Federal Oil and Gas Royalties: Additional Actions Could Improve ONRR's Ability to Assess Its Royalty Collection Efforts

Royalties paid on the sale of oil and gas extracted from leased federal lands and waters are a significant source of revenue for the federal government. However, Interior has faced challenges verifying the accuracy of royalty payments. In the 2000s, GAO issued reports highlighting weaknesses in Interior's royalty compliance program. In 2011, GAO added Interior's management of federal oil and gas resources to its High-Risk List, in part because its work showed Interior did not have assurance that it was collecting its share of revenue from oil and gas produced on federal leases. Interior has taken steps to operate more effectively.

GAO was asked to examine ONRR's federal oil and gas royalty compliance efforts. This report examines, among other objectives, the extent to which ONRR reported meeting its compliance goals for fiscal years 2010 through 2017, the most recent data available. GAO reviewed relevant laws, regulations, agency guidance, and Interior's annual performance plan and report and annual budget justifications for the period; analyzed ONRR compliance data for the period; and interviewed ONRR officials and state auditors who conducted work in coordination with ONRR.

The Department of the Interior's (Interior) Office of Natural Resources Revenue (ONRR) reported that it met its annual performance goals for its royalty compliance program in 6 of the 8 years from fiscal years 2010 through 2017. Under this program, ONRR conducts three levels of compliance activities—audits, compliance reviews, and data mining—to help ensure that oil and gas royalty payments submitted by companies that produce oil and gas from federal leases are accurate and comply with federal laws and regulations (see figure). Specifically, GAO's analysis of Interior's annual budget justifications for fiscal years 2010 through 2017 found that ONRR reported meeting its compliance goals for 6 of the 8 fiscal years. According to ONRR officials, ONRR did not report meeting its compliance goals for 2 years because of a shift in the agency's goals that created a short-term misalignment of planned work and available resources. ONRR's fiscal year 2017 goals for its compliance program were (1) to obtain a return of $2 of additional royalties for every dollar spent on compliance activities and (2) to collect a defined amount of additional royalties. ONRR's compliance goals generally aligned with the agency's requirement that resources should not be expended without an expected return. However, these goals may not align with the agency's mission to collect, account for, and verify royalty payments and other statutory requirements because the goals do not address accuracy—or the extent to which its compliance work is covering, for example, royalty payments. By establishing a goal that addresses accuracy, for example, by covering a portion of royalty payments with its compliance activities, ONRR could increase the extent to which it had reasonable assurance that its compliance program is fully accounting for federal oil and gas royalty payments.

GAO is making seven recommendations, including that ONRR establish an accuracy goal that addresses coverage that aligns with its mission. Interior concurred with GAO's recommendations.

Royalties that companies pay on the sale of oil and natural gas extracted  from leased federal lands and waters constitute a significant source of  revenue for the federal government, accounting for over $5 billion in  2017. In 1982, Congress voted to pass the Federal Oil and Gas Royalty  Management Act of 1982 (FOGRMA), requiring, among other things, that  the Department of the Interior (Interior) establish a comprehensive  inspection, collection, and fiscal and production accounting and auditing  system for these revenues. In particular, the act requires Interior to  establish such a system to provide the capability of accurately  determining oil and gas royalties, among other moneys owed, and to  collect and account for such amounts in a timely manner. To accomplish  this, Interior tasks its Office of Natural Resources Revenue (ONRR) with  collecting and verifying the accuracy of royalties paid by companies that  produce oil and gas from over 26,000 federal leases. Each month, these  oil and gas companies self-report data to ONRR on the amount of oil and  gas they produced and sold, the value of this production, and the amount  of royalties that they owe to the federal government.

To ensure that the data provided to ONRR are accurate and all royalties  are being paid, ONRR relies on its compliance program. Under this  program, ONRR initiates compliance activities by selecting companies  and properties for review to assess the accuracy of their royalty data and  compliance with all relevant laws and regulations. To assess its  compliance program’s performance, ONRR established annual  compliance goals that have changed several times over the last decade  and include measures that identify the percentage of royalties that  ONRR’s compliance activities cover and the return on investment for  those activities. ONRR’s compliance program also directly coordinates  with the members of the State and Tribal Royalty Audit Committee  (STRAC), which have programs that review the accuracy of royalties  paid for oil and gas extracted on federal lands within their respective  states and receive a portion of such royalties.

Over the past approximately 10 years, we, Interior’s Office of Inspector  General (OIG), and Interior’s Royalty Policy Committee have raised  concerns about whether ONRR is collecting all royalties that are owed to  the federal government. In February 2011, in part because of the  challenges identified in our past work, which indicated that Interior did not  have reasonable assurance that it was collecting its share of revenue  from oil and gas produced on federal lands, we added Interior’s  management of federal oil and gas resources to our list of programs at  high risk for fraud, waste, abuse, and mismanagement.

You asked us to review issues related to ONRR’s federal oil and gas  royalty compliance efforts. This report examines the extent to which (1)  ONRR reported meeting its compliance goals for fiscal years 2010  through 2017, (2) ONRR’s process for selecting compliance cases  aligned with the agency’s compliance goals, and (3) STRAC members  are satisfied with ONRR’s efforts to coordinate with them and whether  STRAC members’ case selection processes align with ONRR’s  compliance goals.

To address all of these objectives, we reviewed ONRR’s budget  justifications, guidance, project work plans, and reports for fiscal years  2010 through 2017. We also interviewed ONRR officials in the agency’s  headquarters in Lakewood, Colorado, and at its offices at Interior in  Washington, D.C. Additionally, we reviewed ONRR documentation  regarding its efforts to implement recommendations from Interior’s OIG  and Interior’s Subcommittee on Royalty Management. We did not assess  whether Interior’s actions were sufficient to close the recommendations  as implemented but provide the OIG’s status of recommendations for its  report. We rely on Interior’s status of recommendations information on the  subcommittee’s recommendations, as the subcommittee did not have a  process to track their implementation.

To examine the extent to which ONRR reported meeting its compliance  goals for fiscal years 2010 through 2017, we reviewed agency  documents, including annual budget justifications, annual performance  reports, and annual performance plans. We also reviewed fiscal years  2010 through 2017 agency data on compliance activities, including the  types and numbers of compliance activities conducted. To assess the  reliability of these data, we reviewed documentation on relevant  databases and interviewed agency officials on how they entered and  maintained the data they used to track the performance of the agency’s  compliance program. We found the data to be sufficiently reliable for the  purpose of reporting ONRR’s assessment of whether it met its annual  compliance goals.

To determine the extent to which ONRR’s process for selecting  compliance cases aligns with the agency’s compliance goals, we  reviewed agency documents describing its process for compliance case  selection. We also interviewed agency officials responsible for planning  the processes and considerations used in selecting compliance cases  and reviewed examples of recent case selections from 2018. For the case  selection examples, we requested at least two examples from ONRR of  case selections that were made within the past year and were  representative of their current selection process. We also obtained  documents about the risk model that according to ONRR officials is used  as part of the case selection process. We interviewed agency staff about  the development of the risk model and its use in the case selection  process.

To determine the extent to which STRAC members are satisfied with  ONRR’s efforts to coordinate with them and whether STRAC members’  case selection processes align with ONRR’s compliance goals, we asked  the members about their satisfaction with ONRR’s coordination efforts  and reviewed the most recently signed agreements between the nine  STRAC member states and ONRR to better understand ONRR’s terms  and conditions. We attended a STRAC meeting in Sacramento,  California, in March 2018. In addition, we interviewed representatives  from all nine STRAC member states. We asked the officials about their  processes for compliance case selection and coordination with ONRR,  among other topics. We conducted a content analysis of their responses  to identify common trends. We also interviewed ONRR officials  responsible for overseeing STRAC’s compliance work. Additionally, we  reviewed (1) the most recent agreements between STRAC members and  ONRR to better understand the compliance work requirements and (2)  STRAC annual work plans.

