FEBRUARY 25, 1999

Madam Chairman and Members of the Subcommittee, I appreciate the opportunity to testify today on the Fiscal Year (FY) 2000 budget request for the Minerals Management Service (MMS). This request reflects our best assessment of monies needed to carry out critical MMS programs during the upcoming year.

MMS is requesting $240.2 million, which is $16.2 million more than that enacted in FY 1999. We have looked closely at our ongoing operations and responsibilities, and the MMS budget request for FY 2000 reflects the need for additional funding balanced against savings from streamlined operations. The remainder of my testimony will focus on some of our more recent achievements in improving our operations; challenges and opportunities confronting the agency; and an overview of the funding requested to meet those challenges.

Background

Prior to discussing MMS’s budget request in detail, it is important to put that request into perspective by providing a brief overview of the agency and its programs as well as the benefits derived from those programs. As you are aware, MMS’s mission is:

• To manage the Nation’s Outer Continental Shelf (OCS) mineral resources in an environmentally sound and safe manner; and
• To collect, verify, and distribute in a timely manner mineral revenues generated from Federal (both onshore and offshore) and Indian lands.

To carry out this mission, MMS manages two very important programs-- the Offshore Minerals Management (OMM) Program and the Royalty Management Program (RMP). These programs provide major economic and energy benefits to the Nation, taxpayers, States, and the Indian community--benefits that have both national and local significance. While we have noted these benefits in previous testimony, we believe they bear repeating.

MMS has leased and currently manages more than 42 million acres of Federal lands. Production from those lands accounts for approximately 27 percent of the Nation’s domestic natural gas production and 20 percent of our domestic oil production. Further, the OCS lands currently produce about 1.3 million barrels of oil/day, and natural gas production is currently at 13.9 billion cubic feet of gas/day. By the end of 2000, MMS estimates an increase in oil production to as much as 1.8 million barrels/day, and natural gas is projected to remain steady (but could increase to as much as 17 billion cubic feet/day).

From an economic standpoint, in FY 2000, MMS will account for an estimated $4.0 billion in Federal receipts, including $2.8 billion from OCS receipts and $1.2 billion from onshore receipts. From a taxpayer’s perspective, that converts to:

• $1.9 billion deposited to the General Fund of the treasury to pay for Federal programs and reduce the deficit;
• $611 million in mineral revenue payments made to onshore States;
• $106 million in shared natural gas and oil receipts with coastal States;
• $150 million to Indian Tribes and individual tribal mineral owners;
• $897 million transferred to the Land and Water Conservation Fund; and
• $479 million credited to the Reclamation Fund.

Maintaining Steady Progress in a Changing Climate

In many ways, the FY 2000 budget request for MMS can be viewed as a bridge from the 20th to the 21st centuries. Our request reflects monies needed to carry out core mission responsibilities as well as monies needed to implement recent initiatives aimed at better positioning the agency to meet the challenges of the next century. These FY 2000 initiatives, which will be discussed in more detail later in my testimony, are a direct result of MMS’s desire to continually improve on the way it does business as well as in response to an array of outside factors.

During its relatively short history, MMS has experienced dramatic and profound changes in business, energy and governmental climates. These changes have challenged MMS to keep pace, and the agency has risen to the challenge. These challenges come from many sources, such as--

! Evolving offshore technology

! Dramatically changing energy markets

! Emerging global markets

! Compelling safety and environmental challenges

! Transforming legislation

! Increasingly sophisticated constituent needs

! Advancing information technology

! Challenging governmental initiatives

It is likely that the same forces listed above will continue to have a profound effect on MMS and its programs for the foreseeable future. For that reason, MMS has and will continue to look at ways of doing its business more efficiently while still meeting its missions and responsibilities. As part of that effort, the agency has been aggressive in analyzing its processes and procedures to make them more responsive to our customers. MMS’s vision is to be recognized as the best minerals resource manager--i.e., to be "the best in the business."

Although that vision is a lofty one, it has challenged the agency to make steady progress over the years, and some of those achievements have been discussed in previous testimony before this Committee. At this time, I would like to highlight some of MMS’s most recent achievements as well as discuss some of the challenges the agency faces as we approach the next millennium.

