oversight

Minerals Management: Costs for Onshore Minerals Leasing Programs in Three States

Published by the Government Accountability Office on 1997-02-27.

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

                 United States General Accounting Office

GAO              Report to the Honorable
                 Craig Thomas, U.S. Senate



February 1997
                 MINERALS
                 MANAGEMENT
                 Costs for Onshore
                 Minerals Leasing
                 Programs in Three
                 States




GAO/RCED-97-31
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-275497

                   February 27, 1997

                   The Honorable Craig Thomas
                   United States Senate

                   Dear Senator Thomas:

                   The development of federal onshore leasable minerals nationwide in fiscal
                   year 1996 generated about $963 million, of which states received about
                   half, or $481 million.1 The federal government’s appropriations for
                   administering its onshore leasable minerals program in that same year
                   were almost $114 million. States will pay the federal government about
                   $22 million of this amount. The key agencies responsible for onshore
                   mineral leasing are the Department of the Interior’s Bureau of Land
                   Management (BLM) and Minerals Management Service (MMS), and the
                   Department of Agriculture’s Forest Service.

                   Concerned about whether the costs borne by Wyoming, New Mexico, and
                   California for managing federal minerals were comparable to these states’
                   own programs, you asked us to (1) identify how much the three states paid
                   to the federal government for managing minerals on federal lands within
                   their boundaries, (2) identify the costs to the three states for their own
                   minerals management programs, and (3) compare these federal and state
                   program costs. This report also discusses the activities that are associated
                   with the federal and state programs.


                   In fiscal year 1996, Wyoming, New Mexico, and California received almost
Results in Brief   $358 million in revenues from federal onshore leasable minerals; they will
                   pay almost $14.6 million in fiscal year 1997 for a portion of the federal
                   government’s fiscal year 1996 onshore mineral leasing program.
                   Wyoming’s share of the $14.6 million is $7.02 million, New Mexico’s is
                   $5.94 million, and California’s is $1.65 million. These amounts were
                   computed on the basis of allocations of the federal appropriations for all
                   activities conducted by the Forest Service, the Bureau of Land
                   Management, and the Minerals Management Service related to managing
                   federal onshore leasable minerals.

                   Onshore mineral development on Wyoming’s, New Mexico’s, and
                   California’s state-owned land generated combined royalties, rents, and


                   1
                    The $963 million is the portion of onshore leasable minerals revenue that is sharable with the states.
                   Leasable minerals include oil and gas, coal, geothermal steam, sodium, trona, and potash.



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             bonuses of $148 million in fiscal year 1996.2,3 The states’ combined costs
             for managing onshore mineral development—which includes development
             on state and private lands—totaled about $19 million. Specifically, the
             costs for Wyoming’s minerals management program were $2.4 million in
             fiscal year 1996, while New Mexico’s were $7.2 million and California’s
             costs were $9.9 million.

             Because of differences between federal and state programs, the states’
             costs for these programs cannot be meaningfully compared. Federal
             decisions about mineral leasing must involve land-use planning and
             environmental analysis. The three states we reviewed do not have similar
             land-use planning processes. Furthermore, neither Wyoming nor New
             Mexico requires an environmental analysis similar to that performed by
             the federal government. According to California State Lands Commission
             officials, California laws require an environmental analysis and the
             protection of state lands. Other differences are state-specific and can be
             attributed to a program’s size and regulatory scope and number of mineral
             operations managed. For example, California’s oil and gas conservation
             agency devotes about 95 percent of its resources to managing mineral
             development on privately owned land and other lands not owned by the
             state or federal government.4


             Under the Mineral Leasing Act (30 U.S.C. 181 et seq., as amended) (MLA),
Background   revenues for federal onshore minerals, which include bonuses, rents, and
             royalties,5 are distributed as follows: 50 percent to the state in which the
             production occurred, 10 percent to the general treasury, and 40 percent to
             the reclamation fund.6,7 Lands leased under other laws have different
             distribution requirements. In fiscal year 1996, 41 states received a total of

             2
              The federal fiscal year is from October through September, and the fiscal year for each of the three
             states is from July through June. However, because each covers a period of 12 months, we consider
             them equivalent in this report.
             3
              In addition, Wyoming and New Mexico collected $206 million and $313 million, respectively, in
             severance taxes from mineral production on federal, state, and privately owned land within their
             boundaries in fiscal year 1996.
             4
              California’s Division of Oil, Gas, and Geothermal Resources regulates some aspects of the
             net-profit-sharing operations on lands granted to the City of Long Beach.
             5
              On federal land, lessees pay bonuses to acquire tracts of land for lease. For nonproducing lands,
             lessees pay a rental of $1.50 to $2 per acre. For producing leases, lessees or lease operators pay
             royalties on the basis of a percentage of the value of the minerals produced.
             6,
              The reclamation fund is used for the construction of irrigation projects under the Reclamation Act of
             1902.
             7
              Under MLA, Alaska receives 90 percent of receipts and the remaining 10 percent is paid to the general
             treasury.


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about $481 million in revenues from the development of federal onshore
minerals. Wyoming, New Mexico, and California received about
$206 million, $124 million, and $28 million, respectively.

Wyoming, New Mexico, and California also manage mineral development
on private and state-owned lands. In these states, revenues from
state-owned land are used to fund public educational institutions.
Wyoming’s bonus, rental, and royalty revenues from minerals on
state-owned land in fiscal year 1996 were $29 million. In New Mexico,
these revenues from minerals on state land were $115 million. California’s
revenues from state-owned minerals onshore were $3 million.

In 1991, with the passage of the Department of the Interior’s appropriation
bill, states receiving revenues from federal onshore minerals began paying
a portion of the costs to administer the onshore minerals leasing laws—a
practice known as “net receipts sharing.” Net receipts sharing became
permanent with the passage of the Omnibus Budget Reconciliation Act of
1993 (OBRA), which effectively requires that the federal government
recover from the states about 25 percent of the prior year’s federal
appropriations allocated to minerals leasing activities. (See app. I for a
detailed description of net receipts sharing.)

In general, managing federal and state minerals includes some level of
resource planning and use authorization, compliance inspections, revenue
collection, and auditing. Resource planning may include identifying areas
with a potential for mineral resources; planning for future mineral
development and how that development will affect other resources on the
land (such as recreation, livestock grazing, and wildlife); and geophysical
exploration by potential lessees. Use authorization includes lease issuance
and the approval of post-leasing activities—including the drilling of oil and
gas wells and the extraction of other mineral resources—and such
associated activities as the construction of roads, facilities, pipelines,
storage tanks, and modifications to operations. Once approved and under
way, these operations may be inspected periodically to determine whether
they comply with applicable laws, regulations, and lease terms. The
revenues from mineral leasing and information about production are
collected and may be audited.




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                                      The federal government allocated $14.6 million of its appropriations for
States’ Costs for                     minerals management to Wyoming, New Mexico, and California for fiscal
Federal Minerals                      year 1996. This amount, which will be deducted from the states’ 1997
Management                            revenue payments, was computed on the basis of allocations of the
                                      appropriations for all onshore leasable minerals management activities
Activities                            conducted by the Forest Service, BLM, and MMS—the three key agencies
                                      responsible for administering the federal onshore minerals leasing laws.
                                      Table 1 shows the fiscal year 1996 net receipts-sharing deductions for
                                      Wyoming, New Mexico, and California and the portions attributable to the
                                      Forest Service, BLM, and MMS.

Table 1: Net Receipts-Sharing
Deductions for Wyoming, New Mexico,   Dollars in millions
and California by Federal Agency,     State                   Forest Service                  BLM                MMS                 Totala
Fiscal Year 1996
                                      Wyoming                            $0.14               $4.87               $2.01               $7.02
                                      New Mexico                          0.06                3.27                2.61                 5.94
                                      California                          0.11                1.01                0.54                 1.65
                                      a
                                          Totals may not add because of rounding.



                                      The Forest Service manages mineral uses occurring in national forests,
                                      which includes determining whether forest areas are suitable for leasing,
                                      participating with BLM in making leasing decisions for forest land, and
                                      managing mineral operations on forest land. These activities are required
                                      under several federal laws, including (1) the National Forest Management
                                      Act of 1976, which prescribes forest planning processes; (2) the National
                                      Environmental Policy Act of 1969 (NEPA), which requires environmental
                                      analysis and documentation; and (3) the Federal Onshore Oil and Gas
                                      Leasing Reform Act of 1987, which authorized the Secretary of Agriculture
                                      to determine which Forest Service lands could be leased for mineral
                                      development and to specify the conditions placed on mineral leases.