We conducted this performance audit from June 2017 to May 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence we obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Several bureaus within Interior are responsible for the leasing, permitting,  and inspecting of mineral extraction activities on federal lands and waters.  Interior’s Bureau of Land Management (BLM) is responsible for onshore  activities and manages approximately 700 million acres of subsurface  mineral rights throughout the country, including the acreage it leases to  companies for oil and gas development. At the end of fiscal year 2016,  about 41,000 oil and gas leases accounted for approximately 28.2 million  acres in 32 states, according to BLM data. For offshore oil and gas  activities, the Bureau of Ocean Energy Management is generally  responsible for leasing and resource planning and evaluation, among  other functions, and the Bureau of Safety and Environmental  Enforcement is generally responsible for permitting and inspecting as well  as verifying production volumes on offshore leases, among other  functions. Under the Outer Continental Shelf Lands Act, as amended,  Interior is responsible for leasing and managing approximately 1.71 billion  offshore acres.

To begin the leasing process, Interior holds auctions through which  companies may secure the rights to federal leases that allow them to drill  for oil and gas upon meeting certain conditions. Once a company obtains  a lease, it may conduct further exploration and subsequently determine  whether it would like to drill a well. If a company plans to drill, it must first  secure a permit from Interior. To secure a permit to drill under an onshore  lease, a company must submit an application for a drilling permit to the  appropriate BLM field office. BLM officials then evaluate the company’s  proposal to ensure that it conforms to the relevant BLM land use plan for  the area as well as applicable laws and regulations, including those  focused on protecting the environment. To secure a permit to drill on  offshore leases, a company must submit an application for a drilling  permit to the Bureau of Safety and Environmental Enforcement, where it  is reviewed for completeness and whether all technical elements conform  to applicable regulations.

Once a company secures a permit and begins producing, oil and gas is  transported to market and sold. As part of this process, companies may  elect to process the natural gas into various products before its sale.  Under ONRR regulations, companies may deduct certain costs  associated with transportation and natural gas processing from the  royalties due. Companies can continue to produce oil and gas until the  lease is no longer capable of producing in paying quantities, regardless of  the length of the lease. To ensure compliance with applicable laws,  regulations, and other requirements, both BLM and the Bureau of Safety  and Environmental Enforcement have inspection and enforcement  programs that are designed to verify that companies comply with all  requirements at the lease site, including those related to measuring oil  and gas volumes. The authority for inspecting wells and leases for this  purpose is derived from FOGRMA. The act requires the Secretary of the  Interior to develop guidelines that specify the coverage and frequency of  inspections. Interior has delegated responsibilities for implementing the  act to BLM for onshore leases and to the Bureau of Safety and  Environmental Enforcement for offshore leases.

ONRR’s Role in Collecting, Disbursing, and Verifying Royalties

ONRR’s oversight of federal royalties includes collecting company-paid  royalties, disbursing these royalties to appropriate accounts, and verifying  the company-paid royalties through its compliance activities.

Collecting: Companies that obtain federal onshore or offshore oil and  gas leases are typically obligated to pay royalties on any oil or gas they  produce from the leases and then sell. As a condition of producing oil and  gas under federal and Indian leases, companies are required to submit  two key monthly reports to ONRR—one specifying the total production  and disposition of oil and gas and the other stating the royalties due  based on production. However, because of various leasing and  development arrangements made by companies, these two reports are  often submitted by different companies. The companies physically  developing the lease, referred to as the operators, are responsible for  reporting the production volumes to ONRR in monthly production  reports. The companies with a financial interest in the lease, referred to  as the payors, are responsible for reporting the cash royalty owed on the  federal and Indian oil and gas production in their monthly royalty  reports. Each month, payors are to calculate the royalty payment owed  to the federal government using the four key variables illustrated in the  following equation:  Royalty payment = ((volume sold x sales price) less deductions) x  royalty rate  Companies are to submit monthly production and royalty reports via a  web-based portal to ONRR’s royalty information technology (IT) system.  In addition to filing the royalty report with ONRR, companies typically  make the actual cash royalty payment via an electronic fund transfer to an  account at the Department of the Treasury (Treasury).

Disbursing: Once ONRR reconciles the self-reported royalty payment  data from the monthly royalty reports with the payments to Treasury,  ONRR is to disburse the royalties from the Treasury account to the  appropriate federal, state, tribal, or Individual Indian Money (IIM)  accounts. All these transactions are to be recorded and stored in  ONRR’s IT system.

Verifying: ONRR is responsible for verifying royalties through its  compliance program, which includes ensuring that the royalty revenues  generated from the sale of oil and gas extracted from leased federal lands  are accurately reported and paid. In conducting its compliance activities,  ONRR is to assess the elements of the royalty equation: commodity price,  volume of oil and gas, transportation and processing allowances, and  royalty rate. ONRR also is to ensure that all relevant laws, regulations,  and lease terms have been followed. ONRR has two key statutory  requirements for its compliance program: FOGRMA and the Federal Oil  and Gas Royalty Simplification and Fairness Act of 1996 (RSFA).  FOGRMA requires that ONRR establish a comprehensive auditing  system to provide the capability to accurately determine oil and gas  royalties. RSFA directs ONRR not to conduct audit activities if it and the  relevant state determine that the cost of conducting or requiring the audit  exceeds the expected amount to be collected by the activity, based on  the most current 12 months of activity. ONRR’s Work Planning Group  identifies which companies or leases will be subject to compliance  activities. The three primary levels of compliance activities ONRR  conducts are audits, compliance reviews, and data mining—each of  which provides a varying degree of assurance that royalties are  accurately paid.

Audits: According to ONRR documents, an audit involves detailed  examinations of companies’ royalty payments and corresponding  reporting to ONRR. As part of an audit, ONRR staff are to assess the  accuracy and completeness of the companies’ self-reported  production and royalty data compared to third-party documents, such  as sales contracts and oil and gas sales receipts from pipeline  companies. According to ONRR documents, it is to design its audits to  ensure that royalty payments and other obligations to ONRR are in  substantial compliance with applicable lease terms, federal laws and  regulations, and other policies.

Compliance reviews: ONRR describes compliance reviews as an  analysis designed to determine the reasonableness of company- reported production and royalty data. In contrast to audits, compliance  reviews are quicker, more limited checks on the accuracy and  completeness of companies’ self-reported data and do not include  systematically examining the underlying source documentation used  to generate the self-reported data.

Data mining: ONRR began its data mining program in 2011 and  officially organized it within the compliance program beginning in fiscal  year 2018. Data mining is a partially automated activity to identify and  resolve data errors prior to audits and compliance reviews. According  to ONRR officials, data mining examines large sets of company- reported data for certain common errors, such as irregularities in the  volume of oil or gas extracted. Officials stated that data mining  generally identifies obvious data errors that ONRR staff work with  companies to correct.

The process companies are to follow to produce oil and gas from federal  leases, bring it to market, transmit required data to Interior, and pay  royalties is outlined in figure 1.

The State and Tribal Royalty Audit Committee

FOGRMA authorizes the Secretary of the Interior to enter into cooperative  agreements with states to share oil and gas royalty management  information and carry out inspection, audit, investigation, and  enforcement activities on federal and Indian lands. Currently, the nine  states that are members of STRAC have delegated authority to conduct  compliance activities for federal lands in their respective state. These  agreements form the framework of ONRR’s relationship with states for  mineral revenue compliance activities. A governor or other appropriate  official with delegation authority may request that Interior enter into a  cooperative agreement with a state by sending a letter to the Director of  ONRR. States may also elect to end these agreements at their discretion  with a 120-day notice. States have a vested interest in ensuring that all  royalties are paid accurately because states receive a portion of the  royalties that the federal government collects, including additional  collections resulting from compliance activities identifying underpayment.  ONRR also reimburses states for the costs of performing approved and  eligible compliance activities, including compliance activities under the  cooperative agreement.

State audit offices that have entered into agreements with ONRR are to  submit yearly work plans identifying the compliance activities they  propose to conduct in the next fiscal year, which ONRR is to review and  approve. Member states can conduct both audits and compliance  reviews, and ONRR requires that the state auditors follow the procedures  established in generally accepted government auditing standards and  ONRR’s audit and compliance review manuals. To ensure that  compliance activities are conducted in accordance with generally  accepted government auditing standards and relevant ONRR manuals,  states are to undergo an external peer review every 3 years, during which  they are assessed on their adherence to the standards and manuals and  whether they provided corrective actions to any identified problems.

