection or offset in a timely manner.
recommendation
Establish a process to ensure eligible receivables are referred to
the Treasury in a timely manner.
implementation of recommendation
To address the recommendation, the MMS established a process
described as follows:
--The MMS started mailing Statements of Account (SOA) to all payors.
These SOAs listed all open items (royalties, payments,
invoices) that were on record for the payor and instructed the
payors to cooperate with MMS to clear these open items. SOAs
were mailed in April 2006, October 2006, February 2007, and
June 2007. The plan is to try to send out SOAs three-four times
a year and eventually make them available on-line so that
industry could view open items daily.
--MRM Financial Services employees have been notified each time SOAs
will be issued, are given regular progress reports, can see
daily statistics in the system, and have performance standards
that reflect the need to reduce open balances. By attempting to
become current with open items, fewer open items are becoming
old enough to have to be referred to Treasury.
--Part of the SOA effort is a daily status report that is available
to all employees. Employees were informed of the new reports,
have requested and received additional reports to help them in
their work, and they use these reports daily to track their
progress. These reports provide a great deal of data including
the open items by each employee along with the open items
greater than 120 days old and 180 days old. Employees have been
repeatedly reminded of the need to reduce open items and refer
all debt to Treasury that can not be resolved.
--Debt Collection steps were streamlined in order to meet the 180 day
deadline. Timelines were shortened--the demand to payor letters
now go out 15 or 35 days after the receipt of a royalty
document or creation of an invoice, respectively; Federal
demands to lessees happens 15 days after that; thus the
referral to Office of Enforcement (OE) is done early enough to
allow OE time to make the referral to Treasury.
--The MMS continually monitors the progress of this effort and makes
adjustments as needed. A recent adjustment was a change to have
Supervisors and Managers of Financial Management (FM) certify
that debt is ready for referral to Treasury, which eliminated
the need for the OE to do several verifications on their own.
Since OE is the group that does the actual referral to
Treasury, this change speeds up their process and thus helps
meet the 180 day timeframe.
Senator Feinstein. Thank you. Senator, do you have any
other questions?
Senator Allard. I have one request, I guess, Madam
Chairman. We've run out of time here. I have a number of
questions I'd like to pursue, and I'd like to submit those----
Senator Feinstein. In writing.
Senator Allard [contining]. In writing.
Senator Feinstein. I will, as well. Good.
Senator Allard. You will, too. Okay. Then, the time
expected back in response in that, ordinarily in this
subcommittee, is that--what time do we give those to respond
back? Ten days?
Senator Feinstein. Maximum 3 weeks. That's a lot of time.
Senator Allard. Yeah. I was thinking, the other
subcommittee had 10, but 3 weeks is, I would think, would be
enough for you.
Mr. Allred. It's a pleasure to be here.
Mr. Luthi. Steve and I thought about sitting here and
asking each other questions, since you're leaving. We think we
could answer them, but we probably won't.
ADDITIONAL COMMITTEE QUESTIONS
Senator Feinstein. In any event, we will submit some
questions to you in writing. Once again, let me say thank you
very much for making the effort this morning. It really is
appreciated. Thank you.
[The following questions were not asked at the hearing, but
were subcommittee to the Department for response subsequent to
the hearing:]
Questions Submitted by Senator Dianne Feinstein
1998-1999 deepwater ocs leases
Question. It is disappointing that all but six of the companies
holding leases without price thresholds have declined to pay royalties
to the United States for the privilege of drilling for oil and gas in
U.S. waters. I believe these companies are fully aware that their
profits are costing the United States $10 billion and that they should
come forward on a voluntary basis. Since the companies are not
volunteering to do the right thing, I am considering a provision for
the 2009 appropriation that will bar companies holding the 1998-1999
leases from bidding on future lease sales unless they pay royalties.
Mr. Allred you have stated that there likely would be litigation
brought by these companies that could result in a temporary court-
ordered injunction against lease sales. I find this scenario to be
somewhat implausible. This would be like killing the goose that laid
the golden egg.
Has the Department considered the possibility that preventing those
companies from bidding on future leases might not make litigation more
likely and might bring them to the table instead?
Answer. While the proposal could cause some companies to come to
the table, it would only take one company to file a lawsuit. We believe
there would be such a challenge.
Question. Wouldn't it be in a company's own best long-term interest
to pay the royalties on the 1998-1999 leases instead of losing out on
the chance for future leases?
Answer. Companies may choose to challenge the provision in court,
and if they prevail, they would be able to retain the money and acquire
new leases.
Question. The Kerrey-Garn mineral revenue collection report
included the recommendation that, ``The Department of the Interior
should continue its efforts to pursue voluntary royalty payment
agreements with holders of the 1998 and 1999 leases without price
thresholds.'' Mr. Allred, you have testified that the lease-holding
companies are waiting for the outcome of the Kerr-McGee case. You
further testified that the Department expects the District Court
decision to be overturned.
How many companies do you expect to begin paying royalties
voluntarily when the court rules as you expect it to?
Answer. We remain open to discussing resolution of this issue with
the companies that hold Deep Water Royalty Relief Act leases from sales
held in 1998 and 1999. Given the impact that the District Court's
ruling on Kerr-McGee could have on the ability of the government to
impose price thresholds for leases from 1996 through 2000, it is not
surprising that companies are waiting to see how this is resolved
before continuing any negotiations on the 1998 and 1999 leases. Indeed,
if this ruling stands the price-threshold issue for the 1998/1999
leases becomes moot. It seems doubtful that any additional lessees will
agree to price thresholds until the Kerr-McGee case is finally
resolved.
Question. Are you prepared to sign agreements with those companies
promptly after the Kerr-McGee case is decided?
Answer. We are prepared to sign agreements with any company that is
willing to do so.
royalty revenue report
Question. I would like to follow up on some of recommendations from
the Kerrey-Garn Report.
As you mentioned earlier, the MMS budgets in 2008 and 2009 included
requests for funds to modernize and automate the bureau's reporting and
verification systems. I support this effort and want assurances that
the Department is getting these systems in place and online
expeditiously.
Does the 2009 budget request include all of the funding necessary
to complete these systems?
