Madam Chairman and Members of the Subcommittee, the Minerals Management Service (MMS) appreciates the opportunity to testify today on its Fiscal Year (FY) 1998 budget request. This request reflects our best assessment of monies needed to carry out critical MMS programs during the upcoming year.

In general, MMS is requesting $205.040 million, which is approximately $.6 million more than that appropriated in FY 1997. In formulating its request, MMS looked closely at its ongoing operations and recently increased responsibilities. The MMS budget request for FY 1998 reflects the need for additional funding balanced against savings gained from past and ongoing efforts to streamline operations and find more efficient ways of doing business. The remainder of this testimony will focus on some of our more recent efforts to streamline and improve our operations; challenges and opportunities confronting the agency; and an overview of funding requested to meet those challenges.

Background

Prior to discussing MMS's budget request in some 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. MMS is responsible for two major programs within the Department of the Interior - the Royalty Management Program (RMP) and the Offshore Energy and Minerals Management Program (OEMM). As such, all mineral revenue collection and distribution functions on both Federal (onshore and offshore) and Indian lands are centralized within the bureau. Further, the leasing and oversight of minerals operations on the Nation's Outer Continental Shelf (OCS) also are centralized in MMS. Together, these programs contribute significantly to the Nation's economic well-being and energy security.

From an energy standpoint, MMS currently manages more than 27 million acres of offshore Federal lands. Production from those lands account for approximately 25 and 15 percent, respectively, of our domestic natural gas and oil production.

From an economic standpoint, in FY 1998, MMS will account for an estimated $6.7 billion in Federal receipts, including $5.5 billion from OCS receipts and $1.2 billion in onshore receipts. From a taxpayer's perspective, that converts to:

* $4.3 billion deposited to the General Fund of the Treasury to pay for Federal programs and reduce the deficit;

* $581 million in mineral revenue payments made to onshore States;

* $119 million in shared natural gas and oil receipts with coastal States;

* $74 million to Indian tribes and allottees;

* $900 million transferred to the Land and Water Conservation Fund;

* $458 million credited to the Reclamation Fund; and

* $150 million transferred to the Historic Preservation Fund.

Finding Better and More Efficient Ways of Doing Business

Although MMS is only 15 years old, a hallmark of the agency has been its ability to evolve in response to a changing business and governmental climate. In response to those changes, and due to a desire to continually improve on the way it does business, MMS has devoted a significant amount of attention to developing a long-range vision for the agency in light of its missions and responsibilities. Further, we have looked and are continuing to look for better ways to carry out our programs more effectively. The goals of these efforts are several: to make the agency more efficient, thereby better utilizing limited resources; to be more responsive to our customers; and to better position ourselves to anticipate and meet new challenges thatl inevitably arise.

With regard to long-term planning, MMS developed and issued its first strategic plan - MMS 2000. As a direct result of that planning process, the agency recently implemented a reorganization plan that reduces management layers and realigns several functions to better coordinate program activities. In addition, MMS is in the process of finalizing its plan under the "Government Performance and Results Act," which will include quantifiable performance goals and measures that will be incorporated into all levels of management. Taken together, these two major initiatives provide the basic framework to guide our efforts towards achieving the goals listed above.

As part of this strategic planning, MMS has been aggressive in analyzing its processes and procedures to make them more efficient and to be more responsive to our customers. Examples of some more recent efforts and accomplishments are listed below.

Royalty Management Program

For several years, MMS has dedicated itself to improving the various RMP functions it performs to collect, verify, and distribute mineral revenues received from Federal lands. This effort has paid off, not only for MMS but also for its various constituencies, particularly onshore States, which receive roughly 50 percent of the revenues derived from Federal onshore mineral leases located within their State boundaries.

For example, in FY 1991 - the first year a portion of the Federal Government's administrative costs associated with onshore mineral leasing and collection activities were deducted from payments to States - overall administrative costs were approximately $135.8 million, and about 41 percent of those costs were associated with MMS royalty management functions ($56.2 million). However, by FY 1997, overall administrative costs have decreased roughly 16 percent - to $113.8 million - and about 31 percent of those costs are now associated with RMP functions ($34.5 million). During this interval, MMS has reduced its share of administrative costs by over 37 percent.

Other efforts include -

* Simplifying various RMP processes and procedures. For example, MMS has -

* Removed a substantial reporting burden on industry by eliminating most allowance-form filing requirements. The associated costs savings are estimated at about $500,000 per year. In 1996, MMS published a final rule streamlining filing requirements and changing associated penalties.

