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--We are avare of the potential for oil spills from foreign tankers that bring oil into the United States. Since oil drilling in the North Atlantic is not expected to result in any appreciable displacement of foreign tanker traffic, the threat to the biological resources of the North Atlantic would be compounded, not lessened, by oil drilling. --we are pleased to learn now that MMS does not intend to include any of the Congressional moratorium tracts in Lease Sale 96. However, we are puzzled at the statement (page 2 of the attachment to your letter) that congressional moratorium blocks were never considered for leasing. An MMS map entitled "North Atlantic Planning Area--Lease Sale 96" shows blocks within the 60 meter isobath as having been included in the sale area following the supplemental call of February 1987. It was on the basis of this map that we requested that the Eis consider the Congressional moratorium area as a deferral alternative. The map attached to MMS's June 12 press release was so tiny that we did not find it helpful in terms of learning what tracts are included in the sale. (We suggest that for purposes of clarity on this important matter MMS provide a map of reasonable scale to interested parties at the end of the scoping process.) In closing, I would urge you to consider that EPA's comments are not directed at undermining the ocs program as you believe. believe that the comments in EPA's July 3 letter have merit, are reasonable, and if given due consideration could lead to the resolution of many of the conflicts that have been present in past lease sales. Please feel free to contact me should you wish to discuss this matter further.

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Mr. YATEs. Had you concluded your statement?

Mr. BETTENBERG. Well, you'd asked about progress in terms of the offshore program. Last year, you recall, we were preparing the five-year program.

Mr. YATES. Right.

Mr. BETTENBERG. At this point, we're nearly one year through the program. We have spent a lot of time over the past year working to settle differences with various people wherever possible. We've been working very closely with Alaska, California, Florida, North Atlantic States, Washington and Oregon.

Mr. YATES. Okay.

ROYALTY MANAGEMENT STATUS

Mr. BETTENBERG. From the royalty management side, we have completed a successful conversion of our AFS system. If you recall, we've been discussing that for a couple of years. That's working very well. The production accounting and auditing system has continued to bring in money, and that also works well.

We've discussed product value over several years. Our oil and gas product value rules are now in effect. We completed those in January and they went into effect at the beginning of last month. We're going through an intensive period right now of company training, to make sure the companies understand all the nuances of those rules.

Mr. YATES. Have those rules received the approval-and I don't mean to imply by that that such approval is necessary-of the representatives of the Indian community and of the States?

Mr. BETTENBERG. I think you would find quibbles here or there, but broadly speaking, I think yes. The only litigation we've had on them was brought by industry.

Mr. YATES. Well, was there no litigation brought by the State of California?

Mr. BETTENBERG. No, none brought by the State of California. If I were to categorize the various groups, I would say that the Controller of California would be probably the one most unhappy with the rules at this point.

Mr. YATES. Your impression is that the representatives of the Indian peoples are satisfied?

Mr. BETTENBERG. We've worked awfully close with them. That was my sense of the outcome of that.

The Notice to Lessees Number Five issue is one where legislation was finally enacted essentially incorporating the position that we had advocated, and I think that that issue is resolved now.

In the audit area, we have completed much of what we consider the mandatory workload and have been shifting our resources to comprehensive company audits. We have just completed an audit strategy document, and I think the record will show that we have an aggressive approach to our audit program.

Right now, for instance, we have some 371 cases on appeal from our auditors to me, as of the end of last month. We have 172 cases where companies have appealed my decisions to the Interior Board of Land Appeals, and we're in court with about 100 cases where we're pursuing what we consider to be the appropriate amount of royalty.

As for the future there, the systems improvement effort that we've discussed before is ongoing.

Mr. YATES. Go ahead.
Mr. BETTENBERG. We've had that reviewed.
Mr. YATES. Go ahead, Mr. Bettenberg.

Mr. BETTENBERG. We've had that reviewed by the Royalty Management Advisory Committee. I think that there's pretty universal agreement, with probably a few exceptions here and there, but there's broad agreement on what kinds of improvements need to be made over time.

We're well underway with our work for bringing our production accounting effort into the onshore area. Within the next couple of months we should begin to convert the first district.

Mr. Chairman, I think that concludes my comments on the progress of the program. Secondhand, I heard that there was a fair discussion up here yesterday on the audit area. If you would indulge me for a couple of minutes, I could go through a couple of things that I think might set that in perspective, if you would.

TESTIMONY OF INSPECTOR GENERAL ON AUDIT PROGRAM Mr. YATES. Okay. You may proceed.

Mr. BETTENBERG. My reports are secondhand, since I wasn't here yesterday, and all of what I'm going to say is in that context. My understanding is that the witnesses yesterday indicated that they had learned of the existence of our audit strategy from Committee staff, and that they had not previously received it. I have a copy here of the letter that was sent on February 19, 1988 transmitting a draft of that document to Mr. Robert Williams, the regional audit manager of the Eastern Region.

In point of fact, we had not yet shared the final because it wasn't even approved at that point. Your staff had asked for a copy even before approval, and it was supplied last Friday, the same day as it was received in Washington, as I understand. Before that, I had the only copy that I know of up in New York. It had been sent to me there.

My understanding is that the allegation was made that the strategy was prepared because the IG had prodded the Minerals Management Service. I think the record of my testimony before this Committee would show that we had begun work on rethinking the strategy on audits more than two years ago. That began, in fact, in late 1985 as part of the preparation for the 1986 Work Plan. It was part of the work leading to the conclusion that we needed more auditors a couple of years ago.