                                      Likewise, BLM manages surface uses and makes leasing decisions on
                                      BLM-managed    land. BLM also issues leases and manages operations for oil,
                                      gas, coal, and other minerals (1) on lands with split ownership, namely
                                      where the minerals are federally owned but the surface is not, and (2) on
                                      certain lands managed by other federal agencies.8 BLM is also responsible
                                      for performing inspections to verify the quantity of minerals produced on
                                      federal leases. In addition to MLA, major federal laws governing BLM’s
                                      management of onshore minerals include (1) the Federal Land Policy

                                      8
                                       BLM also has some supervisory authority over state and private wells in federally approved units and
                                      communitization agreements.



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                          Management Act of 1976, which gave BLM general management
                          responsibilities for public land, endorsed multiple-use management, and
                          prescribed a planning process similar to the Forest Service’s; (2) NEPA;
                          (3) the Federal Onshore Oil and Gas Leasing Reform Act; (4) the Federal
                          Coal Leasing Amendments Act of 1976; and (5) the Federal Oil and Gas
                          Royalty Management Act of 1982 (FOGRMA), which was enacted to ensure
                          that the Secretary of the Interior properly accounts for all oil and gas from
                          public lands.

                          MMS collects, audits, and disburses most mineral revenues from production
                          on federal lands. In support of these functions, the agency maintains
                          information on leases and royalty payers. MMS also collects and compares
                          royalty and production information reported by payers and operators.
                          Finally, MMS audits payments received from selected royalty payers. As
                          with some of BLM’s minerals management activities, MMS’ functions stem
                          from requirements in FOGRMA.


                          In fiscal year 1996, Wyoming’s onshore minerals management program
States’ Costs for Their   cost $2.0 million, New Mexico’s cost $7.2 million, and California’s cost
Own Minerals              $9.9 million. All three states lease state-owned land within their
Management                boundaries for minerals development. Each of the three states has a land
                          office responsible for leasing and for collecting revenues from those
Activities                leases. The states also have regulatory agencies that oversee mineral
                          operations within their boundaries, including those on state and private
                          land, and where applicable, on federal and other land.9 Appendix II
                          includes a more detailed description of the three states’ mineral programs.
                          Table 2 shows the costs for the states’ minerals management programs.




                          9
                           According to state officials, New Mexico’s Oil Conservation Division regulates some aspects of
                          mineral operations on Indian lands, and California regulates some aspects of net-profit-sharing leases
                          on granted lands.



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Table 2: Costs for Each State’s
Onshore Minerals Management            Dollars in millions
Program by State Agency, Fiscal Year                                 State land office or
1996                                                                    commission                     Regulatory agency
                                       State                    Agency’s name              Cost Agency’s name              Costa          Total
                                       Wyoming                  State Land and              $0.8 Oil and Gas                 $1.6         $2.4
                                                                Farm Loan Officeb                Conservation
                                                                                                 Commission
                                       New Mexico               State Land Office            3.0 Oil Conservation             4.2c          7.2
                                                                                                 Division
                                       California               State Lands                  0.4 Division of Oil,             9.5           9.9
                                                                Commission                       Gas, and
                                                                                                 Geothermal
                                                                                                 Resources
                                       a
                                         These agencies’ costs are for their regulation of mineral development on all lands under their
                                       jurisdiction, including state and private lands. They may also oversee some aspects of mineral
                                       development on federal and other lands.
                                       b
                                        The Wyoming State Land Office’s costs include the Wyoming Department of Audit’s cost for
                                       auditing state mineral leases.
                                       c
                                           Includes $483,000 for New Mexico’s gas-marketing program.



                                       As land managers, the states’ land offices serve some similar functions for
                                       state land as the Forest Service and BLM do for federal land. The states’
                                       land offices decide how state land will be used and issue leases for mineral
                                       development. As royalty managers, they perform most of the same
                                       functions as MMS does for federal royalties. They collect and account for
                                       mineral revenues, including bonuses, rents, and royalties, and audit these
                                       payments.

                                       As BLM does for federal lands, the states’ regulatory agencies review and
                                       approve drilling and extraction permits and operations; inspect operations
                                       for compliance with safety, environmental, and operational requirements;
                                       and verify and compile data on reported production on state-owned lands.
                                       The state regulatory agencies are also authorized to inspect operations for
                                       compliance with safety and environmental standards on private land
                                       within the state. The agencies are mandated by state laws to perform other
                                       minerals management activities on federal, state, private, and other lands.
                                       These activities include making spacing determinations, reviewing and
                                       approving discharge plans for oil fields, witnessing surface casing and
                                       well-plugging, and inspecting and permitting waste disposal for
                                       commercial facilities.




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                        Because of differences between federal and state programs, the states’
Costs for Federal and   costs for these programs cannot be meaningfully compared. Current laws
State Programs          require the Forest Service and BLM to create land-use plans that evaluate
Cannot Be               alternative resource uses—including minerals—on federally managed
                        lands. These plans must include public involvement and may be appealed
Meaningfully            to the agency or challenged in court. The three states we reviewed do not
Compared                have similar land-use planning processes, and neither Wyoming nor New
                        Mexico has similar requirements for environmental analysis to those for
                        the federal land-managing agencies. In responding to a draft of this report,
                        officials from California’s State Lands Commission commented that the
                        California Environmental Quality Act and other state laws require the
                        protection of the environment, which includes developing environmental
                        information and mitigation requirements; protecting significant
                        environmental values on state lands; and balancing public needs in
                        approving the uses of state lands. A New Mexico state official noted that
                        mineral development in that state does not occur at the expense of
                        archaeological or environmental concerns.

                        Federal law also requires certain royalty management activities that are
                        different from state activities. For example, FOGRMA requires the Secretary
                        of the Interior to have a strategy for inspecting oil and gas operations to
                        ensure that all production is reported. This strategy includes inspections
                        of equipment, specific measurement of oil and production, and site
                        security procedures. In contrast, the states rely primarily upon
                        comparisons of royalty and production reports to verify production
                        amounts rather than on field inspections. (See app. II for more details on
                        the states’ activities.)

                        Other differences are state-specific. For example, federal land in Wyoming
                        contains over twice as many producing coal leases than does state land.
                        By law, BLM must perform an economic evaluation of coal for leasing but
                        not for oil and gas leasing. The scope of the regulatory agencies’
                        responsibilities also differs from that of the federal program, as these
                        agencies regulate mineral development on state, private, and in some
                        cases, federal and other land. In their response to a draft of this report,
                        officials in California’s Division of Oil, Gas, and Geothermal Resources
                        commented that its regulatory scope is unique among the states, as about
                        95 percent of its workload involves administering laws and regulations on
                        private and granted lands.




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                  We provided the Department of the Interior, the Forest Service, BLM, and
Agency Comments   MMS with a draft of this report. Wyoming’s State Land and Farm Loan
                  Office and Oil and Gas Conservation Commission, New Mexico’s State
                  Land Office and Oil Conservation Division, and California’s State Lands
                  Commission and Conservation Department’s Division of Oil, Gas, and
                  Geothermal Resources were also provided with a draft of this report.

                  In written comments, the Department of the Interior and MMS generally
                  agreed with the contents of the report. (See app. IV.) BLM provided us with
                  technical clarifications, which we have incorporated as appropriate, and
                  also suggested that we include information on the states’ mining
                  regulatory agencies. However, we did not include this information because
                  we focused on activities comparable to the federal leasable minerals
                  program (for which net receipts sharing is computed), which does not
                  include all mining-related activities. The Forest Service had no comments
                  on the draft.

                  In written comments, Wyoming’s Office of the Governor acknowledged
                  that the federal and state mineral leasing programs are different, but
                  disagreed with our position that the costs cannot be meaningfully
                  compared. (See app. V.) The Governor’s Office commented that a
                  comparison could be made that includes an analysis of the similarities and
                  differences in the programs. Our analysis shows that because of such
                  differences in the programs as land-use planning, environmental, and
                  production verification requirements, a cost comparison would not be
                  meaningful.

