Page images
PDF
EPUB
[ocr errors]

We have drafted leasing and operations regulations for the OCS nonenergy minerals mining program and have recently held or have scheduled meetings with all interested parties States, industry, Congressional staff, other Federal agencies, and environmental groups.

In October 1987, four Environmental Impact Statement (EIS) scoping meetings for Southern California Sale 95 were held in California. Last January, the California Regional Technical Working Group met and officials from the Pacific OCS Region held a coordination meeting with representatives from the California Secretary of Environmental Affairs Office. In February, MMS headquarters officials and Pacific Region office personnel met with representatives from the State of California to discuss comments for the upcoming Sale 95 EIS and the lease sale schedule, including Northern California Sale 91. For Sale 91, hearings were held on February 1, 1988, in Eureka, California, and February 3-4, 1988, in Fort Bragg, California on the draft EIS.

In January, Secretary Hodel conducted a fact-finding trip to South Florida. While there, he met with Governor Martinez to discuss leasing issues and observed the State's offshore environmental resources, including a first-hand look at living coral reefs in an underwater expedition offshore the Florida Keys. On March 24, 1988, Secretary Hodel and Governor Martinez resolved State concerns in an agreement which excluded the South Florida area around the Florida Keys from the 5-year program and provided additional stipulations for other areas. In return, the State of Florida will drop litigation challenging the 5-year program.

We are conducting a negotiated rulemaking for air quality regulations for OCS operations offshore California with the State, industry, local governments, environmental groups, and other Federal agencies.

A two-phase process involving a study by the National Research Council (NRC) and policy talks with affected States and other parties based upon the NRC report has been proposed for the North Atlantic. The interested parties (including coastal States) attended a March 22 meeting on this effort. As a result, Interior is working with interested parties to arrange a negotiating approach.

In October 1987, MMS initiated a series of meetings with highlevel policy officials in the States of Washington and Oregon to facilitate the formation of a working group to resolve issues associated with offshore leasing. In February 1988, the Governors proposed the establishment of a Pacific Northwest OCS Task Force composed of representatives from the DOI, Oregon, Washington, two Indian Fisheries Commissions, and the public and private sectors. We are currently in the process of working with the States on this proposal.

5

Environmental Studies

The purpose of the Environmental Studies Program is to establish information needed for assessment and management of environmental impacts on the human, marine and coastal environments of the OCS and the coastal areas which may be affected by oil and gas development. The content and timing of studies is keyed to various phases of the leasing program, with information needs progressing from general, descriptive studies to process-oriented impacts studies as the program moves towards production in a given area. At the lease-sale stage, the data gained from the studies program is only one source of information which is integrated into the decision process. While specific references to individual studies may or may not occur in lease sale documents, the cumulative insight gained through our studies program plays an important role in our assessment of potential environmental concerns. Likewise, the information is made widely available to other agencies and the public for their use in evaluating our program.

Additional funding of $0.9 million was provided in the 1988 appropriations to accelerate studies in various frontier areas. Procurements for studies in these planning areas will be awarded in 1988 instead of 1989. All of the planned studies were reviewed by the affected States during the Regional Studies Plan review cycle, and additional coordination is planned.

Royalty Management Program Overview

As the Subcommittee knows, the Department of the Interior has been collecting rentals, royalties, bonuses, and other receipts from Federal and Indian mineral leases since 1921. The MMS has been responsible for this function since its establishment in 1982. Since then, the Department has intensified the attention given to the processes of royalty accounting to insure that mineral lease revenues are collected, accounted for, and distributed properly.

I believe it is particularly important to share with the Subcommittee, highlights of our accomplishments over the past year, demonstrating our continuing commitment to improve the MMS's Royalty Management Program.

Product Value Regulations. I am pleased to report that after several years of effort, the final regulations for oil and gas product valuation became effective on March 1, 1988. Publication of the final regulations followed a series of meetings with States, Indians, industry, and congressional staff and the publication of two sets of draft final rules.

MMS intends to follow a similar process for the final development of new coal product value regulations. We will also evaluate the numerous comments that were received during an extended comment period, and plan to repropose the coal product value regulations in May 1988.

