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Our work has shown that management of federal oil and gas resources was a high-risk area and we added it to the High Risk List in 2011. We identified challenges in the Department of the Interior’s (Interior) management of oil and gas on leased federal lands and waters. We found that Interior (1) did not have reasonable assurance that it was collecting its share of revenue from oil and gas produced on federal lands and waters; (2) continued to experience problems hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations on federal lands and waters; and (3) was undertaking a major challenging reorganization of its oversight of both its offshore oil and gas management and revenue collection functions. In 2013, we concluded that Interior had fundamentally completed its reorganization. Accordingly, the high-risk area was narrowed to Interior’s revenue collection and human capital challenges.

Federal oil and gas resources provide an important source of energy for the United States; create jobs in the oil and gas industry; and generate billions of dollars annually in revenues that are shared between federal, state, and tribal governments. Interior reported collecting approximately $48 billion from fiscal year 2009 through 2013 from royalties and other payments companies made. This makes oil and gas resources one of the federal government’s largest nontax source of revenue. Also, the explosion onboard the Deepwater Horizon and oil spill in the Gulf of Mexico in April 2010 emphasized the importance of Interior’s management of permitting and inspection processes to ensure operational and environmental safety.

Historically, Interior’s Bureau of Land Management (BLM) managed onshore federal oil and gas activities while the Minerals Management Service managed offshore activities and collected royalties for all leases. Interior completed its restructuring of its oil and gas program in 2011, transferring offshore oversight responsibilities to two new bureaus—the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE)—and assigning the revenue collection function to a new Office of Natural Resources Revenue. This restructuring did not include BLM’s management of onshore federal oil and gas activities.

Interior’s leadership has demonstrated a commitment to addressing its weaknesses in revenue collection and human capital, while partially meeting the four remaining criteria. For example, in November 2014, senior Interior officials told us that the agency has implemented a number of strategies and corrective measures to address its revenue collection weaknesses and human capital challenges.

Royalty Determination and Collection

Interior has demonstrated leadership commitment towards addressing its revenue collection weaknesses and has partially met the remaining four criteria.

Leadership commitment. Interior’s leadership has demonstrated its commitment towards addressing revenue collection weaknesses. For example, Interior’s Office of Natural Resources Revenue (ONRR) established a Data Mining Services Group to help identify potentially erroneous data submitted by companies paying royalties. ONRR is also studying whether if it can more efficiently obtain oil and gas production data from companies through automating data collection from metering systems.

Capacity. Interior’s capacity to address weaknesses in revenue collection is uneven. In recent years, Interior has hired offshore inspection staff to focus primarily on oil and gas measurement inspections. Based on ongoing work, we found that BSEE came close to meeting its annual oil and gas production verification inspection goals in the Gulf of Mexico for fiscal years 2009 through 2013. On the other hand, for the same time frame, we found that BLM did not meet its oil and gas production inspection goals, and that officials attributed this, in part, to insufficient inspection staff. Additionally, we have made a number of recommendations to BLM related to updating or revising its oil and gas measurement regulations and policies. However, BLM officials told us that, due to limited staff and competing rulemaking priorities—for example, issuing regulations addressing hydraulic fracturing—it has been unable to issue revised regulations. Interior most recently estimated that it would issue revised oil and gas measurement regulations in the third quarter of fiscal year 2016.

Action Plan. Interior has plans in place to continue implementing our recommendations aimed at correcting weaknesses in its revenue collection policies and practices. In November 2014, Interior provided a briefing document specifying goals and time frames for several areas related to these weaknesses. For example, in December 2013, we recommended that BLM issue revised regulations that would provide it with greater flexibility in setting royalty rates to better ensure that the public is receiving a fair return from the production of oil and gas from federal leases. In November 2014, Interior stated that it plans to begin addressing this issue some time in fiscal year 2015 through issuance of an advance notice for proposed rulemaking. Interior’s briefing document also specified other goals and time frames for completing a study on automating data collection from production metering systems, and for establishing procedures on when to conduct a periodic assessment of its fiscal system. The latter of these two actions will better ensure the government is receiving a fair return on the production of oil and gas from federal leases.

Monitoring. Interior has several efforts in place to monitor its performance to address revenue collections weaknesses. For example, Interior’s November 2014 briefing document demonstrated that it is tracking its implementation of Inspector General recommendations as well as our recommendations related to our high-risk findings. Additionally, Interior’s briefing document indicates it has established milestones for a number of actions, including updating oil and gas measurement regulations. However, in our ongoing work, we found that BLM did not schedule or complete a planned internal review within one year of newly issued oil and gas guidance to assess its overall effectiveness after its implementation by BLM staff in its field offices. The new guidance outlines criteria for approving “commingling” requests—requests to combine oil or gas from public, state, or private leases prior to the point of royalty measurement—and identifies considerations for determining whether commingling is in the public interest. This includes ensuring that BLM has the ability to verify that production is accurately measured and properly reported. By not scheduling and completing a review of the effectiveness of the new commingling guidance after its implementation, BLM does not have reasonable assurance that its staff are consistently applying the new guidance and that staff are able to verify production.