                  The Governor’s Office also requested that we expand our report to provide
                  a breakdown of the federal program’s direct and indirect costs by
                  function. However, our report discusses the federal minerals management
                  program from the perspective of net receipts sharing, which is based upon
                  appropriations and not on actual program costs. Accordingly, we describe
                  how the appropriations are allocated but do not provide actual costs; such
                  a discussion would be outside the scope of this report. Furthermore, we
                  believe that regardless of the level of cost detail provided, a comparison
                  between federal costs and state costs would not be meaningful because of
                  the differences in the programs. The Office of the Governor’s comments
                  included comments and technical clarifications from Wyoming’s Oil and
                  Gas Conservation Commission, State Land and Farm Loan Office, and
                  Department of Audit, which we incorporated as appropriate.




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In commenting on this report, New Mexico’s Oil Conservation Division
(for written comments, see app. VI) stated that the states’ regulatory
agencies are responsible for minerals management activities beyond the
management of state-owned minerals. We adjusted the text of our report
to clarify the role of the regulatory agencies in managing state, private, and
where applicable, federal and other lands. Furthermore, the Oil
Conservation Division commented that many of the net receipts-sharing
costs are not justifiable; however, such an assessment was outside the
scope of our review.

In written comments, California’s State Lands Commission commented
that the draft was generally a fair and accurate review of California’s
minerals management costs. (See app. VII.) However, Commission
officials commented that our reporting of the Division of Oil, Gas, and
Geothermal Resources’ costs overstated the cost of managing state lands.
We adjusted the text of our report to clarify that the regulatory agencies’
scope of authority extends beyond state lands in all three states and that
about 95 percent of California’s Division of Oil, Gas, and Geothermal
Resources’ time is devoted to regulating the development of minerals on
privately owned and other land. The Commission also commented that it
is responsible for implementing the California Environmental Quality Act
and is required to develop environmental information and mitigation
requirements. Furthermore, it commented that state law requires the
Commission to protect significant environmental values on state lands and
to balance public needs in approving the uses of state lands. We
incorporated this information into the text of this report. The Commission
also commented that it has a program of inspections and other audit
procedures to verify production amounts and royalty payments that is
more extensive than we had described in the draft. We incorporated
specific recommended changes into our discussion of California’s
minerals management program in appendix II. California’s Division of Oil,
Gas, and Geothermal Resources provided technical clarifications, which
we also incorporated into the report as appropriate.


In conducting our review, we examined relevant reports and other
documents prepared by the three federal agencies within the Departments
of Agriculture and the Interior that are responsible for (1) managing
federal onshore leasable minerals and (2) allocating their appropriations
among the states for net receipts sharing. We interviewed program
managers and budget officials from these organizations in Washington,
D.C., and in regional, state, and local offices, as appropriate. We also



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obtained cost data and estimates from officials in Wyoming, New Mexico,
and California. We interviewed the officials responsible for compiling the
cost data and discussed the functions of their agencies and how they
compare with the federal program. We conducted our review from June
through November 1996 in accordance with generally accepted
government auditing standards. A full description of our objectives, scope,
and methodology is included in appendix III.

As requested, unless you publicly announce its contents earlier, we plan
no further distribution of this report until 7 days after the date of this
letter. At that time, we will send copies to appropriate congressional
committees, federal agencies, state agencies, and other interested parties.
We will also make copies available to others upon request.

Please call me at (202) 512-9775 if you or your staff have any questions
about this report. Major contributors to this report are listed in appendix
VIII.

Sincerely yours,




Barry T. Hill
Associate Director, Energy,
  Resources, and Science Issues




Page 10                         GAO/RCED-97-31 Onshore Minerals Leasing Programs
Page 11   GAO/RCED-97-31 Onshore Minerals Leasing Programs
Contents



Letter                                                                                               1


Appendix I                                                                                          14
                         Forest Service’s Allocations                                               15
Net Receipts-Sharing     BLM’s Allocations                                                          15
Process                  MMS’ Allocations                                                           15
                         Final Calculation of Net Receipts-Sharing Deduction                        16

Appendix II                                                                                         19
                         Wyoming                                                                    19
Information on States’   New Mexico                                                                 22
Mineral Programs:        California                                                                 25
Wyoming, New
Mexico, and
California
Appendix III                                                                                        30

Objectives, Scope,
and Methodology
Appendix IV                                                                                         32

Comments From the
Department of the
Interior
Appendix V                                                                                          33
                         GAO’s Comments                                                             35
Comments From the
Wyoming Office of the
Governor




                         Page 12                       GAO/RCED-97-31 Onshore Minerals Leasing Programs
                         Contents




Appendix VI                                                                                          36
                         GAO’s Comments                                                              38
Comments From the
New Mexico Oil
Conservation Division
Appendix VII                                                                                         39
                         GAO’s Comments                                                              41
Comments From the
California State Lands
Commission
Appendix VIII                                                                                        42

Major Contributors to
This Report
Tables                   Table 1: Net Receipts-Sharing Deductions for Wyoming, New                    4
                           Mexico, and California by Federal Agency, Fiscal Year 1996
                         Table 2: Costs for Each State’s Onshore Minerals Management                  6
                           Program by State Agency, Fiscal Year 1996
                         Table I.1: Fiscal Year 1996 Revenues and Fiscal Year 1997                   17
                           Deductions by State
                         Table II.1: Statistics on Mineral Revenues and Producing Leases             19
                           in Wyoming for Fiscal Year 1996
                         Table II.2: Statistics on Mineral Revenues and Producing Leases             23
                           in New Mexico for Fiscal Year 1996
                         Table II.3: Statistics on Mineral Revenues and Producing Leases             26
                           Onshore in California for Fiscal Year 1996

                         Abbreviations

                         BLM         Bureau of Land Management
                         EPA         Environmental Protection Agency
                         FOGRMA      Federal Oil and Gas Royalty Management Act of 1982
                         GAO         General Accounting Office
                         MLA         Mineral Leasing Act
                         MMS         Minerals Management Service
                         NEPA        National Environmental Policy Act of 1968
                         OBRA        Omnibus Budget Reconciliation Act of 1993
                         ONGARD      Oil and Natural Gas Administration and Revenue Database
                         RMP         Royalty Management Program


                         Page 13                        GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix I

Net Receipts-Sharing Process


              Under the Mineral Leasing Act (30 U.S.C. 181 et seq., as amended), states
              generally receive 50 percent of the revenues from federal onshore mineral
              leases, which include bonuses, rents, and royalties. Under the act, onshore
              federal mineral receipts are distributed as follows: 10 percent goes to the
              general treasury, 40 percent to the reclamation fund, and 50 percent to the
              state in which the production occurred.10 Lands leased under other laws
              have different distribution requirements.

              With the passage of the Department of the Interior’s 1991 appropriation
              bill, the federal government began recovering a portion of the costs to
              administer the federal onshore minerals leasing laws from the revenues
              generated—a practice now known as “net receipts sharing.” The 1993
              Omnibus Budget Reconciliation Act (OBRA) made net receipts sharing
              permanent. The agencies whose appropriations are included in the net
              receipts-sharing calculations are the Department of the Interior’s Bureau
              of Land Management (BLM) and Minerals Management Service (MMS) and
              the Department of Agriculture’s Forest Service.

              OBRA  requires that 50 percent of the preceding fiscal year’s appropriations
              to administer minerals leasing laws be deducted from the mineral
              revenues from federal lands before they are distributed among the states,
              the general treasury, and the reclamation fund. As a result, the states bear
              the cost associated with about 25 percent of the appropriations. To
              illustrate, if one year’s appropriation were $100, OBRA requires that
              50 percent of that appropriation, or $50, be recovered from the revenues in
              the following year. If the lands were leased under the Mineral Leasing Act,
              the $50 would be recovered as follows: $25 comes from the states
              receiving mineral revenues, $5 from the general treasury, and $20 from the
              reclamation fund.

              Although MMS is responsible for deducting the amounts from each state’s
              revenues, the deductions also include amounts for the Forest Service and
              BLM. The Forest Service and BLM compute and report their allocations to
              MMS, which then calculates the total amount to be deducted from each
              state’s revenues. The following sections explain how the Forest Service,
              BLM, and MMS compute their allocations and how MMS combines the
              allocations of all three agencies to compute the actual deduction from
              state revenues for the management of the federal onshore minerals leasing
              program.



              10
               Alaska receives 90 percent of the revenues, and the general treasury receives the remaining
              10 percent.