Answer. Funding requested in the fiscal year 2009 budget request
addresses two modules of the Minerals Revenue Management Support System
(MRMSS), which supports MRM collection and compliance business
processes. The budget request includes $1.7 million to fully fund
enhancements related the Automated Interest Billing module. It also
provides $2.0 million to fully fund development and implement a risk-
based automated compliance tool and add four FTE in the audit program.
Implemented in fiscal year 2002, the MRMSS will continue to require
ongoing enhancements and upgrades throughout its life cycle to expand
capabilities as technologies change, ensure its greatest efficiency,
and address new and changing business requirements.
Question. Will you please provide for the record a table that shows
the expected annual costs to develop and implement these systems?
Please include any past costs and future cost estimates.
Answer. As stated above, the MRMSS is a comprehensive information
technology solution that supports all MRM collection, disbursement, and
compliance business processes. The table below is included in the MRMSS
capital planning report which is mandated by the Office of Management
and Budget to track large information technology investments. MRMSS
fiscal year costs from inception through fiscal year 2007 are actuals;
fiscal year 2008 through 2013 costs represent estimates and include
funding for the two modules requested in fiscal year 2009.
MINERALS REVENUE MANAGEMENT SUPPORT SYSTEM--SYSTEM DEVELOPMENT LIFECYCLE COSTS BY FISCAL YEAR
[In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal year
----------------------------------------------------------------------------- Total
1999-2006 2007 2008 2009 2010 \1\ 2011 2012 2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Planning......................................................... ......... ........ ........ ....... ........ ....... ....... ....... ........
Acquisition...................................................... 54.014 0.75 1.87 2.8 ........ ....... ....... ....... 59.434
Operations & Maintenance......................................... 45.875 15.138 15.138 18.19 18.79 18.19 18.79 18.19 168.301
--------------------------------------------------------------------------------------
Total...................................................... 99.889 15.888 17.008 20.99 18.79 18.19 18.79 18.19 227.735
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimates for fiscal year 2010 and beyond are for planning purposes only and do not represent budget decisions.
Question. Would you please tell me specifically what you plan to do
to enable the Minerals Management Service and the Bureau of Land
Management to consistently verify production reported by operators?
Answer. MMS and BLM plan to ensure the accuracy and completeness of
production data by:
--Eliminating the inventory of missing Oil and Gas Operating Report
(OGOR) exceptions by the end of 2008,
--Improving timeliness by making 95 percent of production data
available within 3 months of the production month (an
improvement from 5 months) by the end of 2009,
--Reconciling well data maintained by MMS to well data maintained by
BLM,
--Moving from error correction to error prevention by increasing the
number of edits or checks, placed at our electronic reporting
service provider, that reject inaccurate reports submitted by
companies before the reports even get to MMS,
--Increasing use of Orders and Notices of Non-compliance (NONC's) to
enforce compliance,
--Exploring the possibility of the use of technology for reporting of
production (i.e. remote data acquisition), and
--Continually improving communication between MMS and BLM.
These steps will enable MMS and BLM to have accurate and timely
data that can be used to conduct inspections or conduct other
compliance verification steps.
Question. The Kerrey-Garn report also recommended that: ``The
Department of the Interior should continue to explore legislative
options, which could address the loss of royalties without violating
legitimately signed contracts.'' You have had almost a year to study my
provision, which I intend to reintroduce this year, and develop other
legislative proposals as substitutes or amendments to mine.
How would you propose to change my amendment so that ensures
royalties are collected without violating legitimately signed
contracts?
Answer. Under your proposed amendment, companies holding DWRRA
leases without price thresholds that do not renegotiate the terms of
their signed lease would not be able to participate in new lease sales
1 year after the enactment of this provision. This would give lessees
an incentive to litigate. If both the lessees and the government were
forced to devote considerable time and resources to protracted
litigation to resolve lessees' challenges to a new statutory provision,
it could frustrate the goals of increasing domestic energy supply and
raising additional revenue to the U.S. Treasury from new leasing
activity. Any legislative proposal that is developed should mitigate
these potential problems.
The report recommends that the onshore RIK program be discontinued.
The Department has been vigorously promoting the RIK program for the
past several years.
Question. How would discontinuation of the onshore RIK program
impact the Department's ability to collect royalties that are due to
the United States?
Answer. The RPC only recommended discontinuing the onshore RIK oil
program. MMS does not believe this will have any impact on the
Department's ability to collect royalties that are due to the
Government. In fact, MMS discontinued the onshore oil RIK program
effective April 1, 2006. Existence of both the royalty-in-value (RIV)
and RIK options presents the MMS with a unique opportunity to actively
manage the royalty asset stream and optimize the efficiency and
effectiveness of its royalty management process. The use of RIK is
simply an alternate method of collecting royalties and MMS forfeits no
rights or collection authority if RIK were no longer employed.
Question. What is the agency's response to the recommendation to
discontinue the onshore RIK program?
Answer. As indicated above, MMS discontinued the onshore RIK oil
program with the last production taken in kind at the end of March
2006. While we believe this program met our revenue objectives during
the period it operated, it was determined that switching the onshore
RIK oil program to RIV (cash) collection at that time was advantageous
due primarily to decreasing oil production levels and not performance
of the RIK oil program. The ability to change our mode of collection
between RIK and RIV as market conditions change--thereby ensuring a
better return for the public--is a core feature of the MMS asset
management program.
Question. The report includes 110 recommendations for mineral
revenue collection improvements. I recognize that the Department will
need time to implement all of them, but I need to know that you are
actively addressing the recommendations. I ask that you send quarterly
progress reports to the Appropriations Committee so that we may monitor
agency progress. In the short-term, it is important to know if the
Department disagrees with any of the recommendations.
Will you please provide for the record a list of recommendations
that the Department either or opposes or about which it has serious
reservations?
Answer. We are unable at this time to provide you a list of
recommendations that the Department opposes or has serious reservations
regarding implementation. The Department has developed a working draft
of a joint Action Plan to implement the Report's recommendations. The
plan identifies the responsible Bureau, estimated timeframes for
completion and status for each of the remaining 94 recommendations. The
plan identifies the need for any intermediate tasks such as studies to
determine the feasibility of implementing a particular recommendation.