Performance Management Information and Controls

A key practice in results-oriented management for federal agencies is  establishing agency-wide, long-term strategic goals. The Government  Performance and Results Act of 1993 (GPRA), which was significantly  enhanced by the GPRA Modernization Act of 2010 (GPRAMA), requires  federal agencies, among other things, to develop strategic plans with  long-term, outcome-oriented goals; annual goals linked to achieving the  long-term goals; and annual reports on the results achieved, as assessed  through the use of performance measures and targets. Federal  departments and agencies must comply with these requirements and are  to follow associated Office of Management and Budget guidance when  developing their agency-wide strategic plans. We have reported that  these requirements also can serve as leading practices for strategic  planning at lower levels within federal agencies, such as planning for  individual divisions, programs, or initiatives. These leading practices  include defining the mission and goals of an agency or a specific program  and developing and using performance measures that allow an agency to  track its progress toward its mission and goals.

ONRR issued a fiscal year 2017 strategic priorities document that  contains the agency’s mission statement: “to collect, account for, and  verify natural resource and energy revenues due to states, American  Indians, and the U.S. Treasury.” ONRR stated in the document that it  planned to achieve Interior’s strategic goals to (1) timely disburse 98  percent of federal and Indian revenues, (2) close 85 percent of Interior’s  OIG and GAO recommendations targeted for implementation in fiscal  year 2017, and (3) report results of ONRR’s supporting performance  measures for Interior’s strategic goals on total ONRR compliance  collections and a 3-year average compliance return on investment. ONRR  also stated that it planned to create an ONRR strategic plan.

History of Oil and Gas Royalty Oversight Challenges

In the 1970s and early 1980s, we and Interior’s OIG reported on Interior’s  management of the oil and gas revenue collection system. Interior’s OIG  issued five reports critical of the program from 1969 through 1977 that  raised concerns about royalty collections. In 1981, we reported that  Interior was not collecting potentially hundreds of millions in royalties due  from federal oil and gas leases. In response, in 1981, the Secretary of  the Interior established the Commission on Fiscal Accountability of the  Nation’s Energy Resources, also known as the Linowes Commission, to  investigate allegations of irregularities in royalty payments, among other  issues. The Linowes Commission raised a number of concerns, and its  1982 report stated that management of royalties for the nation’s energy  resources had been a failure for more than 20 years. The report found  that because the federal government had not adequately managed this  multibillion-dollar enterprise, the oil and gas industry was not paying all  the royalties it rightly owed. The report cited a range of problems,  including the failure to verify data that companies reported as well as late  payments and underpayments.

Following this report, Interior and Congress took actions aimed at  improving revenue collection, including reorganizing oil and gas revenue  collections under a new bureau within Interior, passing FOGRMA in 1982,  and passing RSFA in 1996. In December 2006, Interior’s OIG analyzed  ONRR’s compliance processes and issued a report that made several  recommendations to improve these processes and the agency’s systems  for tracking them. The report identified deficiencies with how ONRR  maintained compliance-related information and recommended changes  for how ONRR measures its compliance activities’ performance. In 2007,  Interior’s Subcommittee on Royalty Management—a subcommittee of the  Royalty Policy Committee—issued a report that reiterated several of the  findings from Interior’s OIG report on ONRR and further stated that  several aspects of royalty management activities required prompt and, in  some cases, significant management attention. In particular, the report  included over 100 recommendations for improving Interior’s management  of oil and gas resources, including recommendations related to audit,  compliance, and enforcement. Appendix I provides a list of the  subcommittee’s recommendations and the status of their implementation,  according to Interior documents and interviews with Interior officials.

We identified several challenges with Interior’s management of federal oil  and gas in the 2000s. In February 2011, in part because of the  challenges identified in our past work, we added Interior’s management of  federal oil and gas resources to our list of program areas at high risk for  fraud, waste, abuse, and mismanagement. In the March 2019 update of  our High-Risk List, we found that Interior had made progress improving its  management of federal oil and gas resources. However, additional steps  are needed to improve Interior’s royalty determination and collection.

ONRR, according to officials, has begun implementing several initiatives  that seek to make the agency operate more effectively. In March 2017,  ONRR initiated Boldly Go, an effort to assess its organizational structure  and identify and implement potential improvements. According to ONRR  officials, this initiative was in response to March 2017 comments from the  Secretary of the Interior, in which he said the department, in general,  should undergo a “bold restructuring.” ONRR officials said that the Boldly  Go organizational restructuring was implemented in October 2017 and  included several changes to how ONRR conducts its compliance work.  Before the reorganization, audits and compliance reviews were part of the  same management group—referred to as the Audit and Compliance  Management group. After the reorganization, audits and compliance  reviews are managed separately. Audits now have their own  management group, referred to as Audit Management. According to  ONRR officials, the new Audit Management group conducts audits of  multiple companies and properties and will attempt to identify more  systemic misreporting issues common to those companies and  properties.

ONRR staff who conduct compliance reviews were moved into the same  management group as the data mining staff in the new Compliance  Management group. According to ONRR officials, the merger occurred  because both groups use similar data sources to conduct less in-depth  checks of the royalty data than audits. Additionally, officials stated that  putting these activities under the same management could assist in better  targeting companies for similar compliance issues. Prior to the  reorganization, identifying and selecting cases for audits and compliance  reviews was a function of the Audit and Compliance Management group.  After the reorganization, this function was moved to a new Analytics and  Risk Management group that is also tasked with using data analytics  methods, such as computerized analysis of spatial and geographic data,  to better identify noncompliant royalty payments.

ONRR is also in the process of implementing a new electronic  compliance case management and work paper tool referred to as the  Operations and Management Tool (OMT). According to ONRR  documents, OMT is to combine multiple systems into one and is intended  to serve a variety of functions. ONRR documents state that OMT is  designed to be a single standardized system that reduces manual data  entry, creates a single system of record for ONRR case data, offers error  checks to eliminate data entry errors, and provides greater transparency  for outside auditors. One ONRR official stated that the agency plans to  have ONRR’s data mining, compliance review, and audit teams all using  OMT to manage their compliance work in 2019. According to some  ONRR and state audit officials, ONRR piloted OMT’s electronic  compliance case management system in North Dakota in 2018, and  ONRR expects to offer OMT as an option to other STRAC partners for  their audit and compliance review case management needs.

Finally, the agency introduced a new auditor training curriculum in April  2018. Shortly after new auditors are hired, they are expected to begin  ONRR’s training program, and according to ONRR’s training manual, they  are expected to complete the training within 2 years of their hire dates.  According to ONRR officials, courses will also be available to existing  audit staff upon request.

ONRR Reported Generally Meeting Annual Royalty Program Compliance Goals, but Its Goals May Not Align with the Agency’s Mission

ONRR reported generally meeting its annual royalty compliance goals for  fiscal years 2010 through 2017. To meet its compliance goals, ONNR  used all three levels of compliance activities—audits, compliance reviews,  and data mining—each of which provides a different level of assurance.  However, ONRR’s compliance goals may not align with the agency’s  mission to ensure the accuracy of royalty payments and other statutory  requirements.

ONRR Reported Generally Meeting Compliance Goals and Revised Its Goals Multiple Times

ONRR reported generally meeting its annual compliance goals—those  from Interior’s strategic plan and bureau-specific goals—for its royalty  compliance program for fiscal years 2010 through 2017, and the agency  made multiple revisions to its goals during this period. Our analysis of  Interior’s annual budget justifications for fiscal years 2010 through 2017  found that ONRR reported meeting its compliance goals for 6 of the 8  fiscal years we reviewed (see table 1). According to ONRR officials we  interviewed, the 2 years when the agency did not report meeting its  compliance goals largely resulted from a shift in the focus of its goals that  created a short-term misalignment of planned work and available  resources.

