1

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!

2

Overview

UpdateInitiatives RegulationsRoyalty Policy Committee

OrganizationAudit & Compliance

PartnershipsPersonnelStrategies & Risk ApproachAudit & Review Sequence & TypesOil & Gas Reporting Issues

Unbundling AllowancesAdditional Compliance ActivitiesAccomplishmentsFuture Goals and Activities

3

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

4

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

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

5

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

6

7

ONRR’s Audit and Compliance Management (ACM) Organization

04/01/2012

DirectorGreg Gould

________________

Deputy DirectorDebbie Gibbs Tschudy

Audit and ComplianceManagement

Theresa Bayani

Texas Audit &

ComplianceFaye Stewart

Western Audit &Compliance

Vacancy

Houston A

Vacancy

Houston B

Cindy Nguyen

Houston C

Carol Green

Dallas

Allen McDaniel

Denver A

Mary AnnGuilinger

Denver B

John Barder

Denver

Lydia Barder

Oklahoma City

Joel Arnold

Tulsa

AlanClaybaker

Solid Minerals& Geothermal

Vacancy

Allowances& Gas Plants

Linda Shishido-Sheahan

Central Audit &Compliance

Mary Williams

Business Systems& Budget

Craig Sechrest

Audit ProgramManagement

Roman Geissel

Risk &Work Planning

Kathy Sager

8

Audit and Compliance Partnerships

FOGRMA Sections 202 and 205 authorizes ONRR to contract with States and Tribes to conduct audits of leases within their State/Reservation. Currently there are agreements with 10 states and 6 Indian Tribes

States and Tribes are fully reimbursed for their costs

ONRR works in partnership with the States and Tribes to meet compliance goals and provide support and guidance in their audit programs

Expanded 202/205 funding for existing delegations – Wyoming now issues orders

States

Alaska

California

Colorado

Montana

New Mexico

North Dakota

Oklahoma

Texas

Utah

Wyoming

Tribes

Blackfeet

Navajo Nation

Shoshone/Arapaho

Southern Ute

Ute

Ute Mountain Ute

9

Current Audit and Compliance Strategy: Personnel

Strong commitment to auditing and compliance

Additional 106 State and Tribal auditors with delegated audit authorities

Currently staffed with 227 compliance personnel including 149 auditors

FY2011 ONRR received authority to hire 8 auditors for unbundling and gas plant audits

10

Current Audit and Compliance StrategyAnnual 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 auditorsNew Apache Intergrated Pilot ProgramData Mining - coordinating work

11

Audit and Compliance Risk StrategyThe 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

12

Audit and Review Time Sequence

End of the First Month

After Production

Six to Nine

Months After Filing

Reports

Two or Three Years after

Filing Reports

Seven Years after

Filing Reports(Fed O&G)

Payor Submits2014s/OGORs

COMPLIANCE REVIEWS AND AUDITSDATA MININGEDITS

New Up-FrontSystem Edits

DataMining

ComplianceReviews

Audits

· Transportation/ Processing Limit

· APOP with PC04 · Missing API #s on

Southern Ute· Multiple Royalty Rates· Price below Indian Index· Pricing Edit· Agreement # not related

to lease

· Missing Reports· Adjustment

Monitoring· Adjustments to

Completed Cases· Net Negative· Production

Comparisons

· Full Review· Limited Scope· Some Source

Documents· Typically One

Year or Less

· Company· Property· Special Terms· Source Documents

for Sample· Multiple Years

CONTINUOUS COORDINATION EFFORTS

OFFICE OF ENFORCEMENT ACTIVITIES

13

Audits/Compliance Reviews PerformedCompany, 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.

14

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

15

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

16

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

17

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)

18

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

19

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

20

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

21

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