The appropriate subject matter experts will be assigned to conduct
these feasibility studies. Once this important analysis work is
completed, we will inform you if we have serious reservations about
implementing any of the remaining recommendations.
Question. The Subcommittee on Royalty Management report from
Senators Kerrey and Garn states ``that the MMS is an effective steward
of the Minerals Revenue Management program and that MMS employees are
genuinely concerned with fostering continued program improvements''.
Can you tell us about some of these improvements that MMS has made
over the years?
Answer. MRM achieved several key program improvements over the
years, including:
--Reengineered business processes and computer systems, resulting in
several improvements and efficiencies. One significant result
of reengineering was reducing the 6-year compliance cycle to a
3-year cycle. More timely audits correspond with ultimate
recipients receiving assurance sooner that all revenues due are
paid. During this period, MRM focused primarily on revenue
coverage--conducting compliance reviews on companies with the
highest volumes. MMS is now in the process of expanding to a
more dynamic risk-based compliance approach to include coverage
of a greater number of companies and properties.
--Revised oil and gas valuation rules to provide greater certainty
and reduce administrative costs to both lessors and lessees,
making Federal leases more attractive for development and
leasing. Amended valuation rules include: Indian Gas Valuation
Rule, published 1999; Federal Oil Valuation Rule, published in
2004; Federal Gas Valuation Rule, published in 2005; and Indian
Oil Valuation Rule, published in 2007. These rules promoted
greater use of market index prices for determining value and
clarified what costs could, and could not be taken as
deductions.
--Implemented comprehensive Audit Quality Improvement Action Plan to
improve MRM's compliance and audit activities and related
internal controls. Following implementation in 2005, an
independent CPA firm issued MRM a clean opinion regarding MRM
audit functions, with no material weaknesses and no reportable
conditions.
--Redirected and retrained staff resources to build a fully-
operational Royalty In Kind (RIK) program, resulting in reduced
administrative costs, reduced disputes on royalty valuation
and, we believe, increased revenues to the Treasury, states,
and special purpose funds.
--Increased electronic reporting of royalty and production report
lines significantly--from 79.9 percent electronic at the
beginning of fiscal year 2002 to 97 percent electronic by the
end of fiscal year 2007--by publishing regulations requiring
electronic reporting and working closely with companies to
assist them in making the transition from paper to electronic
reporting. Over the same time period, we noted a substantial
increase in royalty reporting accuracy--from 86 percent
accurate in fiscal year 2002 to 96.3 percent accurate in fiscal
year 2007. Accurate reporting increases our timeliness in
disbursing funds to State, Tribal, and U.S. Treasury
recipients, and we have seen a corresponding increase in
disbursement timeliness--from 80 percent timely in fiscal year
2002 to 96.3 percent timely in fiscal year 2007. Timeliness is
defined by statute as disbursing funds by the last business day
of the month following the month when MMS receives the payment
and reporting.
--Established a dedicated Project Management Office (PMO) to ensure
the appropriate establishment and tracking of MRM project
schedules and to facilitate management oversight of the
projects. MRM has proactively pursued the development of
critical project management expertise and now has 10 certified
Project Management Professionals (PMPs).
--Initiated and completed a Statistical Reporting Project designed to
improve the quality and integrity of the MRM external reporting
process related to revenues and disbursements. It is essential
that MRM provide the Congress and other external customers with
mineral lease and revenue statistics that are meaningful and
responsive to their needs. The timely and accurate collection
and reporting of this statistical information is mission
critical and bears directly on the public image of our program.
--Implemented improvements and updated procedures for MRM's
Alternative Dispute Resolution (ADR). The ADR Act of 1990 and
RSFA provide the authority for MMS to negotiate settlements of
mineral revenue payments without going through extensive and
costly adjudication and litigation processes. The MRM
effectively utilizes ADR to resolve certain past period
disputes as well as enter into agreements defining
methodologies to be used to calculate and pay future royalty
payments. Benefits include reduced time necessary to resolve
disputes, avoidance of costly litigation, increased certainty
both for past and future royalty payments, and a proper return
to the Government for its mineral assets.
--MRM completed an Enterprise-Wide Risk Management initiative in
fiscal year 2005 and implemented a follow-up action plan to
mitigate risks and enhance internal controls. As part of this
initiative, MRM evaluated its processes against the control
elements and risk principles of the Council on Sponsoring
Organizations of the Treadway Committee, a recognized, leading
authority in the internal control and risk management field.
Additionally, in response to the annual OMB Circular A-123
requirements, Management's Responsibility for Internal Controls
and the CFO Councils Implementation Guide, MRM began in fiscal
year 2005 to conduct ongoing program-wide evaluations of the
internal controls over operations and financial reporting.
Based on the results of these evaluations, MMS provided
reasonable assurance that the internal controls over program
operations were suitably designed and operating effectively as
of September 30, 2007. No material weaknesses were found in the
design or operation of the internal controls over program
operations or financial reporting. During fiscal year 2008, MRM
will continue these evaluations and implement changes
identified in updated DOI guidance.
--Consistently received clean audit opinions on the annual Chief
Financial Officers audit of MRM custodial statements, performed
by an independent auditor(KPMG) under contract to the Office of
the Inspector General. It should be noted that in fiscal year
2007, the MMS received a clean audit opinion. Furthermore, KPMG
reviewed MMS's progress in OMB Circular A-123 compliance and
found that MMS had a robust system of internal controls and
that MMS provided reasonable assurance that the internal
controls over financial reporting were suitably designed and
operating effectively.
Question. Can you tell us whether any of these improvements have
led to the collection of additional revenues, or addressed ethical
issues surrounding employees who work directly with the oil/gas
companies?
Answer. We believe the Royalty In Kind (RIK) program has resulted
in increased revenues. Cumulatively, for fiscal year 2004 through
fiscal year 2006, RIK estimated net return has been $87 million. In
2006, sales of royalty oil and gas through MMS's RIK program are
estimated to have increased net return to the government by $31.1
million above what would have been received if the government had taken
the oil and gas royalties in value, or as cash payments (RIV). The 2006
result of $31.1 million is a combined total of the following:
--$26.2 million increased RIK incremental net revenue (additional
revenues that would not have been generated under RIV),
--$2.6 million incremental time value of money benefit (positive time
value of money by collecting RIK revenues within 25 days rather
than 30 days for in-value royalties), and
--$2.3 million cost avoidance by collecting offshore oil and gas
royalties in kind (RIK) rather than in value (RIV).