* Refined its policy with regard to recouping royalty overpayments for Federal offshore mineral leases. This policy, which raises the de minimis reporting requirement and allows companies to recover overpayments below the de minimis from future royalty payments, will cut paperwork on this issue by over 50 percent. The associated cost savings are estimated at about $230,000 per year.

* Offered a variety of electronic reporting and payment options to customers. The ultimate goal of this effort is to receive 100 percent of incoming reports electronically, with an expected savings of over $1 million when fully implemented.

* Working closely with our various constituencies. For example, MMS has -

* Completed a 2-year project to expand the RMP dedicated wide-area network to the 17 State and tribal sites that have audit agreements with MMS. This effort provides State and tribal auditors with the means to retrieve royalty revenue data faster and allows for a more complete information exchange with RMP personnel.

* Installed a client-server computer application system which is a powerful, easy-to-use tool that greatly enhances access to RMP data. MMS personnel, State and Indian customers can now access up to 6 years of mineral revenue data and all lease information residing on the RMP databases.

* Coordinated, in conjunction with BLM and BIA, a "one-stop shopping" approach to Indian mineral services in a 2-year pilot program in the Farmington, New Mexico, office (which is one of three MMS offices dedicated to servicing the Indian minerals community).

* Instituted an Indian Royalty Internship program, which is designed to provide tribes the opportunity to learn all facets of the RMP, thereby enabling them to make informed decisions concerning the assumption of functions currently performed for them by the Federal Government.

* Worked closely with the Royalty Policy Committee on a variety of royalty policy and opreational issues. This advisory Committee to provide input from affected parties on important policy questions. The Committee includes representatives of States, tribes, Indian allottees, industry, Federal agencies, and the public.

Offshore Energy and Minerals Management Program (OEMM)

Over the past several years, the offshore program has moved to a more focused leasing program (Gulf of Mexico and certain areas offshore Alaska), with a concentrated emphasis on the safe and environmentally sound development of about 6,500 existing leases (primarily in the Gulf of Mexico, but also certain areas of Alaska and a very small area offshore California). This focus has allowed MMS to reduce its offshore workforce by over 28 percent and to redirect critical resources to the Gulf of Mexico, where the vast majority of exploration and development is occurring.

In line with this shift of focus, the agency is instituting changes aimed at making the program more efficient and effective while maintaining its excellent environmental and safety record. Several of the more recent efforts and accomplishments are listed below.

* Simplifying various OEMM processes and procedures. For example, MMS has -

* Re-engineered the regulatory program to be more performance-based and less prescriptive. Also, MMS has instituted a voluntary Safety and Environmental Management Program (SEMP). Through this program, MMS is collaborating with industry to develop company-specific plans that will better facilitate innovations while still ensuring safety and environmental protection.

* Streamlined the EIS process so that documents will be shorter (by about 25 percent) and more readable while still containing all the information needed for making informed decisions. This new procedure will be used for all EIS's beginning in 1997. In the Gulf of Mexico, EIS work for the period 1997-2002 will be reduced by 80 percent due to these streamlining measures.

* Revised existing regulations related to offshore bidding systems for new leases that will give the Secretary more discretion to set royalty terms which adjust automatically to changing market conditions.

* Eliminated redundant oil spill reporting requirements so that operators will no longer be required to report to both MMS and the Coast Guard spills of less than one barrel. Instead, MMS has arranged to have the Coast Guard forward such reports and only require operators to report spills of more than one barrel. This change will reduce this reporting burden to both MMS and industry by 95 percent.

* Working closely with our various constituencies. For example, MMS has -

* Finalized the first OCS 5-Year Oil and Natural Gas Program (1997-2002) that is consensus-based. This effort will allow industry access to OCS resources to help meet the Nation's energy needs while minimizing future conflicts concerning appropriate areas to lease.

* Worked to resolve conflicts, and created and maintained a stable regulatory regime which has contributed to the positive business environment which has allowed natural gas and oil production to double (up to more than 185,000 barrels per day in 1996) from existing Pacific region leases since 1985 through cooperative efforts with local governments, State government, and industry, including the creation of a Tri-County Forum to address and resolve various issues related to the development of existing leases.

* Devised a multi-constituent effort to address issues associated with implementing the financial responsibility provisions of the Oil Pollution Act (OPA). This effort resulted in amendments to OPA in 1996 which reflected the recommendations made by the special group.

* Established an Alaska OCS Region Offshore Advisory Committee, which will provide the forum for planning for each of the Alaska lease sales proposed in the 1997-2002 OCS 5-Year Program.