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                    Appendix I
                    Net Receipts-Sharing Process




                    For its portion of the net receipts-sharing deduction, the Forest Service
Forest Service’s    calculates and allocates the actual cost of its minerals management
Allocations         program. At the end of each fiscal year, the Forest Service identifies the
                    amounts charged to the minerals management program for each forest and
                    totals these amounts by state to determine each state’s minerals
                    management costs. The Forest Service’s fiscal year 1996 leasable minerals
                    management costs for Wyoming included those for the Bighorn, Shoshone,
                    Bridger-Teton, and Medicine Bow National Forests. The Forest Service’s
                    leasable minerals costs for New Mexico included those for the Carson,
                    Cibola, Gila, Lincoln, and Santa Fe National Forests. The Forest Service’s
                    costs for California included the Angeles, Eldorado, Inyo, Klamath, Lassen,
                    Los Padres, Mendocino, Modoc, Stanislaus, and Tahoe National Forests.

                    The Forest Service adds a percentage to these direct costs for indirect
                    expenses. In fiscal years 1995 and 1996, the Forest Service added
                    20 percent to the leasable minerals costs for program support and
                    common services, including those provided by the regional and
                    headquarters offices. For Wyoming, New Mexico, and California, the
                    Forest Service’s allocation for the fiscal year 1996 net receipts-sharing
                    computation was about $552,000, $234,000, and $517,000 respectively.


                    For its part of the net receipts-sharing process, BLM allocates its onshore
BLM’s Allocations   minerals management appropriations to each state. Each BLM state office
                    receives an energy and minerals budget, which includes all funds
                    dedicated to the management of onshore oil, gas, geothermal, and other
                    mineral resources on federally managed lands. From these amounts, BLM
                    subtracts appropriated amounts not specifically related to federal onshore
                    leasable minerals, such as costs to manage Indian minerals and other,
                    nonleasable minerals.11 To these state office budgets, BLM adds a factor for
                    indirect expenses. In fiscal year 1996, BLM added 19 percent to the energy
                    and minerals appropriations to cover the expense of general
                    administration and information management. For Wyoming, New Mexico,
                    and California, BLM’s allocation for the net receipts-sharing computation
                    was about $19 million, $13 million, and $5 million, respectively.


                    To determine the share of its budget related to onshore activities, MMS
MMS’ Allocations    begins with the budget for the Royalty Management Program (RMP), which
                    is responsible for managing revenues from federal mineral leasing, both

                    11
                      Salable and locatable minerals are nonleasable minerals on public domain land. These include sand
                    and gravel and hard-rock minerals, such as gold and silver. All minerals occurring on acquired land are
                    leasable.



                    Page 15                                    GAO/RCED-97-31 Onshore Minerals Leasing Programs
                       Appendix I
                       Net Receipts-Sharing Process




                       onshore and offshore. Each RMP division identifies the amount of its
                       budget that is related to managing onshore, offshore, and Indian revenues
                       on the basis of workload factors. Then, RMP allocates the federal onshore
                       amount to the states, again, on the basis of workload factors, such as the
                       number of producing leases in the state as a percentage of the total
                       number of federal onshore producing leases.12 For Wyoming, New Mexico,
                       and California, MMS’s allocation for the net receipts-sharing computation
                       was about $8 million, $10 million, and $3 million, respectively.


                       After the Forest Service, BLM, and MMS have identified the amounts to be
Final Calculation of   allocated for onshore leasable minerals management, MMS calculates the
Net Receipts-Sharing   final deduction for each state as follows:
Deduction
                       1. MMS divides the sum of the agencies’ allocations in half as required by
                       OBRA. The sum of the Forest Service’s, BLM’s, and MMS’ allocations for fiscal
                       year 1996 was almost $114 million. One-half of this amount was
                       $57 million.

                       2. The resulting amount ($57 million) is allocated among the states on the
                       basis of each state’s proportion of total revenues for that fiscal year. For
                       example, Wyoming received about 43 percent of the federal onshore
                       leasable mineral revenues in fiscal year 1996. To compute the
                       revenue-based allocation, MMS multiplied $57 million by 43 percent, which
                       resulted in an allocation of about $24 million for Wyoming.

                       3. However, under OBRA, the allocation to each state cannot exceed
                       one-half of the estimated amount that the agencies attributed to that state.
                       For fiscal year 1996, the total amount that the agencies attributed to
                       Wyoming was about $28 million, which is the sum of the Forest Service’s,
                       BLM’s, and MMS’ allocations to the state. One-half of the $28 million is about
                       $14 million.

                       4. The lower amount is deducted according to each state’s
                       revenue-distribution formula in the following fiscal year. Because
                       Wyoming receives one-half of the federal mineral receipts, it is charged
                       one-half of this lower amount ($14 million). Thus, Wyoming’s total
                       deduction in fiscal year 1997 will be about $7 million.



                       12
                         Until 1995, MMS used two methods to allocate its onshore minerals management appropriations to
                       the states. In 1996, the agency began using one method to allocate its onshore budget, the method
                       described in the text.



                       Page 16                                  GAO/RCED-97-31 Onshore Minerals Leasing Programs
                                       Appendix I
                                       Net Receipts-Sharing Process




                                       For all but two states—Wyoming and New Mexico—the allocation based
                                       upon each state’s proportion of total revenues resulted in the lower
                                       deduction for fiscal year 1996. Table I.1 shows the fiscal year 1996
                                       revenues and net receipts-sharing deductions (which will be deducted in
                                       fiscal year 1997) for the states.

Table I.1: Fiscal Year 1996 Revenues
and Fiscal Year 1997 Deductions by                                                                      Final deduction from
State                                  Statea                         Fiscal year 1996 revenuesb   fiscal year 1997 revenues
                                       Alabama                                         $226,578                     $11,157
                                       Alaska                                         5,275,082                     566,552
                                       Arizona                                           23,239                       1,376
                                       Arkansas                                         979,132                      55,052
                                       California                                    27,853,825                   1,649,917
                                       Colorado                                      37,096,417                   2,196,324
                                       Florida                                           33,338                       1,979
                                       Idaho                                          2,320,336                     136,705
                                       Illinois                                          90,546                       7,289
                                       Indiana                                              104                           3
                                       Kansas                                         1,159,257                      68,674
                                       Kentucky                                         116,867                       4,907
                                       Louisiana                                        995,105                      42,647
                                       Michigan                                         762,624                      42,265
                                       Minnesota                                          6,714                         199
                                       Mississippi                                      574,300                      18,789
                                       Missouri                                       1,242,446                      36,994
                                       Montana                                       22,097,622                   1,308,314
                                       Nebraska                                          15,314                         909
                                       Nevada                                         6,320,589                     374,210
                                       New Mexico                                   124,115,117                   5,944,818
                                       N. Carolina                                          118                           4
                                       N. Dakota                                      2,561,441                     151,900
                                       Ohio                                             191,602                      15,243
                                       Oklahoma                                       1,864,532                     113,057
                                       Oregon                                            66,050                       3,911
                                       Pennsylvania                                      23,696                       1,955
                                       S. Carolina                                          255                          11
                                       S. Dakota                                        691,207                      40,924
                                       Tennessee                                             76                           7
                                       Texas                                            675,462                      36,564
                                                                                                                 (continued)



                                       Page 17                             GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix I
Net Receipts-Sharing Process




                                                                      Final deduction from
Statea                          Fiscal year 1996 revenuesb       fiscal year 1997 revenues
Utah                                               36,415,201                      2,157,200
Virginia                                               98,871                           7,828
Washington                                            496,157                          29,376
W. Virginia                                           212,025                          14,352
Wisconsin                                                 930                               28
Wyoming                                          205,960,840                       7,016,230
Total                                           $480,563,017                     $22,057,670

a
  Four states had $0 revenue and $0 deductions: Georgia, Maryland, New Hampshire, and New
York.
b
Numbers have been rounded.




Page 18                                GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix II

Information on States’ Mineral Programs:
Wyoming, New Mexico, and California

                                    Officials in Wyoming, New Mexico, and California described their minerals
                                    management programs and provided us with actual and estimated costs of
                                    operating these programs.


                                    Wyoming receives revenues from the production of oil, gas, coal, and
Wyoming                             other minerals in the state. In fiscal year 1996,13 Wyoming received
                                    $30 million from production on state lands and $206 million from federal
                                    royalties, rents, bonuses, and other revenues. Almost 4 million acres of
                                    state-owned land in Wyoming contain 816 producing mineral leases,
                                    compared with 5,632 producing leases on more than 27 million acres of
                                    Forest Service- and BLM-managed land.