Results for fiscal year 2007 will be available in early summer
2008.
In addition, our audit and compliance review business processes
have resulted in additional revenues. The total amount collected from
audits and compliance reviews for fiscal year 2005-2007 was $373.2
million. However, it is important to note that MMS expects to see a
general and gradual decline in compliance collections year to year as
companies increase their voluntary compliance. This is not a reflection
of reduced rigor of the compliance program, but rather an indication
that the deterrent effect is working. Some of the major reasons for
improved compliance are as follows: clearer regulations; Royalty in
Kind providing greater up-front price certainty; and more effective
compliance strategies based on the new risk-based compliance approach
(using both audits and compliance reviews).
MMS policy requires that all employees receive Ethics Training on
an annual basis. The training is presented in various formats to
include written materials and on-line instruction. During 2007 the
Associate Director for Administration and Budget along with the MMS
Ethics Staff and representatives from the Procurement and Information
Technology functions provided on-site, instructor led training at all
of MMS' primary geographic locations. The training included topics such
as: Executive Order 12731; Federal Criminal Ethics Laws; Gifts from
Outside Sources; Outside Work and Activity; Working with Contractors;
Post Employment Restrictions; and Impartiality Guidelines.
The MMS Training Plan for 2008 includes the review of the recently
published Ethics Guide for Department of the Interior Employees. The
Ethics Guide is presented in the format of a 4 inch by 6 inch in color,
glossy print, tabbed, pocket guide which is to be used as a convenient
reference for employees when performing their day to day assignments.
In addition, a separate training session is being planned for the
employees of the Royalty in Kind Division. This Ethics training will
specifically address the RIK Program by providing a greater focus on
issues that are the most critical to their unique function. These
topics will include key topics such as: interactions between the public
and private sector, use of official and/or proprietary data,
prohibitions concerning the use of public office for private gain and
the receipt of gifts from prohibited sources. The RIK staff will be
asked to provide real life examples of the ethical dilemmas which they
most often face. These examples will be used to develop case scenarios
to be included as integral part of the training presented to the RIK
Team.
Question. Throughout the Subcommittee on Royalty Management's
report it is stated that as a revenue generator for the U.S. Treasury
the MMS should be given the resources needed to carry out an effective
royalty management program. One of the Subcommittee's recommendations
is to study the feasibility of setting up a ``trust fund'' within the
Treasury to fund DOI activities.
Do you see any advantages to this funding approach?
Answer. We believe this type of funding approach could have
advantages and disadvantages, so we would need to evaluate it further
before taking a position. As the RPC Subcommittee report indicates,
this change would require legislation. We will work with other relevant
Federal agencies and offices in evaluating these options before we make
any decision as to how to address this recommendation.
Question. Do you believe that the MMS currently has adequate
resources to effectively collect all the royalties that are owed?
Answer. We do believe that MMS largely has the resources necessary
to ensure that the agency can effectively collect the royalties that
are owed to the Government. To address additional needs that have been
identified, the fiscal year 2009 Budget proposes $3.7 million in
targeted program increases to facilitate the shift toward a risk-based
compliance program and to fully automate the interest billing process.
However, it is also important to recognize that MMS has taken a
variety of steps to improve the efficiency and effectiveness of its
royalty collections program in recent years. MMS has gained
efficiencies through:
--Revised valuation regulations for Indian gas, Federal oil, and most
recently Indian oil. These revisions simplified the
complexities of determining the value of production, thereby
reducing the workload associated with auditing the payment of
royalties.
--The growth of the Royalty-in-Kind program since 2001 has reduced
the compliance workload because significant volumes of
production are now taken in kind and sold by MMS. (Hence, most
valuation and allowance issues associated with royalty payments
are not a factor.)
--Reengineered compliance processes and more efficient methods to
augment the traditional audit approach enabling us to provide
broader coverage with fewer resources. The Office of Inspector
General concluded in their report that ``Compliance reviews can
serve a useful role as part of the Minerals Management
Service's Compliance and Asset Management Program. Compliance
reviews are a legitimate tool for evaluating the reasonableness
of company-reported royalties and allow a broader coverage of
royalties while requiring fewer resources than audits.''
We believe these improvements have allowed MMS to conduct an
effective royalty program through the years within its available
resources. MMS was able to confirm reasonable compliance for 71 percent
of the 2002 mineral revenues in fiscal year 2005, 72 percent of the
2003 mineral revenues in fiscal year 2006, and 65 percent of the
mineral revenues in fiscal year 2007. The MMS believes that these
levels of coverage constitute a significant level of compliance
coverage over the lease universe and substantially reduces risks of
underpayment and nonpayment.
Moving forward, in fiscal year 2007 and 2008, MRM is developing a
more dynamic risk-based compliance approach as part of the MMS's
strategic business planning initiative (and consistent with the OIG
recommendations). This approach will provide coverage of a greater
number of companies and leases. As recommended in the final report of
the RPC Subcommittee on Royalty Management, MMS is also exploring
whether a more flexible approach to audits is feasible. In particular,
MMS will explore different enforcement approaches ranging from
compliance checks to limited- or full-scope field audits similar to the
approach used by the IRS. This analysis will help inform our
assessments of future resource needs.
With the fiscal year 2009 request, MMS anticipates beginning
implementation of the risk-based approach that will improve our
capabilities in identifying when audits or compliance reviews of leases
or companies are warranted and whether additional resources are
required. Increasing the audit staff in fiscal year 2009 will provide
the initial necessary manpower to perform increased company and lease
audits, focusing primarily toward onshore Federal properties, where
most of the higher risk companies and leases exist, while maintaining
appropriate revenue coverage levels. We anticipate using the results of
the risk-based strategy each year and will identify and request
additional resources as needed.
