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ONRR Overview and Updates Presented by: Deborah Gibbs Tschudy, Deputy Director

ONRR Overview and Updates Presented by: Deborah Gibbs Tschudy, Deputy Director. National Oil & Gas Royalty Conference October 17 , 2012. Background and Program Highlights New Initiatives New and Upcoming Regulations. Outline of Presentation. Office of Natural Resources Revenue.

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ONRR Overview and Updates Presented by: Deborah Gibbs Tschudy, Deputy Director

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  1. ONRR Overview and UpdatesPresented by:Deborah Gibbs Tschudy, Deputy Director National Oil & Gas Royalty Conference October 17 , 2012

  2. Background and Program Highlights New Initiatives New and Upcoming Regulations Outline of Presentation

  3. Office of Natural Resources Revenue Background and Program Highlights

  4. ONRR: Who We Are • Office under the Assistant Secretary for Policy, Management and Budget within the Department of the Interior • Responsible for the management of revenues associated with federal offshore and federal and American Indian onshore mineral leases, as well as revenues received as a result of offshore renewable energy efforts  Dallas Denver Farmington Ft. Berthold Houston Oklahoma City Tulsa Washington D.C.

  5. ONRR’s Strategic Outcome Goals Companies timely comply with laws, regulations and lease terms and pay every dollar due 1 States, Tribes, Indian mineral owners, US Treasury and other entities receive timely and accurate revenues and data 2 The public trusts ONRR’s professionalism, integrity, efficiency and quality 3

  6. ONRR Voted Top Work Places 2012 – Denver

  7. Department of the Interior

  8. Office of Natural Resources Revenue

  9. FY 2011 Disbursements: $11.16 Billion $6.05 billion to the U.S. Treasury $892 million to the Land & Water Conservation Fund $150 million to the Historic Preservation Fund $1.53 billion to the Reclamation Fund $2.0 billion to 35 States $538 million to the Department’s Office of the Special Trustee on behalf of 34 Indian tribes and approximately 30,000 individual Indians Note: FY 2012 Disbursement Information will be available on ONRR’s website on November 19, 2012 FY 2011 Disbursements

  10. Industry Compliance Accurate Revenues and Data Professionalism & Integrity FY 2011 Cumulative Mineral Lease Revenue Disbursement ~ $230.7 Billion • Since 1982, ONRR has distributed $230.7 billion in revenues from onshore and offshore lands to the Nation, States, and American Indians • The ONRR distribution to the U.S. Treasury is one of the Federal government’s greatest sources of non-tax income

  11. FY 2012 Reports Received: 1,970 payors (Form 2014) 1,900 operators (Oil and Gas Operations Report) Financial Management Highlights FY 2012 Lines Processed: 4,875,150 million royalty lines @ 98.94 % accuracy rate 6.1 million production lines @ 97.5% accuracy rate The PeopleSoft accounting system was one of the first in DOI to satisfy OMB and Federal Managers Financial Integrity Act financial system requirements Financial operations and internal controls contributed to DOI achieving unqualified opinions* during the annual CFO audits *Unqualified opinion (Clean Audit) - In conformity with U.S. generally accepted accounting principles (GAO-09-946SP)

  12. Industry Compliance Accurate Revenues and Data Professionalism & Integrity Audit and Compliance Highlights Since 1982, audit and compliance activities have collected $3.9 billion For every dollar spent on compliance activities between FY 2009-2011, ONRR returned $3.89 back to taxpayers In FY 2012 completed 325 audits and 891 compliance reviews Completed compliance work on 92% of the companies with a high/significant risk rating In FY 2012 ensured compliance for about $3.1 billion in royalty revenues 12

  13. Cooperative agreement support and coordination with ten States and six Tribes Serves as an advocate for the fulfillment of ONRR trust responsibility and to resolve Indian mineral-related issues Coordination and Enforcement State and Indian Coordination • In FY 2012, ONRR held 97 outreach sessions and resolved over 35,000 royalty-related inquiries

  14. Enforcement Highlights Industry Compliance Accurate Revenues and Data Professionalism & Integrity • Civil Penalties • $28.8 Million in penalties collected since FY 2000 • 1,112 cases opened since FY 2000 and 964 cases closed • Alternative Dispute Resolution • $280 million received in settlement cases from FY 2009–FY 2011 Litigation Support • 849 debts referred to Treasury between FY 2009 - FY 2012 involving over $2.1 million in delinquent debts • 26 Bankruptcy Proofs of Claim filed since FY 2009 involving over $3.8 million