Table II.1: Statistics on Mineral
Revenues and Producing Leases in    Dollars in millions
Wyoming for Fiscal Year 1996                                      Oil and gas                     Coal                       Other
                                    Revenues and
                                    producing leases              State      Federal         State       Federal         Statea     Federalb
                                    Revenues                        $21           $73            $4           $88            $5           $45c
                                    Producing leases                761         5,587            16            35            39             10
                                    a
                                        Other minerals on state land include bentonite, uranium, sodium, and sand and gravel.
                                    b
                                        Other minerals on federal land include bentonite, carbon dioxide, sodium, sulfur, and trona.
                                    c
                                        Includes rents, bonuses, minimum royalties, estimated royalties, and other revenues.




State Land and Farm Loan            Wyoming’s State Land and Farm Loan Office’s Mineral Leasing and Royalty
Office                              Compliance Division issues leases on state lands for mineral development
                                    and collects, verifies, and processes royalty payments and payment
                                    information. The Division’s activities are guided by the agency’s mission of
                                    optimizing economic return from state lands in the interest of the state’s
                                    schools and institutions. The Division’s total costs for fiscal year 1996
                                    were about $750,000.14

                                    The Mineral Leasing Section’s resource-planning activities do not include
                                    formal land-use planning activities similar to those required of federal
                                    agencies. Instead, they focus on compatibility of mineral operations with

                                    13
                                      The federal fiscal year is from October 1 through September 30, and the fiscal year for each of the
                                    three states is from July 1 through June 30. However, because each covers a period of 12 months, we
                                    consider them equivalent in this report.
                                    14
                                      For this and the other agencies discussed, this total includes direct and indirect costs for the agency.
                                    The costs given for the activities were provided to us as general estimates of direct costs and are not
                                    intended to total to the actual expenditures for the agencies.



                                    Page 19                                      GAO/RCED-97-31 Onshore Minerals Leasing Programs
                          Appendix II
                          Information on States’ Mineral Programs:
                          Wyoming, New Mexico, and California




                          other surface uses. State Land and Farm Loan Office officials estimate that
                          direct costs for resource planning were about $29,000 in fiscal year 1996.

                          The Mineral Leasing Section issues leases for mineral development on
                          state land. Although it has no formal procedure for environmental
                          analysis, the Mineral Leasing Section may place restrictions on leases if
                          necessary to protect the public, the environment, cultural or
                          archaeological resources, or threatened and endangered species. Another
                          agency, the Oil and Gas Conservation Commission, reviews and approves
                          “applications for permit to drill” and other requests for permission to
                          operate on state lands. However, the Mineral Leasing Section records
                          these permits and monitors the status of operations on state land. The
                          Section maintains information about lease assignments, transfers, and
                          units and communitization agreements. The Section’s estimated use
                          authorization costs in fiscal year 1996 were just over $131,000.

                          State Land Office staff do not routinely perform compliance inspections,
                          although the Office has budgeted to hire contractors for some site
                          inspections. State Land Office staff may inspect a previously producing
                          operation if it suddenly reports no production, and work with other state
                          and federal officials to protect state lands from being drained. Costs for
                          inspection-related activities in fiscal year 1996 were an estimated $44,000.

                          Mineral Leasing and Royalty Compliance Division staff maintain and verify
                          data on leases, payers, and royalties. The staff receive and process royalty
                          information, which includes volume and product value information for
                          each well. They also receive, account for, and process royalty payments.
                          Auditing is limited mainly to desk reviews of reported sales data, which
                          include verification that information contained in royalty reports is
                          supported by other source documents. These activities cost the State Land
                          Office an estimated $415,000 in fiscal year 1996.

                          The State Land Office may also be involved in appeals to the Wyoming
                          Board of Land Commissioners, coordination of settlements, and
                          assessments of penalties, and it continually works to develop computer
                          systems for royalty management. These along with administrative and
                          other support activities make up the balance of the Division’s costs for
                          fiscal year 1996.


Wyoming Oil and Gas       Wyoming’s Oil and Gas Conservation Commission is the state’s oil and gas
Conservation Commission   regulatory agency. The Commission’s activities include permitting



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Appendix II
Information on States’ Mineral Programs:
Wyoming, New Mexico, and California




geophysical exploration; approving operators’ requests to develop
minerals on state, federal, and private leases; inspecting those leases for
compliance with operating requirements; and collecting and maintaining
production data for all wells in the state. The Commission also administers
the Environmental Protection Agency’s (EPA’s) Underground Injection
Control program. The Commission is funded through a mill levy tax on all
oil and gas production in the state;15 it also receives a grant from EPA. The
Commission’s reported costs for fiscal year 1996 were about $1.58 million.

The Commission’s resource-planning activities include both limited
land-use planning and permitting of geophysical exploration. Land-use
planning focuses on the proximity of proposed oil and gas operations to
sensitive areas, such as houses or water wells, and creeks, drainages,
rivers, or wetlands. The Commission may require operators to line fluid
pits, use a closed system to prevent contamination of these areas, or move
the proposed operation. The Commission also works jointly with BLM to
approve seismic exploration on state, federal, and private land.
Commission officials estimate that these resource-planning activities cost
about $175,000 in fiscal year 1996.

The Commission’s use authorization activities include establishing
minimum distances between oil and gas wells and reviewing and
approving proposals to operate on state, federal, and private land. As part
of its enforcement of Wyoming’s oil and gas conservation laws, the
Commission establishes well-spacing requirements that apply to all wells
in the state.16 The Commission also receives and reviews applications for
permit to drill on all state and private lands in the state and reviews and
approves units and communitization agreements. These use authorization
activities cost an estimated $480,000 in fiscal year 1996.

The Commission’s five inspection staff inspect oil and gas wells in
response to environmental concerns or resource waste. The staff inspect
such things as (1) blowout-preventer equipment, (2) general oil field
conditions, (3) well-plugging operations, (4) dry holes on state and private
lands to ensure that they are properly plugged, and (5) operations for
compliance with surface requirements; they also respond to landowners’
complaints. The Commission does not perform production accountability
inspections in the same way that BLM does; inspectors do not usually strap
tanks, gauge meters, or witness transfers of oil, unless they suspect that


15
  The mill levy tax is currently set at 7/10 of a mill per dollar of value.
16
  BLM accepts the state’s spacing rules for federal leases.



Page 21                                        GAO/RCED-97-31 Onshore Minerals Leasing Programs
                      Appendix II
                      Information on States’ Mineral Programs:
                      Wyoming, New Mexico, and California




                      theft has occurred. The Commission spent an estimated $436,000 on
                      compliance inspections in fiscal year 1996.

                      The Commission receives data on production and wells for all wells in the
                      state and maintains a database of the information that is available to
                      Wyoming’s Department of Revenue and the State Land and Farm Loan
                      Office to assist in their audits of royalties and severance taxes. The
                      Commission spent an estimated $218,000 on collecting, verifying, and
                      maintaining information on production and wells in fiscal year 1996.

                      The Commission carries out EPA’s Underground Injection Control program
                      in Wyoming, and has primary responsibility for Class II (noncommercial)
                      injection and enhanced recovery wells on all but Indian-owned lands.
                      Wyoming has almost 6,500 injection wells, and the Commission inspects
                      about 20 percent of the wells per year to make sure the casing is intact to
                      prevent groundwater from being contaminated. The Commission also
                      witnesses the plugging and abandonment of all wells and attends
                      blowout-preventer tests. Its costs for the Underground Injection Control
                      program were about $320,000 in fiscal year 1996.


Department of Audit   Wyoming’s Department of Audit’s Minerals Audit Division audits revenues
                      from mineral development in the state, including royalties, severance tax,
                      and conservation tax. The Division spends about 5 percent of its time and
                      budget on revenues generated on state lands, and its direct costs for
                      auditing leases on state lands in fiscal year 1996 were about $67,000.


                      New Mexico receives revenues from the production of oil, gas, coal, and
New Mexico            other minerals in the state. In fiscal year 1996, the state received a total of
                      $115 million in royalty, rent, and bonus revenues from production on state
                      lands and $124 million in federal royalties, rents, bonuses, and other
                      revenues. About 9.8 million acres of state-owned land in New Mexico
                      contain 5,116 producing mineral leases, compared with 6,160 producing
                      leases on more than 22 million acres of Forest Service- and BLM-managed
                      land.




