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Dynegy, Duke Win Contracts In MMS RIK Gas Pilot

Dynegy, Duke Win Contracts In MMS RIK Gas Pilot

Reprising their triumphs of last fall, Dynegy Marketing and Trade and Duke Energy Trading and Marketing LLC again have been awarded contracts to deliver federal gas onshore as part of the Minerals Management Service's (MMS) royalty in-kind pilot program in the Gulf of Mexico to begin next month, the agency announced last week.

Between these contracts and the agency's gas sales from the 8(g) zone offshore Texas, Todd McCutcheon, manager of RIK operations at MMS, estimated the agency will be withdrawing more than 300 MMcf/d of royalty gas from the Gulf of Mexico, which is about 10-15% of its available 2.5 Bcf/d production there. "That's about $15 million a month. That's getting up there."

Under the novel RIK pilots, MMS has been accepting oil and gas production on a limited basis from producers to settle their royalty bills in lieu of cash payments. This will be the third RIK pilot in the Gulf for natural gas since 1998.

Dynegy and Duke have contracted to deliver a total of 250 MMfc/d of royalty gas production to onshore pooling points for the General Services Administration (GSA) and MMS beginning in April and ending in October. This was about half of the 465 MMcf/d that MMS had put up for bid. The two marketers will receive a portion of the royalty gas at the lease in exchange for transporting the gas during the seven-month period, McCutcheon said.

Dynegy will transport about 200 MMcf/d from the High Island Offshore, Upper Texas Offshore, Pelican and the Transco North High Island pipeline systems. The GSA will use that royalty gas to meet the energy needs of federal facilities. The 50 MMcf/d to be shipped by Duke via the eastern leg of the Bluewater pipeline system will be marketed to the public by the MMS. The agency rejected bids from Stingray, Sea Robin and the western leg of Bluewater's pipeline system as inadequate, according to McCutcheon.

MMS will begin selling the royalty gas to the public in April, and bidders can pre-qualify to buy it during March. "We're going to test how we do trying to sell the gas," McCutcheon said, although he noted this won't be the first time the agency has sold royalty gas by itself. It has been marketing about 75 MMcf/d of gas from federal leases in the Texas 8(g) zone of the Gulf for nearly a year.

MMS's attitude towards RIK pilots has undergone a 180-degree turnaround in the last couple of years. It initially resisted the idea of producers paying their royalties in-kind, arguing that legislation mandating that royalty payment method would deprive the federal coffers of as much as $500 million a year. However, "under the new [MMS] director, Walt Rosenbush, it has become a program priority for him," McCutcheon told NGI. "It's very clear what our objective is" now.

In fact, the agency is looking at possibly starting an RIK program in Wyoming for onshore natural gas. MMS already has had three successful pilots in the state for crude oil production. Based on that track record, "we want to start exploring whether it's possible for gas also." He noted the Wyoming RIK oil pilot will likely be moved to the Royalty Management Program this summer as a permanent fixture.

For the state's fourth RIK oil pilot, which also gets under way next month, the agency and Wyoming have awarded crude oil sales contracts to Conoco Inc., Eighty-Eight Oil Co., Koch Petroleum Group, Plains Marketing and TransCanada Energy Marketing USA Inc. The contracts cover the production of 5,100 barrels of crude oil per day from federal and state leases between April and September. Currently, 44% of federal crude oil produced in the state is being sold via the RIK program, MMS said. The next bids for sales contract will be solicited by MMS in September for production starting in November.

McCutcheon said the agency plans to continue with its RIK pilot program, although he conceded "we're not looking at [them] as pilots anymore. It's only a pilot in that we're trying different things. But as we find things that we like, our intention is to make them permanent."

Susan Parker

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