  15. Office of Natural Resources Revenue New Initiatives

  16. Upgrade to Minerals Revenue Management Support System • Ability for easier, on-line review and reconciliation of interest calculations • Allows for rule-based interest calculations based on lease type and program; e.g., royalty relief programs that have different interest rules • Interest Modernization • Online rental allows payors to upload data and make annual lease rental payments through pay.gov • Implements industry-recommended enhancements to eCommerce • eCommerce Phase II • PeopleSoft Upgrade from Version 8.9 to 9.1 • PeopleTools Upgrade from Version 8.4.9.18 to 8.5.1 • Database Upgrade from Oracle 10.4 to 11 • PeopleSoft Upgrade 16

  17. OGORS 2014S ONRR DATA ACCURACY EFFORTS Timeline Up-Front System Edits 1 Month 6-9 Months 2-3 Years 7 Years (Fed. oil & gas) Data Mining Missing Reports, Volume Comparisons, LVS/GVS, High Level Analyses of Sales Values, Royalty Values, Adjustments, etc. Enforcement Actions Enforcement Actions Precision Risk-based Approach Risk-based Approach Compliance Reviews Precision Enforcement Actions EnforcementActions Audits

  18. eCommerce and Data Mining Improving Data Quality • Problems Addressed by New Edits in eCommerce • Indian Net Negatives • Exceeding Allowance limits • Incorrect Pricing • Incorrect Royalty Rates- OGOR/2014 Coding Errors • Invalid Agreements • Problems Addressed by Data Mining • Volume Variances • Net Negatives • Improper Adjustments • Reporting Anomalies • Agreement Misreporting • - Chronic Misreporting

  19. Improving Data Accuracy • New Royalty and Production Reporting Edits: • 14 edits in December 2011, • 32 new or modified edits in October 2012, and • 9 edits requiring additional study for future releases • Updated list of edits available at http://www.onrr.gov/FM/ReptInfo.htm Total Data Mining Collections to Date = $20,979,005.94* *As of August 2012

  20. Enhancements to ONRR’s Statistics Website • ONRR is improving the www.onrr.gov statistical website to provide transparency, clarity, ease of use, and ability to search and query data • November 19, 2012, roll-out to include FY 2012 Disbursements and FY 2012 Reported Revenues by Accounting Year http://www.onrr.gov/ONRRWebStats

  21. How Important is Data Accuracy? “Leasing, production revenue on public lands soared in 2011” Phil Taylor, Energy and Environment (E&E) reporter Published: Thursday, January 5, 2012 “Revenue reported from natural gas production on public lands nearly doubled in 2011, and the number of new oil and gas leases issued increased by two-thirds, according to statistics released today by the Interior Department. The Bureau of Land Management data show natural gas production at its highest level since at least 1984.” Question from Senator Barasso’s (Wyoming) Staff: “BLM reports that natural gas production on Federal lands in Wyoming went from approximately 1.63 Tcf in FY 2010 to approximately 3.94 Tcf in FY 2011, or an increase of 140%. In other words, BLM is reporting that natural gas on Federal lands in Wyoming exceeded the total amount of natural gas production in all of Wyoming for FY 2011, which obviously does not make sense. Can you help me understand this?” Did onshore natural gas production actually double from 2010 to 2011?

  22. How Important is Data Accuracy? • In August 2011, a Federal oil and gas payor misreported sales volumes on their Form MMS-2014 report so significantly that it distorted the FY 2011 sales volume published on ONRR’s statistics website by 2.4 Trillion cubic feetgiving the appearance that Federal onshore gas production doubled from FY 2010 • The payor correctly reported the royalty rate and royalty value (subject to audit)

  23. How Important is Data Accuracy? ONRR Actions • ONRR’s Office of Enforcement assessed the company a $1.9 million civil penalty for knowing or willful maintenance of false, inaccurate, or misleading information on ONRR’s database • ONRR updated the Federal gas price up-front edit to “Fatal” on January 26, 2012. The Federal oil and Indian oil and gas up-front price edits were already “Fatal” • ONRR is monitoring reported Sales Volumes on a real time basis

  24. Well Data Reconciliation Project • Consistent well information between ONRR and BLM/BSEE is vital to effectively account for production and collect every dollar due. • ONRR is working with BLM and BSEE to reconcile well data information and • Ensure validation of OGORs against the most recent well data • Streamline OGOR reporting and processing • Provide earlier notification to Operators if OGORs do not match well information • Successful implementation will: • Further automate data exchange between Operators and Federal Agencies • Assure well and OGOR data integrity

  25. Recent Dear Reporter Letters • Recent Dear Reporter Letters Involving Indian Leases (both dated August 27, 2012) • Dual Accounting for Indian Leases and Arm’s-length Sales of Indian Gas Beyond the First Index Pricing Point • Gas Sold From Indian Leases in an Index Zone Under Arms’-Length Dedicated Contracts and Paying Indian Royalties on Oil and Gas Produced From Indian Leases on Behalf of Others • Both letters sent certified mail; return receipt requested • Failure to comply may subject lessee to enforcement actions, including civil penalties

