MMS: RIK Pilots Don't Violate Buy-Sell Ban
The Interior Department's Minerals Management Service contends a
recent bid to exclude Outer Continental Shelf (OCS) pipelines from
FERC's industry-wide ban on "buy-sell" transactions is based on the
incorrect assumption that such transactions routinely occur as part
of the agency's royalty in-kind (RIK) projects.
In a petition for a declaratory order filed in March, Williams
Energy Marketing & Trading requested "guidance" from the full
Commission on buy-sell deals particularly as they related to the
Interior agency's RIK projects [GP00-1]. Specifically, Williams
indicated it wanted a repeal of the buy-sell ban, which was
instituted following Order 636, for offshore pipelines only, so
that it could participate freely in MMS' RIK projects without fear
of violating the Commission's prohibition.
According to Williams, the buy-sell issue arises when an RIK
contractor buys gas from the MMS at one or more receipt points in
the OCS, transports (as well as processes or separates) the gas on
behalf of the MMS to onshore delivery points, and then sells the
gas back to MMS once onshore. In exchange, the RIK contractor or
contractors retain a portion of the gas, plus any processing
revenues, it said.
"This is simply not the case. The MMS.....places no
responsibility on the RIK contractor for any transportation,
processing or separation. Once the contractor takes title to the
gas at the wellhead, MMS has no interest in that gas whatsoever,"
MMS told FERC last week.
Because it has no transportation capability of its own in the
OCS, MMS said it has devised an auction program to trade the gas it
receives at the wellhead as royalty payment for gas at supply pools
in a "number of possible locations" that are convenient to the
ultimate consumer or consumers of the gas. In its largest RIK pilot
to date, MMS noted the gas is destined for the Government Services
Administration (GSA), which then will use it to meet the energy
needs of several federal agencies. "The GSA takes title to [the gas
at] these supply pools and then manages its distribution to the
federal burner tip."
The entire transaction is "no more than a simple asset trade.
The MMS assets in the Gulf of Mexico are traded for other [gas]
assets. There is no mention of price, no mention of services that
have to be provided, and no mention of any compensation."
Any decision on Williams' request "should depend solely on
whether the Commission feels such a waiver has merit and allows
[for] enforcement of the open-access and non-discriminatory
transportation system envisioned by the Outer Continental Shelf
Lands Act," MMS said. "The MMS RIK program cannot and should not
provide the basis for such a waiver."
In the event FERC should decide the MMS RIK program violates its
"buy-sell" prohibition or "shipper-must-have-title" requirement,
MMS asked that it be granted a specific waiver based on the "very
tangible public interest in the program."
Producers and marketers made similar requests last month. They
told FERC they could support a "narrow" exemption of the buy-sell
ban for OCS pipelines, but they were ardently opposed to the
blanket repeal advocated by Williams.
The Commission barred buy-sell arrangements because it said they
provided pipeline customers an opportunity to circumvent the
objectives of its capacity-release program established under Order
636, which requires open bidding by shippers. One example of a
buy-sell transaction would be an LDC buying gas in the production
area from an end-user or someone designated by the end-user,
transporting the gas using its own firm capacity, and then selling
it back to the end-user at the retail delivery point.