Office of Natural Resources Revenue Audit and Compliance Updates Presented by: Mary Williams COPAS Spring Revenue Commi

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 • 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

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

5. 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

6. 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

7. 04/01/2012 Director Greg Gould ________________ Deputy Director Debbie Gibbs Tschudy Audit Program Management Roman Geissel Audit and Compliance Management Business Systems & Budget Risk & Work Planning Theresa Bayani Craig Sechrest Kathy Sager Texas Audit & Compliance Central Audit & Compliance Western Audit & Compliance Faye Stewart Vacancy Mary Williams Houston A Houston B Houston C Dallas Allowances & Gas Plants Tulsa Oklahoma City Denver Denver A Denver B Solid Minerals & Geothermal John Barder Mary Ann Guilinger Lydia Barder Alan Claybaker Allen McDaniel Cindy Nguyen Linda Shishido- Sheahan Joel Arnold Vacancy Carol Green Vacancy ONRR’s Audit and Compliance Management (ACM) Organization

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

9. 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

10. 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

11. 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

12. Audit and Review Time Sequence

13. 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.

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 & GasReporting 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 & GasReporting 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