Outside Panel Calls for Changes in Federal Royalty Oversight

An independent report commissioned by the Interior Department calls for scores of changes in federal collection and auditing of billions of dollars of oil and gas royalties.

The recommendations include working with Congress to create a "trust fund" within the Treasury Department to bolster management activities and broader adoption of a "risk-based" strategy for singling out companies for audits and reviews.

However, the panel that issued the report -- headed by former Sens. Bob Kerrey (D-Neb.) and Jake Garn (R-Utah) -- also said that Interior's Minerals Management Service is in general an "effective steward" of the revenue program.

Royalties from oil and gas producers are among the largest sources of non-tax federal revenue. In fiscal 2007, Interior collected $11.4 billion in mineral revenue, with the vast majority coming from oil and gas royalties.

The report, scheduled to be released today, contains more than 100 recommendations. Most can be implemented without legislation, according to the panel. They address technical, regulatory and strategic issues to ensure proper industry payments and touch on areas such as data management and assessments of gas quality. The report also calls on Interior to bolster ethics training for staff involved with royalty management.

Several of the recommendations call for better management of the royalty-in-kind program, in which energy producers can provide oil and gas to the government directly instead of paying royalties.

Another recommendation calls for amending the Royalty Simplification and Fairness Act "to permit MMS to collect debts by pursuing the royalty payor rather than the operating rights owner." This would lead to more timely and less costly debt collection, according to the report.

The report also recommends better coordination between Interior agencies that have a role in oil and gas management -- MMS, the Bureau of Land Management and the Bureau of Indian Affairs.

One area of the report addresses deepwater Gulf of Mexico leases issued in the late 1990s that allow royalty waivers regardless of energy prices. Those leases lack clauses that end the incentive when oil and gas prices exceed certain limits, which could eventually cost the government billions of dollars in unpaid royalties. MMS has called the absence a mistake.

"The issuance of the 1998 and 1999 leases without price thresholds has undermined taxpayer confidence in the MMS offshore leasing program," the report finds.

About a half-dozen Gulf of Mexico producers have reached voluntary agreements to include the price clauses, but several dozen other leaseholders have not. The report calls for both continuing pursuit of voluntary agreements and exploring legislative options, "which could address the loss of royalties without violating legitimately signed contracts."

Today's report follows questions by Interior's inspector general and Congress about whether MMS is ensuring that oil and gas producers are paying what they owe. Interior announced the panel's formation last year.

In a statement today, Kerrey and Garn called federal employees who work in the area "conscientious, hard working and concerned about the reputation of the program and of the Department of the Interior."

"We believe 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," the former senators said.

Interior Secretary Dirk Kempthorne said today in a statement that the recommendations will "receive the most serious consideration."

Kempthorne said that nine months ago he urged the panel to undertake a full and candid review. ""The panel was given a free hand to scrutinize all key processes, from production accountability and royalty collections to audits, compliance and enforcement," he said.

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