Royalty Management Program (RMP) Achievements

The Federal government has been collecting revenues associated with mineral production on Federal onshore lands since 1920 and from offshore lands since 1953. However, it was not until 1982, with the establishment of MMS and the enactment of the Federal Oil and Gas Royalty Management Act (FOGRMA), that a comprehensive system was put into place for properly collecting, accounting for, distributing, and valuing these revenues. Since 1982, MMS has worked hard to develop systems, policies, and procedures to respond to the mandates of the Act as well as the expectations of its constituencies and numerous oversight organizations. In 1996, the Act was substantively amended by the Federal Oil and Gas Royalty Simplification and Fairness Act (RSFA).

The proper implementation of these two Acts forms the core of the RMP mission. In particular, RSFA significantly changed many historical RMP operating assumptions and revenue processing methods. That, combined with changing energy markets, constituent needs, and government streamlining has caused the RMP to totally rethink and retool its various business processes so they are more responsive to the constituents they serve.

Some more recent achievements include:

• Finalizing a Design for Reengineering RMP - In early 1997, the RMP began a Business Process Reengineering Initiative to prepare itself for the challenges of today and the future. Over the past year and a half, the RMP has been engaged with its customers to design future business processes and support systems to provide the best royalty management services at the least cost. In March 1998, MMS published its Preliminary Design Document outlining RMP’s future business processes, information needs and support systems. During 1998, MMS piloted various aspects of the future processes and testing the information technology needed to support the future RMP. This work led to an implementation plan, or "Road Map to the 21st Century." With this work completed, MMS has begun a three-year journey of change for the RMP.

• Conducting Comprehensive Royalty-in-Kind (RIK) Pilot Programs - Based on the results of a 1997 Feasibility Study, MMS established an implementation team in early 1998 to create detailed program specifications to pilot the taking of oil production in kind from onshore leases and gas production from the OCS. Specifically, the three pilots--which include 1) oil production in Wyoming; 2) OCS Lands Act section 8(g) natural gas production offshore Texas; and 3) natural gas production in the Gulf of Mexico OCS--are structured to be consistent with existing lease terms and to examine where, when, and under what conditions RIK can reduce some of the administrative burdens and uncertainties associated with royalty collection while maintaining revenues.

Federal crude oil was taken by MMS in October 1998 under the Wyoming pilot program. A second Invitation for Bids was issued January 4, 1999, and we will take, beginning April 1999, RIK crude oil from both State of Wyoming and Federal leases located in Wyoming.

The State of Texas section 8(g) natural gas pilot began in late 1998 when MMS began taking natural gas from the Texas 8(g) zone. This gas is being delivered to the General Services Administration for use in Federal agencies. Discussions are also underway with the State of Texas to mutually explore ways to cost-effectively market Federal and State natural gas production.

The third pilot, taking natural gas from the Gulf of Mexico OCS, is scheduled to begin in late 1999.

• Implementing RSFA - Since passage of the Act in 1996, MMS has worked aggressively to implement its many provisions. Of note, the State delegation provision of the Act has already been implemented by regulation, and MMS is paying interest to lessees for royalty overpayments, as provided for by the Act. Proposed versions of several rulemakings have already been published in January and February of this year – amendments to State Delegation Rule, the Appeals Rule, and the Marginal Property Rule.

While the agency has made significant progress in implementing this legislation, there is still much to be done. In 1999, work will continue on the proposed rules published this year and further rulemakings are scheduled that will further contribute to our success in this effort. These include:

• Marginal Properties Relief - to allow reporters to seek accounting, reporting, and auditing relief for their marginal properties. A proposed rule was issued on January 25.

• Revised State Delegation - to amend the already published delegation rule that allows States to perform certain royalty functions for Federal leases within their boundaries. The amended rule would allow States to select certain leases to audit instead of having to select all of them. A proposed rule was issued on February 10.

• Appeals - to further restructure and shorten the appeals process. A proposed rule was issued January 12.

• Reporting and Paying Royalties on Federal Leases - explains which leases the lessee must report and pay royalties for based on the amount they actually took and sold from the leases, or on the amount they were entitled to take based on their percentage ownership in the lease. Also provides an exception to entitled reporting for marginal properties.

• Chronic Erroneous Reporting - to define chronic erroneous reporting and applicable assessments.

