The state of Alabama plans to contribute some of its royalty share of gas production from the 8(g) area offshore in the Gulf of Mexico to an upcoming sale of federal gas royalties taken in kind by the Minerals Management Service (MMS). MMS and Alabama recently signed a partnership agreement governing the sale. The federal agency previously partnered with Texas in similar sales of royalty-in-kind (RIK) gas.

MMS Director Johnnie Burton said the state-federal pact give Alabama a “more active role in managing its gas resources while continuing to protect state and public interests.”

As part of the agreement, up to 1,460,000 MMBtu of gas (or 4,000 MMBtu/d) from three federal leases in the Alabama 8(g) zone will be sold in an unrestricted sale scheduled for this month. It represents the first time that Alabama 8(g) gas has been offered in an RIK sale. States are entitled to 27% of the royalties earned from production that occurs in the Federal 8(g) zone, a 3-mile-wide zone that lies adjacent to the state’s seaward boundary.

The gas sold represents royalties physically received by the government (taken in kind) rather received in cash from producers with offshore federal leases. The gas is sold competitively in the open marketplace. The RIK program has been shown to improve government efficiencies, reduce regulatory costs and reporting requirements, shorten the compliance cycle, and ensure a fair return on the public’s royalty assets, MMS said. The program has also successfully reduced administrative costs and provided significant revenue uplifts in previous sales.

The gas from the Alabama 8(g) leases will be combined with up to 124,100,000 MMBtu of RIK gas (or 340,000 MMBtu/d) from other Gulf of Mexico leases that will be offered for sale in early October. Invitation for offers for the sale, which also includes gas from the State of Louisiana’s 8(g) zone, were published Sept. 27 with sale results expected to be announced later this week.

“The RIK program continues to offer positive and measurable returns to the federal government and the American people on their royalty assets,” Burton said. “RIK sales generated increased receipts of $18 million and $32 million in Fiscal Years 2004 and 2005, respectively, over what would have been received if MMS had taken its royalties in value, or as cash payments.” The program also resulted in a reduction of administrative costs of nearly 50% when compared to royalty in value, translating to a cost avoidance of $3.74 million in fiscal year 2005.

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