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Duke, Dynegy Place Winning Bids in MMS RIK Pilot

November 8, 1999
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Duke, Dynegy Place Winning Bids in MMS RIK Pilot

Duke Energy Trading and Marketing and Dynegy Marketing and Trade were the winning bidders in the first auction of Gulf Coast gas transportation services in the Minerals Management Service's (MMS) Gulf of Mexico royalty in-kind pilot program. The two companies will be transporting a total of 198 MMcf/d of royalty gas production to the General Services Administration (GSA) at market points onshore Louisiana from December through March 2000.

"With the addition of this pilot we are now taking in-kind over 10% of our offshore natural gas royalty production, or approximately 275 MMcf/d," said MMS Director Walt Rosenbusch. "The RIK pilots provide a unique opportunity to ensure an appropriate return on the nation's mineral assets."

Duke was awarded a contract to transport 65 MMcf/d of gas from the Pelican and Stingray pipeline systems in the Gulf, and Dynegy was awarded a contract to transport 133 MMcf/d from the High Island Offshore System. MMS's Bonn Macy said the agency put 250 MMcf/d out for auction and got adequate bids on most of that. "I think that's actually pretty good. It's basically what I expected."

There were seven bidders in total, which Macy said was "not a bad number. We had a lot more people go through the documents than that obviously, and, you know, seven people thought they could be competitive. I think we've done reasonably well on this."

He said the goal still is for the MMS to be taking 800 MMcf/d of royalty gas by next spring. MMS' royalty share of Gulf production is about 2.5 Bcf/d. "We have been moving gas in the Gulf already so 275 MMcf/d is the total now, including the 8(g) area offshore Texas. We've got another 600 MMcf/d to go and hopefully we'll be able to do that by the spring. The next auction will be for delivery in April and the following summer season."

The MMS said it received "inadequate bids" on two additional pipelines: Transco North High Island and Tennessee 800 Line. Another spokesman said bids on those pipes came in lower than the revenues MMS would receive through collecting royalties in cash rather than in kind. "The idea on this is to produce net revenues, and if it doesn't then there's no sense in doing it," said Macy.

Under the winning agreements, Duke and Dynegy will take raw gas production from federal leases and deliver processed gas to the federal General Services Administration (GSA) at several onshore market points in Louisiana. GSA will use the gas to meet energy needs at multiple federal facilities. The terms of the contracts are for production from December through March 2000.

"We had the marketing end pretty much prearranged because the gas out of this pilot is to feed the General Services Administration... What we needed was a way to get it from the producing zone, or the platforms, into the onshore market pools where GSA's marketer could pick it up," said MMS' Todd McCutcheon, manager of RIK operations. "So we're trying as an alternative this bid-exchange process so we're looking for other folks to come in and do the transportation for us. And as a way of collecting their fees, they would keep some [gas]." Bids were made in the form of a ratio of receipts and deliveries.

Macy said the MMS currently does not have the manpower to manage transportation of such a large amount of royalty production, but depending on the economics it may add the staff in the future. The GSA is currently transporting some of its production from the wellhead in the 8(g) pilot in the Gulf offshore Texas, which is being conducted with the Texas General Land Office. Macy also said MMS is selling some of its royalty gas out of the 8(g) area through a commercial auction and also may do that in the future for Louisiana deliveries.

The MMS pilot will be used to determine the best method and most economic locations in the market for taking royalties in kind rather than in cash.

"We want to explore all the possibilities open to us," said Macy. "There are a lot of efficiencies in keeping the gas within the federal government and burning it directly, but there are market opportunities out there."

Rocco Canonica

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