                      Page 22                              GAO/RCED-97-31 Onshore Minerals Leasing Programs
                                    Appendix II
                                    Information on States’ Mineral Programs:
                                    Wyoming, New Mexico, and California




Table II.2: Statistics on Mineral
Revenues and Producing Leases in    Dollars in millions
New Mexico for Fiscal Year 1996                                   Oil and gas                    Coal                      Other
                                    Revenues and
                                    producing leases              State     Federal          State      Federal       Statea      Federalb
                                    Revenues                      $111           $95            $2          $11            $2         $18c
                                    Producing leases              5,000        6,121             1           13           115          26
                                    a
                                        Other minerals on state land include potash, geothermal resources, and sand and gravel.
                                    b
                                        Other minerals on federal land include langbeinite, potash, and carbon dioxide.
                                    c
                                        Includes rents, bonuses, minimum royalties, estimated royalties, and other revenues.




State Land Office                   New Mexico’s State Land Office is responsible for leasing state lands for
                                    mineral extraction and for collecting and distributing the royalties
                                    generated from the production of minerals. The Office’s Oil, Gas, and
                                    Minerals Division identifies parcels to be leased, sets the lease terms, and
                                    holds lease sales. The Royalty Management Division collects and audits
                                    royalties paid for minerals from state lands. The State Land Office’s
                                    estimated costs in fiscal year 1996 for managing the mineral program were
                                    just over $3 million.

                                    The Oil, Gas, and Minerals Division performs resource-planning functions
                                    on state trust lands. The Division conducts very limited land-use planning,
                                    primarily considering the long-term plans for property that it wants to
                                    lease. New Mexico does not require land-use planning nor environmental
                                    planning, although the State Land Office determines if endangered species
                                    are present on state lands identified for leasing. The Division issues
                                    permits for seismic exploration. The State Land Office estimates that
                                    resource-planning activities cost $149,000 in fiscal year 1996.

                                    Use authorization consists of holding monthly lease sales, reviewing and
                                    approving lease assignments and transfers, and reviewing development
                                    plans. The State Land Office monitors diligent development by verifying
                                    that drilling and production reports show that production is occurring on
                                    leases. The Office does not, however, perform physical inspections of sites
                                    for the purpose of verifying production quantities. The Office conducts
                                    environmental inspections if necessary—if, for example, a leak is reported.
                                    It estimates that use authorization and compliance activities cost $366,000
                                    in fiscal year 1996.




                                    Page 23                                      GAO/RCED-97-31 Onshore Minerals Leasing Programs
                            Appendix II
                            Information on States’ Mineral Programs:
                            Wyoming, New Mexico, and California




                            The State Land Office’s Oil, Gas, and Minerals Division maintains
                            information on leases and agreements and information on payers. The
                            Royalty Compliance Division processes royalty reports and payments, and
                            collects and disburses revenues. The Royalty Compliance Division also
                            compares information on royalties and production and identifies and
                            resolves discrepancies. Oil and gas producers report and pay royalties to
                            the Royalty Management Division monthly on the basis of the volume and
                            price of oil or natural gas produced. The Division reviews the royalty data
                            and evaluates whether the correct royalty was paid. The Division also
                            audits royalty reports to verify that the reported value is correct. The State
                            Land Office estimates that costs for these activities were about $847,000 in
                            fiscal year 1996.

                            Other minerals management activities include the adjudication of appeals;
                            coordination of settlements; litigation support; development of procedures
                            and rules; and system development, implementation, and operation.


ONGARD System               New Mexico’s Oil and Natural Gas Administration and Revenue Database
                            (ONGARD) is a shared database that includes production, tax,
                            transportation, and royalty information for all oil and gas wells in New
                            Mexico. The database includes information on all state leases and the
                            locations of all 45,000 active wells on federal, Indian, state, and private
                            lands. State officials compare production and transportation reports from
                            the system to verify production amounts reported to the state. According
                            to state officials, this comparison is an important control to ensure that
                            the state receives the correct royalty amounts. Development costs for
                            ONGARD totaled $15 million to $20 million as of July 1996. State Land Office
                            officials estimate that the costs for implementing and operating ONGARD in
                            fiscal year 1996 were about $734,000.


Oil Conservation Division   New Mexico’s Oil Conservation Division of the Department of Energy,
                            Minerals, and Natural Resources is responsible for regulating oil, gas,
                            carbon dioxide, and geothermal wells on state and private land and in
                            some cases on federal and Indian land.17 The Division establishes spacing
                            for oil and gas wells in the state and reviews and approves operators’
                            applications for permission to operate on state and private lands, inspects
                            oil and gas operations, processes production information, and administers



                            17
                             The Oil Conservation Division and the Bureau of Land Management often work together in the field,
                            but New Mexico has not entered into a formal memorandum of agreement with the Bureau.



                            Page 24                                  GAO/RCED-97-31 Onshore Minerals Leasing Programs
             Appendix II
             Information on States’ Mineral Programs:
             Wyoming, New Mexico, and California




             EPA’s Underground Injection Control program. The Division’s budget for
             fiscal year 1996 was about $4.2 million.18

             The Division authorizes uses on state and private lands by reviewing and
             approving applications for permit to drill and other operator proposals.
             The Division approves drilling plans before operations can begin on state
             leases and may place conditions on its approval of drilling plans on all
             leases; for example, it requires operators to place nets over all fluid pits to
             keep birds from landing on the oil-soaked water. The Division also reviews
             and approves abandonment plans for all wells and other facilities. The Oil
             Conservation Division estimates its fiscal year 1996 costs for these use
             authorization activities at about $683,000.

             The Oil Conservation Division requires drainage protection and inspects
             oil and gas operations to verify that operators are complying with their
             approved plans and with environmental requirements. The Division is not
             required by state law to conduct field inspections to verify mineral
             production quantities. The Division’s fiscal year 1996 costs for drainage
             protection and operational and environmental inspections are estimated to
             be $819,000.

             The Division collects monthly production disposition and well information
             for each well in the state and makes it available to the oil and gas industry
             and other state agencies through the ONGARD database; the State Land
             Office compares it with royalty reports, and the Taxation and Revenue
             Department compares it with severance tax reports. The Oil Conservation
             Division also receives volume reports from oil and gas transporters and
             compares the production amounts with the amounts reported as
             transported. The Division investigates and attempts to resolve
             discrepancies. We were not provided with a separate cost estimate for this
             function.

             The Division administers EPA’s Underground Injection Control program, in
             which it has primacy. The Division inspects wells into which water is
             being injected to ensure that water does not escape into other geologic
             formations, which could contaminate groundwater. A grant from EPA
             covers about 10 percent of the Division’s costs to administer the program.


             California receives revenues from the production of oil, gas, geothermal
California   resources, and other minerals in the state. In fiscal year 1996, the state

             18
               This includes $483,000 for gas marketing.



             Page 25                                       GAO/RCED-97-31 Onshore Minerals Leasing Programs
                                        Appendix II
                                        Information on States’ Mineral Programs:
                                        Wyoming, New Mexico, and California




                                        received about $3 million from onshore mineral production on state lands19
                                        and $28 million from onshore federal royalties, rents, bonuses, and other
                                        revenues. Onshore, California owns over 1.3 million acres of school lands
                                        and minerals; these lands contain 13 producing mineral leases,20 compared
                                        with 358 producing leases on almost 38 million acres of Forest Service-
                                        and BLM-managed land.21

Table II.3: Statistics on Mineral
Revenues and Producing Leases           Dollars in millions
Onshore in California for Fiscal Year                                 Oil and gas                    Coal                      Other
1996                                    Revenues and
                                        producing leases              State      Federal         State      Federal        Statea       Federalb
                                        Revenues                         $0c         $14            $0            $0           $3           $14d
                                        Producing leases                   1         334              0            0           12            24
                                        a
                                         Other minerals on state land include geothermal resources (which generated about $3 million in
                                        revenues in fiscal year 1996), and hard-rock minerals, and sand and gravel (which generated
                                        about $70,000).
                                        b
                                            Other minerals on federal land include geothermal resources, potash, sodium, and trona.
                                        c
                                            California’s onshore oil and gas generated about $20,000 in revenues in fiscal year 1996.
                                        d
                                            Includes rents, bonuses, minimum royalties, estimated payments, and other revenues.