• Providing Relief to Small Oil Refiners - In 1998, MMS began reviewing amounts billed small oil refiners because of questions regarding undervaluation of the oil provided by producers to MMS for purchase by the small refiners. MMS realized that billing the refiners for these additional amounts would create economic hardships and jeopardize the program that allowed them to purchase oil for refining. To resolve this issue retroactively, the FY 1999 Omnibus Appropriations Act (P.L. 105-277, section 139) provides for the ratification of payments made under preexisting onshore and offshore RIK contracts under certain conditions. MMS addressed the issue prospectively by renegotiating contracts with the small refiners to assure that future deliveries would be billed at fair market value.

• Revising Indian Gas Valuation Regulations - In early 1999, MMS will publish a final regulation to revise the way that gas taken from Indian leases is valued. This regulation is the product of a negotiated rulemaking involving MMS, Indian Tribes, the Bureau of Indian Affairs and industry. The regulation is a step forward for MMS in meeting its trust responsibility to the Indian community and in complying with the unique terms contained in Indian leases.

Recent Innovations -

• High Tech Imaging - One-stop shopping is now available to customers who need information on leasable solid minerals. More than 100,000 solid mineral lease and logical mining unit documents are easily and immediately retrievable from RMP’s optical library.

• Resolution of Royalty and Production Volume Inconsistencies - Dramatic improvements have been made in the process to resolve discrepancies in royalty and production volume data submitted by industry by reengineering front-end system software and follow-up procedures. Since 1996, MMS has resolved 50,000 inconsistencies and collected an additional $54 million in royalties, some of which goes to the Federal treasury and some to States and Tribes.

• New Sales Reporting Software - Software is now available free from MMS to industry which offers on-line help and incorporates certain edit routines to ease preparation of royalty sales reports, reduce reporting errors and lower costs associated with manually entering the data. This is one step closer to MMS’ goal of 100 percent electronic reporting.

• Compliance Accomplishments - Since the late 1980's, MMS, including its State and Tribal audit partners under the FOGRMA Section 202 and 205 audit cooperative and delegated agreements, has pursued a company-based single and multi-year audit strategy that focused on selected companies’ portions of leases and properties. This strategy has provided a high percentage of coverage for a particular company’s royalty obligations and has resulted in the collection of over $1.5 billion in underpaid royalties. Other compliance efforts apart from audits have produced an additional $500 million. In the past 5 years alone, MMS collected $1 billion as a result of audit and compliance actions--as much as had been collected in the agency’s entire previous life.

 

• Reengineering the Royalty Management Program - MMS’s number one priority is to reengineer RMP’s business processes. This comprehensive overhaul is necessary because of new legislative mandates, changing energy markets, the need for more cost-effective operations, and outdated computer systems. The future RMP will be process centered, focused on outcomes, less costly, and, hopefully, viewed as the best by others. The reengineered program will be organized around two core business processes – the financial management process which will focus on financial accounting and receiving and rapidly distributing revenues; and the compliance and asset management process which will focus on the entire realm of activities related to producing properties, instead of focusing on actions by individual payors that might be active on a particular property. For the customer, the result will mean "one-stop shopping" and better customer service. Other benefits will be a dramatically shortened time frame to ensure compliance – from 6 to 3 years and a 40 percent reduction in reporting requirements.

To test the latter process, which is a dramatic change from current operations, teams have been established to conduct three operational models – oil and gas leases in the Gulf of Mexico, onshore leases in the Uintah Basin of Utah/Colorado, and solid mineral leases in Utah, Wyoming, Colorado, and Montana. A sub-group within the solids team will focus on geothermal issues. These pilots will be conducted in a live environment beginning in early 1999 with the offshore model.

As part of furthering the reengineering initiative, MMS has put several partnerships into place with our customers in order to actively involve them in further defining future business processes, refining planned changes in reporting requirements, and developing the best information technology solutions for the future--Amoco, Texaco and Chevron are participating in the model for the oil and gas leases offshore the Gulf of Mexico; the States of Utah, Colorado, and the Ute Tribe will participate in the similar onshore model; industry representatives on the solids team are BHP, New Mexico Coal, Cyprus Amax Minerals Company, Kennecott Energy Company, PacifiCorp, Peabody Group, and Westmoreland Resources Inc. They join Colorado, Montana, Utah, Wyoming and the Navajo Nation and Crow Tribe.

