The federal government will begin accepting royalty-in-kind(RIK) for some Gulf of Mexico gas production beginning Dec. 1 inwhat will be the Minerals Management Service’s (MMS) third ongoingRIK pilot.

This time around, MMS is testing a different approach to RIK,using a competitive auction to move up to 260 MMcf/d initially.When the pilot ramps up fully, MMS could be taking 800 MMcf/d asroyalty-in-kind payment. Bonn Macy, special assistant to the MMSdirector, said April is when the agency hopes to reach 800 MMcf/d.

The GOM pilot was supposed to begin this month but was delayedby additional preparations. It will involve federal propertiesoffshore western Louisiana and is expected to include a largenumber of operators, leases and potential purchasers. Bidders willoffer a quantity of gas at a specific market center location inreturn for royalty gas from specified locations at or near theleases. That will leave the government’s General ServicesAdministration with gas to supply various government agencies. Infuture Gulf RIK sales, additional royalty gas will be offered andadditional methods of disposal will be tested.

Leases from which royalties will be taken in-kind are on severalGulf pipeline systems: Stingray Pipeline, the High Island OffshoreSystem (HIOS), the U-T Offshore System, Transco’s North High Islandsystem, Tennessee’s 800 line, and the Pelican Gas Gathering System.

Concepts being examined in the GOM pilot differ from the two MMSRIK pilots currently under way in Wyoming and the Texas offshore.The Wyoming oil pilot is testing competitive sales of crude oil atthe lease. MMS and Wyoming recently held their third sale ofroyalty oil from both federal and state leases. The Texas offshorepilot includes leases offshore Texas in which both the state andfederal governments have a revenue interest. MMS is managing theTexas pilot in cooperation with the Texas General Land Office,which has years of experience managing its own RIK program. TheTexas pilot currently is taking about 76 MMcf/d as royalty-in-kind

“The purpose behind the pilot program is for the government todetermine and test the key factors required for a successfulfederal oil and gas RIK program as well as test the effectivenessof collecting royalties in-kind, rather than in cash,” said MMSDirector Walt Rosenbusch. “All three pilots will help us makeinformed and effective decisions on where to use royalty-in-kind inthe best interest of the taxpayer.”

Specific information on the Gulf RIK pilot is detailed in anInvitation for Bid (No. RIK-200-GOMR-001) and posted on the MMS website at under “What’s New.”

Joe Fisher, Houston

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