Question. The subcommittee report recognizes many advantages
associated with Royalty in Kind (RIK) collection compared to the
Royalty in value approach. Under RIK the government takes its royalty
in the form of oil rather than in cash. It also stated that ``MMS
should immediately take steps to ensure that the RIK program has
sufficient personnel depth to maintain an expanding trading operation
and to ensure that RIK staff have a solid understanding of ethics
guidelines''.
Can you tell us what the major advantages of the Royalty in Kind
program are compared to the traditional Royalty in Value approach?
Answer. The benefits of the RIK program include conflict avoidance,
increased certainty and decreased administrative costs for the public
and industry, earlier receipt of royalty revenues, and potential
revenue enhancement for the Treasury. In addition to intangible
benefits like conflict avoidance, MMS outlines three separate areas of
quantifiable benefit as outlined in the RIK Annual Report to Congress:
--Administrative Savings.--MMS performs an annual comprehensive
comparative analysis between administering the RIK and RIV
programs. The costs associated with administering the RIV
program are typically higher than those costs related with the
RIK program. Royalties taken in kind are sold under explicit
commercial contract terms. These standard industry contracts
provide a level of transparency in the valuation and
transportation of royalty oil and gas which, we believe, lead
to a more efficient process with decreased audit costs.
--Time Value of Money.--Revenue Collection Time (RCT) is a measure of
the number of days after each production month that MMS takes
to collect outstanding receivables for each month of
production. Payments in the RIK program are received on average
5 and 10 days before the end of the month following production
for gas and oil respectively.
Conversely, RIV payments are due at the end of the month
following the month of production. The difference in Revenue
Collection Time between RIK and RIV provides a time value of
money component for payments received in the RIK program.
Because these payments are received five to ten days earlier
than they would have otherwise been received in the RIV
program, a time value of money is calculated on RIK payments
using the number of days for which early payment was made at an
annual interest rate of three percent.
--Revenue Performance.--The RIK program can leverage its position in
many markets to realize higher royalty revenue than MMS would
expect to earn through RIV. These higher revenues come from
more favorable natural gas processing contracts, and, to a
lesser extent, transportation contracts, as well as increased
competition, and aggregated production. RIK has a well-defined
process using economic modeling to measure and record overall
RIK revenue performance.
Question. Have you been able to quantify whether the government has
gotten a better return when using the RIK approach versus Royalty in
Value? If so, how much additional money has MMS collected by virtue of
using RIK?
Answer. MMS began formally calculating RIK revenue ``uplift''--the
incremental revenue benefits we believe are achieved through the RIK
program--beginning with fiscal year 2004. The results, using the three
categories detailed above are summarized in this table:
----------------------------------------------------------------------------------------------------------------
Fiscal year
Category ------------------------------------------------ Total
2004 2005 2006
----------------------------------------------------------------------------------------------------------------
Admin. Savings.................................. $1,600,000 $3,740,000 $2,300,000 $7,640,000
Time Value of Money............................. 892,875 1,528,550 2,633,470 5,054,895
Revenue Perf.................................... 17,242,415 30,790,483 26,254,845 74,287,743
---------------------------------------------------------------
Total..................................... 19,735,290 36,059,033 31,188,315 86,982,638
----------------------------------------------------------------------------------------------------------------
The fiscal year 2007 calculations are being prepared at this time.
They will be released in the next Annual Report to Congress due early
summer 2008 this spring.
Question. Please tell us what steps are being taken to implement
the Report's recommendation regarding the RIK trading operation and
ethics guidelines?
Answer. Vacancy announcements are in process for oil and gas asset
managers as well as back office personnel in order to ensure sufficient
depth. A tentative offer has been issued to a prospective Gas Front
Office Manager with extensive industry experience. RIK will develop and
implement a Personnel Plan to address flexibility in hiring,
compensation, and specialized ethics training by July 2008. To date,
RIK has had success attracting personnel with industry expertise.
1998-1999 oil/gas leases/kerr-mc gee case
Question. With respect to the status of the 1998 and 1999 leases
without price thresholds, the Department has signed agreements with six
of the oil companies.
Can you tell us who these companies are and what portion of
production from all the 1998-1999 leases that they represent?
Answer. The six companies that have signed agreements are British
Petroleum (BP), Conoco Phillips, Marathon, Shell, Walter Oil & Gas and
Walter Hydrocarbon Inc. In an attempt to address the missing price
thresholds, we remain open to negotiating with companies to obtain
agreements to apply price thresholds to the deep water leases issued in
1998-1999. We are focused on obtaining the much larger royalty amounts
to be realized from future production, estimated to range between $5.3
billion to $7.8 billion. To date our progress has included agreements
reached with six companies and they have been paying royalties
consistent with the terms of the agreements. These agreements represent
approximately 12 percent of the future production from all 1998-1999
leases.
Question. Have they been paying the royalties as agreed?
Answer. All six companies with signed agreements have continued to
pay royalties consistent with the terms of the agreement.
Question. Is there any indication that the Kerr-McGee case will
change their decision on whether to continue to pay?
Answer. If there is a final non-appealable judgment in which the
court finds price thresholds are illegal, then the companies have the
right to terminate the agreements.
kerr-mc gee case
Question. Last October, in the Kerr-McGee litigation, the district
court held that price thresholds are not permitted in any leases under
the Deepwater Royalty Relief Act (DWRRA).
While this case is being appealed, is there really anything that
the Department can do to encourage more companies to come to the table
and pay royalties on the 1998-1999 leases?
Answer. While we remain open and willing to discuss agreements with
the remaining companies holding DWRRA leases without price thresholds,
we do not believe that any additional lessees will agree to price
thresholds until they see the outcome of the Kerr-McGee case.
Question. What is happening with respect to royalty collection from
companies holding leases from 1996, 1997, and 2000? Have any of them
indicated that they will not continue to pay?
Answer. Companies holding 1996, 1997 and 2000 DWRRA leases have
either been paying royalties consistent with the terms of their lease
or have appealed orders to make such payments. The recent Federal
District ruling in the Kerr-McGee case has called into question MMS's
authority to establish price thresholds under the authority of the
DWRRA. If the ruling is upheld, companies holding 1996, 1997 and 2000
DWRRA leases would be entitled to recoup prior year payments and would
not be required to make future payments.