• Devising an Improved Audit Strategy - One of MMS’s reengineering goals is to complete lease royalty compliance within three years, but that goal is not possible in the current operating environment. Therefore, beginning in Fiscal Year 1999, MMS will utilize a new audit strategy that will concentrate on a property rather than company basis consistent with MMS’s reengineering effort. This strategy will emphasize the use of special teams to audit specific producing properties and other targets such as collection and distribution terminals, gas plants and crude oil refineries. Future audits will be highly integrated, with the compliance processes being tested and developed by the reengineering operational model teams. The new strategy provides for full audit coverage of OCS royalties on a property basis, 80 percent coverage of onshore and tribal royalties, and reserves significant resources for a continued high level of coverage of individual Indian mineral revenues. These audit goals will be integrated into the reengineering environment by 2003.

• Finalizing the Federal Crude Oil Valuation Rulemaking - For the past three years the MMS has been engaged in efforts to update its Federal crude oil valuation regulations to better reflect current crude oil marketing practices. However, just prior to publishing a final rulemaking, a prohibition was added to a FY 1998 Emergency Supplemental Appropriations Act (P.L. 105-174) that barred MMS from implementing the rule until the end of FY 1998. This prohibition was extended by the FY 1999 Omnibus Appropriations Act (P.L. 105-277) until June 1, 1999, or until a negotiated agreement is reached.

While we have reached consensus in many areas of this proposed rule, there are still a few remaining areas of disagreement – areas that have been thoroughly reviewed during the course of the rulemaking process. Nevertheless, to the extent that industry has new, not-previously-considered ideas or concepts to resolve the issues that divide us, consistent with our criteria and statutory responsibilities, further discussion may be beneficial. Department of the Interior staff have recently been in contact with the industry to urge its representative to provide more specific information about their ideas for addressing the unresolved components of the proposed rule.

• Finalizing the Indian Oil Valuation Rulemaking - Following extensive input from the Indian community, MMS published a proposed rule in the Federal Register on February 12, 1998, and conducted two public hearings to obtain additional comments. MMS then reviewed the comments submitted and met with the Indian community to discuss them. MMS plans to publish a supplemental proposed rule in early 1999 to get public comment on changes made to the rule in response to comments received.

However, when the FY 1999 Omnibus Appropriations Act (P.L. 105-277) prohibited MMS from publishing any crude oil valuation final rulemakings prior to June 1, 1999, that prohibition included the Indian oil valuation rule as well as the Federal crude oil valuation rule. MMS remains committed to assuring that Indian lessors receive market value for their crude oil resources and to finalizing the rulemaking in a timely manner.

• Meeting Electronic Reporting Goals - MMS is aggressively pursuing more electronic reporting because it is cost effective. A proposed rule was published in April 1998 that moves the agency closer to 100% electronic reporting. MMS plans to issue a final rule in early 1999 that will include exclusions for hardship cases and small reporters. MMS also plans to convert the remaining paper reporters in the near future.

• Electronic FOIA - RMP is in the process of establishing a web site that will include information about how to submit a FOIA request. This will be the first time an agency within the Department of the Interior has provided this service. In addition, documents that are most often requested will be included on the site. This will simplify the FOIA process for both the Federal government and the individual making the request.

 

Offshore Minerals Management (OMM) Achievements

The Federal OCS program has been ongoing and active since 1953. During that time, the program has changed dramatically in response to changing technology, national energy priorities, and enviornmental considerations. Today, the OCS program has matured into a focused leasing program, with concentrated emphasis on safe and sound development of about 8,000 leases.

Recent achievements include:

• Developing a major safety initiative for offshore oil and gas operations. MMS has made safety one of its highest priorities during the past several years. The continued movement of industry into deeper waters and the overall increased industry activity in the Gulf of Mexico have increased both the level and complexity of monitoring and ensuring safe OCS operations. Likewise, there has been a significant rise in the number of operators on the OCS, some without the same level of experience as the more seasoned operators. To address these concerns, MMS has supplemented its existing safety regime with new measures to determine safety and performance of operators--and using this information, to improve offshore activities. The major components of this initiative include: 1) annual performance reviews of all offshore operators; 2) assessment of appropriate civil penalties; and 3) disqualification of unacceptable operators.

 

• Managing the safe and environmentally sound leasing and development of offshore resources on nearly 8,000 active leases in the Gulf of Mexico. Interest has been strong in leasing natural gas and oil resources in the Gulf of Mexico. Total high bids received in recent sales have been 20% higher than the totals in 1993 sales, and the number of participating companies has increased steadily since 1993. Further, from 1993 to 1997, oil production rates have risen more than 32 percent (to 1.3 million bpd) and natural gas production has risen nearly 12 percent (to 13.9 bcf/day). However, we anticipate some decline in leasing this year as a result of lower oil prices.

