Good morning Chairman Rahall and distinguished members of the committee.  Thank you for the opportunity to testify today.  My name is Ryan Alexander and I am President of Taxpayers for Common Sense (TCS), a national, non-partisan budget watchdog organization.  We believe in transparency, competitive and clean contracting, and accurate and independent auditing. In short, we believe that taxpayers have a right to demand excellence and accountability from our government.  

For more than a decade, TCS has actively worked to ensure that taxpayers receive a fair return on resources extracted from federal lands and waters.  In recent years, numerous management failures at the Minerals Management Service (MMS) have cost taxpayers billions of dollars in waste and lost revenue. TCS urges the committee to reform the revenue collection process, to improve contracting practices, and to increase accounting accuracy at MMS. We also urge the committee to hold the oil and gas industry accountable for accurate reporting of minerals extracted from federal lands and to eliminate royalty relief provisions.  We look forward to working with the committee to effect these changes. 

My focus today will be on three areas of primary concern to Taxpayers for Common Sense: the risks presented by the reliance on compliance review and industry self-reporting; the risks to taxpayers we believe the Royalty-in-Kind program presents, and the failure of MMS to remedy known problems. 

It is the responsibility of MMS to ensure fair calculation, collection, and distribution of royalties on behalf of the American taxpayer. 

In decades past, the MMS auditing and compliance division collected over $100 million annually through the audit process. However, in recent years this amount has declined to less than half of that number. 

In the last decade, MMS began transitioning from a traditional audit process to a new, automated royalty verification process, known as compliance review.  This system relies substantially on self-reported data from the oil and gas industry.  A recent report of the Inspector General of the Department of Interior concluded that the compliance review process may not detect under-reporting and underpayment of royalties, particularly because anomalies detected in the compliance review process rarely trigger a traditional audit. The combination of self-reporting and superficial data reviews provides companies with an incentive to under-report and under-pay royalties owed.

Royalty-in-Kind Program

The Royalty-In-Kind program allows oil and gas companies to pay their royalty dues in the form of oil or gas instead of cash.  Usually, this practice forces the federal government to market the oil and gas directly. We think this is unnecessary. Industry has proved itself very capable of bringing oil and gas to the marketplace; putting the government in the role of a marketer of natural resources is inefficient and costly.  Recent Inspector General reports raise questions about the ability of MMS to track the royalties collected and the volume of production on federal lands.  GAO has also raised questions about MMS’s ability to determine if sales from Royalty-in-Kind payments equal or exceed cash royalty payments.  Given these concerns, we have little confidence that MMS is equipped to get the best deal for taxpayers through direct sales.  At the very least the Royalty-In-Kind system should be thoroughly evaluated, and, if found not to benefit the taxpayer, scrapped.

Failure of MMS to address known problems

As the committee well knows, the error of omitting price threshold language from leases executed in 1998 and 1999 has already cost the taxpayers $1 billion.  Recent reports suggest that Director Johnnie Burton was aware of this error in 2004 and it was brought to wide public attention by a New York Times expose last year.  And yet, MMS has only recently begun to remedy this problem.  Moreover, the current leadership at MMS has shown little appetite for pursuing underpayments discovered by their own staff.  Worse, employees who have attempted to remedy underpayments of royalties have been dismissed. 

It is clear that several actions at MMS must occur to remedy the current situation.  Compliance review based on self-reported data cannot be relied upon to ensure adequate collection of royalty revenues.  Steps must be taken to ensure independent audits occur and royalty underpayments cease. The system has to be reformed so that it is more transparent and can easily account for royalty payments. Furthermore this system needs to be publicly accessible via the Internet.

It is the federal government’s responsibility to protect taxpayers’ resources and ensure they are adequately compensated for their sale.   It is clear the agency responsible for this taxpayer protection is in need of an accountability overhaul.

Again, we are pleased to see such rigorous oversight by Congress.  The absence of the checks and balances inherent in the oversight process invariably leads to problems, particularly in agencies that by the nature of their missions have close ties to the industries they regulate.    We are pleased the committee has begun to address this issue and look forward to working to see this agency reformed.