Question. As you know, there have been legislative efforts to force
the oil companies with these leases to renegotiate their contracts. Can
you give us a better idea of what the impact of any future legislative
efforts like these would have while the Kerr-McGee case remains on
appeal?
Answer. If Kerr-McGee is successful in their lawsuit, we estimate
that the total royalties at stake could range from about $23 billion to
$32 billion. The legislation to address this situation that was passed
by the House had a high potential for causing litigation by modifying
existing contracts. We believe that efforts to recoup these moneys
should not jeopardize our nation's energy security or the future
revenues from upcoming OCS sales. Applying fixes that could result in
litigation could easily cost the United States billions over the next
decade and result in reduced annual production levels. We still remain
committed to the sanctity of our contracts; companies need to know that
the United States negotiates in good faith. We are also still committed
to working with Congress to try to resolve this issue as long as any
effort to recoup royalties is fully thought through and protects the
integrity of the government and energy security for the American
people.
Question. If the Kerr-McGee case is upheld on appeal, what is the
potential loss to the Treasury?
Answer. Our original estimate, reported by GAO, was $60 billion.
Since that time we have updated that work and have reported the updated
estimates to Congress in two installments.
The first installment applied only to those DWRRA leases sold in
1998 and 1999, and was reported in June 2007. This work indicates that
the future royalty potential, as of January 1, 2007, from the 1998-1999
DWRRA leases ranges from $5.3 billion to $7.8 billion.
The second installment, reported in February 2008, applied only to
those DWRRA leases sold in 1996, 1997, and 2000. This work indicates
that the future royalty potential, as of October 1, 2007, from the
1996, 1997, and 2000 DWRRA leases ranges from $15.7 billion to $21.2
billion.
Looking backward, as of the end of fiscal year 2007, we estimate
that $1.37 billion would have been paid on DWRRA leases issued in 1998
and 1999 had price thresholds been in place. In addition, over $1.1
billion in royalties have already been paid on DWRRA leases issued in
1996, 1997, and 2000. For all Deep Water Royalty Relief leases from
these 5 years, we estimate the total amount at risk to be $23 billion
to $32 billion.
Question. Do you have any recommendations for what Congress should
do if the government loses the case on appeal?
Answer. Recent legislative proposals we have seen would have given
lessees an incentive to litigate. If both the lessees and the
government were forced to devote considerable time and resources to
protracted litigation to resolve lessees' challenges to a new statutory
provision, it could frustrate the goals of increasing domestic energy
supply and raising additional revenue to the U.S. Treasury from new
leasing activity. Any legislative proposal that is developed should
mitigate these potential problems.
Question. As you know, the Inspector General (IG) issued a
memorandum to you in September that accompanied an investigation he had
done with respect to the royalty collection program. It raised a number
of troubling issues.
The IG indicated that the MMS does not have an adequate computer
system to accurately calculate interest owed by the oil companies on
underpaid or late royalty payments. Is this the case?
Answer. No. The MMS system is capable of accurately calculating
interest owed by oil companies. However, before invoices are finalized,
automated draft invoices are manually verified and updated based on
unique exceptions not programmed into the MRMSS system. This is a
cumbersome, time-consuming process.
Question. If so, what is the Department doing to remedy this
situation?
Answer. In fiscal year 2007, MMS redirected staff to reduce
interest billing backlogs, and implemented performance tuning of the
interest billing module to increase processing capacity. The interest
backlog was eliminated as of 09/30/07. As part of the President's
fiscal year 2009 budget request, MMS is requesting funding to provide
for enhancements to more fully automate the interest billing module
within MRM's Support System to significantly reduce manual intervention
requirements and greatly increase processing efficiencies. This
initiative will fund the final phase of an improvement initiative begun
within base funding in fiscal year 2007, with the objective of
transitioning from an extremely labor intensive process to a highly
effective and efficient business process.
Question. The IG has stated that with respect to official and even
proprietary information submitted by the oil companies that there were
``vague policies and rules and poor overall document control''.
Is this true? If so, what is the Department doing to put better
controls in place?
Answer. No. The Minerals Revenue Management (MRM) has issued
numerous guidance and policy memos to all MRM employees and contractor
staff for how to handle and protect proprietary information. These
guidance memos clearly stated that proprietary information must be
protected from unauthorized disclosure and provided specific
instructions for handling proprietary and confidential business
information obtained from oil, gas, and solid minerals companies. Some
of the more pertinent memos are listed below:
--June 14, 1989, Memo from the Associate Director for Royalty
Management titled, ``Protection of Privileged and Proprietary
or Confidential Information.''
--October 7, 1991, Memo from the Associate Director for Royalty
Management titled, ``Physical Security Over Proprietary Data.''
--October 30, 1991, Memo from the Associate Director for Royalty
Management titled, ``Guidance and Procedures for Handling
Requests for RMP Information and Records.''
--February 24, 1993, Memo from the Associate Director for Royalty
Management titled, ``Priority Processing of Freedom of
Information Act Requests.''
--February 27, 1995, Memo from the Associate Director for Royalty
Management titled, ``Guidance and Procedures for Handling
Requests for Royalty Management Program Proprietary Data/
Records.''
--August 22, 2007, Memo from the Associate Director for Minerals
Revenue Management titled, ``Updated Guidance and Procedures
for Handling Requests for Minerals Revenue Management
Proprietary and Other Information/Data/Records.''
The most recent memorandum codified new controls that proprietary
data sent to an external recipient be encrypted.
In addition, we have required mandatory annual Freedom of
Information Act (FOIA) training since 1995. The FOIA training includes
guidance on how to process FOIA requests and how to handle and protect
proprietary information. The FOIA training has been provided via a
Computer Based Training Module for the past several years and is
required and available for all employees and contractor staff. Also, in
2004, MRM developed and presented to all Compliance and Asset
Management staff and State and Tribal audit staff training titled,
``Safeguarding Proprietary Data.''
Additional guidance was included in published documents such as the
``Guide to Royalty Information'' first published August 17, 1998, and
last updated September 24, 2001, and Attachment D to the Tripartite
Memorandum of Understanding titled, ``Treatment of Proprietary/
Confidential Data,'' dated August 15, 1991.