During fiscal years 2010 through 2017, ONRR revised its annual  compliance goals multiple times. These included both compliance goals  supporting Interior’s strategic plans covering fiscal years 2007 through  2018 and bureau-specific goals. In the revisions to its compliance goals,  ONRR generally shifted from goals focused on the extent to which its  compliance program was ensuring the accuracy of royalty payments to  those focused on the efficiency of the program. ONRR’s accuracy goals,  which included conducting compliance activities to cover a specific  percentage of royalties, companies, or properties, helped it assess the  extent to which it was ensuring the accuracy of royalty payments. That is,  by measuring the portion of, for example, royalties subject to compliance  activities, it was able to quantify the percentage of royalties that were  reasonably correct or accurate. ONRR’s efficiency goals, which included  conducting compliance activities to obtain a certain return on investment  and additional amount of royalty collections, helped it assess whether  resources spent on compliance activities were used cost effectively.  According to ONRR officials, these revisions were made in an effort to  continually improve its compliance performance. Table 2 identifies  ONRR’s annual compliance goals for fiscal years 2010 through 2017 and  establishes two categories for these goals corresponding to ONRR’s  requirements under FOGRMA and the RSFA. Appendix II provides  more detailed information on ONRR’s annual compliance goals and the  agency’s reported compliance program performance.

Conduct compliance activities on specified  percentage of companies (coverage)

Conduct compliance activities on specified  percentage of properties (coverage)

Conduct compliance activities on specified  percentage of payors and operators (coverage)

Generate specified return on investment from  compliance activities  Generate specified return on investment from  compliance activities  Generate specified amount in total additional  royalties  Generate specified return on investment from  compliance activities  Generate specified amount in total additional  royalties  Legend: FOGRMA = Federal Oil and Gas Royalty Management Act of 1982, as amended; N/A = not applicable; RSFA = Federal Oil and Gas Royalty  Simplification and Fairness Act of 1996; — = does not apply.

While it is within ONRR’s purview to revise its compliance goals or  targets, frequent changes may complicate management’s ability to  assess performance over time because consistent goals are needed as a  baseline from which to assess performance. For example, for the time  period we reviewed, ONRR revised its compliance goals or goal targets  nearly every year. This makes it difficult to assess, for example, how  variations in resource allocations to and among its compliance activities  may have affected the compliance program’s performance. The following  are the types of compliance goals that ONRR used and revised for the  period:  Royalty coverage goal. Prior to fiscal year 2010, one of ONRR’s  compliance goals was to conduct compliance activities on a specified  percentage of royalties within 3 years of the date it received payment. In  December 2006, Interior’s OIG issued an audit report that found, among  other things, that the royalty compliance coverage goal had reduced the  number of companies and properties subject to compliance work. The  report stated that ONRR should consider modifying its compliance  program strategy to ensure appropriate coverage of properties and  companies within a reasonable time frame even if this resulted in a  reduction in the overall percentage of dollars covered and recommended  that ONRR develop separate performance measures for companies and  properties subjected to compliance coverage. ONRR concurred with the  recommendation and developed an implementation action plan. For fiscal  year 2010, ONRR eliminated its royalty coverage goal in response to the  OIG recommendation.

Company/operator/payor and property coverage goals. For fiscal year  2010, ONRR revised its compliance goals to address company and  property coverage, or conducting compliance activities—including audits  and compliance reviews—on a certain percentage of companies and  properties. ONRR’s fiscal year 2010 budget justification stated that the  new compliance goals would reflect the cumulative percentage of unique  companies and properties covered by audits, compliance reviews, or the  royalty-in-kind compliance strategy. For fiscal year 2010, ONRR’s  company coverage goal was to cumulatively conduct compliance  activities on 57.6 percent of companies that paid royalties from fiscal  years 2008 through 2012. ONRR’s property coverage goal was to  cumulatively conduct compliance activities for 35 percent of properties  where oil and gas had been extracted and sold from fiscal years 2008  through 2012.

For fiscal year 2011, ONRR revised its compliance goals, eliminating the  property coverage goal. ONRR also revised its company coverage goal to  cumulatively conduct compliance activities on 66 percent of companies  that paid royalties for fiscal years 2011 through 2016. ONRR further  revised this goal for fiscal year 2014 to consider operators and payors  instead of companies. In fiscal year 2014 ONRR established a  compliance goal of conducting compliance activities on 90 percent of  operators and payors but dropped the goal to 52 percent for fiscal year  2015. The goal for covering a percentage of operators and payors was  eliminated beginning in fiscal year 2016, which left ONRR without a  compliance goal addressing its coverage of royalty payments. Agency  officials we interviewed told us that they eliminated ONRR’s company  coverage goal because they concluded that the compliance program was  reviewing too many companies and properties with smaller royalty  payments, which officials deemed an inefficient use of limited compliance  resources. ONRR officials added that budgetary constraints and the  complexity of company bankruptcies and consolidation in the oil and gas  industry also contributed to the goal’s elimination.

Additionally, in 2008, ONRR established a data mining program to  examine large sets of operator-reported data to identify royalty and  reporting errors, such as when the production volumes that payors and  operators reported for the same lease did not match. This work led to  additional royalty collections, but ONRR did not consider these results  when calculating its annual performance measure for company and  property coverage. According to officials, data mining was the  responsibility of ONRR’s Royalty Reporting group and was not  considered compliance work.

Return on investment goal. ONRR has had a goal for return on  investment for fiscal years 2010 through 2017 that measured the  efficiency of the compliance work that all of its program areas performed.  However, Interior elevated this goal from a bureau-specific goal to a  strategic plan goal for fiscal year 2017. This goal is a ratio of costs to  collections for compliance activities—and is to assess whether ONRR  collected additional royalties for every additional dollar the agency spends  on compliance reviews, audits, and data mining. To account for  variations in collections and oil and gas prices, ONRR is to calculate its  performance on return on investment based on the royalties from the  previous 3 years. For example, the return on investment the agency  reported for fiscal year 2017 was based on revenues collected from fiscal  years 2014, 2015, and 2016. According to ONRR officials, the goal for  fiscal year 2017—to collect an additional $2 in royalties for every $1 spent  on compliance activities—was developed based on trends from prior  years. Achieving this return on investment would indicate that ONRR met  its goal.

Total additional royalty collections goal. In fiscal year 2016, ONRR  developed a bureau-specific goal for total additional royalties collected  from compliance reviews, audits, and data mining. The goal for fiscal year  2016 was to collect an additional $110 million from compliance activities.  In the following fiscal year, 2017, ONRR elevated this goal to a strategic  plan goal and kept the amount the same, at $110 million in additional  royalties.

ONRR Used All Levels of Compliance Activities to Generally Meet Goals

To generally meet its compliance goals during fiscal years 2010 through  2017, ONRR used all levels of its compliance activities: audits,  compliance reviews, and data mining. The number of audits completed  annually generally remained the same for fiscal years 2010 through 2017,  declining slightly from 162 in 2010 to 153 in 2017. During the same time  period, the number of completed compliance reviews decreased,  declining from 1,233 in 2010 to 683 in 2017 (see fig. 2). During this time  frame, ONRR’s Data Mining group increased the number of exceptions  resolved to address instances of incorrectly reported data from 4,323 in  2010 to over 26,000 in 2017.

Our analysis of ONRR’s data on compliance activities showed that adding  data mining financial results in 2011 was associated with a decrease in  the return on investment for ONRR’s other compliance activities. Prior to  including data mining, compliance reviews earned a 6 to1 return on  investment, STRAC compliance work earned about a 4 to1 return on  investment, and audits earned a 2 to1 return on investment. By the end of  fiscal year 2017, data mining proved to be far more cost-effective for  royalty compliance, with a return on investment of 9 to1. During the same  time, return on investment declined for all compliance reviews (including  STRAC compliance work) and all audits (see fig. 3). According to ONRR  officials, the reason for this decline was that data mining was identifying  royalties that might otherwise have been identified through audits or  compliance reviews. Additionally, ONRR officials we interviewed stated  that data mining has been more cost-effective than audits or compliance  reviews in identifying additional royalties. Officials we interviewed stated  that data mining often identifies more simple reporting errors.

Return on investment is an indicator of the efficiency of ONRR’s  compliance program. As long as ONRR is collecting more royalties  through its compliance activities than it is spending on identifying those  royalties, the federal government will obtain additional revenues.  According to ONRR officials we interviewed, the agency does not  calculate the potential additional royalty revenues that would be  generated if it conducted additional compliance activities. However,  ONRR officials said they do calculate the effect of reduced funding on  compliance activities. For example, ONRR stated in its fiscal year 2018  budget justification document that reductions in its budget for compliance  work would directly result in reductions to additional royalty collections.

