The Department of the Interior’s Minerals Management Serviceannounced plans last week to begin selling royalty gas productioncollected in its offshore Texas royalty in-kind (RIK) pilotprogram. The two-year joint initiative between the MMS and theTexas General Land Office will use an auction process that willtake place during the regular bidweek period each month, withdeliveries starting June 1.

MMS’ Greg Smith said he expects about 20 MMcf/d to be offeredinitially from a few 8(g) leases. The 8(g) corridor is about 10miles off the Gulf coast. It is a bi-jurisdictional area, in whichthe states split royalties with the federal government. “There’s 52leases in the 8(g). I doubt that we’ll take all 52 in-kind, butit’s possible,” said Smith. “I think if we did there’s something onthe order of over 70 MMcf/d. I doubt we’ll get that big. We’d haveto ramp up. It all depends on how the economics look and how theprocedures are working.” Some of the production will be sold on theopen market and some will be made available to other federalfacilities, he said.

The MMS selected the 8(g) off the Texas coast because of theGeneral Land Office’s extensive experience selling royalty gasproduction on the open market. It will be the second RIK pilot forthe MMS, which is attempting to determine if taking royaltiesin-kind can be either revenue neutral for the federal government oreven revenue positive compared to the amount of royalty revenuetaken via its traditional method.

By the end of the year, the MMS will have three pilotsoperating. The first pilot, an oil RIK in Wyoming is in its secondsix month period and has gone very well, said Smith. MMS isplanning a much larger third pilot for a significantly greaternumber of leases in the central and western Gulf of Mexico inOctober. Although the number of leases that will be included in thelarger pilot has not been determined, Smith said the productionquantities will be in the “hundreds of millions of cubic feet perday.”

Potential bidders for the 8(g) RIK will be notified at thebeginning of bidweek and will be given a couple days to place abid. The gas to be sold will be delivered to major Texas marketpoints, pipeline interconnections, hubs and gas plants fromplatforms offshore Texas, on which Texas and the federal governmentcollect royalties.

Any party interested in participating must submit an applicationby May 7 and be prequalified by the MMS. Contract periods and thesize of the packages to be auctioned will be specified in eachnotification of sale. Contract periods may be one month, sixmonths, one year or two years.

For additional details see MMS’ web site www.mms.gov or contactGreg Smith at (303) 275-7102.

Rocco Canonica

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