Minerals Management Service: Improvements Planned for Automated Royalty Management System

Published by the Government Accountability Office on 1990-07-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                                                     Improvements Planned
                                                                                     for Automated Royalty
                                                                                     Management System


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                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Information Management and
                   Technology Division


                   July 27,199O

                   The Honorable Manuel Lujan, Jr.
                   Secretary of the Interior

                   Dear Mr. Lujan:

                   For several years, information-related problems have existed in the Roy-
                   alty Management Program administered by the Department of the Inte-
                   rior’s Minerals Management Service (MMS). Until these information
                   problems are fully resolved, the federal government risks losing reve-
                   nues from mineral leases on public lands and inaccurately distributing
                   royalties. Because automation difficulties have contributed to MMS' roy-
                   alty management problems, we collected information on MMS' progress in
                   resolving these difficulties, Appendix I provides details of our objec-
                   tives, scope, and methodology.

                   MMS has identified problems with its automated royalty management
Results in Brief   system, developed a plan to address them, and is implementing the plan
                   through a series of systems enhancement projects. This plan is a positive
                   step towards addressing the problems with the system. However, at the
                   time of our review, the enhancement projects were in early stages which
                   precluded their evaluation.

                   New initiatives designed to improve royalty management services to
                   Indian tribes and allottees (individuals for whom the government holds
                   land in trust) are being added to planned system enhancements. MMS
                   estimates that revised system requirements resulting from these
                   changes will cause a 6-month delay in the completion of the system
                   enhancement projects. At the time of our review, MMS was beginning to
                   incorporate the changes into its implementation plan; therefore, we did
                   not assess the validity of their delay estimate.

                   Although the MMS system improvement plan addresses identified auto-
                   mation problems, a key issue remains unresolved. MMS uses self-
                   reported, onshore oil and gas production data from producers to verify
                   royalty collections and disbursements. We have recently reported that
                   Interior’s Bureau of Land Management (BLM), which is responsible for
                   onshore inspection and enforcement, does not adequately verify the

                   Page 1                                   GAO/IMTBC9085   Planned Improvements


             accuracy of these oil and gas production data.’ With this limitation, MMS
             cannot ensure that its royalty collections and disbursements made in
             conjunction with onshore federal mineral leases are accurate. BLM is
             taking or planning steps to improve the accuracy of the information.
             However, we have not evaluated what the effects will be on the Royalty
             Management Program if the steps are implemented.

             The royalty management program is one of the most visible and impor-
Background   tant in Interior’s broad range of responsibilities. Interior agencies lease
             federal and Indian lands to private parties and collect, account for, and
             disburse revenues from leases on these lands. The royalty management
             program uses automated information systems to help ensure that all
             revenues and royalties are properly collected and that appropriate roy-
             alty payments-totalling     millions of dollars annually-are   distributed
             to the U.S. Treasury, states, and Indian tribes and allottees.

             Interior’s royalty management responsibilities are divided among three
             of its agencies: MMS, BLM, and the Bureau of Indian Affairs (BIA). MMS
             administers offshore leases and collects, accounts for, and disburses rev-
             enues from both onshore and offshore federal and Indian land leases.
             BLM generally administers federal onshore leases, even on lands over
             which other agencies, such as the Forest Service and the Army Corps of
             Engineers, have primary jurisdiction. BLM is also responsible for
             inspecting federal and Indian onshore oil and gas lease sites and
             enforcing provisions of federal laws and regulations2 BIA, acting as the
             federal government’s trustee for property held by federally recognized
             tribes and for Indian allottees, identifies and disburses royalties to indi-
             vidual Indian recipients. As a result of a Senate Select Committee study
             of Indian issues, MMS has sought to improve services related to royalty
             payments to Indian tribes and allotteesZ1

             In 1988 the government collected over $2.5 billion in royalties from the
             production and sale of oil and gas extracted from Indian lands and
             onshore and offshore federal lands. Royalties are amounts paid by les-
             sees for oil and gas produced and are usually calculated as a percentage

             ‘Mineral Revenues: Shortcomings in Onshore Federal Oil and Gas Production Verification (GAO/
                   -*90 -99, June 26,109O).
             “The Federal Oil and Gas Royalty Management Act of 1982 calls for inspection and enforcement of
             onshore oil and gas leases.
             “Final Report and Legislative Recommendations, Special Committee on Investigations of the Select
             Committee on Indian Affairs, United States Senate, November 1989.

