Senate Appropriations Panel to Assess Interior's Royalty System

The Interior Department's management of offshore oil and gas royalties comes before the Senate Appropriations Committee this week as lawmamkers continue to look into the controversial topic amid charges Interior has not done enough to make sure petroleum companies make their full payments.

The Interior and Related Agencies Appropriations Subcommittee will hear from Stephen Allred, Interior's assistant secretary for land and minerals management, at a hearing scheduled for tomorrow morning. One focus of the hearing will be Interior's proposed fiscal 2008 budget, which envisions $297.2 million for the Minerals Management Service, around $16.2 million above the continuing resolution for fiscal 2007.

MMS manages federal offshore leasing and collects royalties for both onshore and offshore production.

The hearing comes as MMS is under fire from lawmakers over several royalty-related issues. Critics have slammed the agency for its response to flawed 1998 and 1999 deep water leases that allow royalty waivers regardless of energy prices.

Critics also say MMS does not aggressively pursue underpayments. In addition, an inspector general report in December alleged MMS does too little to verify company-reported data.

The agency maintains it has a strong compliance system, and officials have vowed improvements through an action plan announced following the inspector general's report.

The proposed budget includes $161.5 million in direct appropriations, which is $3.2 million higher than the CR but $2.1 million below the fiscal 2007 request, according to MMS. The rest of the MMS budget comes in offsetting collections, such as leasing payments.

The budget includes $4 million in new money to implement the upcoming 2007-2012 offshore leasing program and $1.3 million in new funds to help manage the growth in ultra-deepwater development at depths greater than 5,000 feet.

The request also includes $940,000 for a new "adjustment line monitoring" initiative. This would ensure that company's royalty adjustments are made "within allowed time frames and in compliance with laws and regulations," according to the MMS budget plan.

According to the budget, an MMS sample analysis has found companies making adjustments on royalties from as far back as the late 1980s, with companies making "negative recoupments" outside of allowed time frames.

"A cursory review of this sample appears to show improper company royalty recoupments of more than $10 million," the budget states.

It adds that MMS cannot adequately monitor company adjustments without automated system modifications and increased staff the new plan would provide.

A changing program

The Bush administration is making several changes to the offshore oil and gas program. They include opening new Gulf of Mexico areas, which Congress required in legislation approved and signed last year. The administration also recently lifted leasing bans covering the Bristol Bay section of offshore Alaska.

The administration is also increasing the royalty rate on new deepwater gulf leases to 16.7 percent, up from the current deepwater rate of 12.5 percent. The change is estimated to increase payments by $4.5 billion over 20 years, Interior said.

The administration is also proposing to end some offshore royalty incentives included in the Energy Policy Act of 2005, repeals also included in energy legislation the House passed last month.

Schedule: The subcommittee will meet tomorrow at 10 a.m. in 124 Dirksen.

Witness: Stephen Allred, assistant secretary for land and minerals management, Interior Department.

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Company: Minerals Management Service (MMS) more info
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