Although the Department of the Interior’s Minerals ManagementService (MMS) is about to embark on another gas royalty in kind(RIK) pilot in the Gulf of Mexico, it doesn’t mean producers therewill be completely relieved of gas sales price reportingrequirements.

At a Tuesday MMS open meeting in Houston to discuss the Gulfpilot, slated to begin Oct. 1, about 100 attendees heard what sometook as pretty bad news. The MMS interpretation of the OuterContinental Shelf Lands Act (OCSLA) says the agency must sell thegas it takes as royalty in kind at a price not lower than thatreceived by the lessee for his share of the production.

“So, to ensure that we operate within the intent of the OuterContinental Shelf Lands Act, we will have to require periodicreporting of these prices,” Bonn Macy, special assistant to the MMSdirector, told attendees at the meeting. “I’m sure a lot of youdon’t want to hear that. This is still a pilot program and theobjective of a pilot program is to see how these things work. Inorder to demonstrate whether this has been successful we then havesome data to compare it to.”

Macy stressed producers won’t have to report prices asfrequently as they do now for royalty purposes. He said the datawould only be used to evaluate whether MMS should continue takingroyalties in kind. Still, a number of listeners were not happyabout the reporting requirement.

“I have a problem with your using my data.to decide whether ornot you have actually met the fair market requirement of OCSLAbecause what you say is – if you haven’t met the fair market valuerequirement of OCSLA then you’re just going to stop selling [thegas],” said one attendee. “But to me, that makes me scared becauseit makes me think, well, you haven’t complied with OCSLA if youconclude, based upon my data, that you have not actually sold thatproduction to someone for fair market value. Are you going to takethe heat of not complying with our own interpretation of OCSLA?”

Macy’s answer was yes. “There’s a clear, common sense intentbehind that provision. If we can’t sell it for more than what thelessee’s already selling it for and providing us in-valueroyalties, we shouldn’t be selling it.”

With at least 800 MMcf/d and potentially more than 1 Bcf/d ofgas supply to sell, the Minerals Management Service (MMS) will be amajor force in the gas market once its new Gulf RIK program begins.MMS’ total royalty share of Gulf production is 2.5 Bcf/d and itexpects at least a third of that will be taken in kind by spring.

MMS doesn’t expect to be selling the full 800 MMcf/dimmediately. By November, the agency should be taking about 500MMcf/d in kind, Macy said. (See Daily GPI, July 7, 1999).

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