  26. GAO High Risk Report GAO High Risk Report • Three "shortcomings" in Interior's revenue collection policies: • The Federal Government receives a fair return on its oil and gas resources (so called "government take") • Interior completes its production verification inspections • Interior's data on production and royalties are consistent and reliable Responsibility shared with BLM, BOEM and BSEE ONRR’s responsibility to accurately collect royalty and production data from industry

  27. Four ONRR-related GAO Reports Cited on the GAO High Risk Report GAO-08-0893R – Mineral Revenues: Data Management Problems and Reliance on Self-Reported Data for Compliance Efforts Put MMS Royalty Collections at Risk Status: All 4 implemented GAO-09-549 – Mineral Revenues: MMS Could Do More to Improve the Accuracy of Key Data Used to Collect and Verify Oil and Gas Royalties Status: All 5 implemented GAO-10-313 – Oil and Gas Management: Interior’s Oil and Gas Production Verification Efforts Do Not Provide Reasonable Assurance of Accurate Measurement of Production Volumes Status: 1 implemented GAO-11-34 – Federal Oil and Gas Leases: Opportunities Exist to Capture Vented and Flared Natural Gas, Which Would Increase Royalty Payments and Reduce Greenhouse Gases Status: 1 targeted for full implementation in 2013 GAO High Risk Report

  28. Because fees charged by pipeline companies often include deductible and non-deductible costs, calculation of allowable gas transportation and gas processing costs can be difficult and complicates ONRR’s compliance reviews and audits ONRR and the State of New Mexico have unbundled 12 systems to date. Rates may be found at http://www.onrr.gov/unbundling/default.htm ONRR has hired 8 new FTE and will be hiring 3 additional FTE to implement a strategy to unbundle rates for Federal and Indian transportation and processing systems ONRR is implementing the unbundling strategy in coordination with State and Tribal audit programs Unbundling of Transportation and Processing Costs

  29. Draft ONRR Unbundling Strategy • Unbundling Team (AV) • Inventory & prioritize transportation and processing systems • Develop and oversee a 3 - 5 year project plan • Develop the Statement of Work and oversee contractor • Provide technical support to ACM, STRAC, & contractor • Develop performance measures and monitor progress • Publish unbundled rates on website LEADERSHIP & DIRECTION Data • Contractor • Determine allowable equipment based on guidance • provided by the Unbundling Team • Sort equipment costs by allowed and non-allowed • costs • Use the data to determine allowable and • non-allowable percentages • Store & maintain collected data COLLABORATION DATA REPOSITORY Data Data • Unbundling Audit Team (ACM) • Incorporate the high risk transportation • systems into annual work plans • Tour facilities of selected systems • Issue data requests to system operators • Analyze & submit data to Contractor • Issue orders to pay and perform • States & Tribes • Issue data requests to system operators • Tour facilities of selected systems • Analyze & submit data to Contractor • Draft orders to pay and perform AUDIT & DATA COLLECTION

  30. ONRR Unbundling Information Website • Published Annual Factors for Gas Plants and Transportation Systems (http://www.onrr.gov/Unbundling/default.htm)

  31. Inventory & Prioritization of Bundled Systems • ONRR has identified 189 gas plants that process Federal & Indian natural gas production (based on FY 2011 data) • ONRR established 22 criteria for each plant and selected 7 high risk factors to prioritize which gas plants to unbundle • 29 high-priority gas plants cover more than 80% of total volume reported for all gas plants in FY 2011 • Timeline for unbundling the 29 high-priority plants: • FY 2013 – 6 Gas Plants • FY 2014 – 7 Gas Plants • FY 2015 – 16 Gas Plants • ONRR will evaluate associated transportation systems when we evaluate each gas plant

  32. Next Steps in ONRR’s Unbundling Efforts • Previous unbundling efforts have taken an average of 3 years to complete, yielded results that are only valid for one year, and must be repeated for each year where factors are needed • ONRR is evaluating an engineering solution that uses: • Industry accepted engineering practices and data; • Sophisticated, industry standard modeling tools; and • Replacement costs, adjusted for location and updated annually • An engineering solution would be based on minimal data needs: • Process Flow Diagrams • Gas Throughput • Gas Composition • Inlet and outlet conditions for major process components

  33. New and Upcoming Regulations Office of Natural Resources Revenue

  34. ONRR published an Advanced Notice of Proposed Rulemaking for Federal Oil and Gas Valuation on May 27, 2011; comment period closed on July 26, 2011 Purpose is to make changes to existing Federal Oil & Gas regulations at 30 CFR Part 1206, subparts C and D to: Offer greater simplicity, certainty, clarity, and consistency in production valuation for mineral lessees and mineral revenue recipients; Be easy to understand; Decrease industry’s cost of compliance and government’s cost of enforcement; and Provide early certainty to industry and ONRR that companies have paid every dollar due Federal Oil & Gas Valuation Proposed Rule

