The Department of the Interior’s Minerals Management Service(MMS) is beginning its third royalty-in-kind (RIK) pilot, puttingit in the business of selling Gulf of Mexico (GOM) gas productionit accepts in place of cash royalties. The pilot is intended totest a different approach to RIK, using a competitive auction tomove up to 260 MMBtu/d initially.

The GOM pilot will involve federal properties offshore westernLouisiana and is expected to include a large number of operators,leases and potential purchasers. Bidders will offer a quantity ofnatural gas at a specific market center location in return forroyalty gas from specified locations at or near the leases. Infuture RIK sales in the Gulf, additional royalty gas will beoffered and additional methods of disposal will be tested.

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.

“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.”

With at least 800 MMcf/d and potentially more than 1 Bcf/d ofgas supply to sell, the MMS will be a major force in the gasmarket. MMS plans to focus the pilot on leases and areas of theGulf that have the best economics for the program. Bringing gas onshore in Louisiana will be the primary goal, but there are a numberof federal uses for gas in Texas, so some gas might be takenin-kind from the western Gulf, MMS said.

Specific information on the Gulf RIK pilot will be detailed inan Invitation for Bid (No. RIK-200-GOMR-001) and posted today onthe MMS web site at under “What’s New.”

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