The initial draft of the company audit strategy was completed in April of last year. It was discussed with the States and tribes in June, I think it was, of last year. We briefed the Inspector General's office on it in August, in terms of the new strategic approach. We had meetings with States and Indians in September, October, and December of last year, and January and February of this year. I have a copy of it here, and the Committee has a copy of it as well. I have the chronology of our work on it. I don't think that the record would show that it took that kind of prodding.

My understanding is that the comment was made that it was "just a strategy and not a plan."

Mr. YATES. That's correct.
Mr. BETTENBERG. It's labelled a strategy.

AUDIT PLAN

Mr. YATES. Obviously labelled a strategy, except that also part of the testimony was to the effect that the plan is supposed to have been created back in 1983 or so, and we've been waiting for four or five years for the plan to be developed rather than the strategy. This was the testimony of the IG.

Mr. BETTENBERG. Well, there have been plans in the past. We continue to update those.

My understanding is that one of the comments made yesterday was that you would need things like a list of companies—the dates and so forth. I have them here. This document has the companies, that are subject to the major audits, the schedule, and so forth.

The Inspector General doesn't have a copy of it, and we consider it confidential. Just as the Internal Revenue Service doesn't tell when they're going to audit your books, we don't tell companies when we're going to enter to begin an audit. But in fact we have a complete listing of the companies, that we feel cover well over 90 percent of the audits and a six-year schedule, for when those will be done.

Backing that up, we have a complete computer run inventory that was done last fall, updated this year, and the work papers that go on behind that.

We're also in the process of developing more detailed plans for residency audits. About half of those are in review right now, I'm told. When you begin each audit, you do a similar plan for that particular audit. But the basic backbone of how you go about that is included in our audit manual, copies of which have been provided to this committee over the last couple of years.

AUDIT WORKLOAD

My understanding is that the testimony yesterday was that the IG was "disappointed in the use of residency audits” and that there have not been enough comprehensive audits. That's a problem of priorities. Our audit staff has felt that there was a substantial amount of what they consider to be non-discretionary workload that had to be done before you could get into the company comprehensive audits.

One major element of that work which we've discussed previously was the account reconciliations. That was required by law, and so it was done, even though even our auditors didn't think that it was high priority work. It was work that the law required.

We've spent a lot of time redoing or completing Inspector General lookback audits. That's a staff intensive effort.

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We have spent a lot of time reviewing Section 10 refunds. The law requires that those be sent to Congress for review. We've probably taken a more conservative approach than we might have, but it has turned in a lot of money.

Finally, we have a lot of Bureau of Indian Affairs, Bureau of Land Management, and MMS referrals. When an Indian feels that his particular account may have been slighted, when the Bureau of Indian Affairs or BLM feels that there may be a problem, our auditors feel that is priority work as well.

In doing it this way, we have collected over the last four or five years some $400 million. We think that approach has served us well. We have another approximately $200 million that's bonded and under appeal right now, representing audit findings.

We agree completely with the Inspector General in terms of the proper way to proceed with the audit program. There's no philosophic difference between us. We think that as you complete that mandatory workload, and large portions of it have been completed over the past few years, you shift into the comprehensive audits. That's the basis of the entire audit strategy that we've been working on these past two years. We haven't waited until the document was produced to implement it.

The Inspector General's audit report failed to mention that at the end of last fiscal year we had 75 company comprehensive audits underway apart from the residency audits, and we had 13 residency audits underway. My understanding at this point is that approximately 90 are underway.

The 75 and 13, for a total of 88, cover approximately 70 percent of the revenues that have been collected over the last six years. To back that up, I have a document that lists the 75 companies where audits were underway at the end of last year and, in addition, those that are under review right now. We can provide a copy of that for the record if you would so desire.

Mr. YATES. Yes.
The document follows:

COMPANY AUDITS-ON-GOING AND PLANNED THROUGH FISCAL YEAR 1987 1. AAA Operating Co.

23. Energy Development Co. 2. Amerada Hess Corp.

24. Enserch Expl., Inc. 3. American Gilsonite Co.

25. Enstar Petroleum, Inc. 4. American Petrofina Co.

26. FMP (McMoran) 5. Anadarko Land & Expl.

27. Forest Oil Corp. 6. Ark Land Co.

28. Gulf Oil Corp. 7. ASARCO

29. Hanna Oil & Gas 8. Banta & Haigh

30. Harper Oil Co. 9. Bass Enterprises Prod. Co.

31. IPMC 10. Beartooth Oil & Gas

32. Ind Prod Mktg Corp. 11. Bechtel Investment Co.

33. Kaiser Energy Inc. 12. Belco Development Co.

34. Koch Industries Inc. 13. BHP (Monsanto)

35. Merrion & Bayless 14. Bigheart Pipe Line Co.

36. Mesa Grande Resource 15. Bountiful Corp.

37. Mesa Petroleum Co. 16. Bridger Coal Co.

38. Mid-Continent Resource 17. Brown, J. Burns

39. Mid Plains Petroleum 18. Citgo Petroleum Corp.

40. Montana Power Co. 19. Cotton Petroleum Corp.

41. National Cooperative Refinery 20. Davis Oil Co.

42. Natomas 21. Diamond Shamrock

43. Northern Michigan Expl. 22. Dome Petroleum Corp.

44. Northwestern Mutual

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