Hearing of the Energy and Mineral Resources Subcommittee of the House Natural Resources - Getting Royalties Right: Recent Recommendations for Improving the Federal Oil and Gas Royalty System

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REP. ADRIAN SMITH (R-NE): Thank you, Mr. Chairman.

I'd like to ask Mr. Rusco a couple of questions. In your testimony you were critical of MMS, because it relies heavily on self reporting, an honor system, I guess, as described. Isn't it true that the IRS relies on self reporting? Is that accurate?

MR. RUSCO: It's accurate, except that they also require employers to submit W2s or 1099s and other third-party documentation.

REP. SMITH: Okay. And so I guess furthermore, the IRS has conducted audits of about 1 percent of the payers, and yet MMS examined 8.2 percent of the properties and 25.9 percent of the payers. And was that included in your testimony?

MR. RUSCO: Not specifically, but we do agree that there is an over reliance on compliance and audits in MMS, and that is because the quality of the data coming into the system and the integrity of that data are not up to par.

REP. SMITH: So the integrity of the data is lacking?

MR. RUSCO: If the data -- if we could be sure that the self- reported data were accurate and if third-party data were collected in a timely fashion and compared to those data and those problems were fixed in the IT and management systems upfront, that would be a better way to do it than to rely more heavily on your audit system.

REP. SMITH: Okay. And if we could meet the requests that you're -- the suggestions that you're making, what do you think the net result would be?

MR. RUSCO: I think the system would be -- would work much more efficiently. And I think part of what MMS is doing with -- in trying to implement a risk-based system is they're trying to touch fewer properties but do it more efficiently and closer to the model that the IRS uses.

REP. SMITH: And would the amount due increase?

MR. RUSCO: If the data could be assured of being accurate, then we'd know we have the accurate collection of royalties. We don't know at this point and we can't know, because the data are not reliable or accurate enough.

REP. SMITH: So maybe some folks are overpaying -- do I hear you saying that?

MR. RUSCO: It's certainly possible.

REP. SMITH: Likely?

MR. RUSCO: I can't comment on that.

REP. SMITH: Okay. Thank you.

And Mr. Deal, if we found the amount payable on the amount due to increase, what do you think that would -- what do you think would be the impact in the marketplace?

MR. DEAL: Well, I guess it's kind of hard to say. Depends on the impacts, but I would say -- but the best way I could say it is the oil companies try to be good corporate citizens, they pay what's due, sometimes they overpay. And as for refund, sometimes they underpay and need to pay with interest.

What difference would it have on the market? I would say relative to existing oil prices and gas prices, you know, my guess is it's not likely to have a big impact on the market. But you know, we're kind of talking in the abstract here. It depends on the amounts we're talking about. But I -- there is no obvious big impact that tuning up the royalty management program would have.

REP. SMITH: Okay. Thank you.

And I would yield the balance of my time to Mr. Pearce. Thank you.

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