Interior Secretary Ken Salazar last Wednesday said he plans to administratively terminate the controversial royalty in-kind (RIK) program for oil and natural gas producers, calling it a "blemish" on the entire department. The department also indicated that the Obama administration would issue a decision on its new five-year leasing plan for the Outer Continental Shelf (OCS) in 2010.

"My decision is it's time to end the royalty in-kind program," he told the House Natural Resources Committee during a hearing on HR 3534, which also seeks to abolish the RIK program. "I am...announcing a phased-in termination of the program and an orderly transition over time to a more transparent and accountable royalty collection program." Salazar did not disclose how or when the RIK program would be terminated.

American Petroleum Institute President Jack Gerard blasted the administration's plans. He said that terminating the RIK program "runs the risk of raising administrative costs and adding additional layers of paperwork required to determine the value of oil and gas production...We urge Secretary Salazar to carefully weigh the impacts his 'fundamental restricting' of the royalty system could have on U.S. production of oil and gas, American jobs and revenue to the government."

Nixing the RIK program would be a disincentive for independent oil and gas producers as well, said Barry Russell, president of the Independent Petroleum Association of America.

Watchdog group Project on Government Oversight (POGO) called Salazar's announcement a "big step to finally ending this gift to industry, and POGO congratulates him for taking this stand. The next important step is ensuring Congress puts the final nail in the RIK coffin so it doesn't rise again."

The termination of the RIK program would be overseen by Wilma Lewis, assistant secretary for lands and minerals management; Liz Birnbaum, director of the Minerals Management Service (MMS); and Bob Abbey, director of the Bureau of Land Management (BLM).

Both Interior's Office of Inspector General (OIG) and the Government Accountability Office (GAO) concluded that the RIK program has contributed to "problems and ethical lapses within the department," Salazar said. The RIK program, which began in the late 1990s, permits producers to pay their royalties in-kind (with oil and natural gas product) to Interior, rather than in cash.

A just completed audit by the GAO found that the MMS has no "reasonable assurance" that it receives its share of natural gas RIK payments, and it risks losing millions in revenue because of a lack of tools and staff. The audit estimates that the MMS is currently owed a net $21 million for gas imbalances, but the GAO lacks the necessary information to determine the exact amounts.

"RIK officials told us that as of June 2009, the agency has reconciled nearly 99% of the imbalances from 2002 through 2006," the GAO report said. "In addition, MMS's data indicate it has completely reconciled almost 99% of the imbalances for production occurring in fiscal year 2007, almost 98% for fiscal year 2008 and about 94% for fiscal year 2009."

However, MMS doesn't know the exact amount it is owed for imbalances, the GAO audit found, because it lacks "at least" three types of information. The MMS does not verify all gas production data to ensure it receives its entitled RIK gas from all leases taken in kind; it lacks information on how to price gas imbalances for leases that have terminated from the program or where production has ceased; and it could be "forgoing revenue" because it lacks information on daily gas imbalances.

According to API estimates, the RIK program collected $6.6 billion in oil and gas deliveries in fiscal 2008, and is one of the government's largest sources of non-tax revenue.

Salazar cited the scandal that surfaced last year involving sex, drugs and financial/contract misconduct at high levels within Interior's MMS and auditing problems as chief reasons for terminating the program (see NGI, Sept. 15, 2008).

"We believe political pressure to end the program intensified last year when a report by the Interior inspector general indicated that almost one-third of the royalty in-kind staff socialized with and received gifts/gratuities from oil and gas companies," wrote energy analyst K. Whitney Stanco of Washington Research Group in a "Washington Energy Bulletin."

"Bravo, bravo, bravo," said Committee Chairman Nick Rahall (D-WV) of Salazar's plan to cut the RIK program. Rep. Rush D. Holt (D-NJ) echoed the sentiment, saying that Salazar's RIK decision "really is music to our ears."

But termination of RIK "is only one thing that we have to do with respect to how we address the whole issue of royalties from oil and gas production on our public lands," Salazar said. Other issues include royalty simplification -- "how do we make the collection of royalties more transparent and easier to do," he noted.

Salazar also said he is reviewing options for improved coordination between the MMS and BLM in onshore and offshore leasing and revenue management policies with respect to energy development. HR 3534, sponsored by Rahall, supports combining the MMS and BLM into one office -- the Office of Federal Energy and Minerals Leasing -- but Salazar appeared to skirt the issue.

Interior's six-month hold on the new five-year leasing plan (2010-2015) for the OCS ends this week, but Salazar said the Obama administration's revised leasing plan won't be released for the "next several months." The Bush administration issued a new leasing plan for 2010-2015 before it left office, and one of Salazar's first acts as Interior secretary was to extend the review process to give the public more time to comment (see NGI, Feb. 16).

The comment period on the Bush leasing plan for 2010-2015, which would open banned areas off the Atlantic and Pacific coasts and in the eastern Gulf of Mexico, ends on Wednesday (Sept. 23). The Bush proposal would accelerate by two years the regular process for creating a new leasing plan for the OCS.

Interior spokesman Frank Quimby dismissed published reports that the Obama administration would not release a revised OCS leasing plan until 2012. He said a decision on what to include in the revised five-year leasing plan would come out in 2010 -- or, as Salazar said, in the "next several months."

"It is important that we get it [the leasing plan] right," said Salazar in response to questions about when it would come out. He reminded House lawmakers that the current five-year plan (2007-2012) was partially vacated by the U.S. Court of Appeals for the District of Columbia earlier this year because of environmental concerns (see NGI, April 20).

Last Wednesday's hearing was called to review Rahall's legislation, which would eliminate the RIK program, transfer the audit and compliance functions of MMS to the Interior OIG, combine MMS and BLM into one office, raise onshore oil and gas rental rates for the first time since the 1980s, assess a production incentive fee on existing leases that are not producing oil or gas, and repeal unnecessary royalty relief provisions (see NGI, Sept. 14).

The Bush administration "granted every wish" of the oil and gas industry and got high prices and scandals in return, Rahall said. He said his bill, the Consolidated Land, Energy and Aquatic Resources Act of 2009, would change this.

But Rep. Doc Hastings of Washington, the ranking Republican on the House resources panel, countered that the proposal "potentially adds years of delay" to the development of oil and gas and renewable energy.

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