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1
EVAL
UATI
ON O
F VU
LNER
ABIL
ITIE
S TO
UN
DERR
EPOR
TING
:Ro
yalt
y-in
-Val
ue
vers
us R
oyal
ty-in
-Kin
d
EVAL
UATI
ON O
F VU
LNER
ABIL
ITIE
S TO
UN
DERR
EPOR
TING
:Ro
yalt
y-in
-Val
ue
vers
us R
oyal
ty-in
-Kin
d Re
port
No. 2
002-
I-004
4
Augu
st 20
02
D-IN-MMS-0004-2002
September 12, 2002 Memorandum To: Director, Minerals Management Service From: Roger La Rouche Assistant Inspector General for Audits Subject: Advisory Report on Evaluation of Vulnerabilities to Underreporting: Royalty-in-Value Versus Royalty-in-Kind (No. 2002-I-0044)
The attached Advisory Report presents the results of our comparison of the Minerals Management Service’s (MMS) royalty-in-value (RIV) program to its royalty-in-kind (RIK) program to determine which was more vulnerable to underreporting. We performed the evaluation at the request of the Deputy Secretary.
We determined that the RIV program was more vulnerable because the lessee established the basis for valuing the oil and gas and the transportation and processing costs. The RIK program was not as vulnerable because MMS received actual proceeds from oil and gas sales and paid actual transportation and processing costs. However, we did find instances where RIV would be preferable. In addition to these findings, we concluded that MMS could improve its controls over the RIK program in the areas of gas imbalances, credit line approval, manual data entry, and sales contract limitations.
We conducted our evaluation from January through February 2002 at RIK program offices in Lakewood, Colorado, and at MMS Compliance and Asset Management offices in Houston, Texas, and Washington, D.C. Our evaluation was performed in accordance with the President’s Council on Integrity and Efficiency Quality Standards for Inspections.
We presented the results of our evaluation to you, the Deputy Secretary, and the Assistant Secretary for Land and Minerals Management on April 29, 2002 and the Deputy Director of MMS, the Associate Director for Minerals Revenue Management, and other MMS officials on May 3, 2002. MMS management officials generally concurred with our conclusions and indicated that they have initiated actions to address the control issues noted in our report.
A response to this report is not required. However, we would appreciate being kept informed of actions taken regarding the matters contained in our evaluation. We will list this advisory report in our semiannual report to Congress, as required by section 5(a) of the Inspector General Act (5 U.S.C. app.3). Attachment: PowerPoint Presentation
United States Department of the Interior
OFFICE OF INSPECTOR GENERAL Washington, D.C. 20240
2
Obje
ctiv
eOb
ject
ive
To co
mpar
e the
risks
of un
derre
portin
g oil a
nd
gas r
oyalt
ies du
e the
Gov
ernm
ent b
etwee
n Ro
yalty
-In-V
alue a
nd R
oyalt
y-In-
Kind
proc
esse
s.To
iden
tify op
portu
nities
for im
prov
ed co
ntrols
for
redu
cing v
ulner
abilit
ies w
ith th
e Roy
alty-I
n-Ki
nd
proc
ess.
3
Back
grou
ndBa
ckgr
ound
The M
inera
l Lea
sing A
ct of
1920
and t
he O
uter
Conti
nenta
l She
lf Lan
ds A
ct of
1953
autho
rize t
he
Fede
ral G
over
nmen
t to re
ceive
its ro
yalty
shar
e of o
il an
d gas
prod
uctio
n eith
er in
-value
or in
-kind
.Ro
yalty
-In-V
alue (
RIV)
: MMS
rece
ives p
ayme
nts fo
r oil a
nd
gas b
ased
on va
lues a
ssign
ed by
less
ee.
Roya
lty-In
-Kind
(RIK
): Ro
yaltie
s are
rece
ived b
y MMS
as
prod
ucts
(oil/g
as) f
rom
lesse
es th
at MM
S the
n mar
kets
and
sells
.
