In what could be a telling sign for making permanent a similarprogram for natural gas royalties, the Minerals Management Servicereports that its crude oil royalty-in-kind (RIK) pilot program inWyoming has successfully demonstrated that taking production inkind is a “viable alternative” to the traditional method ofcollecting royalties, in some circumstances.

Now in the public comment stages, the MMS is finalizing itsreport on the Wyoming RIK pilot, and expects to offerrecommendations later this year. It already has natural gas pilotprograms ongoing in the Gulf of Mexico, but no report has beenissued. MMS began its RIK pilot projects to test the circumstancesunder which taking oil and gas royalties in kind, rather than cashpayments, makes sense. The Wyoming oil RIK pilot began in late 1998in a partnership with the state.

MMS implemented two pilot programs to take Gulf of Mexico gasproduction as royalties: one involving leases in the 8(g) zoneoffshore Texas and another in the Central and Western Gulf. Thepilots were designed to test the efficacy of the RIK concept forcollecting royalties from federal natural gas leases in the region.Although there is no announcement of whether the MMS natural gaspilot program will become permanent, MMS said that it expects tocontinue its Gulf of Mexico activities with other federal agenciesand the State of Texas for one or two more years.

Regarding the success of the Wyoming pilot, MMS Acting DirectorTom Kitsos said, “This pilot program has provided MMS withinvaluable experience in operating any future RIK activities. Whilethe Wyoming oil market is complex, the MMS and the state havedemonstrated that they can initiate and operate an ongoing RIKprogram.”

MMS said that in evaluating future RIK programs, it would uselessons learned in Wyoming’s pilot: selective use of RIK should berevenue neutral; lessees can benefit from a reduced administrativeburden; there is more certainty for both the lessee and thegovernment because valuation disputes can be avoided; RIK may notwork in every situation.

MMS and Wyoming took and sold in-kind between 25-30% of theroyalty barrels produced in the state during the 18 months coveredby the analysis. The total 1.6 MM bbl of federal and state oil weresold with a value of $27.66 million.

MMS has published a draft report and is asking for publiccomments from the oil and gas industry, states, and members ofCongress before making its final conclusions. Comments are due toMMS by April 27. The report is available on the MMS web site.

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