MMS Calls Pilot RIK Program 'Viable Alternative'

In what could be a telling sign for making permanent a similar program for natural gas royalties, the Minerals Management Service reports that its crude oil royalty-in-kind (RIK) pilot program in Wyoming has successfully demonstrated that taking production in kind is a "viable alternative" to the traditional method of collecting royalties, in some circumstances.

Now in the public comment stages, the MMS is finalizing its report on the Wyoming RIK pilot, and expects to offer recommendations later this year. It already has natural gas pilot programs ongoing in the Gulf of Mexico, but no report has been issued. MMS began its RIK pilot projects to test the circumstances under which taking oil and gas royalties in kind, rather than cash payments, makes sense. The Wyoming oil RIK pilot began in late 1998 in a partnership with the state.

MMS implemented two pilot programs to take Gulf of Mexico gas production as royalties: one involving leases in the 8(g) zone offshore Texas and another in the Central and Western Gulf. The pilots were designed to test the efficacy of the RIK concept for collecting royalties from federal natural gas leases in the region. Although there is no announcement of whether the MMS natural gas pilot program will become permanent, MMS said that it expects to continue its Gulf of Mexico activities with other federal agencies and the State of Texas for one or two more years.

Regarding the success of the Wyoming pilot, MMS Acting Director Tom Kitsos said, "This pilot program has provided MMS with invaluable experience in operating any future RIK activities. While the Wyoming oil market is complex, the MMS and the state have demonstrated that they can initiate and operate an ongoing RIK program."

MMS said that in evaluating future RIK programs, it would use lessons learned in Wyoming's pilot: selective use of RIK should be revenue neutral; lessees can benefit from a reduced administrative burden; there is more certainty for both the lessee and the government because valuation disputes can be avoided; RIK may not work in every situation.

MMS and Wyoming took and sold in-kind between 25-30% of the royalty barrels produced in the state during the 18 months covered by the analysis. The total 1.6 MM bbl of federal and state oil were sold with a value of $27.66 million.

MMS has published a draft report and is asking for public comments from the oil and gas industry, states, and members of Congress before making its final conclusions. Comments are due to MMS by April 27. The report is available on the MMS web site.

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