NTL-5 Regulations and Legislation. To address changes in market conditions, MMS proposed a retroactive modification of Notice to Lessees and Operators of Federal and Indian Onshore Oil and Gas Leases No. 5 (NTL-5). To accomplish this, Congress passed H.R. 3479, the "Notice to Lessees Numbered 5 Gas Royalty Act of 1987" (the Act). As mandated by the Act, the Department published a

6

notice in the Federal Register on February 25, 1988, explaining provisions of the Act and providing a description of the procedures the Department will use to collect underpayments or issue refunds which result from royalty calculations under the Act. This notice was sent to each Federal and Indian oil and gas lessee or payor of record. Payor training sessions regarding the oil and gas product value regulations and implementation of the Act began on February 23, 1988, with roughly 1,000 industry personnel signed up for the training. The MMS has received numerous commendations on the quality and usefulness of the seminars.

Indian Royalty Management. A number of activities in the past year contributed to improved royalty management services to Indian royalty recipients. The MMS audit strategy has been revised to provide improved audit coverage of Indian leases. The MMS will now assure audit coverage of Indian leases on a 6-year cycle through major company audits, payor audits, and specific audit requests. Also, MMS will use exception processing information from the Auditing and Financial System (AFS) and the Production Accounting and Auditing System (PAAS) to target audits. During the period FY 1982 through FY 1987, approximately 1,800 Indian leases have been audited and over $15 million in additional Indian royalties and interest has been collected.

The MMS has been designated the agency responsible for computerizing onshore oil and gas production data and distributing that data to the Bureau of Indian Affairs (BIA) and Indian tribes. The MMS has worked closely with Indian representatives to determine their report requirements. Currently, MMS provides onshore production data to tribes which have requested information for those onshore leases converted to PAAS.

The

Specific improvements to MMS systems benefiting Indians are underway. MMS will soon add the transaction code reported on Form MMS-2014 to the Indian Financial Distribution Report (IFDR), which is provided semi-monthly to the BIA and Indian tribes. In conjunction with this change, the royalty rate and unit value will be calculated at the transaction level on the IFDR so that the Explanation of Payments will reflect the correct values. An enhancement is also underway by MMS to improve the accounting for and distribution of negative royalty amounts to BIA. In the interim, BIA has established a system which ensures that no Indian allottee Individual Indian Money account is being debited. The MMS is also working with Indian groups to develop a process of disseminating unedited royalty data from AFS. Through the State and Tribal Support System, MMS provides on-line computer access to detailed data from the AFS to ten tribes and 14 BIA offices.

In his February 24, 1988, appropriation hearing with this Subcommittee, Secretary Hodel committed to review the nonstandard lease accounting issue and ensure that either MMS or BIA assume accounting responsibility. In March 1988, MMS was designated as the agency responsible for nonstandard lease accounting functions. The MMS has already begun identifying and evaluating the combination of manual and automated procedures necessary to perform these functions. The MMS is contacting the BIA and Indian tribes to establish the universe of nonstandard leases and agreements. Additionally, we are designing software changes to AFS that will accommodate Indian royalty-in-kind lease and agreement transactions. The MMS is also responsible for auditing nonstandard Indian agreements. As of November 1987 audits on 5 out of the 28 producing leases had been completed, resulting in over $444,000 in additional revenues.

7

A study on the feasibility of having the minerals industry pay royalties directly to Indians was completed in June 1987. It concluded that extending direct payments to Indian royalty recipients beyond those now in a direct pay status was impractical and not desired by Indian royalty recipients. In January 1988, a tripartite steering committee was formed among BIA, the Bureau of Land Management (BLM), and MMS. The new BIA/BLM/MMS Steering Committee replaces the other minerals management steering committees among these bureaus, and provides a Departmental focal point for Federal and Indian minerals leasing and royalty management. The tripartite committee has already met twice this year on Indian minerals leasing and royalty management matters. Conversion of AFS. The conversion of AFS software to operate on a new IBM mainframe computer was successfully completed on September 1, 1987. Although a number of technical problems were reported during the software testing process, all were resolved and operation of the AFS on the IBM has proven stable and capable of meeting current MMS processing requirements.

