Office of Natural Resources Revenue

Audit and Compliance Updates

Presented by: Mary Williams

COPAS Spring Revenue Committee Meeting

April 18, 2012
The Denver Post Names ONRR’s Denver Office As
One of the Top Places to Work in Denver!

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Overview
Update

Initiatives
Regulations
Royalty Policy Committee
Organization

Audit & Compliance

Partnerships
Personnel
Strategies & Risk Approach
Audit & Review Sequence & Types
Oil & Gas Reporting Issues
Unbundling Allowances
Additional Compliance Activities

Accomplishments

Future Goals and Activities

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Initiatives
 Expanding Internal Audit and Oversight
 10 new certified internal auditors and fraud examiners to perform
internal reviews and investigations of procedures and
performance
 New Compliance, Valuation and Market Research Staff
 11 positions for ensuring proper royalties paid on
transported/processed natural gas – unbundling
 Extractive Industry Transparency Initiative (EITI)
 EITI sets a global standard for transparency in oil, gas and mining
 ONRR’s Director leads the EITI global efforts
 IT Initiatives
 ONRR is implementing new IT initiatives during the next two
years

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Regulations
 Takes vs. Entitlements
 New proposed regulations prescribing when a Federal lessee
must report and pay royalties on the volume of oil and gas it
takes from a lease or the volume to which it is entitled based on
its ownership in the unit or lease. Status: on its way to OMB
 Indian Oil Negotiated Rulemaking
 Purpose: Advise the Secretary on a rulemaking to address
Indian oil valuation as it relates to the major portion requirement
in Indian leases
 Status: Members and alternates from industry, tribes and
allottees and the Federal government are approved. First
meetings are May 1 and 2 and June 18 and 19th, 2012
http://www.onrr.gov/about/pdfdocs/20120405.pdf

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Regulations

 Federal oil and gas valuation

 Proposed rule under development in-house
 Civil Penalties
 Draft rule under review in the Office of Hearings and
Appeals
 Solicitors office review:
 P.O. Box changes – direct final rule
 Clarification of Appeals Procedures
 Debt Collection Final Rule

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Regulations

 Indian Major Portion Prices published in Federal

Register
http://onrr.gov/Laws_R_D/FRNotices/PDFDocs/14041.pdf

 Royalty Policy Committee

 Charter renewed
 Two active committees
 Coal Valuation and Oil and Gas Royalty Reporting
 ONRR completed 70 of its 77 recommendations from the RPC
Subcommittee on Royalty Management draft report

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 ONRR’s Audit and Compliance
Management (ACM) Organization
04/01/2012

Director
Greg Gould
________________
Deputy Director
Debbie Gibbs Tschudy
Audit Program
Management

Roman Geissel
Audit and Compliance
Management
Business Systems Risk &
& Budget Work Planning
Theresa Bayani
Craig Sechrest Kathy Sager

Texas Audit & Central Audit & Western Audit &

Compliance Compliance Compliance
Faye Stewart Mary Williams Vacancy

Houston A Houston B Houston C Dallas Allowances Tulsa Oklahoma Denver Denver A Denver B Solid Minerals
& Gas Plants City & Geothermal
Cindy Allen Linda Shishido- Alan Joel Lydia Mary Ann John
Vacancy Carol Vacancy
Nguyen McDaniel Sheahan Claybaker Arnold Barder Guilinger Barder
Green

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 Audit and Compliance Partnerships

States  FOGRMA Sections 202 and 205 authorizes Tribes

Alaska ONRR to contract with States and Tribes to
Blackfeet
California conduct audits of leases within their
State/Reservation. Currently there are Navajo Nation
Colorado
agreements with 10 states and 6 Indian Tribes
Montana Shoshone/Arapaho
New Mexico  States and Tribes are fully reimbursed for their
Southern Ute
North Dakota costs
Oklahoma  ONRR works in partnership with the States and Ute
Tribes to meet compliance goals and provide Ute Mountain Ute
Texas
support and guidance in their audit programs
Utah
 Expanded 202/205 funding for existing
Wyoming
delegations – Wyoming now issues orders

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Current Audit and Compliance Strategy:
Personnel
Strong commitment to
auditing and compliance

FY2011 ONRR received authority to

hire 8 auditors for unbundling and
gas plant audits

Additional 106 State and Tribal auditors

with delegated audit authorities

Currently staffed with 227 compliance

personnel including 149 auditors

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Current Audit and Compliance Strategy
Annual Compliance Strategy

 A New Workplan process includes:

 Properties/Companies targeted using risk tools
 Required reviews/audits
 Auditor knowledge and feedback
 Review of properties previously in-kind; and
 Indian Trust responsibilities
 Residencies still in place
 Other companies may have short tern on-site auditors
 New Apache Intergrated Pilot Program
 Data Mining - coordinating work

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Audit and Compliance Risk Strategy

The Risk Based Approach

 Stratifies the entire universe of companies and

properties
 Identifies company and property risk indicators to
assess the risk of non compliance of all companies
 Risk model is maturing, feedback from completed
audits/reviews is very useful
 CR’s vs. audits are typically determined from risk data

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Audit and Review Time Sequence
November - December
Payor Submits
2014s/OGORs