State Lands Commission                  California’s State Lands Commission is responsible for leasing
                                        revenue-generating lands and collecting revenues for the state and for
                                        protecting, preserving, and restoring the natural values of state lands, both
                                        onshore and offshore. The Commission evaluates resources on the land;
                                        leases state land for mineral development and permits and reviews plans
                                        for mineral development on that land; inspects to ensure compliance with
                                        laws, regulations, and lease terms; and collects and audits revenues that
                                        the mineral development generates. The Commission’s onshore and
                                        offshore minerals management costs for fiscal year 1996 totaled about
                                        $6 million. The Commission attributes costs of about $390,000 to onshore
                                        minerals management.




                                        19
                                         Total state revenues of $76 million include offshore and onshore production, including about
                                        $58 million from two net-profit-sharing operations administered by the City of Long Beach. California
                                        granted the city the mineral rights in trust but retained the right to receive 95 percent of the
                                        operations’ profits.
                                        20
                                          California has surface and mineral ownership of approximately 570,000 acres of school lands and
                                        retains the mineral rights to an additional 760,000 acres.
                                        21
                                          We did not include federal offshore revenues nor producing leases because the management of the
                                        federal offshore program is separate from the onshore program, and none of the offshore management
                                        costs are included in net receipts-sharing deductions.
                                        Page 26                                      GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix II
Information on States’ Mineral Programs:
Wyoming, New Mexico, and California




The State Lands Commission’s resource-planning activities include
economic evaluation, mineral and geologic work, and reservoir
engineering. According to Commission officials, these activities implement
planning and environmental requirements imposed by the California
Environmental Quality Act and other state laws. The State Lands
Commission estimates that its direct costs for onshore and offshore
resource-planning activities were about $534,000 in fiscal year 1996.

The Commission leases state land for mineral development, both offshore
and onshore. Although the Commission is currently issuing leases for
navigable stream beds and river land, no offshore leases have been issued
since 1968, when the California state legislature instituted a moratorium
on offshore leasing because of an offshore oil spill that occurred near
Santa Barbara. Despite the leasing moratorium, drilling continues on
existing leases under environmental and management control by the
Commission. The Commission’s Mineral Resources Management Division
reviews and approves drilling and other operation plans on state leases,
onshore and offshore. The plans are required to provide for
production-monitoring equipment and procedures for the documentation
of royalty payments. For offshore development, the Division reviews
oil-spill contingency plans. The estimated fiscal year 1996 costs for
onshore and offshore use authorization activities were about $824,000.

The Commission monitors onshore and offshore operations to ensure
diligent development and inspects for compliance with operational and
environmental requirements. Because of the environmental sensitivity of
operating offshore, the Commission inspects offshore operations at least
annually. Inspections involve examining all meters, witnessing every
shipment made, and sampling and verifying quality for pricing purposes.
The costs for compliance inspections and oil-spill prevention activities
both onshore and offshore were estimated to be $925,000 in fiscal year
1996.

The Commission maintains information on leases and royalty payers, and
verifies royalty statements for value, volume, and quality. The Commission
receives monthly reports from mineral operators showing production
amounts and estimating royalties due. Commission staff compare this
information with quality and pricing information and calculate the amount
of royalty that should be paid. The Commission also receives and
processes royalty payments, bills for late payments, and disburses
royalties to the state general fund. Estimated costs for these activities
onshore and offshore in fiscal year 1996 were about $313,000.



Page 27                              GAO/RCED-97-31 Onshore Minerals Leasing Programs
                            Appendix II
                            Information on States’ Mineral Programs:
                            Wyoming, New Mexico, and California




                            The Commission’s minerals audits are conducted mainly for the Long
                            Beach operations. The costs for these activities not related to the
                            net-profit-sharing leases were estimated at $1,000 for fiscal year 1996.
                            These and other activities, including appeals adjudication, litigation
                            support, the development of rules, and system operations and
                            development cost an estimated $271,000 in fiscal year 1996.


Division of Oil, Gas, and   The Department of Conservation’s Division of Oil, Gas, and Geothermal
Geothermal Resources        Resources regulates oil, gas, and geothermal resources in California. The
                            Division reviews and approves plans to develop minerals on state and
                            private lands; inspects operations to protect public health and safety;
                            collects and maintains production and well information; and has primary
                            responsibility for administering EPA’s Underground Injection Control
                            program.22 Officials estimate that 4 percent of the Division’s time is
                            devoted to state-owned land, 1 percent to federally managed land, and the
                            remaining 95 percent to private and granted lands. The Division is funded
                            through a uniform assessment on every barrel of oil and every 10,000 cubic
                            feet of gas produced in California. The Division’s onshore and offshore
                            minerals management costs for fiscal year 1996 totaled about $10 million.
                            The Division attributes about $9.5 million to onshore minerals
                            management—regardless of land ownership.

                            Although the Division is not generally required to perform land-use
                            planning, it reviews counties’ decisions on oil, gas, and mineral
                            exploration and development.23 The Division is the state’s main source for
                            oil, gas, and geothermal reserve estimates and develops 5-year production
                            forecasts and possible development scenarios. The Division also provides
                            information on the condition of plugged and abandoned wells in areas
                            where future land development will occur and reviews land-development
                            plans for these areas to ensure that wells are properly plugged and
                            abandoned. These resource-planning functions were estimated to cost
                            $150,000 for both onshore and offshore activities in fiscal year 1996.

                            The Division reviews and approves drilling permits, enhanced recovery
                            and rework proposals, and plugging and abandonment plans for all wells
                            in the state. In approving drilling permits, Division staff review well
                            placement so that wells do not drain resources from adjacent leases;

                            22
                             California’s Division of Oil, Gas, and Geothermal Resources has a memorandum of agreement with
                            BLM and is drafting joint regulations with the State Lands Commission to eliminate duplicative
                            permitting and inspection activities.
                            23
                              Except for exploratory geothermal wells, according to Division officials.



                            Page 28                                     GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix II
Information on States’ Mineral Programs:
Wyoming, New Mexico, and California




operators are required to notify adjacent leaseholders of operations that
may affect their leases. Use authorization activities onshore and offshore
cost an estimated $2.3 million in fiscal year 1996.

Division staff perform field inspections for compliance with operating
requirements and monitor leases to determine whether they are being
developed diligently. Inspectors are present at blowout-preventer tests and
examine the surface area of a lease to verify that the lease and facilities
are in order, operations are fenced and signed, pits and sumps are
screened to protect wildlife, and there are no leaks from tanks and
pipelines. The Division does not normally perform on-site production
verification inspections. Compliance inspections and related activities
onshore and offshore were estimated to cost $4.5 million in fiscal year
1996.

The Division is the state’s repository for well and operations information
and receives production reports for all wells in the state monthly and
annually. The Division compares annual production reports with monthly
reports to check for inconsistencies in reported production. It provides
estimates of reserve volumes to counties for their ad valorem tax
estimates. The Division also conducts field audits by comparing
companies’ run tickets and other source documents with production
reports provided to the agency. Production report processing, data
resolution, and audit activities were estimated to cost $750,000 in fiscal
year 1996. Other activities such as enforcement, appeals adjudication, and
legal support, along with systems operations and development costs, are
estimated at about $1.1 million in fiscal year 1996.

The Division also administers EPA’s Underground Injection Control
program. This includes the approval and inspection of all injection wells in
the state, including those on federal land. The state receives an annual
grant from EPA—about $453,000 in fiscal year 1996—which, according to
Division officials, funds about 18 percent of the state’s total cost of the
program.




Page 29                              GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix III

Objectives, Scope, and Methodology


               In May 1996, we were asked to (1) identify how much Wyoming, New
               Mexico, and California paid to the federal government for managing
               minerals on federal lands within their boundaries, (2) identify the costs to
               the three states for their own minerals management programs, and
               (3) compare these federal and state program costs.

               Two of the three states we were asked to include in this study—Wyoming
               and New Mexico—received the largest state revenue shares from federal
               mineral onshore leases in fiscal year 1996. The third state we were asked
               to include—California—provided geographic diversity because it is not in
               the Rocky Mountain area. California received the fifth largest share of
               revenues from federal onshore leases in fiscal year 1996.

               To determine the costs for the three states for federal minerals
               management, we obtained fiscal year 1996 net receipts-sharing data for the
               three federal agencies responsible for minerals management
               activities—the Department of Agriculture’s Forest Service, and the
               Department of the Interior’s MMS and BLM. We interviewed agency officials
               responsible for allocating the agencies’ budgets for minerals activities to
               the states. We also interviewed Forest Service and BLM field staff to
               discuss the minerals management activities they perform. Specifically, we
               met with Forest Service officials in Regions 2, 3, and 5, and with BLM
               officials in the Wyoming, New Mexico, and California State Offices.