Systems Improvements Planning. A comprehensive study, begun in November 1986, resulted in the identification of numerous proposals that should improve MMS's royalty accounting systems. Currently, each proposal is being evaluated for its efficacy and cost efficiency. The proposed improvements should provide benefits to all of our external clientele by significantly reducing the number of royalty information lines reported; providing improved production and royalty data to the States and tribes; accelerating payments to recipients; and increasing the effectiveness of the royalty collection activity.

The RMP staff conducted an extensive outreach program to involve States, Indians, industry, congressional staff, and other Departmental agencies in developing these initiatives. In September 1987, the Secretary's Royalty Management Advisory Committee endorsed most of the recommended improvements and added several others. Phase II of the study, now underway, includes implementation of several short-term improvements, plus detailed systems analysis, design, development and testing of all approved long-term system improvements.

Onshore Production Accounting. The MMS has been designated the agency responsible for collecting and distributing production data for all onshore oil and gas leases using a modified Form 3160 approach. As a result of this decision, an implementation plan was developed for software development, database verification, operator training, and determination of State and Indian report requirements. This effort will affect about 1,800 oil and gas operators who submit over 20,000 monthly production reports on about 8,000 leases and 9,500 agreements associated with over 80,000 individual wells. Because of the large scale of onshore oil and gas operations, automation of the production data will occur in phases with the current schedule calling for conversion to be completed in May 1989.

Status of the Management Action Plan. The Management Action Plan (MAP) for the Royalty Management Program, issued by the Secretary in April 1985, contained 42 action elements designed to improve overall RMP performance.

8

Work on almost three-fourths of the MAP action elements has been completed and most of the remaining actions are ongoing or long-term projects. Specifically, a total of 26 action elements have been completed, 5 elements have been set aside after further study, 1 is on hold, and the remaining 10 elements are substantially underway.

Audit Program. The MMS continues to conduct an aggressive and comprehensive audit program to ensure compliance with royalty collection regulations. From inception of the royalty audit program through the end of FY 1987, audit activities have resulted in additional collections of over $310 million and refund denials of over $93 million. Our audit strategy commits to a goal of audit coverage for over 90 percent of Federal and Indian mineral revenues through company audits of the major royalty payors on a 6-year cycle. In the case of Indians, the strategy is supplemented by about 25 staff years reserved for responding to lease specific audit requests, audits of non-standard leases and litigation support.

Error Rate. An overall royalty information input reporting error rate of 5 percent or less has been achieved and maintained in the AFS since August 1986. This is largely attributed to ongoing payor training efforts and the implementation of streamlined error correction procedures in the reference function. A significant benefit of maintaining a low error rate is the reduction in the amount of interest that must be paid to the States and Indians because of delayed disbursements by MMS.

Exception Processing. In order to assist in royalty payment compliance, the AFS generates late payment, nonrespondent, and underpayment "billable exceptions" by comparing what a payor reports and pays to what the system expects the payor to report and pay. In addition, the Production Accounting and Auditing System (PAAS), using data provided on production reports, identifies the amount of production that should be reported to AFS as sold. The two systems are designed to allow for regular comparisons to identify instances of underreporting, overreporting, and nonreporting. Exception processing in both the AFS and the PAAS began operation in FY 1985. The billable exception processing system in AFS provided nearly $7 million in interest and late payment assessments in its first year of operation. As of December 1987, $27 million has been collected from AFS exception processing. The PAAS exception processing started in June 1985 and by the end of January 1988 had resulted in $19 million in additional royalties.

As the Subcommittee is well aware, the Congress has shown keen interest in the activities of the Royalty Management Program through numerous site visits, oversight hearings, and investigations. Additionally, the General Accounting Office (GAO), the Department's Office of Inspector General (OIG), and other external audit groups and observers have also conducted oversight of RMP and made numerous positive recommendations concerning the Program. In response, we have either implemented or moved to implement most of the recommendations made by these groups. This is readily apparent from the fact that, although the GAO and OIG continue to audit the Program, their findings and recommendations address mostly smaller operational issues, rather than the larger programmatic issues highlighted in previous years. In April 1987. the GAO testified before the House Subcommittee on Mining and Natural

« PreviousContinue »