Reprising their triumphs of last fall, Dynegy Marketing andTrade and Duke Energy Trading and Marketing LLC again have beenawarded contracts to deliver federal gas onshore as part of theMinerals Management Service’s (MMS) royalty in-kind pilot programin the Gulf of Mexico to begin next month, the agency announcedlast week.

Between these contracts and the agency’s gas sales from the 8(g)zone offshore Texas, Todd McCutcheon, manager of RIK operations atMMS, estimated the agency will be withdrawing more than 300 MMcf/dof royalty gas from the Gulf of Mexico, which is about 10-15% ofits available 2.5 Bcf/d production there. “That’s about $15 milliona month. That’s getting up there.”

Under the novel RIK pilots, MMS has been accepting oil and gasproduction on a limited basis from producers to settle theirroyalty bills in lieu of cash payments. This will be the third RIKpilot in the Gulf for natural gas since 1998.

Dynegy and Duke have contracted to deliver a total of 250 MMfc/dof royalty gas production to onshore pooling points for the GeneralServices Administration (GSA) and MMS beginning in April and endingin October. This was about half of the 465 MMcf/d that MMS had putup for bid. The two marketers will receive a portion of the royaltygas at the lease in exchange for transporting the gas during theseven-month period, McCutcheon said.

Dynegy will transport about 200 MMcf/d from the High IslandOffshore, Upper Texas Offshore, Pelican and the Transco North HighIsland pipeline systems. The GSA will use that royalty gas to meetthe energy needs of federal facilities. The 50 MMcf/d to be shippedby Duke via the eastern leg of the Bluewater pipeline system willbe marketed to the public by the MMS. The agency rejected bids fromStingray, Sea Robin and the western leg of Bluewater’s pipelinesystem as inadequate, according to McCutcheon.

MMS will begin selling the royalty gas to the public in April,and bidders can pre-qualify to buy it during March. “We’re going totest how we do trying to sell the gas,” McCutcheon said, althoughhe noted this won’t be the first time the agency has sold royaltygas by itself. It has been marketing about 75 MMcf/d of gas fromfederal leases in the Texas 8(g) zone of the Gulf for nearly ayear.

MMS’s attitude towards RIK pilots has undergone a 180-degreeturnaround in the last couple of years. It initially resisted theidea of producers paying their royalties in-kind, arguing thatlegislation mandating that royalty payment method would deprive thefederal coffers of as much as $500 million a year. However, “underthe new [MMS] director, Walt Rosenbush, it has become a programpriority for him,” McCutcheon told NGI. “It’s very clear what ourobjective is” now.

In fact, the agency is looking at possibly starting an RIKprogram in Wyoming for onshore natural gas. MMS already has hadthree successful pilots in the state for crude oil production.Based on that track record, “we want to start exploring whetherit’s possible for gas also.” He noted the Wyoming RIK oil pilotwill likely be moved to the Royalty Management Program this summeras a permanent fixture.

For the state’s fourth RIK oil pilot, which also gets under waynext month, the agency and Wyoming have awarded crude oil salescontracts to Conoco Inc., Eighty-Eight Oil Co., Koch PetroleumGroup, Plains Marketing and TransCanada Energy Marketing USA Inc.The contracts cover the production of 5,100 barrels of crude oilper day from federal and state leases between April and September.Currently, 44% of federal crude oil produced in the state is beingsold via the RIK program, MMS said. The next bids for salescontract will be solicited by MMS in September for productionstarting in November.

McCutcheon said the agency plans to continue with its RIK pilotprogram, although he conceded “we’re not looking at [them] aspilots anymore. It’s only a pilot in that we’re trying differentthings. But as we find things that we like, our intention is tomake them permanent.”

Susan Parker

©Copyright 2000 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.