             Page 2                                                 GAO/IMTEG9085       Planned Improvements

                       of the oil and gas value Royalties from federal and Indian onshore oil
                       and gas leases accounted for $471 million of the $2.6 billion in royalties
                       collected in 1988.

                       According to MMS officials, the federal process for collecting royalties
                       from payors is similar to federal income tax collection. That is, the
                       payor (1) tells the government what is owed based on federal regula-
                       tions and laws, (2) makes the payment, and (3) is subject to MMS internal
                       analysis and audit to determine if the proper amount was paid.

                       Throughout the 1980s numerous studies and audits reported problems
Information Problems   with MMS'S automated royalty management systems. (See bibliography
Affecting MMS’         and the list of related GAO products at the end of the report.) For
Royalty Management     example, a 1984 House Committee On Interior and Insular Affairs
                       report” cited several major problems with the Royalty Management Pro-
System                 gram’s automated system, including (1) inadequate definition of func-
                       tional requirements, (2) inefficient automated data processing programs,
                       (3) poor systems documentation, (4) inadequate planning for equipment
                       requirements (underestimated capacity needs), and (6) overly ambitious
                       systems development (unrealistic project schedules and system

                       In addition, past studies identified a continuing data reliability problem
                       affecting Interior’s royalty management program. A key component of
                       this program is verification of self-reported mineral production data.
                       Weaknesses in Interior’s production verification inspections raised con-
                       cerns about underreporting. We recently concluded that BLM'S verifica-
                       tion of onshore oil and gas production is inadequate to satisfy
                       requirements that Interior accurately determine royalty payments.”

                       In November 1986, because of the many reported deficiencies, MMS used
MMS Royalty            an International Business Machines methodology, called Business Sys-
Management System      tems Planning, to identify systems problems. This involved the creation
Improvement Plan       of an MMS Systems Improvement Team and coordination with key sys-
                       tems users including MMS, state, industry, and Indian representatives. In
                       addition to confirming earlier concerns, the team identified a more com-
                       prehensive set of systems problems that included issues relating to

                       “Federal Minerals Royalty Management, Committee on Interior and Insular Affairs, U.S. House of
                       Representatives, December 1984.
                       "GAO/RCED-90-99,June 26,lQQO.

                       Page 3                                                GAO/NTEG9086        Planned Improvements

    system architecture, data integrity, application software, and internal

    After identifying systems problems, the MMS Systems Improvement
    Team with the assistance of a contractor, American Management Sys-
    tems Operations Corporation, developed a Business System Improve-
    ment Plan. The plan identified projects to be performed over a 3-year
    period, beginning in September 1988, to resolve these problems. MMS
    assessed the feasibility of these potential improvement projects, con-
    structed actual project proposals, and developed an implementation plan
    for those projects it considered feasible.

    MMS’S system improvement plan is a positive step towards addressing
    problems with its automated royalty management system.‘The plan
    covers several factors generally considered critical to success in system
    redesign.” For example, it employs a structured methodology for sys-
    tems planning and for systems development, and describes segmented
    projects that are to specifically address the problems identified with
    MMS’S automated royalty management system. Moreover, systems
    enhancement is being implemented through a series of upgrades where
    each upgrade provides a new and/or improved function and builds upon
    the capabilities provided in earlier releases. In addition, the plan
    addresses several other key factors, including:

l   better defined functional requirements that are reviewed and approved
    by MMS and the systems contractor;
l   thorough systems documentation, including software design documents,
    users manuals, and operations manuals;
l   a modular, flexible system design that can accommodate technological
    change and future growth;
l   target dates for completing each enhancement project and an overall
    project completion date; and
l   detailed capacity analysis and equipment planning to ensure that the
    systems improvements will meet needs through 1996 and provide a plat-
    form for growt,h beyond 1996.

    “Critical Factors in Developing Automated Accounting and Financial Management Systems, United
    States General Accounting Office, January 1987.

    Page 4                                               GAO/LM’ITKSO86     Planned Improvements
                       In response to issues raised in November 1989 by the Senate Select Com-
                       mittee on Indian Affairs,7 and based on consultation with the Indian
                       community,?MMs has recently modified its implementation plans by
                       including steps to improve automated royalty management information
                       services pertaining to Indian tribes and allottees: For example, software
                       enhancements are now planned to better identify and track instances
                       involving nonpayments or underpayments made by oil and gas pro-
                       ducers on Indian leases. MMS is developing necessary software and
                       system changes as part of its overall system improvement process and
                       has incorporated them into its system improvement plan. As a result of
                       these changes, MMS projects March 1992 as a completion date for all
                       projects, 6 months later than originally planned.