4
MMS
colle
cts, a
ccou
nts fo
r, an
d disb
urse
s to i
ts re
cipien
ts ab
out $
5 billi
on in
mine
ral re
venu
es
annu
ally.
Hi
storic
ally,
most
of the
se re
venu
es ha
ve be
en
rece
ived i
n the
form
of R
IV pa
ymen
ts.
MMS
starte
d its
first R
IK by
takin
g gas
from
the
Gulf o
f Mex
ico in
1995
.
5
In 20
01, M
MS pu
blish
ed “I
mplem
entin
g Roy
alty
in Ki
nd, B
usine
ss P
roce
sses
and S
uppo
rt Sy
stems
, Roa
d Map
to th
e Futu
re” w
hich
includ
ed:
Crea
ting p
roce
sses
and o
rgan
izatio
nal s
tructu
res
Acqu
iring t
echn
ology
solut
ions
Chan
ging r
epor
ting r
equir
emen
tsCo
mmun
icatin
g with
indu
stry
6
Curr
ent P
rodu
ctio
n St
atus
Curr
ent P
rodu
ctio
n St
atus
Total
Dail
y Roy
alty P
rodu
ction
Onsh
ore –
27,00
0 bar
rels
oil, 6
82 m
illion
cubic
feet
gas
Offsh
ore –
220,0
00 ba
rrels
oil, 2
.1 bil
lion c
ubic
feet g
asRI
K ex
ists:
Onsh
ore -
Wyo
ming
total
roya
lty pr
oduc
tion i
s 10,0
00
barre
ls/da
y–
Oil –
40%
of to
tal pr
oduc
tion (
4,000
barre
ls/da
y)Of
fshor
e –Gu
lf of M
exico
–Oi
l –50
% of
prod
uctio
n (11
0,000
barre
ls/da
y)–
Gas –
15%
of pr
oduc
tion (
320 m
illion
cubic
feet/
day)
Offsh
ore –
Pacif
ic Oi
l-1
4,000
barre
ls/da
y roy
alty p
rodu
ction
-9,30
0 bar
rels/
day R
IK
7
Futu
re P
rodu
ctio
n St
atus
Futu
re P
rodu
ctio
n St
atus
MMS
mana
geme
nt sta
ted th
at, du
ring 2
002,
it will
incre
ase R
IK fo
r Gulf
oil to
80%
of to
tal pr
oduc
tion t
o fill
the S
trateg
ic Pe
troleu
m Re
serve
8
RIK
Proc
ess
vers
usRI
V Pr
oces
sRI
K Pr
oces
s ve
rsus
RIV
Proc
ess
MM
SSe
lls,
thro
ugh
com
petit
ive
bids
, to
Purc
hase
r **
Sele
cts
Prop
ertie
s to
pay
in
-kin
d
Purc
hase
rB
uys
Oil/
Gas
From
MM
S
Ope
rato
r/Les
see
pays
MM
S
MM
S A
naly
zes
Prod
uctio
n
MM
S C
ondu
cts
Aud
it
MM
S C
ondu
cts
Cas
e R
esol
utio
n
Oil/
Gas
is T
rans
porte
d
** th
e M
inim
um A
ccep
tabl
e B
id is
a k
eyco
ntro
ltha
t MM
S us
es to
dete
rmin
e w
heth
er a
Pro
perty
shou
ld b
e co
nver
ted
to R
IK o
r rem
ain
RIV
.Th
e bi
d m
ust M
EET
or B
EAT
wha
t wou
ld’v
e be
en c
olle
cted
thro
ugh
RIV
.