  35. ONRR received responses from 19 commenters representing states, industry, industry trade associations and the general public. Comments viewable at: http://www.onrr.gov/Laws_R_D/PubComm/AA01rmpc.htm ONRR has drafted proposed regulations for Federal Oil and Gas Valuation. The proposed rule is currently with the Office of the Solicitorfor review Federal Oil & Gas Valuation Proposed Rule

  36. Purpose:Advise the Secretary on a rulemaking to address Indian Oil Valuation as it relates to the major portion requirement in Indian oil leases Charter signed by the Secretary on Dec 1, 2011, establishing the Indian Oil Valuation Negotiated Rulemaking (IONR) Committee under the authority of the Federal Advisory Committee Act Balanced membership from industry, Indian tribes and allottees, and the Federal government Held meetings throughout the Spring/Summer 2012; next meeting late October 2012 Committee is considering a traditional ONRR-calculated major portion and an index-based methodology. Indian Oil Negotiated Rulemaking

  37. Debt Collection, 30 CFR 1218 – Final rule Published May 2, 2012 Clarified and codified provisions of Debt Collection Act of 1982 and Debt Collection Improvement Act of 1996 Established procedures governing collection of delinquent royalties, rentals, bonuses, and other amounts due Included provisions for administrative offset Amendments to ONRR’s Website, Mailing Addresses, and Payment Definitions – Direct Final Rule Published May 2, 2012 Codified eCommerce as ONRR’s reporting website for royalties and production Added a definition for pay.gov Regulations

  38. Amending OMB Control Numbers and Certain Forms - Direct Final Rule Published December 8, 2011 Amended OMB control numbers for information collection requirements, certain form numbers, and corresponding technical corrections to position titles, agency names, and acronyms listed in chapter XII of 30 CFR ONRR is in the process of finalizing a second Direct Final Rule to update the remaining forms Regulations

  39. Regulations • Proposed Rule for Civil Penalties • Applies civil penalty regulations to solid mineral and geothermal leases • Adjusts FOGRMA civil penalty amounts for inflation as required by the Federal Civil Penalty Inflation Adjustment Act • Provides notice that ONRR will post a matrix for civil penalty assessments on the ONRR website • The proposed rule is currently in internal review

  40. Proposed Rule for GOMESA (Phase II) Moves GOMESA Phase I regulations from 30 CFR Part 519 to 30 CFR Part 1219 Establishes formula and methodology for calculating and allocating GOMESA Phase II revenue to the Gulf Coast States, their eligible coastal political subdivisions, and the Land and Water Conservation Fund GOMESA Phase-II revenue sharing starts after October 1, 2017 The proposed rule is currently in internal review Regulations

  41. Regulations • Takes vs. Entitlements – Proposed rule • Implements section 6(d) of RSFA and prescribes when a Federal lessee must report and pay royalties on the volume of oil and gas it takes from a lease, or on the volume to which it is entitled based on its ownership interest in the unit or lease • The proposed rule is currently with OMB for review

  42. Sharing of Civil Penalties The Department is proposing new language amending Section 206 of the FOGRMA that requires ONRR to share with States and Tribes 50% of any civil penalties resulting from activities conducted by a State or Tribe under a cooperative audit agreement. The law also requires to ONRR deduct the 50% civil penalty share from the funding it provides to the State or Tribe for its audit program costs.  Proposed language would require ONRR to reduce the State or Tribe’s share of the 50% civil penalty by the funding ONRR provides through audit cooperative agreements FY 2013 President’s Budget Items of Interest

  43. FY 2013 Onshore Oil & Gas Inspection Fees: BLM will collect a non-refundable inspection fee from the designated operator of each Federal and Indian lease or agreement subject to inspection under 30 U.S.C. 1718(b) FY 2013 fees range from $700 to $6,800 for each lease or agreement- billed at the beginning of the fiscal year FY 2013 Offshore Oil and Gas Inspection Fees: For facilities above the waterline, excluding drilling rigs, the annual fee ranges from $10,500 – $31,500 - billed at the beginning of the fiscal year FY 2013 drilling rig inspection fees are $16,700 for rigs operating in water depths < 500 feet $30,500 for rigs operating in water depths ≥ 500 feet These fees billed within 30 days of the month in which the inspection occurs FY 2013 President’s Budget Items of Interest

  44. Please Contact Deborah Gibbs Tschudy Deputy Director, Office of Natural Resources Revenue PO Box 25165 MS-61000B Denver Federal Center, Bldg 85 Denver, CO 80225 Deborah.Gibbs.Tschudy@ONRR.Gov http://www.onrr.gov Questions & Comments

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