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Gulf Players Quibble With MMS Over RIK Reporting

Gulf Players Quibble With MMS Over RIK Reporting

Although the Department of the Interior's Minerals Management Service (MMS) is about to embark on another gas royalty in kind (RIK) pilot in the Gulf of Mexico, it doesn't mean producers there will be completely relieved of gas sales price reporting requirements.

At a Tuesday MMS open meeting in Houston to discuss the Gulf pilot, slated to begin Oct. 1, about 100 attendees heard what some took as pretty bad news. The MMS interpretation of the Outer Continental Shelf Lands Act (OCSLA) says the agency must sell the gas it takes as royalty in kind at a price not lower than that received by the lessee for his share of the production.

"So, to ensure that we operate within the intent of the Outer Continental Shelf Lands Act, we will have to require periodic reporting of these prices," Bonn Macy, special assistant to the MMS director, told attendees at the meeting. "I'm sure a lot of you don't want to hear that. This is still a pilot program and the objective of a pilot program is to see how these things work. In order to demonstrate whether this has been successful we then have some data to compare it to."

Macy stressed producers won't have to report prices as frequently as they do now for royalty purposes. He said the data would only be used to evaluate whether MMS should continue taking royalties in kind. Still, a number of listeners were not happy about the reporting requirement.

"I have a problem with your using my data.to decide whether or not you have actually met the fair market requirement of OCSLA because what you say is - if you haven't met the fair market value requirement of OCSLA then you're just going to stop selling [the gas]," said one attendee. "But to me, that makes me scared because it makes me think, well, you haven't complied with OCSLA if you conclude, based upon my data, that you have not actually sold that production to someone for fair market value. Are you going to take the heat of not complying with our own interpretation of OCSLA?"

Macy's answer was yes. "There's a clear, common sense intent behind that provision. If we can't sell it for more than what the lessee's already selling it for and providing us in-value royalties, we shouldn't be selling it."

With at least 800 MMcf/d and potentially more than 1 Bcf/d of gas supply to sell, the Minerals Management Service (MMS) will be a major force in the gas market once its new Gulf RIK program begins. MMS' total royalty share of Gulf production is 2.5 Bcf/d and it expects at least a third of that will be taken in kind by spring.

MMS doesn't expect to be selling the full 800 MMcf/d immediately. By November, the agency should be taking about 500 MMcf/d in kind, Macy said. (See Daily GPI, July 7, 1999).

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