• Expanding opportunities for States, localities and other Federal agencies to use OCS sand for beach restoration purposes. For several years, MMS has worked cooperatively with coastal States interested in identifying and assessing the viability of using OCS sand for State and local beach restoration purposes. In 1998, MMS completed a negotiated agreement with the U.S. Army Corps of Engineers and the National Park Service for the use of OCS sand for restoration of the northern portion of Assateague Island, MD. Also in 1998, MMS completed a non-competitive lease agreement with the City of Virginia Beach to use OCS sand to construct a beach restoration and hurricane protection project along a 5-mile stretch of Sandbridge Beach, Virginia. Of note, this was the first project where a fee was assessed for the Federal sand resource (roughly $198,000). MMS sustantially discounted (by 65%) the fee off the estimated value of the sand to reflect the public interest served by the project.

• Providing international leadership on offshore oil and gas issues. Through its regulation of offshore operations in the United States, MMS has recognized how important it is for industry and government regulators around the world to share information and expertise with the goal of achieving clean and safe operations on a global scale. Some examples in this area include--

- Developing and/or extending MOU’s with various countries to exchange scientific and technical information related to offshore mineral leasing and development activities such as resource assessment, administrative procedures and practices, safety, environmental protection, and royalty accounting assistance. In 1998, MMS expanded its cooperative efforts and developed working arrangements with several new foreign nations, including Australia, Norway, and the Republics of Kazakhstan and Turkmenistan.

- Organizing and convening the first-ever Panel of International Regulators at the 1998 Offshore Technology Conference. The panel was comprised of industry represenatives and government regulators from nine countries and addressed the challenges and opportunities for industry and government regulators in achieving clean and safe operations around the world.

- Helping organize an international workshop in Indonesia on the decommissioning of offshore oil and gas platforms. The workshop was conducted under the auspices of the Asia Pacific Economic Cooperation Marine Resources Conservation Working Group, and included representatives from MMS, universities, U.S. oil and gas companies, and other industry organizations.

• Implementing financial responsibility requirements for "offshore facilities" under the Oil Pollution Act of 1990 (OPA 90), as amended. In October 1996, Congress amended the original language of OPA 90 pertaining to financial responsibility requirements for offshore facilities. The amendments made it possible for MMS to develop a fair and reasonable rule that did not negatively impact the industry but still ensured that responsible parties maintain the financial capability to pay for an oil spill, should it occur. In August 1998, MMS published a final rule that was the result of extensive consultation with all affected parties. It specified the amounts of financial responsibility required, the types of facilities covered, and the methods for demonstrating financial responsibility. In addition to OCS facilities, the rule covers facilities in certain State waters. Implementation of the new rule began in October 1998, and financial responsibility coverage must be in place for all affected facilities by April 1999.

• Implementing all relevant provisions of the Deep Water Royalty Relief Act (DWRRA). The DWRRA of 1995 provided that, under certain conditions, royalty relief would be given to: 1) new leases located in the Central, Western, and a small portion of the Eastern Gulf of Mexico; and to 2) existing leases located in these same areas. In 1998, MMS finalized its regulations pertaining to existing leases (it had previously finalized regulations on new leases), and held outreach efforts with industry to explain the regulations. Since passage of the Act, MMS has held a total of six lease sales in the Central and Western Gulf of Mexico, and three of those sales were recording-breaking sales. Approximately 4,400 tracts were leased and over $3.6 billion was taken in bonus bids for the Federal government. Also, to date, MMS has approved three DWRRA applications on existing leases, and a fourth application is pending. Finally, in 1998, the Gulf of Mexico saw its first production from a lease issued under the DWRRA with the automatic royalty relief provision.

• Assisting in efforts to gain ratification of the United States/Mexico maritime boundary. The U.S./Mexico maritime boundary was ratified in November 1997. MMS worked closely with the Department of State to explain the importance of the treaty, the necessity of timely ratification, and its impact on domestic energy activities in the Gulf of Mexico. Ratification established a permanent boundary to resolve U.S. and Mexican overlapping claims for offshore lands within 200 miles of the coastline. This recognized boundary will provide certainty to U.S. oil and gas operators pursuing exploration and development activities in areas adjacent to the boundary. Furthermore, ratification set the stage for futher delimiting areas beyond 200 miles. At present, negotiations between the United States and Mexico are focused on the area known as the "Western Gap."

