Citing revenue increases of 1-3% more than cash royalties, Secretary of the Interior Gale Norton announced a significant expansion of the government’s royalty-in-kind (RIK) program that calls for the Minerals Management Service (MMS) to be accepting and remarketing about 1.3 Bcf/d of its natural gas royalties by 2009.

“The new MMS five-year royalty-in-kind business plan provides the blueprint to successfully increase revenues and decrease administrative costs associated with managing our oil and gas royalty assets,” said Norton. “We are applying proven private sector business practices to improve government efficiencies and effectiveness.”

The agency currently takes about 500,000 MMBtu/d of Gulf of Mexico gas production (25% of its total Gulf royalty share) in kind rather than in cash. It also takes 180,000 bbl/d of crude oil, most of it (170,000 bbl/d from the Gulf).

Under the new five-year plan for the RIK program, the amount of gas taken will more than double while the amount of crude oil taken will increase only slightly. MMS predicts that RIK gas volumes will increase between 500,000 and 800,000 MMBtu/d by 2009.

Much of the crude oil taken in kind today goes directly into the Strategic Petroleum Reserve (SPR), which is expected to be full sometime next year. After the SPR is filled to its 700,000 bbl capacity, the MMS will devote the volumes to its RIK program.

MMS has a goal of bringing in $50 million in net revenue from RIK through 2009. The expanded program will require the agency to develop a high quality marketing portfolio with a larger sales team and diverse customers, 20% of which are expected to be industrial companies and utilities.

The new plan for RIK is a culmination of six years of pilot testing and validation of the approach. Assessments of the program to date indicate that business efficiencies are being achieved, conflict with oil and gas producers is diminishing, and MMS is achieving revenue increases compared to what it would receive if it had take the royalties in cash, the agency said.

“The MMS is now poised to fully deploy a royalty asset management strategy that selectively uses both RIK and cash royalties to optimize returns to taxpayers,” said Norton.

The new business plan incorporates suggestions of the General Accounting Office and recommendations from MMS’s commercial consultant, the Lukens Energy Group of Houston, to clearly outline RIK program objectives and to routinely and comprehensively measure RIK program performance. Norton said that Interior also commits to routine reporting to Congress on MMS’s progress in achieving the plan’s goals.

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