Washington (Platts)--16Feb2011/542 pm EST/2242 GMT

The US Government Accountability Office has designated problems the Interior Department has had collecting oil and gas royalties to the level of "high risk," a category designed to focus the efforts of government on critical issues, according to a copy of the report obtained Wednesday.

The new report, which has been circulated to Congress but has not yet been made public, recognizes that Interior has made some progress addressing areas noted in a GAO report last year, but that it will be challenged to continue that progress while also splitting the former MMS into three new agencies.

"Specifically, GAO is concerned about Interior's ability to undertake this reorganization while providing reasonable assurance that billions of dollars of revenues owed the public are being properly assessed and collected," the report states.

The GAO first identified problems with the way Interior tracks and records royalty payments in a report last April, the result of a two-year audit. The agency found that the Minerals Management Service, now called the Bureau of Ocean Energy Management, Regulation and Enforcement, was using outdated methods and could not reasonably prove that volumes are being measured accurately.

The report also found a lack of training of inspectors and high turnover rates both in the former MMS and in the Bureau of Land Management, which monitors production volumes onshore.

"BLM and MMS have encountered persistent problems in hiring, training, and retaining sufficient staff to meet a workload that is increasing as a result of rapid increases in oil and gas operations on federal lands and waters," the GAO found.

The former MMS is being reorganized to solve some of the inherent conflict of interest problems that many have said contributed to the lax oversight of offshore drilling over the years. Interior Secretary Ken Salazar initiated the reorganization in the wake of last year's blowout and oil spill at BP's Macondo well in the Gulf of Mexico.

The new report said that Interior's "human capital" problems are especially noteworthy, given the challenge the department will face securing more money from Congress for hiring.

A BOEM spokeswoman noted the progress the agency is making recruiting new petroleum engineers and inspectors. But she also noted the challenges the bureau faces trying to match salaries and incentives offered by private employers.

"The high-risk list released today by the Government Accountability Office reflects and underscores the importance of the aggressive and comprehensive regulatory reform efforts currently underway in the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) and makes abundantly clear the critical need for resources to effectively implement those reforms," the spokeswoman, Melissa Schwartz, said in an email.

--Gary Gentile, gary_gentile@platts.com

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