9
RIV
Unde
rpay
men
t Vul
nera
bilit
ies
RIV
Unde
rpay
men
t Vul
nera
bilit
ies
Valua
tion i
s rep
orted
by le
ssee
Tran
spor
tation
and p
roce
ssing
costs
are
dedu
cted b
y les
see
20 ye
ars o
f aud
its/Q
ui Ta
m re
sulte
d in
unde
rpay
ment
detec
tions
total
ing $2
billio
nOi
l pos
ted pr
ices d
id no
t refl
ect a
ctual
proc
eeds
Accu
racy
of va
luatio
n and
dedu
ction
s tak
en
must
be ve
rified
.
10
RIV
Post
ed P
rice
Exa
mpl
eRI
V Po
sted
Pri
ce E
xam
ple
A lar
ge ve
rticall
y inte
grate
d oil c
ompa
ny ca
n buy
and
sell o
il fro
m wi
thin i
ts ow
n com
pany
. Al
lowed
the c
ompa
ny to
contr
ol the
value
Po
sted p
rice o
f $20
/barre
l So
ld the
proc
esse
d oil p
rodu
cts fo
r the
equiv
alent
of $2
2/bar
rel
Only
paid
roya
lties f
or th
e pos
ted pr
ice of
$20 w
hich
was $
2/ ba
rrel b
elow
actua
l valu
e
11
Leas
e
Met
er
Ref
iner
y
Dis
tribu
tor
Gas
Truc
k
Gas
Stat
ion
Act
ual v
alue
$22
Post
ed p
rice
$20
Exce
ss$2
$2 x
roya
lty %
= u
nder
paym
ent
$
$
$
$M
otor
ist
$
$
12
Amou
nt o
f Und
erpa
ymen
ts -
RIV
Amou
nt o
f Und
erpa
ymen
ts -
RIV
Sinc
e 198
2, MM
S an
d OIG
Aud
its an
d Inv
estig
ation
s rep
orted
$2 bi
llion i
n roy
alty
unde
rpay
ments
.
13
MM
S RI
V Au
dit F
indi
ngs
MM
S RI
V Au
dit F
indi
ngs
74,8
90
13,1
95
1,58
65,
790
1,62
8
-
10,0
00
20,0
00
30,0
00
40,0
00
50,0
00
60,0
00
70,0
00
80,0
00
dollars (in millions)
Val
ueA
llow
ance
Vol
ume
Set
tlmen
tsU
npai
d
RIV
Vio
latio
ns in
Dol
lars
FY 1
999
- FY
2001
14
RIV
Effic
ienc
ies
RIV
Effic
ienc
ies
On-S
hore
W
ells w
ith lo
w vo
lume
Thin
marke
tsHi
gh tr
ansp
ortat
ion co
sts
15
RIK
Vuln
erab
iliti
esRI
K Vu
lner
abili
ties
Imba
lance
sIm
balan
ces o
ccur
whe
n the
purch
aser
rece
ives m
ore
or le
ss oi
l/gas
than
entitl
ed.
Imba
lance
s are
a fre
quen
t occ
urre
nce.
Th
e gov
ernm
ent is
vulne
rable
until
the im
balan
ce is
ide
ntifie
d, re
conc
iled a
nd se
ttled i
n a tim
ely m
anne
r.
16
RIK
Effic
ienc
ies
RIK
Effic
ienc
ies
Valua
tion e
stabli
shed
byMM
S us
ing fa
ir-ma
rket
sale
and r
eceiv
es ac
tual
proc
eeds
from
sale
Redu
ces n
eed f
or M
MSve
rifica
tion a
udits
MMS
nego
tiates
and
pays
actua
l tran
spor
tation
an
d pro
cess
ing co
sts
Certa
inty o
f pay
ments
and
poten
tial in
creas
e of
reve
nue o
ver R
IV
Certa
inty o
f cos
ts
Utiliz
es le
ss re
sour
ces:
Audit
Litiga
tion
17
RIK
/ RI
V Pe
rfor
man
ceRI
K /
RIV
Perf
orm
ance
RIK
(FY
2001
)21
emplo
yees
Colle
cted $
1.4 bi
llion
4 mon
th tra
nsac
tion c
ycle
RIV
(FY
2001
)Ab
out 3
22 em
ploye
es
Colle
cted a
bout
$6 bi
llion
6+ ye
ar tr
ansa
ction
cycle
18
RIVRIK
4 m
onth
s36
mon
ths
12 m
onth
s?