• Approaching first development on the Alaska OCS. Although leasing has occurred offshore Alaska since 1976, to date there has been no production from Federal leases due to remote locations, harsh operating environments, and the significant finds that would be required to justify the substantial development costs. However, in 1998, BP filed a proposed Development and Production Plan (DPP) in the Beaufort Sea for its "Liberty" prospect. BP estimates that the prospect contains about 120 million barrels of recoverable oil. The plan is currently undergoing the necessary reviews and approvals. However, if those approvals are given, it is expected that first production could occur in late 2002. When complete, this would be the first stand-alone OCS development project in the Alaskan Beaufort Sea, and under section 8(g) of the OCS Lands Act, the State would receive 27 percent of the monies generated from the production from the "Liberty" facility.

• Developing cooperative efforts with States and local governments, industry and others to address various OCS-related safety and regulatory issues. By working with its constituents, MMS has been able to find program efficiencies while continuing to improve the effectiveness of its safety and environmental program. Examples include--

- Finalizing a Memorandum of Understanding (MOU) in December 1998 with the U.S. Coast Guard concerning shared responsibilities under the Outer Continental Shelf Lands Act. The two agencies based the MOU on input from affected groups.

- Developing an MOU in conjunction with the Special Programs Office of the Department of Transportation governing the regulation of offshore pipelines. With help from the regulated groups, the two agencies arrived at an agreement that gives pipeline owners a role in determining which agency will regulate a given pipeline.

- Implementing a series of agreements with other Federal agencies and coastal State governments to cooperatively develop Federal/State boundaries, describing data relevant to leasing as well as State regulatory and enforcement actions. Many of the agreements with coastal States will lead to fixing of the Federal/State boundary by Joint Motions filed with the United States Supreme Court. The latest effort has lead to a Supplemental Decree fixing the Offshore Boundary with the State of Texas.

- Working in close association with the American Petroleum Institute to develop industry standards and with the Offshore Operators Committee to develop performance measures for operators and contractors working on the OCS.

 

Future OMM Challenges and Opportunities

• Continuing to ensure safe and clean operations. Interest in the deep water Gulf of Mexico remains strong. In the past three years alone, about 4,400 tracts have been leased (many of them in the deeper waters of the Gulf), bringing MMS’s lease monitoring responsibilities to about 8,000 leases and over 3,900 platforms. As industry continues to move into deeper and deeper waters, MMS must be prepared to meet the technical, safety, and environmental challenges associated with deep water operations while still ensuring safe and clean operations in other areas of the OCS . To meet this challenge, the agency will continue to work proactively to find ways to effectively manage an increased workload while ensuring proper stewardship of OCS resources.

• Effectively managing the OCS program in times of low oil prices. In 1998, oil prices fell to dramatic lows, and low price scenarios could continue for several years. This scenario can have dramatic implications for the OCS program. Low prices over an extended period of time can be devastating for small independents who do not have the deep pockets necessary to survive financially in these difficult periods. Likewise, even the very large companies are finding it necessary to cut costs dramatically, and several large companies have merged. The potential of small operators leaving the OCS and large companies getting even bigger can have an effect on the level of participation and competition in the OCS.

In addition, MMS will likely see increased requests for royalty relief and lease extensions if companies do not have the resources available to explore and develop them. How best to address these issues may not be as clear cut in areas subject to leasing restrictions.

Finally, there may be other ramifications which are not yet identified. MMS is adopting a pro-active approach by meeting with offshore operators to see where we can reduce their costs without compromising safety, the environment, or royalties owed to the Treasury. We are considering several applications for royalty relief submitted by companies that believe that their production will cease at the current royalty rate.

We also are cooperating with the Department of Energy to place additional oil in the Strategic Petroleum Reserve (SPR) while oil prices are relatively low. We will being this Spring to take a limited amount of oil royalties in kind from leases in the Gulf of Mexico and transfer the oil to DOE for placement in the SPR.