               To determine the costs for the three states’ minerals management
               programs, we requested and received cost estimates for fiscal year 1996
               from the states’ land and conservation offices. Specifically, in Wyoming,
               we obtained cost data from the Wyoming State Land and Farm Loan
               Office, the Wyoming Oil and Gas Conservation Commission, and the
               Wyoming Department of Audit’s Mineral Audit Division. In New Mexico,
               we obtained data from the State Land Office and from the Oil
               Conservation Division of the Energy, Minerals, and Natural Resources
               Department. In California, we obtained data from the State Lands
               Commission and from the Division of Oil, Gas, and Geothermal Resources
               of the Department of Conservation. To obtain descriptions of functions
               associated with these costs, we interviewed officials at each of these
               offices.

               Because of key differences in the federal and state programs, a
               comparison of the programs’ costs would not be meaningful. To assess the
               differences between the federal and state programs, we reviewed legal and
               statistical information on each, including federal minerals legislation, state



               Page 30                         GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix III
Objectives, Scope, and Methodology




conservation and land laws, and federal and state statistics on mineral
activities in each of the three states.




Page 31                              GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix IV

Comments From the Department of the
Interior




              Page 32    GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix V

Comments From the Wyoming Office of the
Governor

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.


See comment 2.




See comment 3.




                             Page 33   GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix V
Comments From the Wyoming Office of the
Governor




Page 34                            GAO/RCED-97-31 Onshore Minerals Leasing Programs
                 Appendix V
                 Comments From the Wyoming Office of the
                 Governor




                 The following are GAO’s comments on the Wyoming Office of the
                 Governor’s comments enclosed in a letter dated January 10, 1997.


                 1. Wyoming’s Office of the Governor acknowledged that the federal and
GAO’s Comments   state minerals leasing programs are different but disagreed with our
                 position that the costs cannot be meaningfully compared. The Governor’s
                 Office commented that a comparison could be made that includes an
                 analysis of the similarities and differences in the programs. However, our
                 analysis shows that because of differences in the programs’ land-use
                 planning, environmental, and production verification requirements, as well
                 as state-specific differences, a cost comparison would not be meaningful.

                 2. The Governor’s Office requested that we expand our report to provide a
                 breakdown of the federal program’s direct and indirect costs by function.
                 However, our report discusses the federal minerals management program
                 from the perspective of net receipts sharing, which is based upon
                 appropriations and not on the program’s actual costs. Accordingly, we
                 describe how the appropriations are allocated but do not provide actual
                 cost breakdowns. To obtain such actual cost breakdowns would require a
                 review of those costs, which is outside the scope of this report.
                 Furthermore, we believe that regardless of the level of cost detail
                 provided, a comparison between federal costs and state costs would not
                 be meaningful because of the differences in the programs described in the
                 report.

                 3. Wyoming’s Office of the Governor commented that we do not itemize
                 the basis for over $500,000 deducted from Wyoming’s royalty share for the
                 Forest Service. We adjusted the text of appendix I to clarify that the
                 amount referred to in the Governor’s Office’s comments—$552,000—
                 represents the Forest Service’s allocation to Wyoming for its leasable
                 minerals program, which is included in the net receipts-sharing
                 computation and is not the final deduction. As shown in table 1 of the
                 letter, approximately $140,000, which is about 25 percent of the allocation,
                 will actually be deducted from Wyoming’s federal minerals revenues for
                 the Forest Service’s fiscal year 1996 minerals management activities. As
                 we described in appendix I, the basis for the Forest Service’s allocations to
                 the states is the amount charged to the minerals program for each forest;
                 these amounts are totaled for each state to determine each state’s minerals
                 management costs. The Forest Service adds a percentage to these direct
                 costs for indirect expenses which, in fiscal years 1995 and 1996, was
                 20 percent.



                 Page 35                            GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix VI

Comments From the New Mexico Oil
Conservation Division

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




See comment 2.




See comment 3.




                             Page 36   GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix VI
Comments From the New Mexico Oil
Conservation Division




Page 37                            GAO/RCED-97-31 Onshore Minerals Leasing Programs
                 Appendix VI
                 Comments From the New Mexico Oil
                 Conservation Division




                 The following are GAO’s comments on the New Mexico Oil Conservation
                 Division’s comments enclosed in a letter dated December 19, 1996.


                 1. New Mexico’s Oil Conservation Division commented that we did not
GAO’s Comments   distinguish between minerals management and surface management and
                 the costs associated with each and further commented that many of the
                 costs allocated to the states are not justifiable. We did not distinguish
                 between the costs for minerals management and surface management
                 because our report does not address actual costs for the federal minerals
                 management program; rather, it discusses how appropriations for federal
                 onshore leasable minerals management are allocated among the states. We
                 did not assess whether these costs were “justifiable” because such an
                 assessment is outside the scope of this review.

                 2. The Division commented that the state programs include many
                 responsibilities that are not mandated under federal laws, such as
                 statewide spacing rules, oil and gas field rules (and exceptions to these
                 rules), discharge plans, and the witnessing of oil-well casing and plugging
                 operations. We revised our report to include additional information about
                 all three states’ minerals management activities.

                 3. The Division stated that the report leaves one with the impression that
                 federally managed oil and gas programs are intrinsically more expensive
                 than state programs because federal programs are more comprehensive,
                 involving multiple-use management. We did not analyze whether federal
                 programs were “intrinsically more expensive” or less efficient than the
                 states’ programs and did not intend to leave this impression.




                 Page 38                            GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix VII

Comments From the California State Lands
Commission

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




See comment 2.




                             Page 39   GAO/RCED-97-31 Onshore Minerals Leasing Programs
                 Appendix VII
                 Comments From the California State Lands
                 Commission




See comment 3.




                 Page 40                            GAO/RCED-97-31 Onshore Minerals Leasing Programs
                 Appendix VII
                 Comments From the California State Lands
                 Commission




                 The following are GAO’s comments on the California State Lands
                 Commission’s comments enclosed in a letter dated December 20, 1996.


                 1. In written comments and in subsequent discussions, State Lands
GAO’s Comments   Commission officials commented that our reporting of the Division of Oil,
                 Gas, and Geothermal Resources’ costs overstated the cost of managing
                 state lands. Commission officials suggested that we clarify that the
                 regulatory agencies’ costs are for managing all lands under its
                 jurisdiction—not just state lands. We adjusted the text of our report to
                 clarify that the regulatory agencies’ scope of authority extends beyond
                 state lands in all three states, stating specifically that about 95 percent of
                 California’s Division of Oil, Gas, and Geothermal Resources’ time is
                 devoted to regulating onshore mineral development on privately owned
                 and other land.

                 2. In written comments and in subsequent discussions, Commission
                 officials clarified California’s legal requirements for environmental and
                 land-use planning. They commented that the State Lands Commission is
                 responsible for implementing the California Environmental Quality Act
                 and is required to develop environmental information and mitigation
                 requirements and to protect significant environmental values on state
                 lands. We incorporated this information into the text of the report. In
                 written comments, officials stated that the Commission is required to
                 balance public needs in approving the uses of state lands, but in discussing
                 the Commission’s land-use-planning activities, officials agreed that the
                 state land-use-planning processes differ from federal land-use planning.

                 3. Commission officials commented that the State Lands Commission has
                 a program of inspections and other audit procedures to verify production
                 amounts and royalty payments that is more extensive than our description
                 in the draft. In their specific technical clarifications, they stated that
                 operators are required to submit plans that provide for production-
                 monitoring equipment and procedures for documenting royalty payments.
                 We incorporated the Commission’s specific recommended change into our
                 discussion of California’s minerals management program in appendix II.
                 However, according to Division of Oil, Gas, and Geothermal Resources
                 officials, Division inspectors do not perform production verification
                 inspections because California does not have a severance tax. Because the
                 Division of Oil, Gas, and Geothermal Resources performs the majority of
                 the workload for California’s onshore minerals management program, we
                 did not adjust the text of the report to reflect the Commission’s comment.



                 Page 41                            GAO/RCED-97-31 Onshore Minerals Leasing Programs
Appendix VIII

Major Contributors to This Report


                       Jennifer L. Duncan
Resources,             Susan E. Iott
Community, and         Sue Ellen Naiberk
Economic               Victor S. Rezendes

Development Division




(140002)               Page 42              GAO/RCED-97-31 Onshore Minerals Leasing Programs
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