Demonstrated Progress. Interior has demonstrated considerable progress in addressing weaknesses in its revenue collection policies and practices. For example, in our ongoing work, we found that Interior had implemented a majority of the 36 recommendations we made since 2008 addressing revenue collection weaknesses, including those related to oil and gas production verification and royalty data.

Human Capital Challenges

Interior has demonstrated its leadership commitment towards addressing its human capital challenges at the bureaus responsible for oversight and management of federal oil and gas, and has partially met the four additional criteria.

Leadership commitment. In January 2014, we recommended that Interior explore the expanded use of hiring incentives and systematically collect and analyze hiring data. We found that Interior’s hiring and retention challenges were largely due to lower salaries and a slow hiring process compared with similar positions in industry. The fiscal year 2012 attrition rate for petroleum engineers at BLM was more than 20 percent, or more than double the average federal attrition rate of 9.1 percent. The attrition rate for other key oil and gas staff was lower but still a challenge because some field offices had only a few employees in any given position, and a single separation could significantly affect operations. According to Interior officials, these challenges made it more difficult to carry out oversight activities, including conducting production facility inspections, in some field offices. Interior agreed with our recommendations and stated that the bureaus have begun a more systematic collection and analysis of hiring data to identify causes for delays and to expedite the hiring process. In November 2014, Interior senior leaders briefed us on their commitment to address the department’s human capital challenges.

Capacity. For fiscal years 2012 and 2013, Congress provided funds to BOEM and BSEE in the Gulf of Mexico to establish higher minimum pay rates—up to a 25 percent increase—for key positions, including geophysicists, geologists, and petroleum engineers. This authority was subsequently extended through fiscal year 2015. However, it is uncertain how Interior will address staffing shortfalls over time unless these funding authorities continue.

Action Plan. In 2010, we found that Interior’s bureaus experienced high turnover rates in key oil and gas inspection and engineering positions. As a result, Interior faces challenges meeting its oil and gas oversight responsibilities, potentially placing both the environment and royalties at risk. After Interior reorganized its offshore management of oil and gas, it developed plans to hire additional staff with expertise in inspections and engineering. However, as of January 2014, its plans had not been fully implemented.

Monitoring. We found that Interior and the three bureaus had taken some actions to address these challenges, but had not fully used their existing authorities to supplement salaries and provide other recruitment, relocation, and retention incentives. Additionally, Interior records showed that the average time required to hire petroleum engineers and inspectors generally exceeded 120 calendar days—much longer than OPM’s target of 80 calendar days. The department and bureaus had taken some steps to reduce hiring times, but did not have complete and accurate data to identify the causes of delays in the hiring process. Without reliable data, Interior’s bureaus cannot effectively implement changes to expedite the hiring process. In November 2014, Interior senior officials told us that BOEM, BSEE, and BLM are developing and implementing a tracking system to support the accurate capture of hiring data and address delays in the hiring process. Additionally, officials told us that BSEE and BOEM are developing plans to transition to a hiring software that is expected to reduce applicant processing time and decrease costs. Once Interior has the systems in place to capture accurate data on hiring, the department will be able to monitor hiring times and the causes of delays in the hiring process.

Demonstrated Progress. In March 2010, we found Interior had not consistently provided appropriate training for offshore inspection and engineering staff. In July 2012, we found that Interior was creating a new training program for its offshore inspection and engineering staff. We also found that Interior has made progress in providing its inspectors and engineers with standardized training.

Interior has partially met the criteria to address the revenue collection and human capital challenges we identified, and has implemented some of the recommendations we made. However, Interior needs to do more to meet its responsibilities to manage federal oil and gas resources and to maintain leadership commitment in addressing the remaining four criteria.

Capacity. To address its revenue collection challenges, Interior will need to identify the staffing resources necessary to consistently meet its annual goals for oil and gas production verification inspections. It will also need to complete updates to oil and gas measurement and onshore royalty rate regulations, among other actions. To address its human capital challenges, Interior needs to consider how it will address staffing shortfalls over time in view of continuing hiring and retention challenges.

Action Plan. To address its revenue collection challenges, Interior needs to continue meeting its time frames for updating regulations related to oil and gas measurement and onshore royalty rates, among other actions. To address its human capital challenges, Interior needs to implement its plans to hire additional staff with expertise in inspections and engineering.

Monitoring. To address its revenue collection challenges, Interior needs to provide reasonable assurance that oil and gas produced from federal leases is accurately measured and that the federal government is getting an appropriate share of oil and gas revenues. To address its human capital challenges and to reduce hiring times, Interior needs to ensure that it collects and maintains complete and accurate data on hiring times—such as the time required to prepare a job description, announce the vacancy, create a list of qualified candidates, conduct interviews, and perform background and security checks—to effectively implement changes to expedite its hiring process.

Demonstrated Progress. To address its revenue collection challenges, Interior needs to continue to effectively implement our related recommendations as outlined in the areas above. To address its human capital challenges, Interior must continue to show progress in hiring, retaining, and training inspectors and engineers.

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