* Completed an atlas series (in conjunction with the Department of Energy, the Gas Research Institute, and the University of Texas Bureau of Economic Geology) on Gulf of Mexico offshore natural gas and oil fields. The database includes a wide variety of geologic and other information on more than 1,100 fields and 22,000 reservoirs.

Future Challenges and Opportunities Facing MMS

Based on past strides that MMS has made to become a more efficient, yet responsive agency, as well as its willingness to continually look for ways to become even more efficient, it is in an excellent position to favorably respond to new challenges. Listed below is a brief overview of some of those challenges. However, it is important to note that while these issues will demand the agency's full attention, MMS also views these as opportunities to more fully advance its mission and to further enhance our vision of becoming the best minerals manager.

Royalty Management Program

As you can see from some of the examples listed above, MMS, and in particular the Royalty Management Program, has been aggressive in scrutinizing its processes in order to streamline and improve them. While this effort has already paid dividends, there are several ongoing efforts which will help the program achieve even more dramatic efficiencies. For example -

Implementation of the "Federal Oil and Gas Royalty Simplification and Fairness Act" (RSFA)

The RSFA was enacted in August 1996 and will significantly impact the way MMS conducts its management of mineral revenues as well as how it interacts with its State and industry customers. In general, the Act provides:

- the framework for additional delegations of certain royalty functions to States, subject to Secretarial discretion.

- a 7-year statute of limitations for all royalty collections and limitations on industry liability, and a 33-month limit on all administrative appeals.

- the payment of interest on overpayments.

- assurance of cost-effective audit and collection activities.

- repeal of offshore refund requirements and streamlined adjustment procedures.

MMS is committed to fulfilling the mandates of the Act and has developed a plan for implementing RSFA changes within the time frames required by law. We estimate that full implementation of this legislation will take approximately 3 years from the date of enactment of the law (8/96) and will require extensive efforts during that time. However, after that time we expect that the various provisions of the law, combined with some of the efforts listed below, will help result in further program efficiencies.

Royalty Management Program (RMP) Reengineering Project

MMS recently began a major project, which will continue in 1997, to intensively evaluate strategies to ensure that mineral lease revenues are paid on time and accurately. This comprehensive effort will involve several aspects: 1) implementation of systems and operational changes related to the RSFA; 2) evaluation of royalty managment processes and automated systems to meet future requirements; 3) development of the best and most cost-effective operational strategies and organizational structures for the future; and 4) implementation of short and long-term systems and process changes.

Recommendations of the Royalty Policy Committee

The Committee was formed in FY 1995 as part of the Minerals Management Advisory Board and acts as a sounding board for new procedures and policies. The Committee subsequently designated eight subcommittees to look at wide range of issues associated with the royalty collection process - royalty reporting; audit; appeals and alternative dispute resolution; disbursements and Net Receipt Sharing; valuation; and phosphate, trona and leasable solid minerals. All eight subcommittees have presented either final or interim reports. These reports contain recommendations addressing major policy issues or ways to improve existing RMP operational procedures. MMS is committed to implementing as many of these recommendations as is feasible and is also considering these in the context of implementing RSFA requirements.

State Benchmarking Study

MMS recently completed a benchmarking study which describes and analyzes the functions performed and costs incurred by four selected States to manage royalties generated from leases on State-owned lands. The primary objective of this study is to identify State "best practices" for potential adoption by MMS as part of its RMP Reengineering Project.

Oil and Natural Gas Valuation Regulations

MMS is in the process is revising the way in which it calculates the value of these two products and has worked extensively with a broad array of our customers to incorporate their ideas and concerns into our rulemakings. The purpose of both rulemakings is to simplify royalty payments; make valuation methods responsive to modern market conditions; offer the industry more flexibility; reduce administative costs; and maintain revenue neutrality.

Taken in concert, the initiatives listed above will help MMS become even more cost efficient and will allow us to redirect our budgetary resources during FY 1998 to areas where we are seeing a dramatic increase in responsibilities.

Offshore Energy and Minerals Management Program

One of the most significant events to occur in the history of the OCS program is the dramatic rise in interest in the Gulf of Mexico by the natural gas and oil industry that has been occurring during the last several years. Further, this interest is expected to increase further due to a variety of factors - favorable economics; new discoveries in the deep water areas of the Gulf; renewed interest in some of the more shallow waters due to discoveries in "sub-salt" areas; and the use of new technology to extend the life of current fields and accurately find new ones. While this is a very positive occurrence in terms of the Nation's economic and energy well-being, it also presents MMS with many challenges.