ONRR’s Goals May Not Align with Agency Mission and Statutory Requirements to Account for Royalty Payments

ONRR’s fiscal year 2017 compliance goals, the most recent compliance  goals we reviewed, may be useful for assessing certain aspects of  ONRR’s performance but may not be effectively aligned with the agency’s  stated mission or fulfill other statutory requirements. ONRR’s 2017  strategic priorities document states that the agency’s mission is to collect,  account for, and verify energy revenues. Additionally, statutory  requirements under RSFA direct ONRR not to conduct audit activities if it  and the relevant state determine that the cost of conducting or requiring  the audit exceeds the expected amount to be collected by the activity,  based on the most current 12 months of activity. ONRR’s fiscal year 2017  return on investment compliance goal helps the agency comply with  RSFA by assessing whether the agency’s compliance program is cost- effective.

Moreover, ONRR’s statutory requirements under FOGRMA require that it  establish a comprehensive auditing system to provide the capability to  accurately determine oil and gas royalties, among other requirements.  However, ONRR’s fiscal year 2017 compliance goals do not sufficiently  address its mission or FOGRMA requirements, in part, because its goals  do not address accuracy—or consider the extent to which its compliance  work is covering, for example, royalty payments. While ONRR previously  had coverage goals, agency officials told us that they eliminated their  company and property coverage goals because they concluded the  compliance program was reviewing too many companies and properties  with smaller royalty payments. ONRR officials told us that this was  deemed an inefficient use of limited compliance resources. However, it is  difficult for ONRR to provide reasonable assurance that it is accurately  collecting royalties when it does not have data on the extent to which, for  example, royalties or companies were subject to compliance activities.  According to agency officials we interviewed, ONNR stopped tracking  these data when ONRR eliminated its coverage goals for fiscal year  2016. As a result, ONRR could be determining that it is meeting its  current annual compliance goals but potentially doing so by examining a  small percentage of royalties or companies. For example, ONRR may be  able to achieve a 2 to 1 return on investment, but only conduct  compliance activities on 10 percent of the approximately $5 billion in  royalties paid in calendar year 2017. This raises questions about the  extent to which ONRR can provide reasonable assurance that its  compliance program is assessing the accuracy of oil and gas royalty  payments because it does not have a goal for, or data on, the amount of  royalties subject to compliance activities.

Finally, because ONRR no longer has a coverage goal—which helps it  assess the extent to which it has ensured the accuracy of royalty  payments—it does not track the amount of royalties subject to its differing  level of compliance activities. ONRR has established a compliance  program with three activities—audits, compliance reviews, and data  mining—each of which offers varying levels of assurance for determining  the accuracy of royalty payments. However, the extent to which its  compliance program allows ONRR to accurately determine and collect  royalty payments is unclear because the agency does not track each  compliance activity’s contribution toward a coverage goal. Interior’s OIG  reported a similar finding in December 2006. In its report, the OIG found  that ONRR’s compliance goal for coverage of royalties was misleading  because it weighed audits and compliance reviews equally, although the  two compliance activities provided differing levels of assurance about  whether royalties were accurately paid. The OIG recommended that  ONRR should revise the compliance goal to account for each compliance  activity separately. While ONRR did not concur with establishing a goal  for each of the compliance activities, it agreed to internally track separate  measures for them. According to ONRR documentation, the agency took  steps to identify what amount of royalties was covered by audits or  compliance reviews but did not report this information. When ONRR  eliminated its coverage goals for fiscal year 2016, it no longer tracked  information on the extent to which royalty payments were subject to its  different levels of compliance activities. By establishing a coverage goal  (e.g., identifying the number of companies or percentage of royalties  subject to compliance activities over a set period of time) that aligns with  the agency’s mission and tracking the extent to which each of its  compliance activities contributes toward this goal, ONRR would have  greater assurance that its compliance program has the capability to  accurately determine oil and gas royalties.

ONRR’s Process to Select Compliance Cases Is Not Documented and May Not Align with Compliance Goals

ONRR’s process to select compliance cases for audits and compliance  reviews is not documented. Additionally, the agency does not have  performance measures for determining whether its case selection  process aligns with the agency’s compliance goals. Finally, while ONRR  has a risk model to assist in selecting compliance cases, it has not  analyzed the effect the risk model has had on its selection process.

ONRR Does Not Have a Documented Case Selection Process for Audits and Compliance Reviews

ONRR does not have a documented case selection process with  procedures for how to select cases. According to ONRR officials, ONRR’s  Work Planning Group reviews royalty information on federal oil and gas  leases and selects leases from specific companies or properties to  undergo either an audit or a compliance review. These officials also  stated that while the process for selecting cases for audits and  compliance reviews differs, the agency has no written procedures for  either compliance activity on how cases should be selected.

For audits, ONRR officials we interviewed told us that cases are generally  selected based on research from ONRR’s recently established Analytics  and Risk Management group, which includes the relocated Work  Planning Group and other offices that analyze particular aspects of the oil  and gas industry, such as pricing. According to these officials, the work  planners or analytics staff review a variety of royalty payment and oil and  gas production information to identify trends and outliers that may indicate  potential royalty noncompliance. The officials told us that they also  consider other factors in their selection decisions, such as whether a  company was new—and therefore may be unfamiliar with how to correctly  report royalties—or had undergone a change in ownership—which can  lead to reporting errors. Additional factors that ONRR officials told us they  considered were referrals by ONRR staff based on recently completed  compliance activity on a specific company or property and the risk scores  for the relevant companies and properties generated from the agency’s  compliance risk model.

For compliance reviews, ONRR officials we interviewed told us that the  Work Planning Group includes information from a Go/No-go analysis,  which they said allows ONRR to make a decision early in the process to  cost effectively decide whether to initiate a compliance review. According  to ONRR officials, the use of the Go/No-go analysis began in fiscal year  2015 as means to better ensure that the compliance activities they select  will identify a finding of royalty noncompliance. According to the officials,  the Work Planning Group then compares the list of companies and  properties to other sources of information, such as the findings of recently  completed work and ONRR’s royalty compliance risk model, to select  cases based on the group’s professional judgment. Overall, ONRR  officials we interviewed said that the Work Planning Group maintains a  small pool of cases for either an audit or compliance review for when staff  become available after completing other work.

ONRR officials said that as there was no requirement that they develop  documented procedures for case selection, they rely on the experience  and training of members of the Work Planning Group to review the  available information and select cases based on requests from the Audit  Management and Compliance Management groups. Under federal  standards for internal control, management should establish an  organizational structure, assign responsibility, and delegate authority to  achieve the entity’s objectives, including the documentation of the internal  control system. Documentation provides a means to retain organizational  knowledge and mitigate the risk of consolidating that knowledge to a few  personnel, as well as a means to communicate that knowledge as  needed to external parties, such as external auditors. By developing a  documented case selection process that includes procedures for how to  select compliance cases, ONRR could better ensure that it retains the  organizational knowledge needed to carry out the process effectively and  can defend it to external parties.

ONRR Does Not Have Performance Measures for Determining Whether the Way Such Cases Are Selected Contributes to Overall Compliance Goals

ONRR does not have performance measures for determining the extent  to which cases selected align with the agency’s compliance goals.  ONNR’s Work Planning Group is responsible for selecting cases—that is,  companies or properties—to undergo a compliance review or audit. As  mentioned previously, ONRR’s fiscal year 2017 goals for its compliance  program are to achieve a specified return on investment and total amount  of additional royalties collected from the cases it selects to undergo  compliance activities. However, according to ONRR officials we  interviewed, these goals are not considered when selecting cases.  Rather, these officials told us that the Work Planning Group attempts to  select cases for compliance activities that are the most likely to result in a  finding of royalty noncompliance. A finding of noncompliance for a  company can result from a variety of circumstances, such as reporting an  incorrect volume of oil or gas sold or claiming allowances for  transportation and processing costs above established limits. ONRR  officials stated that the agency’s IT system tracks whether a completed  compliance case resulted in a finding, but the agency does not regularly  assess the percentage of completed cases that produce findings.