CONTINUOUS COORDINATION EFFORTS

October - NovemberNovember - February December - September

EDITS
October - October DATA MINING COMPLIANCE REVIEWS AND AUDITS

End of the Six to Nine Two or Three Seven Years

First Month Months Years after after
After After Filing Filing Reports Filing Reports
Production Reports (Fed O&G)
OFFICE OF ENFORCEMENT ACTIVITIES

October - November March - May March - June February - May

New Up-Front Data Compliance
Audits
System Edits Mining Reviews

· Transportation/ · Missing Reports · Full Review · Company

Processing Limit · Adjustment · Limited Scope · Property
· APOP with PC04 Monitoring · Some Source · Special Terms
· Missing API #s on · Adjustments to Documents · Source Documents
Southern Ute Completed Cases · Typically One for Sample
· Multiple Royalty Rates · Net Negative Year or Less · Multiple Years
· Price below Indian Index · Production
· Pricing Edit Comparisons
· Agreement # not related
to lease

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Audits/Compliance Reviews Performed

Company, Property, Issue and Special Terms Audits

 Special Terms has a specified completion date based
on regulation, policy or other management directive.

Full and Limited Scope Compliance Reviews

 Full: compares all 4 elements of the royalty equation
(volume, value, royalty rate and allowances) to an
expected value/target to determine if variances exist.
Provides reasonable assurance that royalties are paid
correctly.
 Limited: compares less than 4 elements such as
volume and royalty rate. Allows for resolution of errors
quickly.

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Compliance Reviews vs. Audit
 CR’s typically are completed in a year or less, most audits
take longer
 CR’s rely on expected or weighted average targets to
determine if variances are valid
 When the variances are greater than the expected, source
data may be requested; Contracts, run tickets, gas plant
statements, invoices, etc.
 Federal onshore requires source documents to verify volume
for sample months if not reviewed by BLM or other
audits/reviews
 Establishing efficiency measures for audits and CR’s based on
the results of our cost/benefit analyses
 We continue to have significant findings from CR’s

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Oil & Gas Reporting Issues

 Marketable Condition
 For allocated production under unit agreements, report
both the agreement and lease numbers
 Correct Transaction Code for offshore royalty relief leases
 Adjustments on production reports and 2014s, number of
adjustments and impact
 Excess allowances taken in multiple adjustments
 Not including agreement numbers on adjustments
 Keep Whole Agreements/gas is processed
 Record Retention
 Refer to Dear Reporter dated March 10, 2011
 New for APOP’s - use OGOR Disposition Code 11

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Oil & Gas Reporting Issues
 Correct Adjustment Reason Codes (ARC):
 ARC 16 – gas major portion adjustments
 ARC 17 – audit and compliance review payments
(including Unique Finding Identifier in the payor assigned
document number)
 ARC 49 – index liability adjustments
 For Indian properties, companies need to file
 Form MMS-4410 for dual accounting
 Form MMS-4411 for safety net prices
 Arm’s-length gas transportation and processing contracts
 Non-arm’s-length gas transportation and processing forms
 For Indian oil, rules require oil transportation allowance forms
for AL and NAL contracts
 Office of Enforcement – 35 active cases for ACM

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Unbundling Fees for Allowances
Determine if fees are bundled from:
 Gathering and transportation contracts
 Gathering and processing contracts
 Natural gas purchase contracts

What part of bundled fees are allowed?

 Determine reasonable actual costs
 Calculate proportion of bundled costs before and
after point Marketable Condition is achieved

Limitations on allowances
 50.00% for transportation
 66.67% for processing

Note: Boosting (compression) of residue gas is not allowed*

* Beginning with USGS Regulations of 1942 (97 F.R. 4132-4141) & CFR 30 Part 221.51 (1942)
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Unbundling Fees for Allowances

 Unbundling is labor intensive

 Each system is unique and requires detailed study
 ONRR is ramping up resources
 Audit and Compliance Management
 New Unbundling Audit and Gas Plant Audit teams
 Asset Valuation
 New Gas Unbundling team
 Existing Market Analysis team
 Outside Contractor
 Project design stresses collaboration
 Based on meeting with API – the ONRR website
now contains dates for all systems posted and
indicates which are new

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Additional Compliance Activities

 Working closely with BLM revising Onshore

orders
 Orders 4, 5 – oil/gas measurement
 Order 9 – beneficial use and venting/flaring
 Peer Review completed for FY2011
 Passed with no deficiencies
 Assuring compliance with the Indian Gas Rule
for CY 2002 through 2010

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Audit and Compliance Accomplishments
 Assured reasonable compliance on 45% of total offshore and
onshore royalties paid for CY2008 totaling $5.5 billion in FY2011

 ONRR covered 49% of unique companies (680) and 17% of unique

properties (2832) FY2010 & FY2011

 Completed 311 audits and 1059 compliance reviews in FY2011

 Covered 92% of significant/high risk companies and 18% of

significant/high risk properties in FY2011

 Since 1982, audit and compliance activities have collected $3.9

billion

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Future Goals and Activities
 Expanding the review of companies and properties
 Improving reporting and compliance
 Review of allowances and gas plants
 Working closely with BLM, BIA and BSEE and BOEM to
ensure overall compliance on properties, transportation
systems and gas plants
 Implementing OIG, GAO, and RPC recommendations
 Significant emphasis on internal coordination of workloads

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