Ope
rato
r pay
sM
MS
Exce
ptio
n Pr
oces
sing
Prop
erty
/Pay
or A
naly
sis
Payo
r Let
ters
and
Mee
tings
Targ
eted
Aud
itsQ
ualit
y C
ontr
ol A
udits
Ran
dom
Aud
itsR
an
App
eals
Litig
atio
nSe
ttlem
ents72 m
onth
s
Prod
uctio
nPeriod
19
Conc
lusi
onCo
nclu
sion
RIV
is mu
ch m
ore s
usce
ptible
to un
derre
portin
g tha
n RIK
. RI
V all
ows l
esse
e to r
epor
t valu
ation
basis
and t
ake
dedu
ction
s for
tran
spor
tation
and p
roce
ssing
costs
.RI
K is
subs
tantia
lly LE
SS su
scep
tible
beca
use v
aluati
on
is es
tablis
hed b
y fair
-mar
ket s
ale, M
MS re
ceive
s actu
al pr
ocee
ds fr
om sa
les, M
MS ne
gotia
tes an
d pay
s actu
al tra
nspo
rtatio
n and
proc
essin
g cos
tsHo
weve
r, the
re ar
e opp
ortun
ities t
o imp
rove
contr
ols
withi
n the
RIK
proc
ess.
20
Oppo
rtun
itie
s fo
r Im
prov
ed R
IK
Cont
rols
& In
crea
sed
Reve
nues
Oppo
rtun
itie
s fo
r Im
prov
ed R
IK
Cont
rols
& In
crea
sed
Reve
nues
Gas i
mbala
nces
Ap
prov
al of
Cred
itMa
nual
data
entry
Limita
tion o
n Sale
s Con
tract
Leng
th
21
Gas
Imba
lanc
esGa
s Im
bala
nces
Gas i
mbala
nces
occu
r whe
n the
prod
ucer
/less
ee
deliv
ers t
o MMS
gas v
olume
s tha
t eith
er ex
ceed
or
do no
t mee
t the r
equir
emen
ts of
the le
ase.
The r
espo
nsibi
lity fo
r man
aging
oil a
nd ga
s im
balan
ces a
re sp
lit be
twee
n:Oi
l -the
RIK
/CAM
prog
ram
office
s Ga
s -the
Com
plian
ce an
d Ass
et Ma
nage
ment
(CAM
) Gro
up
22
Acco
rding
to th
e “Op
erato
r Gas
Imba
lance
Dra
ft As
sess
ment”
(Mar
ch 20
02)
Some
gas i
mbala
nces
have
not b
een w
orke
d as f
ar ba
ck as
Ap
ril, 20
01. M
ost o
f the i
mbala
nces
have
been
unre
solve
d sin
ce Ju
ne, 2
001.
CAM’
s is r
espo
nsibl
e for
reso
lving
imba
lance
s of a
bout
240
oper
ators
and 1
56 F
MP’s.
RIK
Prog
ram
Offic
e and
CAM
’s wi
ll be a
sses
sing t
he
unde
rlying
caus
es of
the g
as im
balan
ces a
nd w
ill de
velop
pla
ns fo
r the
ir pro
mpt r
esolu
tion.
Howe
ver,
oil im
balan
ces w
ere g
ener
ally i
denti
fied
withi
n 30 d
ays o
f pro
ducti
on by
the R
IK/C
AM p
rogr
am
office
s.
23
Sugg
esti
onSu
gges
tion
We s
ugge
st tha
t the D
irecto
r, MM
S ad
opt a
nd
imple
ment
the pr
oces
ses u
sed b
y the
RIK
/CAM
pr
ogra
m off
ices f
or oi
l imba
lance
s as a
mod
el for
ad
dres
sing t
he ga
s imb
alanc
es.