• Supporting increasing needs by States, localities and other Federal agencies for access to OCS sand and gravel resources. With the passage of amendments to section 8(k) of the OCS Lands Act (P.L. 103-426), OCS sand has become easier to obtain for beach nourishment, shoreline protection, and wetlands enhancement projects that benefit the public. In addition, during the past several years, States, localities and others have seen their needs for OCS sand increase due to adverse weather and diminishing suitable sources located either onshore or in coastal waters. MMS expects requests for Federal sand for beach restoration and hurricane protection to significantly increase in the future from current levels. In anticipation, the agency’s current and future activities are laying the groundwork for effective regional management of OCS sand resources.

Through its Marine Minerals Program, MMS will continue to work cooperatively with interested States, focusing its efforts on integrating geologic and environmental information to identify sand deposits in Federal waters suitable for beach nourishment. Past and ongoing partnerships with States along the East Coast and the Gulf of Mexico are designed to collect and analyze in an organized and cost-effective fashion the information needed to make decisions on beach restoration projects. This proactive approach will help ensure that when OCS sand resources are most needed, the necessary groundwork will have already been accomplished--thereby expediting the overall beach restoration process.

• Regulating a domestic oil and gas industry that is becoming increasingly global in scope. During the past several years, numerous foreign nations have stepped up their efforts to offer their mineral resources for exploration and development, particularly their offshore oil and natural gas resources. While those decisions have positive aspects, the Administration also has recognized that there is a growing need to ensure that those offshore operations are conducted in an effective and environmentally safe manner since the mineral leasing or development policies of other countries can have a profound impact on the United States. For that reason, MMS is helping to develop a comprehensive set of internationally recognized technical standards through active involvement with technical and trade associations in the U.S. and international standards setting organizations. The agency participates in information-sharing fora to dissiminate information on the best practices utilized by the domestic oil and gas industry as well as to learn about best practices from other offshore regulators around the globe.

In addition to maintaining U.S. leadership in developing international standards, as offshore petroleum operations are expanding around the globe, MMS is increasingly being called on to participate in international projects that further U.S. foreign policy goals. The agency is developing relationships with other regulatory bodies around the world and assisting when asked to develop in-country expertise in nations with both emerging or developed oil and gas programs.

• Maintaining a viable OCS program that is consistent with the President’s decision to administratively withdraw certain areas of the OCS. As MMS begins the process of developing its next 5-Year Program (which covers the timeframe 2002-2007), it must factor into the decisionmaking process the President’s leasing restrictions as well as dialogues with coastal States and other constituencies in areas where offshore oil and gas activity is currently not underway. One of the agency’s core responsibilities in managing OCS leasing and development is to ensure that our leasing decisions fully consider the possible risks to coastal communities and environments of offshore development and that our regulatory efforts ensure the highest degree of safety and protection possible in day-to-day operations. A major part of the debate surrounding moratoria is how people perceive the risks of offshore oil and gas activity to their coastal environment. MMS will continue to work on finding ways to identify the important issues, attempt to address them, and find a forum or fora where all parties can engage in a constructive discussion.

In addition to the various program achievements and challenges listed above, MMS is also working on two important government-wide issues--implementation of the Government Performance and Results Act (GPRA) and Year 2000 (Y2K) compliance.

With respect to GPRA implementation, MMS has woven strategic planning and accountability for results into its culture. MMS has developed, through a team approach, a mission, goals, and performance indicators that are being used to measure the performance of the bureau’s critical systems. As part of this process, the organization has examined political, legislative, judicial, administrative, environmental, and economic factors while developing its Strategic Plan and has focused on programmatic outcomes.

To date, MMS has made great strides with the development of its first strategic and annual performance plans and the development of a methodology to gather and report performance information as required by GPRA. The bureau views implementation of this Act as one of the cornerstones of its management efforts. As more experience and knowledge is gained, MMS will continue to refine its strategic thinking, will reevaluate its goals and measures, and will improve its capacity to gather, analyze and make performance information available to its managers as well as its customers and stakeholders.

Continuing efforts in 2000 and beyond will focus on:

• Verification, validation and reporting of performance information in a way that is useful;
• Refining and revising strategic plans to respond to a changing world;
• Creating stronger linkages between performance and the budget; and
• Creating more accountability for program performance.

With respect to Y2K issues, MMS has published a Y2K readiness statement on the Internet. All four MMS mission-critical systems have been independently validated as being Y2K compliant. At this point, MMS is dealing with embedded and telecommunication system compliance. With respect to telecommunications, about 80 percent of MMS routers and telephone exchanges are compliant, and the remainder will by compliant by March 1999. MMS now will give greater attention to business continuity plans and take steps to work with offshore operators to ensure that their Y2K programs are sufficient to prevent potential safety concerns or oil spill hazards.

