The Interior Department’s Minerals Management Service contends arecent bid to exclude Outer Continental Shelf (OCS) pipelines fromFERC’s industry-wide ban on “buy-sell” transactions is based on theincorrect assumption that such transactions routinely occur as partof the agency’s royalty in-kind (RIK) projects.

In a petition for a declaratory order filed in March, WilliamsEnergy Marketing & Trading requested “guidance” from the fullCommission on buy-sell deals particularly as they related to theInterior agency’s RIK projects [GP00-1]. Specifically, Williamsindicated it wanted a repeal of the buy-sell ban, which wasinstituted following Order 636, for offshore pipelines only, sothat it could participate freely in MMS’ RIK projects without fearof violating the Commission’s prohibition.

According to Williams, the buy-sell issue arises when an RIKcontractor buys gas from the MMS at one or more receipt points inthe OCS, transports (as well as processes or separates) the gas onbehalf of the MMS to onshore delivery points, and then sells thegas back to MMS once onshore. In exchange, the RIK contractor orcontractors retain a portion of the gas, plus any processingrevenues, it said.

“This is simply not the case. The MMS…..places noresponsibility on the RIK contractor for any transportation,processing or separation. Once the contractor takes title to thegas at the wellhead, MMS has no interest in that gas whatsoever,”MMS told FERC last week.

Because it has no transportation capability of its own in theOCS, MMS said it has devised an auction program to trade the gas itreceives at the wellhead as royalty payment for gas at supply poolsin a “number of possible locations” that are convenient to theultimate consumer or consumers of the gas. In its largest RIK pilotto date, MMS noted the gas is destined for the Government ServicesAdministration (GSA), which then will use it to meet the energyneeds of several federal agencies. “The GSA takes title to [the gasat] these supply pools and then manages its distribution to thefederal burner tip.”

The entire transaction is “no more than a simple asset trade.The MMS assets in the Gulf of Mexico are traded for other [gas]assets. There is no mention of price, no mention of services thathave to be provided, and no mention of any compensation.”

Any decision on Williams’ request “should depend solely onwhether the Commission feels such a waiver has merit and allows[for] enforcement of the open-access and non-discriminatorytransportation system envisioned by the Outer Continental ShelfLands Act,” MMS said. “The MMS RIK program cannot and should notprovide the basis for such a waiver.”

In the event FERC should decide the MMS RIK program violates its”buy-sell” prohibition or “shipper-must-have-title” requirement,MMS asked that it be granted a specific waiver based on the “verytangible public interest in the program.”

Producers and marketers made similar requests last month. Theytold FERC they could support a “narrow” exemption of the buy-sellban for OCS pipelines, but they were ardently opposed to theblanket repeal advocated by Williams.

The Commission barred buy-sell arrangements because it said theyprovided pipeline customers an opportunity to circumvent theobjectives of its capacity-release program established under Order636, which requires open bidding by shippers. One example of abuy-sell transaction would be an LDC buying gas in the productionarea from an end-user or someone designated by the end-user,transporting the gas using its own firm capacity, and then sellingit back to the end-user at the retail delivery point.

Susan Parker

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