Duke Energy Trading and Marketing and Dynegy Marketing and Tradewere the winning bidders in the first auction of Gulf Coast gastransportation services in the Minerals Management Service’s (MMS)Gulf royalty in-kind pilot program. The two companies will betransporting a total of 198 MMcf/d of royalty gas production to theGeneral Services Administration (GSA) onshore Louisiana fromDecember through March 2000.

“With the addition of this pilot we are now taking in-kind over10% of our offshore natural gas royalty production, orapproximately 275 MMcf/d,” said MMS Director Walt Rosenbusch. “TheRIK pilots provide a unique opportunity to ensure an appropriatereturn on the nation’s mineral assets.”

Duke was awarded a contract to transport 65 MMcf/d of gas fromthe Pelican and Stingray pipeline systems in the Gulf, and Dynegywas awarded a contract to transport 133 MMcf/d from the High IslandOffshore System. MMS’s Bonn Macy said the agency put 250 MMcf/d outfor auction and got adequate bids on most of that. “I think that’sactually pretty good. It’s basically what I expected.”

There were seven bidders in total, which Macy said was “not abad number. We had a lot more people go through the documents thanthat obviously, and, you know, seven people thought they could becompetitive. I think we’ve done reasonably well on this.”

He said the goal still is for the MMS to be taking 800 MMcf/d ofroyalty gas by next spring. MMS’ royalty share of Gulf productionis about 2.5 Bcf/d. “We have been moving gas in the Gulf already so275 MMcf/d is the total now, including the 8(g) area offshoreTexas. We’ve got another 600 MMcf/d to go and hopefully we’ll beable to do that by the spring. The next auction will be fordelivery in April and the following summer season.”

The MMS said it received “inadequate bids” on two additionalpipelines: Transco North High Island and Tennessee 800 Line.Another spokesman said bids on those pipes came in lower than therevenues MMS would receive through collecting royalties in cashrather than in kind. Bids were made in the form of a ratio ofreceipts and deliveries. “The idea on this is to produce netrevenues and if it doesn’t then there’s no sense in doing it,” saidMacy.

Under the winning agreements, Duke and Dynegy will take raw gasproduction from federal leases and deliver processed gas to thefederal General Services Administration (GSA) at several onshoremarket points in Louisiana. GSA will use the gas to meet energyneeds at multiple federal facilities. The terms of the contractsare for production from December through March 2000.

“We had the marketing end pretty much prearranged because thegas out of this pilot is to feed the General ServicesAdministration… What we needed was a way to get it from theproducing zone, or the platforms, into the onshore market poolswhere GSA’s marketer could pick it up,” said MMS’ Todd McCutcheon,manager of RIK operations. “So we’re trying as an alternative thisbid-exchange process so we’re looking for other folks to come inand do the transportation for us. And as a way of collecting theirfees, they would keep some [gas].” Macy said the MMS currently doesnot have the manpower to manage transportation of such a largeamount of royalty production, but depending on the economics it mayadd the staff in the future. The GSA is currently transporting someof its production from the wellhead in the 8(g) pilot in the Gulfoffshore Texas, which is being conducted with the Texas GeneralLand Office. Macy also said MMS is selling some of its royalty gasout of the 8(g) area through a commercial auction and also may dothat in the future for Louisiana deliveries.

The MMS pilot will be used to determine the best method and mosteconomic locations in the market for taking royalties in kindrather than in cash.

“We want to explore all the possibilities open to us,” saidMacy. “There are a lot of efficiencies in keeping the gas withinthe federal government and burning it directly, but there aremarket opportunities out there..”

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