The jury is still out, but initial word from the MineralsManagement Service (MMS) on royalty in kind (RIK) pilots is RIKcould work for some gas and oil leases

The MMS currently is conducting RIK pilots for Wyoming oilproduction and gas production offshore Texas in the 8g zone betweenstate and federal waters. Set to begin by the end of this year is alarger RIK pilot for gas production from the Gulf of Mexico

“MMS has long believed there is some potential for natural gas[RIK] in the Gulf of Mexico. There is potential there, and we’reworking to see that succeed, and there is potential in Wyoming,”said Bonn Macy, special assistant to Cynthia Quarterman, MMSdirector. “Our initial data from the Wyoming pilot show that we’veearned some money.” However, Macy said, RIK might not be right forall areas of Wyoming and not for all production

Revenue neutrality to federal coffers has always been the MMSobjective for any RIK program. “We still do believe royalty in kindhas potential as a royalty collection method, and that’s why we’redoing the pilots. We were cool only to the idea that royalty inkind would be mandatory for all oil and gas production. The morework we do the more we are convinced of that. But with that said,we are also convinced of its potential.

Legislation to require mandatory royalty in-kind collection wasintroduced during the last legislative session and was fought byMMS. An MMS report concluded mandatory RIK would cost the federalgovernment up to $374 million annually in lost revenues. Thatassertion was called “deeply flawed” by an industry-backed study ofthe agency’s analysis (see Daily GPI, May 26, 1998). The RIK bill,introduced by Rep. William M. “Mac” Thornberry (R-TX) died in theHouse

MMS pilots now underway suggest revenue neutrality is anachievable goal, at least in some instances. “It’s clear that it’sgoing to be revenue-neutral in certain cases,” Macy said. “We’vealready seen it’s not going to work everywhere. We’ve had problemsin various areas that just make it difficult to do it effectivelyand economically.

If the federal government were to take all of its Gulf of Mexicoroyalty entitlement in-kind rather than in-value, it would mean 2.3Bcf of gas would flow to the government daily, making the U.S.government one of the biggest Gulf “producers.” Macy said theplanned pilot would take about a third of that amount, about 800MMcf/d, in-kind. “Obviously, the objective of running pilotprograms is to learn how to do this, learn what works.” The GulfRIK program is planned to begin Oct. 1, and it’s not known whether800 MMcf/d of gas will be taken as royalty payment right away, Macysaid

In Texas, the MMS is working with the Texas General Land Officeto create a program to move royalty gas to Texas customers. TheLand Office has been running an RIK program for state leases forabout a dozen years, Macy said. “They’ve been pretty successfulwith that. We’re coming in there and looking at the federalproduction and trying to learn how they’re doing it. sort of alittle technology transfer, if you will. That program is definitelyin the final stages of development.” The program likely will beginMarch 1, he said. The MMS also is working with the federalgovernment’s General Services Administration (GSA), which is apurchaser for federal agencies. The GSA is currently acquiringroyalty gas supplies in behalf of its federal government customers.”We certainly see the MMS-GSA relationship expanding over thecoming year.

The Wyoming pilot began Oct. 1, 1998 to run for six months. Bidsto buy royalty gas from the government are due at MMS at thebeginning of next month for the pilot’s next six-month phase.Currently, the government is taking about 2,500 barrels/d aspayment for royalties from Wyoming producers. Macy said MMS hopesthat figure will grow in the next six months

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