Prior to 2015, ONRR had performance measures for determining the  extent to which cases selected aligned with its compliance goals but  stopped using these measures after it made changes to the goals. Prior  to fiscal year 2010, for example, ONRR had a goal for conducting  compliance activities on a certain percentage of royalties within 3 years  from the date it received payment. To support this goal, ONRR sought to  select companies with relatively high royalty dollar amounts. ONRR then  assessed its performance toward achieving this goal by reviewing all  completed audits and compliance reviews over a 3-year period and  calculating the percentage of total royalties paid over this period from  completed compliance cases. For example, in fiscal year 2008, ONRR  reported that compliance cases covered 69 percent of royalties received  in calendar year 2004.

However, as we noted previously, the 2006 OIG report found that the  focus on coverage of royalties resulted in ONRR providing limited  coverage of its universe of companies and properties. Additionally,  ONRR officials we interviewed confirmed that selecting cases with higher  royalty amounts to achieve the royalty coverage goal resulted in more  limited coverage of companies because the goal directed ONRR toward  repeatedly selecting many of the same large companies each year for  compliance activities.

In response to the recommendations in the OIG’s report as well as  ONRR’s own recognition of the reduced company coverage resulting from  its selection of companies that pay high royalties, ONRR transitioned to a  new performance measure for case selection along with a new  compliance goal in fiscal year 2010. ONRR’s new performance measure  assessed the number of unique companies and properties for selected  compliance activities. This new performance measure, according to  ONRR officials, was driven by ONRR’s new compliance goal for  cumulatively covering a certain percentage of unique companies and  properties over a 3-year period.

According to ONRR officials, after the company and property coverage  goal was in place for approximately 5 years, officials determined that this  goal and corresponding performance measure was driving the  compliance case selection process to select too many companies and  properties with smaller royalty payments, which they deemed an  inefficient use of limited compliance resources. As a result, ONRR  officials told us that the agency decided to change its compliance goal in  fiscal year 2015 to focus on return on investment and total additional  dollars collected. However, ONRR did not establish a corresponding  performance measure for its compliance case selection process that  would determine the extent to which cases selected contributed to  ONRR’s compliance goals.

As stated previously, we have reported that the requirements in GPRA  and GRPAMA for establishing performance metrics serve as leading  practices for divisions, programs, and initiatives. Performance measures  help agencies make resource decisions, provide managers information on  which to base their organizational and management decisions, and create  powerful incentives to influence organizational and individual behavior.  Furthermore, successful performance measures are aligned with division  and agency-wide goals and missions. According to ONRR officials we  interviewed, they have not established performance measures for  determining whether the way such cases are selected aligns with the  agency’s compliance goals because there is no specific requirement to do  so. By developing performance measures (e.g., establishing a specified  percentage of compliance cases that identify findings of royalty  noncompliance or total additional royalties) that assess whether the  agency is selecting cases that are helping it achieve its compliance goals,  ONRR would be able to better monitor its performance in achieving its  goals and whether changes to its selection process affect its  performance.

ONRR Has Not Analyzed the Effectiveness of Its Risk Model on Case Selection

ONRR has developed a model that assesses the risk of noncompliance  for companies and properties. Officials from the Work Planning Group  use this model to inform their compliance case selections. However, it is  unclear whether use of the model has improved case selection because  ONRR has not analyzed the model’s effect on such selections.

ONRR began a pilot program in 2006 to analyze the risk factors for  royalty noncompliance, which included developing a quantitative risk  model. In December 2006, Interior’s OIG recommended that ONRR  consider additional factors that may indicate a risk of noncompliant royalty  payments when making case selection decisions. In addition to the  factors that ONRR was using to select cases to help achieve its  compliance goals, such as cases with high royalty dollars, the OIG  recommended that ONRR incorporate other risk factors, including  companies or properties having a history of underreported royalties and  falsely reported information to other federal agencies, such as the  Environmental Protection Agency. In December 2007, Interior’s  Subcommittee on Royalty Management reiterated the importance of using  a risk-based process for compliance and made a number of related  recommendations to ONRR. Among these were that ONRR should fully  implement the quantitative model it was developing as part of its pilot  program. Additionally, the subcommittee recommended that ONRR  evaluate its risk model’s performance and then establish a process to  continually validate and update the model to ensure that it remains  effective.

In response to these recommendations, ONRR worked with a contractor  from 2006 through 2012 to develop an initial risk model. This model  evaluated the risk of royalty noncompliance for each lease based on four  characteristics: the type of lease, the specific location of the lease, the  region of the country the lease was in, and the type of commodity  extracted. The model looked at a number of indicators of risk, which were  grouped into four overall risk drivers: complexity of the oil and gas market,  complexity of regulations, commodity-specific practices, and transparency  of the market. According to officials from the Work Planning Group we  interviewed, they used the risk scores generated from this model to help  inform the list of compliance cases to be reviewed the following year.  These officials told us that they stopped using the scores from this model  around 2012 for two reasons. First, the model allowed for the scores to be  manually weighted based on the judgment of those selecting the  compliance cases, and this weighting process was believed to have  eventually hurt the accuracy of the risk scores. Second, agency officials  determined that the risk scores the model was producing did not correlate  closely with cases resulting in significant findings.

In 2013, ONRR tasked a different contractor with developing a new set of  risk models. According to an initial development document, ONRR  requested separate risk models for companies and properties that would  determine the propensity for a company to submit an incorrect royalty  payment using historical royalty compliance data that ONRR and third- party sources provided. The contractor produced two risk models, one  that assigned a risk score to companies and one to properties. The risk  scores—which ranged from 0 to 100—attempted to quantify the risk of  royalty noncompliance. The initial models were completed in 2014, and  ONRR began including the risk scores from these models in the data that  the Work Planning Group reviewed during the case selection process.  Documents from the contractor show that the models then went through  an initial validation process using the results of cases that the contractor  selected when the models were instituted in 2014 and completed cases  from 2012 onward.

According to documents summarizing the contractor’s efforts, the  validation showed a correlation between higher risk scores on the  company model and cases that resulted in findings and additional royalty  revenues. However, the contractor reported that higher risk scores on the  property model did not correlate with either findings or additional royalty  revenues. The documents we reviewed also included a number of  recommendations to ONRR to improve its risk modeling, including adding  third-party and commercial data sources, adding data sources from within  ONRR and other oil and gas bureaus within Interior, and attempting to  redefine property risk and building a new property risk model. However,  according to officials we interviewed, they have not yet acted on any of  these recommendations. ONRR requested that the contractor update the  models with data from recent royalty reporting and completed compliance  cases, which it did in both 2015 and 2018 but does not do either regularly  or periodically.

According to ONRR officials, the Work Planning Group currently  considers the risk scores based on the company model when selecting  cases but does not consider the risk scores based on the property model,  as the group considers those scores less reliable. ONRR officials told us  that they do not believe that their current risk approach is entirely effective  and are considering having staff from the Analytics and Risk Management  group develop a risk model for the agency. To date, ONRR has not  analyzed how the use of the risk scores has affected case selection or  findings of royalty noncompliance and is therefore unable to identify  whether its risk model is effective. As a result, the agency does not have  sufficient information to make a decision on whether to continue using the  model as it exists today, consider potential improvements, or discontinue  the model in favor of another approach.

Federal standards for internal control state that management should  design control activities to achieve objectives and respond to risks, such  as by comparing actual performance to planned or expected results and  analyzing significant differences. By periodically analyzing whether the  risk model is effectively identifying potential royalty noncompliance and  whether the model’s results are being effectively used to assist in case  selection, and making changes to the model (e.g., updating it) or  developing a new model based on this analysis, ONRR would be better  able to determine how to proceed with using risk analysis to inform its  case selections.

STRAC Members Reported They Are Satisfied with ONRR Coordination but Do Not Have Documented Processes, and Compliance Activities in Their Work Plans Do Not Align with ONRR Goals STRAC Officials Expressed Satisfaction with ONRR’s Coordination on Royalty Compliance

STRAC officials we interviewed from the nine member states that had  agreements with ONRR for conducting royalty compliance generally  expressed satisfaction with ONRR’s coordination of compliance activities,  including both the frequency of interaction as well as support for budget  and training.