24
Appr
oval
of C
redi
tAp
prov
al o
f Cre
dit
Only
2 peo
ple ov
erse
e and
appr
ove c
redit
lines
.Ap
prov
al fro
m up
per m
anag
emen
t is no
t utili
zed.
We s
ugge
st tha
t the R
IK pr
ogra
m off
ice re
quire
senio
r man
agem
ent a
ppro
val o
f all c
redit
lin
es au
thoriz
ed fo
r RIK
prod
uctio
n pur
chas
es.
25
Man
ual D
ata
Entr
y Pr
oces
ses
Man
ual D
ata
Entr
y Pr
oces
ses
The R
IK pr
ogra
m us
es an
exten
sive a
moun
t of m
anua
l da
ta en
try pr
oces
ses t
hat a
re no
t inde
pend
ently
ve
rified
. Man
ual d
ata en
try pr
oces
ses a
re em
ploye
d in
the as
semb
le mi
nimum
acce
ptable
bid,
cond
uct b
id an
alysis
, cre
dit pr
oces
s and
analy
ze po
st pr
oduc
tion.
Fo
r exa
mple:
Du
ring t
he cr
edit p
roce
ss, R
IK pe
rsonn
el ma
nuall
y ente
r cri
tical
infor
matio
n fro
m a c
ompa
ny’s
finan
cial s
tatem
ents
into
a cre
dit sc
oring
mod
el tha
t is re
lied u
pon t
o dete
rmine
a co
mpan
y’s cr
edit l
ine. I
n add
ition,
key f
ormu
las w
ithin
the
credit
scor
ing m
odel
are a
lso m
anua
lly en
tered
.
26
Sugg
esti
onSu
gges
tion
We s
ugge
st tha
t MMS
imple
ment
an
indep
ende
nt re
view
proc
edur
es fo
r all m
anua
l da
ta en
try pr
oces
ses u
ntil a
utoma
ted sy
stems
ar
e emp
loyed
to re
place
thes
e pro
cess
es.
27
RIK
Cont
ract
Leng
thRI
K Co
ntra
ct Le
ngth
Contr
act le
ngth
varie
s only
from
4 to
12 m
onths
. Th
is pr
even
ts MM
S fro
m off
ering
mor
e luc
rativ
e co
ntrac
ts to
buye
rs of
RIK
prod
uctio
n and
prev
ents
MMS
from
rece
iving
bette
r disc
ounts
for
trans
porta
tion.
Long
er co
ntrac
ts co
uld pr
ovide
mor
e com
petiti
on fo
r oil
/gas t
rans
porta
tion a
nd re
duce
limita
tions
impo
sed
by pr
ivatel
y own
ed pi
pelin
es.
28
Des
tin
Tran
sco
Sona
t
Colu
mbi
aFr
ee
Pool
ing
(Ful
l)
IT =
$.0
5/
M
MBt
u
IT =
$.2
0/
MM
Btu
Will
iam
s bu
ys a
t in
terc
onne
ct
VKGS
$.10
MP
252
Taho
e U
nit
VK 9
56
Ram
Pow
ell
Vios
ca K
noll
Gath
erin
g Sy
stem
Vios
ca K
noll
Gath
erin
g Sy
stem
29
Sugg
esti
onSu
gges
tion
We s
ugge
st tha
t:MM
S se
ek de
cision
from
the C
omptr
oller
Gen
eral
to de
termi
ne w
hethe
r legis
lation
is re
quire
d for
ex
tensio
n of th
e con
tract
terms
MMS
seek
legis
lative
autho
rizati
on, if
requ
ired,
for
exten
ding R
IK co
ntrac
ts for
5 ye
ars.
How to Report Fraud, Waste, Abuse and Mismanagement
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1849 C Street, NW Washington, DC 20240
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