The Interior Department’s Minerals Management Service (MMS) can’t say for sure whether its program in which it takes oil and natural gas from producers in lieu of cash royalty payments has been a success or failure, said the General Accounting Office (GAO).

Under the so-called royalty-in-kind (RIK) program, which began in January 1995, the MMS has taken in kind 178 million barrels of crude oil and 213 Bcf of gas from producers, according to a 21-page GAO report, which was released last Thursday. This represented 32% of the federal government’s royalty share of all oil and 3% of the federal government’s royalty share of all gas produced on federal lands. MMS sold much of the RIK oil to refiners and provided some to the Strategic Petroleum Reserve, and marketed a significant amount of the RIK gas.

However, the Interior agency “cannot systematically assess whether royalty-in-kind sales are administratively less costly, whether they generate fair market value or at least as much revenue as traditional cash royalty payments, and thus whether MMS should expand or contract the royalty-in-kind program,” the report noted.

“After five years of conducting pilot programs and completing 24 oil and gas pilot sales, MMS’s ability to effectively and efficiently monitor and evaluate its RIK program is limited because it has not obtained the necessary information,” including the administrative costs of the RIK program, the cost savings from avoiding potential litigation with producers over royalty amounts owed, cost savings from not having to audit producer properties, and the revenue impacts of all RIK sales, the GAO said.

The agency has made some progress in establishing “management control over its RIK program,” and in “documenting the results of its RIK sales,” according to the GAO. However, “MMS has not established clear objectives for the program that are linked to statutory requirements,” which demand that it “collect at least as much during pilot sales as it would have collected in cash royalty payments, and obtain fair market value” for the RIK oil and gas.

The MMS failed to meet this statutory requirement in a 1995 gas RIK pilot in the Gulf of Mexico, the report said. The agency sold the RIK gas through auctions for about $72.6 million, which was more than $4 million below what it would have gotten from cash royalty payments.

By 2004, MMS is expected to turn its RIK program, which has been operating as a pilot, into a “fully operational” program, the report noted.

Before expanding its RIK program, the GAO recommended that MMS “identify and acquire key information needed to monitor and evaluate performance,” and “explicitly” spell out the objectives of the RIK program — namely, to receive fair market value for RIK oil and gas, and to collect as much revenue from RIK as it would from cash royalty payments.

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