As you can see, MMS has accomplished much, but there are still many challenges and opportunities that lie ahead. I would like to devote the remainder of my testimony to MMS’s Fiscal Year 2000 budget request, and specifically, how this budget request will help us meet the challenges identified and discussed earlier.

OVERVIEW OF FY 2000 MMS BUDGET REQUEST

In addition to appropriations for operations, the MMS receives appropriations for distribution of the States share of onshore mineral receipts. Those permanent appropriations are:

FY 2000 Budget Request

The MMS budget request totals $240.2 million, an increase of roughly $16.2 million above the 1999 enacted level of $224.0 million. The $16.2 million increase will continue the activities funded by the $8.7 million increase provided in FY 1999 to meet legislative and workload increases. The FY 2000 proposed increases are covered by raising the cap on offsetting receipts from $100.0 million to $124.0 million. In turn, the request for direct appropriations is only $116.2 million, a decrease of $7.8 million from the 1999 level of $124.0 million. At the FY 2000 request level, offsetting collections would cover over 50 percent of MMS’s operating budget.

The net increase of $16.2 million, over the FY 1999 enacted level, includes:

• $5.4 million for uncontrollable cost increases such as pay and rental increases;

• $11.6 million for programmatic increases tosupport continuing Royalty Reengineering efforts, workload requirements in the Gulf of Mexico, and MMS participationin international for a affecting worldwide standards for oil and gas activities.; and

• -$0.8 millionin programmatic reductions due to higher priority budgetary requirements.

The $10 million proposed in 2000 for RMP reengineering will be used to continue implementation of new applications and technologies supporting RMP’s future concept of operations. The RMP faces the dilemma of responding to new legislative requirements, most notably the Royalty Simplification and Fairness Act (RSFA), with aging systems that already exceed accepted life cycle standards and have been criticized by the Department’s Office of Inspector General. Without this investment, a major risk of system failure and operational instability exists. Furthermore, the RSFA-authorized delegation of royalty management functions to States cannot be accommodated fully with the current RMP systems configuration. The RMP modernization is also essential for MMS to continue fulfilling its basic goal of ensuring the timely collection, accounting, verification, and disbursement of mineral revenues.

This initiative will improve the timeliness and accuracy of payments to States, Indian tribes and others. It will improve the cost effectiveness of our collections and disbursements and increase compliance with lease terms, regulations and laws. In short, this initiative is expected to reduce MMS operating costs by $3.5 million per year and reduce reporting requirements on industry by 40 percent, thereby saving them millions of dollars.

The Royalty Reengineering initiative is one of the principal Sub Projects of the Secretary’s Trust Fund Management Improvement Initiative and will play an important role in the trust managment improvements of the Bureau Of Indian Affairs and Office of Special Trustee.

The Gulf of Mexico workload continues to grow. While lower oil prices may reduce FY 1999 lease sale bonuses, industry has, over the past several years, accumulated a large inventory of new leases, particularly in deep water. Industry appears committed to the exploration and possible future development of those leases. Consequently, there is an increasing demand on MMS to review exploration and development plans, issue permits, and provide inspection and oversight of offshore operations. A increase of $1.4 million dollars is requested to support Gulf of Mexico Region activities.

The MMS has a strong commitment to safety and environmental protection. The offshore oil and gas industry is international in scope and its activities in other parts of the world are having a growing effect on our domestic activities. Numerous international organizations and fora play a significant role in developing offshore oil and gas standards that directly impact operations in U.S. waters and worldwide. An increase of $250 thousand is requested for FY 2000 to allow MMS to participate in these international organizations and fora. The MMS’s participation in these types of exchanges will support U.S. policy objectives, assist U.S. industry interests, and advance the Nation’s commitment to safe and environmentally sound offshore oil and gas management practices.

Reductions of $0.8 million have been proposed which include -$600 thousand for the Marine Minerals Research Center and -$250 thousand in reduced well log data conversion funding.

CONCLUSION

Madam Chairman, that concludes my written testimony. However, I would be happy to answer any questions you or other Members of the Subcommittee may have regarding any aspect of our budget request for FY 2000.

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updated July 1, 1996