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RIK Showing Promise In MMS Pilots

January 18, 1999
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RIK Showing Promise In MMS Pilots

The jury is still out, but initial word from the Minerals Management Service (MMS) on royalty in-kind (RIK) pilots is RIK could work for some gas and oil leases.

The MMS currently is conducting RIK pilots for Wyoming oil production and gas production offshore Texas in the 8g zone between state and federal waters. Set to begin by the end of this year is a larger RIK pilot for gas production from the Gulf of Mexico.

"MMS has long believed there is some potential for natural gas [RIK] in the Gulf of Mexico. There is potential there, and we're working to see that succeed, and there is potential in Wyoming," said Bonn Macy, special assistant to MMS Director Cynthia Quarterman. "Our initial data from the Wyoming pilot show that we've earned some money." However, Macy said, RIK might not be right for all areas of Wyoming and not for all production.

Revenue neutrality to federal coffers has always been the MMS objective for any RIK program. "We still do believe royalty in-kind has potential as a royalty collection method, and that's why we're doing the pilots. We were cool only to the idea that royalty in-kind would be mandatory for all oil and gas production. The more work we do the more we are convinced of that. But that said, we are also convinced of its potential."

Legislation to require mandatory royalty in-kind collection was introduced during the last legislative session and was fought by MMS. An MMS report concluded mandatory RIK would cost the federal government up to $374 million annually in lost revenues. That assertion was called "deeply flawed" by an industry-backed study of the agency's analysis (see NGI May 25, 1998). The RIK bill, introduced by Rep. William M. "Mac" Thornberry (R-TX) died in the House.

MMS pilots now underway suggest revenue neutrality is an achievable goal, at least in some instances. "It's clear that it's going to be revenue-neutral in certain cases," Macy said. "We've already seen it's not going to work everywhere. We've had problems in various areas that just make it difficult to do it effectively and economically."

If the federal government were to take all of its Gulf of Mexico royalty entitlement in-kind rather than in-value, it would mean 2.3 Bcf of gas would flow to the government daily, making the U.S. government one of the biggest Gulf "producers." Macy said the planned pilot would take about a third of that amount, about 800 MMcf/d, in-kind. "Obviously, the objective of running pilot programs is to learn how to do this, learn what works." The Gulf RIK program is planned to begin Oct. 1, and it's not known whether 800 MMcf/d of gas will be taken as royalty payment right away, Macy said.

In Texas, the MMS is working with the Texas General Land Office to create a program to move royalty gas to Texas customers. The Land Office has been running an RIK program for state leases for about a dozen years, Macy said. "They've been pretty successful with that. We're coming in there and looking at the federal production and trying to learn how they're doing it. sort of a little technology transfer, if you will. That program is definitely in the final stages of development." The program likely will begin March 1, he said. The MMS also is working with the federal government's General Services Administration (GSA), which is a purchaser for federal agencies. The GSA is currently acquiring royalty gas supplies in behalf of its federal government customers. "We certainly see the MMS-GSA relationship expanding over the coming year."

The Wyoming pilot began Oct. 1, 1998 to run for six months. Bids to buy royalty gas from the government are due at MMS at the beginning of next month for the pilot's next six-month phase. Currently, the government is taking about 2,500 barrels/d as payment for royalties from Wyoming producers. Macy said MMS hopes that figure will grow in the next six months.

Joe Fisher, Houston

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