From the U.S. Government Accountability Office, www.gao.gov Transcript for: Offshore Oil and Gas Leases Description: In this episode, we talk about how Department of Interior leases offshore oil and gas areas. Related GAO Work: GAO-19-531: Offshore Oil and Gas: Opportunities Exist to Better Ensure a Fair Return on Federal Resources Released: October 2019 [ Background Music ] [ Frank Rusco: ] We think that they're not following their procedures in a way that would generate the right amount of revenue. [ Matt Oldham: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. I'm Matt Oldham. The federal government took in nearly $90 billion in revenue between 2006 and 2018 from the production of oil and natural gas leases on offshore waters. This money comes from companies bidding on rights, rent on the leases, and royalties coming from the sale of oil and gas production on the leased areas. And here to talk about a GAO Report looking at how the government ensures a fair return on these leases is Frank Rusco, a Natural Resources and Environment director. Thanks for joining me, Frank. [ Frank Rusco: ] Thank you. Pleased to be here. [ Matt Oldham: ] So, first off, is the government getting the most money they could from these offshore leases? [ Frank Rusco: ] Well, they're not getting the most. It's a balancing act. The federal government wants to lease lands and waters for oil and gas development. And the way to get the most leasing and the most production would be to charge nothing for it. The way to get the most money for it would be to find that magical amount of royalties and rental charges that would get -- get you the most revenue but it would -- it would not be as much production. Where we are right now, we think that, given the procedures that Interior -- the Department of the Interior -- has decided to use to auction offshore leases for oil and gas production, we think that they're not following their procedures in a way that would generate the right amount of -- of revenue. And in fact, they're -- they're generating less than they would if they were following their procedures more systematically. [ Matt Oldham: ] So, how does Interior determine what a starting bid would be? [ Frank Rusco: ] Basically, the way things are right now, every 6 months, every available lease that is not already under lease in the Gulf of Mexico goes up for auction and not all of them get bids. And so, what they do after they get bids, they take that information and they decide, is there a lot of oil gas down here, and if there is, maybe that bid wasn't high enough, and sometimes they reject the bid. When that happens, that same tract goes back into the queue for the next auction. So 6 months later, it would be up again. And typically, when that happens, they get a significant increase in how much that was actually bid. Now a lot of times, when they look at that same information, they find that, yeah, we're not seeing anything more than what we think the company saw. And sometimes, they're even saying, we don't really see anything here. We don't know why they're bidding on it. But the real issue that we found is that, except when the Department of Interior's estimate is much, much higher than the industry's, they seem to be shading their estimates down after their initial estimates. And that means that they're accepting bids for which they actually did see something that they thought was worth more. And so, in that sense, if they weren't doing that, they would probably be making more money. [ Background Music ] [ Matt Oldham: ] So, it sounds like Interior is pricing these leases so that industry would bid on and work these areas, but they sometimes may be starting at prices lower than companies would be willing to pay, they're leaving money on the table. So, Frank, does the report offer a sense of how much of this undervaluation could be costing the government? [ Frank Rusco: ] Yes, it's -- it's hard to be precise, there's a lot of uncertainty around all of the data, but it's -- it's in the order of hundreds of millions of dollars in recent times. And we think it's probably tens of millions of dollars going forward per year. If Interior would change its practices to follow its policies of actually rejecting bids when their estimates are higher than industry, then they would probably be earning tens of millions of dollars a year more for those leases. [ Matt Oldham: ] So, last question, what's the bottom line here? [ Frank Rusco: ] Well, the bottom line is, we really hope that the Department of Interior will take a look at what we've done, that they'll follow their practices a little more consistently. We think that there was some just inadvertent over-conservative looks at things. And then we also hope that they'll do stronger look-backs at what the actual outcomes of -- of these auctions have been, what -- whether they were -- are doing a good job of predicting what value is. And if they are, they should -- they should feel more confident in rejecting a bid if they come in higher than what industry does. [ Matt Oldham: ] Frank Rusco was talking about a GAO Report looking at how the federal government leases offshore oil and gas resources. Thank you for your time, Frank. [ Frank Rusco: ] Thank you, it's a pleasure. [ Background Music ] [ Matt Oldham: ] And thank you for listening to the Watchdog Report. To hear more podcasts, subscribe to us on Apple Podcasts. For more from the congressional watchdog, the U.S. Government Accountability Office, visit us at gao.gov.