More recently, the MRM FOIA staff provided handouts and made a
presentation titled, ``Proprietary Data Guidance,'' to the State and
Tribal auditors at the MMS/State and Tribal National meeting on
September 11, 2007. The MRM FOIA staff is also developing formal
classroom FOIA and Proprietary Data training to be presented to all MRM
and contractor staff later this fiscal year.
Question. The IG stated in his memo to you of September, 2007 that
``we discovered a number of other significant issues worthy of separate
investigation, including ethics lapses, program mismanagement and
process failures.'' I recognize that you can't comment on the specific
aspects of any ongoing investigations by the IG, but this is a very
disturbing statement.
The IG's statement suggests very wide ranging problems within the
royalty collection program. Do you think this is a fair
characterization?
Answer. No, we do not believe this to be a fair characterization of
the Minerals Revenue Management Program. MMS has been the subject in
recent years of numerous reviews, audits and investigations conducted
by the DOI Office of Inspector General, the Government Accountability
Office, Congressional Committees and our own internal reviews. To
provide greater assurance on the integrity of financial operations and
the accuracy of financial data, MMS undergoes annual Financial
Statement audits, including a thorough review of mineral revenue
custodial accounts. For the past 5 years, as part of this annual CFO
audit, MMS consistently has received a clean audit opinion from the
Office of Inspector General's contracted independent auditing firm.
To date, the various audits, investigations and reviews have made
recommendations to strengthen procedures, improve training, and enhance
tracking and documentation. We have taken these recommendations
seriously and have developed corrective action plans to address every
recommendation.
To date, the various audits, investigations and reviews have made
recommendations to strengthen procedures, improve training, and enhance
tracking and documentation. We have taken these recommendations
seriously and have developed corrective action plans to address every
recommendation.
The MRM also utilizes 3 proactive internal evaluation tools to
ensure (1) internal controls and related policies and procedures are
properly designed to address risk and provide reasonable assurance of
the effectiveness and efficiency of program activities and operations;
(2) reliable, complete, and timely data is maintained; (3) compliance
with applicable laws, regulations and standards; and (4) programs and
resources are protected from fraud, waste, and mismanagement. The first
tool is Internal Quality Control Reviews to evaluate audits performed
on Federal, State, and Tribal lands to determine compliance with
Government Auditing Standards and MRM policies and procedures. In 2005,
an independent CPA firm issued MRM a clean opinion regarding MRM audit
functions, with no material weaknesses and no reportable conditions.
The second tool is Alternative Internal Control Reviews to evaluate
internal controls over program offices, operations, and financial
reporting. MRM submits a 3-year plan to the Department identifying
planned reviews and a risk based component inventory. Finally, OMB
Circular A-123, Management's Responsibility for Internal Control,
evaluates MRM's overall risks, internal controls, and documentation
over program offices and financial reporting processes to facilitate
accurate and timely assurance statements to the Department. In fiscal
year 2007, KPMG, the DOI OIG's independent auditor examined MMS's
progress in OMB Circular A-123 compliance and found that MMS had an
adequate system of internal controls and that MMS provided reasonable
assurance that the internal controls over financial reporting were
suitably designed and operating effectively.
The December 17, 2007, Royalty Management Subcommittee Report on
``Mineral Revenue Collection from Federal and Indian Lands and the
Outer Continental Shelf'' concluded that the Minerals Management
Service is an effective steward of the Minerals Revenue Management
Program and that MMS employees are generally concerned with fostering
continued program improvements. The Subcommittee members unanimously
agreed that MMS is the best agency suited to fulfill the stewardship
responsibilities for Federal and Indian leases.
In reference to the statement regarding ethical lapses, it is
important to note that MMS first contacted the Office of Inspector
General and requested that they look into some of these issues 2 years
ago when MMS management first became aware of concerns. We temporarily
reassigned some employees pending the outcome of the IG investigation.
In the meantime we strengthened many of our internal controls and
processes. We strengthened our ethics training to ensure our employees
fully understand their ethical responsibilities as federal employees.
Question. Do you believe the recommendations that you are
implementing with respect to the Kerrey/Garn report will effectively
deal with this criticism by the IG?
Answer. Yes. Many of the recommendations in the Kerrey/Garn report
are similar to recommendations made by the Office of the Inspector
General. We agree with the statement of Senators Kerrey and Garn that
implementing the recommendations in their report will greatly
strengthen the management of the program, will restore public
confidence, and will ensure maximum value for the U.S. taxpayer.
naval oil shale reserve
Question. I have a parochial matter I hope that you could address
and that involves the Naval Oil Shale Reserve (NOSR) in Colorado. The
President's budget request contains a proposal to cancel $24.7 million
of the balances in the Naval Oil Shale Reserve Site Restoration Fund
account that exceed the estimated funding needed to cover site cleanup
costs. Obviously, I oppose this. In my view, those funds belong to the
State of Colorado.
This account is growing, and royalties are not being paid to the
State of Colorado only because of the failure of the Department of the
Interior to certify the clean up of the site. I believe that everyone
acknowledges that there are sufficient funds in the account to do this.
If I have any say about it, this proposal will not be a part of this
year's Interior bill and instead Colorado's rightful share of these
funds should be given to the State, not put in the Federal Treasury.
I have been working with Secretary Kempthorne to have this
certification issued as soon as possible so that Colorado can start
collecting its fair share of the royalties being generated at NO SR.
Can I get your assurance that the Department will continue working with
me on this issue so that we can get it resolved as soon as possible?
Answer. You have our assurance to continue to work with you and the
rest of the Colorado delegation. On January 23, 2008, the Colorado
Department of Public Health and Environment provided its concurrence
with the BLM's 100 percent Design Report for the clean-up at the Anvil
Point Facility. This is a major milestone that allows the BLM to begin
working toward awarding a clean-up contract by early June. Once the
Department has obligated funds for the cleanup contract, one of a
number of steps that has to be completed to comply with the law, we can
begin to work toward certification.
administrative fees on onshore leases
Question. I The fiscal year 2008 Interior bill authorized the
Bureau of Land Management to charge a fee this year of $4,000 on
Applications for Permits to Drill. It is my understanding that the
Administration is proposing an amendment to the Energy Policy Act of
2005 that would authorize the Department to issue a rule making these
fees permanent and also to raise them. This concerns me if it creates a
disincentive for increased domestic production and does not take into
account differences in the costs of production in different states.