                       Although the plan is a positive step, we did not evaluate any projects
                       because they were in early implementation stages. Similarly, we did not
                       evaluate the rationale used by MMS to estimate the 6-month schedule
                       delay because this occurred during the final stages our of review. Never-
                       theless, even if the objectives of all the projects are met, data integrity
                       concerns remain about royalty management information external to MMS
                       which can affect the success of the overall enhancement project.

                       Data reliability problems associated with onshore oil and gas production
External Information   data used by MMS to determine royalty collections and disbursements
Issue Affecting MMS    have not been satisfactorily resolved. As we reported in June 1990,
Royalty Management     BLM’S verification of this production data is inadequate to satisfy the
                       requirement that Interior accurately determine royalties.R Specifically,
                       we found that most data on oil and gas production are not verified,
                       inspection and enforcement program oversight is inadequate, and insuf-
                       ficient guidance and monitoring of inspection information collection pro-
                       duces unreliable data. Without adequate verification of this data used
                       by MMS in carrying out its royalty management responsibilities, MMS has
                       little assurance that all the royalty revenue due the federal government
                       from onshore production is being collected now or will be collected once
                       the systems improvement projects have been completed. BLM cited this
                       data reliability problem as a material internal control weakness in the
                        1989 Interior Financial Integrity Act report.

                       7Collectively known as Initiatives for Indian Tribes and Allottees, these issues span all Royalty Man-
                       agement Program activities including organizational structure, enforcement, communications, and
                       automated systems.
                       ‘GAO/RCED-90-99, June 26,lQQO.

                       Page 5                                                   GAO/IMTEG90436       Planned Improvements

              As a result of our report on oil and gas production verification problems,
              BLM is taking or planning steps to improve the accuracy of the informa-
              tion. These include revisions in inspection processes, improvements in
              field office staffing and resources, use of internal control reviews, and
              improvements to inspection data collection and entry. However, we have
              not verified these actions or evaluated their effects on the Royalty Man-
              agement Program.

              An interagency steering committee, formed in 1988, exists to help
              resolve difficulties in accurate and timely information exchanges. As
              part of its response to our June 1990 report, Interior has stated that it
              will ask this committee to re-evaluate whether an existing Memorandum
              of Understanding among MMS, BLM, and BIA adequately addresses inter-
              agency information sharing issues” According to one member of the
              committee, it has no authority to mandate budgetary or operational
              changes that cut across agency boundaries.

              Interior’s Office of Information Resources Management is not repre-
              sented on the interagency steering committee even though it is respon-
              sible for overseeing and guiding departmentwide information resources
              and technologies. Its primary role has been to set policy, develop infor-
              mation resources management guidance, and facilitate discussions
              among Interior bureaus and offices.

                      plan for enhancing its automated royalty management system is a
Conclusions   MMS’S
              positive step toward addressing many previously identified problems.
              The systems improvement plan is following a formal, structured meth-
              odology that addresses many key factors important to the success of the
              system enhancement effort. However, because the implementation
              projects were in early stages, we did not evaluate them and cannot reach
              final conclusions about the enhanced system. Additional requirements
              have also been added because of initiatives requiring improvements in
              royalty management services to Indians. Because MMS was formulating
              its strategy for addressing these initiatives at the time of our review, we
              also did not evaluate how MMS estimated the 6-month delay in the
              delivery of the enhanced system.

              “The Memorandum of Understanding defines responsibilities for managing mineral leases and identi-
              fies required information exchanges concerning MMS audits and BLM inspection and enforcement

              Page 6                                                GAO/IMTJSG9085      Planned Improvements
Our June 1990 report concludes that data verification concerns continue
to pose potential risks to the accuracy of onshore production informa-
tion contained in MMS' automated royalty management system. Thus,
even if the objectives of the projects implementing the system enhance-
ment plan are met, there is no assurance that the automated system will
produce accurate royalty determinations, BLM is taking and planning
steps to remedy existing shortcomings; however, it is too early for us to
evaluate whether these actions resolve the onshore production verifica-
tion issue and better ensure the accuracy of MMS'S royalty