Increased Responsibilities in the Gulf of Mexico

Currently, there are over 6,500 active leases in the Gulf of Mexico. Bidding on leases increased by more than 155 percent from 1993 to 1996. During the same period, production rates have risen by more than 16 percent (to about 1.1 million barrels per day). In the next few years, this rate is expected to increase even more dramatically, due in part to passage in 1995 of the "Deep Water Royalty Relief Act." In 1996 (the first year the provisions of the Act applied to new leases), a record number of tracts were leased in the Central and Western Gulf of Mexico sales - approximately 1,500 - with bonus bids of about $1 billion going to the Federal Treasury.

MMS estimates that by the year 2002, oil production will increase roughly 70 percent - to about 1.7 million barrels per day. During that time, natural gas production is expected to remain steady (about 13 billion cubic feet per day) or increase slightly, and by the year 2007, production could rise to as high as 17.2 billion cubic feet per day.

With this dramatic upsurge in interest comes the responsibility to continue to properly manage industry activities and to ensure that the environment is protected. MMS will face increased leasing-related responsibilities ranging from assuring that the Federal Government receives fair market value for tracts leased to review of industry exploration and development plans and increased lease monitoring responsibilities, such as scheduled and unscheduled inspections of operations. To gain some perspective on this increased workload, a table showing the increasing Gulf of Mexico workload from FY 1992 - FY 1998 is depicted below:

	FY 1992	FY 1993	FY 1994	FY 1995	FY 1996	FY 1997*	FY 1998*
Industry Activity
Total Active Leases				15,000	5,196	6,500	8,300
Exploratory Wells Drilled	210	318	387	361	446	460	480
Plans of Exploration/Development	407	572	719	711	768	800	850
Deepwater Operations Plans	-	-	-	-	13	40	50
MMS Gulf of Mexico OCS Region Activity
Environmental Assessments	203	231	198	145	236	245	260
Categorical Exclusion Reviews	733	927	1,143	1,138	1,196	1,350	1,500
Air Quality Reviews	355	602	1,148	1,255	998	1,400	1,600
Archaeological Reviews	488	406	648	664	740	900	1,000
Oil Spill Plan Reviews	589	851	752	879	604	1,100	1,200
Inspections	7,500	9,100	9,900	10,500	10,600	11,600	12,700
G&G Permits Processed	126	126	135	106	126	140	150

* projected

Ongoing Responsibilities Offshore Alaska and the Pacific

Even though the bulk of OCS leasing, exploration and development has occurred, and will continue to occur, in the Gulf of Mexico, MMS is responsible for conducting important leasing activities offshore certain areas of Alaska and for overseeing the development of resources from existing leases offshore California. During the timeframe 1997-2002, there are five lease sales scheduled for areas offshore Alaska. Furthermore, due to past exploration efforts, there is a good chance that the first Federal OCS production offshore Alaska could occur by 1999.

In addition to managing Alaska OCS leasing and operations, MMS must continue to devote an appropriate level of resources to addressing and overseeing various issues associated with ongoing and potential future OCS operations offshore California. Because of a past dedication to these issues and a willingness to work in collaboration with the State of California, local governments, and industry, MMS has helped facilitate a significant increase in oil production coming from existing leases. However, there are currently 40 existing, but still undeveloped, leases offshore California. MMS is committed to continuing its collaborative efforts with its stakeholders in an effort to determine if those leases can be developed in an acceptable manner.

Overview of MMS's FY 1998 Budget Request

In recognition of the Administration's commitment to balance the budget, the business pressures and opportunities for which MMS has stewardship, and the need to continue to improve the operations of the organization, MMS has crafted a budget request primarily refocusing some of our resources to the Gulf of Mexico in support of increased leasing, exploration and developmental activities.

Industry enthusiasm is projected to remain high and be reflected in future lease sales. Because of the lag time between the issuance of new leases and the MMS workload associated with a lease, the Offshore program is now beginning to encounter increased work associated with its 1995 and 1996 highly successful lease sales. By 1998, the enormous increase in the number of active leases in the Gulf of Mexico will require a redirection of resources to ensure MMS's capacity for managing the Offshore program in a safe and environmentally sound manner and for assuring the public a fair return on the sale of oil and gas leases.

The record-breaking results of recent lease sales in the GOM, particularly in deeper waters, have

placed a heavy demand on our efforts to ensure the safe and environmentally sound development of the OCS, to service the needs of our stakeholders in a timely manner, and to assure the public a fair return on the leasing of OCS minerals. Deep water operations are vastly different from conventional operations in shallower waters of the shelf. Deepwater operations also are much farther from shore, encounter different environmental conditions, are technologically more sophisticated, produce at much higher rates, and are subject to different economic determinants. These differences will significantly impact the MMS's workload and present many technical and regulatory challenges.