In Colorado, the costs of production are very high. Will this rule
take into account the differences among the states in terms of the cost
of production when setting fees?
Answer. At this time, we do not anticipate the rule taking into
account the differences among the states in terms of the cost of
production when setting the fee. The proposal is for a cost recovery
fee that takes into account the BLM's cost to process an application
for permit to drill (APD). If it is determined that the costs for
processing an APD vary from state to state, then the final cost
recovery fee may, likewise, vary from state to state. The proposed
interim fee represents a very small fraction of the development and
production costs for any new well, and as such, we do not believe it
will be a disincentive to producers interested in developing new wells.
Question. Won't charging higher fees upfront to process these
applications hurt smaller producers?
Answer. The proposed fee represents a small fraction of the
development and production costs for any new well, and the fee is
proportional. Small producers will request fewer APDs and will
therefore pay less in fees than larger producers submitting many APDs.
The fee may also encourage operators to do more pre-planning before
submitting an APD, to ensure that their submitted applications are
those that have a greater degree of probability of being drilled. This,
in turn, reduces the BLM APD workload, which should help to ensure that
all APDs can be processed in a more timely manner.
Question. How long will it take the BLM to issue this rulemaking?
Answer. At the latest, we expect to release the final rulemaking by
the end of calendar year 2009. To avert any shortfall in funding for
APD processing, in the event that the cost recovery rulemaking has not
been implemented for all of fiscal year 2009, the legislation submitted
by the administration will impose, by statute, an interim fee of
$4,150, to ensure the estimated $34.0 million in fees are collected.
Question. How much in fees does the agency plan to collect if it is
implemented?
Answer. As noted in the preceding response, we estimate that we
will collect $34 million in fiscal year 2009, either solely through
cost recoveries, or through some combination of cost recoveries and a
statutory interim processing fee.
Question. In the last two Interior bills language was considered
but never passed, that would bar companies that hold OCS leases issued
in 1998-1999 that are not subject to price thresholds from bidding in
future leases sales. I am told that if that provision became law, there
would be some companies that bid in the October 3, 2007 Gulf of Mexico
lease sale would not be able to participate in future lease sales. In
that sale alone, the government received $2.9 billion in high bids. I
know Secretary Allred has testified at previous hearings of the
potential loss to the government if a producer were to challenge the
statute and a court were to enjoin future leases.
My question today is does the MMS have an estimate of what the
government could lose in reduced bonuses if the companies subject to
the leasing bar were not able to participate in future lease sales?
Answer. Although there is considerable uncertainty in trying to
predict bidder behavior, as evidenced by the unexpectedly large bonus
bids received in recent lease sales, the government's losses from
barring certain companies from bidding in future sales could be
substantial. If realized, the proportional losses would likely vary
through time and across OCS regions.
The composition of the barred companies will change over the next
few years as leases expire upon reaching the end of their 10-year
primary terms in 2008 and 2009. A recent count identified 44 companies
that could be subject to being barred. We estimate this number would be
reduced to about 28 companies by the time all of the 1998 and 1999
leases reach the end of their primary terms, around the beginning of
fiscal year 2010, leaving only leases in development or in production
still active.
We analyzed the results of central Gulf of Mexico Sale 205, held in
October, 2007, under two scenarios to obtain a future baseline. The
first scenario assumed that the 44 companies noted above were barred
from bidding, while the second scenario assumed that the reduced set of
28 companies was barred. In both cases, we stipulated that (1) bidding
by other companies would not have changed in the presence of certain
companies being barred, (2) in the case of a multiple bid tract with
the high bid submitted by a barred company, the revised hypothetical
high bid would be the next highest bid submitted by a non-barred
company, and (3) in the case of a joint high bid involving one or more
barred companies, the high winning bid would have remained the same as
long as the barred companies' share of the joint bid was less than 50
percent; otherwise, the bid would not have been made.
We found that under these assumptions, the sum of the resulting
high bids in Sale 205 would have fallen by 5 1.5 percent if the 44
companies had been barred and by 29.6 percent if the identified reduced
set of 28 companies had been barred. We then applied the proportional
losses in high bids for the 44 company case to the next three Gulf of
Mexico sales beginning with the western Gulf of Mexico sale in August
2008, and applied the proportional losses in high bids for the 28
company case to the subsequent six Gulf of Mexico sales ending with the
western Gulf of Mexico sale in August 2012.
We previously estimated for the President's budget that absent any
Congressional action to bar companies, the sum of the high bids in
these 9 sales would amount to $2.7 billion. Our analysis showed that in
the presence of Congressional action barring certain companies from
bidding in future sales, the sum of the high bids would be reduced by
$1.1 billion, equal to 40 percent.
In contrast, barring the same set of companies from offshore sales
in Alaska would appear to have a far more modest effect on bidding
results. For example, in the Chukchi sale 193, which had high bids of
$2.6 billion, the direct losses from barring the same set of 44
companies would only have been $30 million, or slightly more than one
percent of the high bids.
It is reasonable to think that the effects on bonus bids from
barring companies could be even greater than estimated here. For one
thing, the remaining bidders may well lower their bids in the
expectation of less competition. For another, when we analyze the four
Gulf of Mexico sales held prior to Sale 205 in the scenario where 44
companies are barred, the results show losses of about 60 percent,
instead of losses around 50 percent (actually, 5 1.5 percent) that we
found in Sale 205. Finally, the specification of the 28 company case
reflects a limited assessment of leases that will be held beyond their
primary terms--more leases will likely be held, but their identity and
the lease owners cannot be currently determined. So, for those reasons,
we believe the one billion dollar loss over the next 5 years calculated
here is a conservative estimate of the adverse fiscal effects from
Congressional restrictions on bidding and competition in future OCS
sales.
CONCLUSION OF HEARING
Senator Feinstein. The hearing is recessed. Thank you.
[Whereupon, at 10:19 a.m., Tuesday, February 26, the
hearing was concluded, and the subcommittee was recessed, to
reconvene subject to the call of the Chair.]
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