Three Interior agencies share responsibilities in administering the Roy-
alty Management Program and are dependent upon each other for
important program information and services. In response to our June
1990 report, the Secretary’s office has asked the interagency steering
committee to re-examine interagency information issues and to ensure
the effectiveness of actions taken by the individual agencies. Interior’s
Office of Information Resources Management is not represented on the
steering committee, even though it has departmentwide information
management responsibilities covering all Interior agencies. As Interior
reviews BLM'S onshore production verification weaknesses and associ-
ated cross-agency royalty management information issues, it might con-
sider the benefits that could be obtained from the departmentwide
perspective provided by a more actively involved Office of Information
Resources Management,

We conducted our work in accordance with generally accepted govern-
ment auditing standards. The views of MMS officials were sought during
the course of our work and their informal comments were obtained on
this report. We have incorporated these comments where appropriate.
MMS officials agreed with our conclusions.

We are sending copies of this report to the Senate Committee on Energy
and Natural Resources; House Committee on Interior and Insular
Affairs; House Subcommittee on Energy and the Environment; Director,
Office of Management and Budget; and other interested parties. We will
also make copies available to others on request.

This work was performed under the direction of JayEtta Hecker,
Director of Resources, Community, and Economic Development

Page 7                                   GAO/IMTJZG90-65   Planned Improvements

Information Systems Issues, who can be reached at (202) 275-9675.
Other major contributors to this report are listed in appendix II,

Sincerely yours,

Assistant Comptroller General

Page 8                                  GAO/lMTEG9O86   Planned Improvements
Page 9   GAO/IMTEC99-tM   PLanned Improvements

Letter                                                                                               1

Appendix I                                                                                       12
Objective, Scope,and
Appendix II                                                                                      15
Major Contributors to
This Report
Bibliography                                                                                     13

Related GAO Products                                                                             16


                        HA        Bureau of Indian Affairs
                        I3LM      Bureau of Land Management
                        GAO       General Accounting Office
                        IMTEC     Information Management and Technology Division
                        MMS       Minerals Management Service

                        Page 10                               GAO/IMTEG9085   Planned Improvements
Page 11   GAO/IMTEG9085   Planned Improvements
Appendix I                                                                                  4

Objective,Scope,and Methodology

              Because of the many automation problems that have contributed to MMS'
              royalty management difficulties, we collected information on MMS' pro-
              gress in resolving these problems. The objective of our review was to
              determine whether MMS' automated system improvement plan was
              addressing automated systems problems affecting its royalty manage-
              ment mission.

              To accomplish our objective, we reviewed operations at MMS' Royalty
              Management Program office in Lakewood, Colorado. We interviewed
              MMS contractor officials responsible for systems operation, maintenance,
              engineering, software development, and testing and integration. We
              interviewed program officials who use the MMS systems, and we
              reviewed the agency’s plans for improving its systems. We obtained doc-
              uments from and interviewed members of the MMS/BLM Joint Steering
              Committee, officials from MMS' Office of Information Resources Manage-
              ment, and directors and chiefs at MMS, BLM, and Interior’s Office of Infor-
              mation Resources Management. At the time of our review, the
              enhancement projects being done under the system improvement plan
              were in early stages which precluded their evaluation.

              We conducted our work between August 1989 and April 1990 in accor-
              dance with generally accepted government auditing standards. The
              views of agency officials were sought during the course of our work and
              their comments have been incorporated where appropriate.

              Page 12                                  GAO/IMTEG90-65   Planned Improvements


                      Management Action Plan for the Royalty Management Program (MAP),
Department of the     April 29, 1985.
                      Oil and Gas Management Study (Shriver Report), Dec. 7, 1984.

                      Report of the Commission on the Fiscal Accountability    of the Nation’s
                      Energy Resources (Linowes Report), Jan. 21, 1982.

                      The Royalty Management Program: A Management Oriented Post Imple-
                      mentation Review (Cason Report), March 8, 1985.

                      Conversion of the Casper, Wyoming Station - Minerals Management Ser-
Office of Inspector   vice (C-EM-MMs-09-84(E), May 8, 1985).
                      Mission Accomplishment - Fiscal Accounting Division (88-6 1, Apr. 1,

                      Mission Accomplishment - Production Accounting Division (88-62, Apr.
                      1, 1988).