STRAC officials from all nine member states generally expressed  satisfaction with the frequency of interaction between STRAC and ONRR.  STRAC officials stated that this interaction occurred primarily through  three mechanisms. First, ONRR and STRAC hold semiannual in-person  meetings. At these meetings, STRAC officials said that attendees discuss  a range of topics. For example, at the March 2018 STRAC meeting in  Sacramento, California, which we attended, there were two training  sessions as well as a session on updates to ONRR’s IT systems. Second,  ONRR and STRAC hold quarterly teleconferences. These  teleconferences, according to STRAC officials, are opportunities for both  ONRR and STRAC to highlight any significant or systematic issues that  they may be identifying in their compliance activities. Third, ONRR  assigned agency points of contact to each STRAC member state for  technical questions. The STRAC officials stated that ONRR has been  responsive when they have reached out with questions or concerns.  Overall, STRAC officials from seven of the nine member states said that  coordination with ONRR had improved over the past approximately 10  years. STRAC officials from two of the member states attributed this  improvement to ONRR leadership’s concerted effort to work more  effectively with STRAC.

Additionally, STRAC officials from the majority of member states  generally expressed satisfaction with the support ONRR has provided  STRAC member states with respect to resources and training. STRAC  officials from seven of nine member states told us that the current  contracted budget was sufficient to conduct oversight of their states’  federal oil and gas royalties. STRAC officials from two member states  stated that the budget was insufficient. One official stated that the budget  did not allow the state to review all of the federal properties for which it  was responsible. The officials from the other state indicated that a larger  budget would allow the state to hire additional auditors. According to  these officials, additional auditors could help the state conduct  compliance activities on more royalty payors and in particular small  royalty payors that may not be as familiar with the requirements for  federal royalty payments.

STRAC officials from several member states said that the flat budget that  ONRR provided over the past several years may lead to changes in their  federal royalty compliance activities. For example, one official stated that  without additional funding in the future, the state may have to move more  experienced and higher paid auditors to state royalty compliance  activities, thus leaving less experienced and lower paid auditors to  conduct federal royalty compliance activities. Another official stated that  the state had offered less training and reduced the amount of funds for  travel to address potential budget shortfalls. Additionally, another official  stated that flat budgets could make it difficult to offer staff merit pay  increases.

Finally, officials from seven of the nine STRAC member states said  ONRR provided sufficient training on policies, procedures, and IT  systems used to conduct compliance activities on federal oil and gas  royalties. A STRAC official from one member state said that ONRR’s  training had improved recently, while another official said that support had  improved. However, STRAC officials from three member states  expressed uncertainty about ONRR’s training for companies. These  officials stated that they would like to understand the content of the  training so they would better understand how ONRR is training  companies to report royalties.

STRAC Members’ Processes for Selecting Compliance Cases Are Not Documented

None of the nine STRAC member states had documented case selection  processes. Specifically, officials from all nine STRAC member states we  interviewed said that either they did not have, or were unable to provide,  documented procedures for the processes they used to select federal oil  and gas compliance cases. Rather, STRAC officials stated that they  relied on a variety of factors to select cases for compliance reviews. Staff  expertise about companies and properties was the factor that all nine  STRAC officials identified as key for case selection. For example, one  official stated that she had over 10 years of experience and therefore  knew what companies or properties to review. Another official stated that  because staff also work on state tax audits, they can use knowledge from  that work to help identify compliance cases. Another factor officials  identified as assisting in the case selection process was ONRR’s  company and property risk scores, though they were given varying  degrees of consideration. Other factors officials identified included  referrals from BLM or ONRR, and risk scores generated from their own  models.

Under federal standards for internal control, management should  establish an organization structure, assign responsibility, and delegate  authority to achieve the entity’s objectives, including the documentation of  the internal control system. Documentation provides a means to retain  organizational knowledge and mitigate the risk of consolidating that  knowledge to a few personnel, as well as a means to communicate that  knowledge as needed to external parties, such as external auditors.  Because STRAC members do not have a documented process, ONRR  cannot, for example, assess whether STRAC members are selecting  compliance cases in a manner that aligns with ONRR’s compliance goals  or that future STRAC members will know how to select compliance cases.  In the agreements between the nine STRAC members and ONRR, the  agency includes terms and conditions that the members agree to, but  ONRR does not require STRAC members to have documented  procedures for compliance case selection. By including in ONRR’s future  agreements with STRAC members requirements to develop a  documented case selection process, including procedures for how to  select compliance cases and how to document which factors were  considered in selection decisions, ONRR could better assess whether  members select cases that align with the agency’s compliance goals.

STRAC Compliance Activities Described in Work Plans Do Not Align with ONRR Goals

We reviewed STRAC members’ annual work plans to determine whether  the compliance activities discussed aligned with ONRR compliance goals.  STRAC member agreements from eight of the nine STRAC members  included language that the “state will contribute to ONRR’s GPRA goals  and thereby the performance goals of this Agreement by performing  audits, compliance reviews and other investigations in coordination with  ONRR. The yearly performance goals are listed on the state’s annual  work plan.” However, when we reviewed the STRAC members’  corresponding annual work plans, we found no information on how the  members’ compliance activities contributed to ONRR’s goals. For  example, several of the STRAC members’ work plans included  information on the leases and properties selected for compliance  activities but did not include information on how those selections would  contribute to ONRR’s compliance goals.

In addition, the majority of STRAC officials from member states said they  did not consider ONRR’s compliance goals for return on investment or  total additional royalty collections when selecting compliance cases.  When we asked STRAC members about their goals, three of nine STRAC  member states noted that they had compliance program goals. For  example, one STRAC member’s goal was to “maximize revenue to the  state” and “implement on behalf of ONRR and the state, a constantly  improving and efficient royalty audit program.” Another member’s goal  was to “protect the US Citizens’ Federal Mineral Interest within the  boundaries of the state by ensuring that a fair value, as established by the  federal regulations, is received.” Officials from the other six STRAC  members told us that their states do not have goals for federal oil and gas  royalty compliance activities because ONRR does not require that they do  so. For STRAC members that did not have compliance goals, officials  provided examples of informal goals—or goals that were not documented.  For example, one STRAC official reported that the state’s goal was to try  to audit 50 percent of royalties paid to the state every 2 years. Another  STRAC official stated the state tries to review major market areas in the  state once every 7 years. When we compared STRAC officials’  responses on their goals to ONRR’s broader compliance goals for return  on investment and total additional royalty collections, we found that the  majority of states’ compliance goals did not align with ONRR’s goals.

Federal standards for internal control state that management should  define objectives clearly to enable the identification of risk and define risk  tolerances, such as by defining objectives in alignment with the  organization’s mission, strategic plan, and performance goals. In  requiring eight of the nine STRAC members to conduct compliance  activities consistent with the agency’s compliance goals, ONRR was  following these standards. However, ONRR approved the STRAC  members’ work plans, although those work plans did not specify how the  described members’ compliance activities would contribute to ONRR’s  goals as the agency stated they would in the agreements between the  seven of the nine STRAC members and ONRR. By requiring STRAC  members to describe in their annual work plans how their compliance  activities would align with ONRR’s current compliance goals, ONRR  would have better assurance that activities were aligned with its  compliance goals.

Finally, ONRR does not track STRAC member states’ contributions  against its annual compliance goals. ONRR has the data available to  track these contributions because the results of STRAC members’  compliance activities are retained in ONRR’s IT system. For example, we  obtained reports on the aggregate overall return on investment of STRAC  members and reviewed individual data entries from STRAC members’  work that included a data field for revenue collections. According to  regulations, if a state accepts delegated authority, it is to assist ONRR in  meeting the requirements of GPRA as well as in developing and  endeavoring to comply with ONRR’s Strategic Plan and Performance  Measurements. Because ONRR does not track STRAC member states’  contributions toward its annual compliance goals, the agency has limited information for assessing whether the funding they are providing to  STRAC members is achieving its goals. ONRR officials we interviewed  stated that they do not track states’ contributions to ONRR’s overall  compliance goals as there is no requirement to do so. However, by  tracking the performance of each state and its contribution toward  ONRR’s compliance goals, ONRR could better assess the effectiveness  of states’ performance in supporting the agency’s mission of ensuring  accurate royalty payments.

