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MMS Details Rockies Express Pipeline Capacity Agreement, Expanding RIK Program

Outlining the previously reported capacity agreement with the developers of the proposed Rockies Express Pipeline, the Minerals Management Service (MMS) announced that its 10-year deal commits MMS to transport more than 18 Bcf of gas per year (or 50 MMcf/d) from the pipe's origin in Wyoming.

The agency said the capacity agreement will allow the company to expand its onshore Royalty-In-Kind (RIK) gas program, which made its first sale last month. Instead of collecting royalties from minerals produced on federal and Indian lands "in value," or as cash payments, the MMS in the mid-1990s began exploring the potential to take its royalties "in kind," in the form of product, and competitively sell that commodity on the open market. Based on the success of earlier pilot projects, the RIK oil and gas program went into full operations in 2005.

"This is the program's second full year of operation," said Patrick Etchart, an MMS spokesman. "In February, we closed the first Wyoming RIK gas sale, which was also the first onshore natural gas sale in the RIK program."

In that sale, the MMS sold 30 MMcf/d for a 12-month term. Tulsa, OK-based Odyssey Energy Services LLC won the 10 MMcf/d package and Omaha, NB-based Tenaska Marketing Ventures won the 20 MMcf/d package. The sale was concluded Feb. 15 with delivery beginning April 1.

The Rockies Express Pipeline project, which is being constructed by Kinder Morgan Energy Partners LP. and Sempra Pipelines and Storage, will be 1,323 miles long and will transport gas from Wyoming and Colorado to markets in eastern Ohio. It will connect with multiple other pipelines serving markets in the midwestern and eastern United States (see NGI, March 6). The $4 billion, 1.8 Bcf/d pipeline is scheduled to become fully operational in 2009.

"Natural gas production in the Rocky Mountain Region is increasing substantially," said MMS Director Johnnie Burton. "With this pipeline commitment, MMS will be able to expand its Royalty-in-Kind program in Wyoming. In addition, this will provide MMS more flexibility to transport gas to markets where demand is highest."

MMS has determined that the RIK program improves overall business efficiencies, reduces regulatory costs and reporting requirements, shortens the compliance cycle, and returns a fair value to the public. Taking royalties "in kind" in the form of oil or, in this case, natural gas greatly simplifies the auditing process.

In addition, the MMS said recent analyses indicate that taking royalties in kind can generally increase returns to taxpayers by 1-2% over what would have been received if royalties were taken in-value, or as a cash payment.

"We signed this commitment following months of intensive economic analysis," Burton said. "Based on that analysis, MMS is convinced there is a strong business case for taking more gas in-kind, and transporting that gas to markets where higher prices could potentially provide greater returns to taxpayers." Burton compared the deal to an insurance policy, which provides the government additional options to effectively mitigate its commercial price risk.

The agreement, which will require final approval from the Federal Energy Regulatory Commission, will become effective when the pipeline becomes fully operational in 2009.

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