                      Recommendations Impacting the Improved Royalty Management System
                      (C-EM-GSV-14-82, Sept. 14, 1982).

                      Review of Bonus and Rental Accounting Support System (C-LM-MMS-08-
                      85(D), Nov. 29, 1985).

                      Review of System Change Procedures - Minerals Management Service
                      (C-EM-MMs-0984(D), Sept. 12, 1984).

                      Review of the Bureau of Land Management, Minerals Management Ser-
                      vice, and Office of Surface Mining, Reclamation, and Enforcement Cor-
                      rective Action Tracking System Established Pursuant to the Federal
                      Manager’s Financial Integrity Act (E-MO-MOA-07-86-(C), Oct. 28, 1986).

                      Survey of Bonus and Rental Accounting Support System       (C-EM-MMS-0%
                      84(B), July 18, 1984).

                      Risk Assessment: AFS Reimplementation Project (Aug. 15, 1986).
General Seyices

                      Page 13                                 GAO/IMTEC-9065   Planned Improvements

                     Data Base Validation (Aug. 5, 1986).
Royalty Management
Advisory Committee   Report of the Panel on Systems Improvement (Oct. 12, 1987).

                     Federal Minerals Royalty Management (Udall Report). House Committee
United States        on Interior and Insular Affairs, Dec. 20, 1984.
                     Indian Oil and Gas Royalty Payments: Problems Persist (Synar Report).
                     House Committee On Government Operations, July 19, 1985.

                     Page 14                                GAO/IMTEG90-65   Planned Improvements
Major Contributors to This Report

                       Theodore C. Gearhart, Assistant Director
Information            Susan Maciorowski, Technical Adviser
Management and         David L. McClure, Assignment Manager
Technology Division,
Washington, D.C.

                       Ronald J. Guthrie, Regional Management Representative
Denver Regional        Brian W. Eddington, Evaluator-in-Charge
Office                 Walter E. Machin, Evaluator

                       Page 15                                GAO/IMTEG9065   Planned Improvements
RelatedGAO Products

               Mineral Revenues: Shortcomings in Onshore Federal Oil and Gas Produc-
               tion Verification (RCED-90-99,June 26, 1990).

               Mineral Revenues: Options to Accelerate Royalty Payment Audits Need
               Further Consideration (Ram-89-167. June 5, 1989).

               Mineral Revenues: Implementation of the Federal Onshore Oil and Gas
               Leasing Reform Act of 1987 (RCED-89-108,May 28, 1989).

               Mineral Revenues: Information on Interior’s Royalty Management Pro-
               gram (RCED-88-166,July 22, 1988).

               Mineral Revenues: Cost of Modifying Gas Royalty Provisions Overesti-
               mated by Interior (RCED-88-46,Nov. 5, 1987).

               Mineral Revenues: Interior’s Control Over Oil and Gas Allowances
               (RCED-87-207RR,Sept. 17, 1987).

               Mineral Resources: Timely Processing Can Increase Rent Revenue From
               Certain Oil/Gas Leases (RCED-87-98,June 18, 1987).

               Mineral Revenues: Opportunities to Increase Onshore Oil and Gas Min-
               imum Royalty Revenues (~~~~-86-110, June. 24, 1986).

               Interior Has Not Solved Indian Oil and Gas Royalty Payment Problems
               (1~~~~86-13, Mar. 3 1, 1986).

               Mineral Revenues: Delays in Processing and Disbursing Onshore Oil and
               Gas Bid Revenues (mm-86-69, Mar. 24, 1986).

               Interior Should Solve Its Royalty Accounting Problems Before Imple-
               menting New Accounting System (AFMD-83-43, Jan. 27, 1983).

               Need For Guidance and Controls On Royalty Rate Reductions For Fed-
               eral Coal Leases (EMD-82-86, Aug. 10,1982).

               Interior’s Minerals Management Programs Need Consolidation To
               Improve Accountability and Control (EMD-82-104, July 27, 1982).

               Oil and Gas Royalty Accounting-Improvements    Initiated But Con-
               tinued Emphasis Needed to Ensure Success (~~~~82-66, Apr. 27,1982).

               Oil and Gas Royalty Collections-    Longstanding Problems Costing Mil-
               lions (AFMD-82-6, Oct. 29, 1981).

(510426)       Page 16                                   GAO/IMTJ3G9OB5   Planned Improvements
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