ONRR is taking steps intended to improve its royalty compliance program  and better verify that all royalties paid on the sale of oil and gas extracted  from leased federal lands are accurate. These steps include reorganizing  the management structure of its compliance program, implementing new  systems for managing compliance cases electronically, and instituting a  training curriculum for newly hired auditors. However, although ONRR  reported generally meeting its compliance goals for fiscal years 2010  through 2017, its current goals may not align with the agency’s mission or  other statutory requirements. For example, ONRR’s fiscal year 2017  compliance goals do not sufficiently address its mission to collect,  account for, and verify revenues, in part, because its goals do not  address accuracy, such as through a coverage goal. Establishing a  coverage goal (e.g., identifying the number of companies or percentage  of royalties subject to compliance activities over a set period) that aligns  with the agency’s mission, and tracking the extent to which each of its  compliance activities contributes to this goal, would provide ONRR more  reasonable assurance that its compliance program is assessing the  extent to which oil and gas royalty payments are accurate. Furthermore,  ONRR’s audits, compliance reviews, and data mining efforts each provide  a different level of assurance that royalties are accurately paid, but the  agency does not measure how each of the compliance activities  contributes to the FOGRMA requirement to establish a system with the  capability to accurately determine and collect royalties in a timely manner.  By tracking the extent to which each of its compliance activities  contributed to any future coverage goal, ONRR would have greater  assurance that its compliance program has the capability to accurately  determine oil and gas royalties.

In addition, ONRR’s compliance program relies on its Work Planning  Group, which is responsible for reviewing information on companies and  properties to select cases for audits or compliance reviews. The Work  Planning Group, however, does not have a documented case selection  process. By developing a documented case selection process that  includes procedures for how to select compliance cases, ONRR could  better ensure that it retains the organizational knowledge needed to  effectively select compliance cases and defend the process in external  reviews. In addition, ONRR does not have performance measures to  determine the extent to which cases selected align with ONRR’s  compliance goals. By developing performance measures (e.g.,  establishing a specified percentage of compliance cases that identify  findings of royalty noncompliance or total additional royalties) that assess  whether the agency is selecting cases that are helping it achieve its  compliance goals, ONRR would be able to better monitor its performance  in achieving its goals and whether changes to its selection process affect  performance.

Moreover, since 2006, ONRR has worked to develop a model to assess  the risk of royalty noncompliance for use in its compliance case selection  process. After several iterations with two contractors, ONRR began using  the risk scores from its model to assist with case selection in 2014.  However, according to ONRR officials, the agency is considering  discontinuing the use of its current model in favor of one that is internally  developed. ONRR has not analyzed how the use of the risk scores has  affected case selection or findings of royalty noncompliance and is  therefore unable to identify whether its risk model is effective. By  periodically analyzing whether the risk model is effectively identifying  potential royalty noncompliance and whether the model’s results are  being effectively used to assist in case selection and making changes to  the model (e.g., updating it) or developing a new model based on this  analysis, ONRR would be better able to determine how to proceed with  using risk analysis to inform its case selections.

Furthermore, none of the nine STRAC members had documented case  selection processes. In the agreements between the nine STRAC  members and ONRR, the agency includes terms and conditions that the  members agree to, but ONRR does not require STRAC members to have  documented procedures for compliance case selection. By including  requirements in ONRR’s agreements with STRAC members to develop a  documented case selection process, including procedures for how to  select compliance cases and how to document which factors were  considered in selection decisions, ONRR could better assess whether  members select cases that align with the agency’s compliance goals.  Additionally, ONRR does not require that STRAC members specify how  their compliance activities included in annual work plans contribute to  ONRR’s compliance goals, although those goals appear on the work  plans. ONRR approved the work plans but did not specify how the  members’ compliance activities would contribute to its goals as the  agency stated they would in the agreements between eight of the nine  STRAC members and ONRR. By requiring STRAC members to describe  in their annual work plans how their compliance activities would align with  ONRR’s current compliance goals, the agency would have better  assurance that activities were aligned with its performance goals. Lastly,  ONRR does not track STRAC members’ contributions toward its annual  compliance goals though it has the data to do so. By tracking the  performance of each state and its contribution toward ONRR’s  compliance goals, ONRR could better assess the effectiveness of states’  performance in supporting its mission of ensuring accurately royalty  payments.

We are making a total of seven recommendations to ONRR. Specifically:

The Director of ONRR should establish an accuracy goal (e.g.,  identifying the number of companies or percentage of royalties subject  to compliance activities over a set period of time) that aligns with the  agency’s mission of collecting, accounting for, and verifying royalty  payments. In doing so, ONRR should track the extent to which each  compliance activity (audits, compliance reviews, and data mining)  contributes toward achieving this goal. (Recommendation 1)

The Director of ONRR should develop a documented case selection  process that includes procedures for how to select all compliance  cases. (Recommendation 2)

The Director of ONRR should develop performance measures (e.g.,  having a specified percentage of compliance cases identify findings of  royalty noncompliance or total additional royalties) that assess  whether the cases the agency is selecting are helping it achieve its  compliance goals. (Recommendation 3)

The Director of ONRR should periodically analyze whether the risk  model is effectively identifying potential royalty noncompliance and  whether the model’s results are being effectively used to assist in  case selection, and should use this analysis to make changes to the  model (e.g., updating it) or develop a new model. (Recommendation  4)

The Director of ONRR should include requirements in ONRR’s  agreements with STRAC members to develop a documented case  selection process, including procedures for how to select compliance  cases and how to document which factors were considered in  selection decisions. (Recommendation 5)

The Director of ONRR should require STRAC members to describe in  their annual work plans how their compliance activities would align  with ONRR’s current compliance goals. (Recommendation 6)

The Director of ONRR should track the performance of the  compliance work of each state STRAC member and the contribution  that each state makes to ONRR’s compliance goals.  (Recommendation 7)

We provided a draft of this report to Interior for review and comment.  Interior concurred with all seven recommendations. Agency comments  are reproduced in appendix III.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of the Interior, and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff members who made major contributions to  this report are listed in appendix IV.

Appendix I: Status of Royalty Policy Committee’s Subcommittee on Royalty Management

We reviewed and summarized recommendation closure documentation  that the Department of the Interior (Interior) provided for royalty  compliance recommendations made to the department by the Royalty  Policy Committee’s Subcommittee on Royalty Management in 2007 and  Interior’s Office of Inspector General (OIG) in 2006. For the  subcommittee recommendations, Interior officials told us that the  subcommittee did not assess the implementation of its recommendations.  As a result, we present information that Interior provided on its decision  about the status of the recommendations and a summary of actions  taken. (See table 3.) For the OIG recommendations, we present the  status of recommendations according to the OIG and a summary of the  actions according to Interior. (See table 4.) We did not independently  assess the implementation of the recommendations.

Appendix II: ONRR’s Annual Compliance Goals and Performance

See table 5 for detailed information on the Office of Natural Resources  Revenue’s (ONRR) performance goals, including goal type, goal, fiscal  year goal, fiscal year performance, and long-term target for performance  goal.

Appendix III: Comments from the Department of the Interior

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Christine Kehr (Assistant  Director), Glenn C. Fischer (Analyst-in-Charge), Tim Bober, John  Delicath, Sarah Detweiler, Wil Gerard, Cindy Gilbert, Michael Kendix, Eli  Lewine, Ben Licht, Anne Stevens, and Sara Sullivan made important  contributions to this report.

About a decade ago, we found that the Department of the Interior may not have been collecting all of the royalties that oil and gas companies owed the federal government. In 2011, we added Interior's oil and gas management to our High Risk List.

We reviewed what Interior's Office of Natural Resources Revenue (ONRR) has done to ensure the accuracy of royalty payments from companies with federal leases. ONRR has set goals for its royalty compliance efforts and reports that it largely met them. However, its goals could better address payment accuracy.

Our recommendations are to strengthen ONRR's review process and ensure more accurate payments.