Therefore, MMS's Leasing and Environmental Program is requesting additional funding to the Environmental Studies Program (+$1,526,000) and additional personnel to process the administrative reporting and permitting requirements (+$375,000 and +6 FTE). These increases are partially offset by a decrease of $375,000 (and -6 FTE) which is possible because of successful efforts to streamline and make the Offshore program more efficient. For example, we are focusing leasing activities only on those areas currently experiencing OCS activities or areas with the near term potential for OCS activities.

Industry geological and geophysical (G&G) permit requests have increased to their highest level ever. MMS will need to acquire new geologic and geophysical data (+$1,100,000) and correct and computerize historical well log data (+$1,200,000). An additional increase (+$300,000 and +4 FTE) is necessary for geologic and geophysical evaluations for new leases under the Deep Water Royalty Relief Act. This increase will give us the means to more accurately evaluate bids and royalty relief applications to ensure that the public receives fair market value on offshore leases and to continue to responsibly respond to surety requirements, safety precautions and conservation practices. Because the 1997 - 2002 Five Year Plan lease sale program contains no Atlantic lease sales, and through efficiencies gained through the establishment of a centralized data and information collection unit in the Gulf of Mexico, MMS is able to propose a reduction of $300,000 (and -3 FTE).

MMS also needs to expand the inspector team and support increased helicopter use to maintain inspection rates over more offshore facilities and drilling operations, many of which are

located great distances from land. MMS is receiving more exploration, development and deep water operating plans and pipeline applications for review and action that requires us to do

more environmental assessments, categorical exclusions and platform structural analysis. In order to continue to respond on a timely basis, the increased workload associated with document and application reviews and permitting required in the post-lease process must be addressed. In total, the Regulatory Program will require an additional $1,890,000 (+18 FTE) to accomplish these tasks. However, this funding increase will be partially offset by savings of $746,000 (-3 FTE) derived from a combination of buyouts and streamlining initiatives, as well as non-recurring FY 1997 costs associated with the acquisition of local area/wide area network hardware and software.

As I mentioned earlier in my testimony, MMS has been diligent in identifying more efficient and effective methods of doing business. Those efficiencies make it possible for us to shift our limited resources to those areas where we will see a marked upswing in work.

For example, efficiencies gained in the RMP have reduced resource requirements in that program area. The funding decrease, reflecting downsizing efforts, will be achieved through implementation of scheduled buyouts and a reduction in contractual support for mission operations. RMP has aggressively pursued streamlining, reducing management levels, and reducing staff support positions at divisional levels. The results of these efforts are fewer divisions, one less Deputy Associate Director, and fewer staff support levels. Through successful implementation of buyouts targeted to higher grades, these efforts have reduced requirements for FY 1998. MMS hopes to maintain the current high level of performance achieved though streamlining and improved efficiency of operations. We will continue to work to identify further efficiencies and to reengineer processes to help ensure high performance levels in the future.

Additionally, RMP has evaluated the cost efficiency of performing functions under contractual services versus in-house staff. By now performing some functions inhouse that were originally contracted out, RMP anticipates a significant reduction in these costs and significant savings overall (-$3,713,000 and -36 FTE).

Through comparable methods and techniques, the Executive Direction (-$87,000), Policy and Management Improvement (-$252,000) and Administrative Operations (-$571,000 and -3 FTE) reductions have been achievable.

General Support Services, which provides office space, telephones, mail, communication services etc., we estimate a net reduction in requirements of $724,000.

Summary

In summary, the MMS budget proposal:

o provides the necessary environmental studies, geologic and geophysical data, and historical well-log data to help MMS ensure that the Federal Government receives a fair return on the public's offshore mineral resources and possesses adequate information needed to protect the environment as it pertains to exploration, development and production of natural gas and oil on the Gulf of Mexico OCS;

o provides the resources necessary to ensure that increased operations in the Gulf of Mexico are adequately monitored, given the reality of a dramatic increase in the number of leases as well as in exploration and development activities;

o provides the opportunity for the Nation to increase production in the Gulf of Mexico while protecting the environment, with the resultant royalty income significantly contributing to the Administration's efforts to balance the budget;

o provides continued organization strides towards efficiency to support the public's desire for less government; and

o provides a government that manages its responsibilities through inclusive rather than exclusive involvement with the constituency it serves.

Madam Chairman, this concludes my testimony on the FY 1998 budget request for MMS. However, I will be pleased to answer any questions you or Members may have regarding any aspect of this request.