Six Questions for Kendra Barkoff

Introduction

On behalf of the Interior Department, spokeswoman Kendra Barkoff responded to six questions from iWatch News reporter Aaron Mehta about the government’s collection of royalties from the oil and gas industry.

Does Interior have any estimate about how much the government is losing each year in royalty underpayments? I’m not talking about the royalty relief bill related leases, which aren’t paying anything, but just a general estimate for how much is lost each year. Millions? Tens of millions? Hundreds of millions? A hundred bucks?

The Department has a sophisticated accounting and detection system and a comprehensive risk-based audit and compliance program that rely on source data and third-party data to target underpayments and to ensure that royalties do not go uncollected. In fact, since 1982, the Department’s audit and compliance efforts have uncovered and collected $3.8 billion. And, on average, over the last 3 years, the Department’s audit and compliance program collected payment of approximately $90 million a year from companies. These amounts represent companies’ underpayments in their initial voluntary reporting, which were discovered through on-going compliance activities.

If not, why doesn’t that estimate exist?

The Department employs a risk-based compliance strategy to target audits and compliance reviews on those properties and companies identified with the highest risk of underpayment. Based on that strategy, we believe that we are collecting the royalties that are due from Federal and Indian mineral leases.

Does Interior agree with experts who say that the government is losing money overall in royalty underpayments?

The Department does not believe that material amounts of royalties are ultimately uncollected and we have implemented a number of reforms in recent years to accelerate the collection of any underpayments. These efforts include greater emphasis on up front data reviews and more sophisticated systems and protocols for accepting industry reports before making initial payments. We are also currently working on “data-mining” efforts that will further our ability to detect inaccurate reports earlier in the process as well as numerous improvements in the oil and gas production verification and inspection process.

How does Interior respond to critics who say that the royalties system relies too heavily on self-reporting from industry?

Although companies report their own data (just like taxpayers self-report to the IRS), the Department has a sophisticated accounting and detection system and a comprehensive risk-based audit and compliance program to target underpayments and to ensure that royalties do not go uncollected. Specifically, current technology and system capabilities have opened new avenues for the Department to identify and analyze erroneous data on a real-time basis and up-front systems edits now put more emphasis on industry to report correctly through a series of royalty and production edits to ensure that data is correct before it arrives at the Department.

We understand that when audits occur on the royalty system, they almost always turn up lost profits. Roughly how many audits are performed each year by ONRR’s office of royalty payments, and is there an average amount each audit turns up?

During fiscal years 2008-2010, the Office of Natural Resources Revenue (ONRR) completed 723 audits and 3,104 compliance reviews. ONRR performed compliance activities on approximately 50 percent of the total royalties paid during each of the past 3 fiscal years. On average, during those same three years, the Department’s audit and compliance program collected payments of over $90 million per year from companies.

How does the department respond to outside groups who say that Interior was “too close” to industry during the Bush administration? Does Secretary Salazar believe there should be more collaboration with industry, or less?

Since arriving at the Department of the Interior, Secretary Salazar has both eliminated the Royalty-in-Kind Program and separated the revenue collection function of the former MMS from the offshore leasing and regulatory functions. Each of these efforts is designed to reduce real and perceived conflicts in the performance of this essential public trust. Further, his goal is to ensure full compliance with the existing laws through clear communication of expectations, timely and effective audit activities and, when necessary, appropriate enforcement actions.