MMS plans more in-kind royalty gas sales

U.S. Minerals Management Service is considering additional pilot projects under which it would take and sell the federal government's royalty share of gas production from offshore leases. MMS conducted a pilot project last year in which it took 45.6 bcf of gas from 14 lessees on 79 leases in the Gulf of Mexico and sold the gas to marketing companies.

July 8, 1996

3 min read

U.S. Minerals Management Service is considering additional pilot projects under which it would take and sell the federal government's royalty share of gas production from offshore leases.

MMS conducted a pilot project last year in which it took 45.6 bcf of gas from 14 lessees on 79 leases in the Gulf of Mexico and sold the gas to marketing companies.

1995 pilot a success?

Cynthia Quarterman, MMS director, recently told a House of Representatives resources subcommittee, "The pilot was an operational success, proving that the concept is feasible. Our experience demonstrated to us that the procedures employed in the pilot can function smoothly once producers and marketers have a clear understanding of their respective responsibilities."

She said MMS this summer will issue a report on the experiment.

"Our preliminary estimates indicate some royalty revenue loss for the gas production covered by the pilot. However, this is not entirely unexpected or unreasonable because we built in a 5% tolerance. The most important aspect on this pilot was to gain information and experience on taking royalty in kind."

MMS has asked Congress to change some laws to give it the flexibility for conducting additional tests.

Quarterman said, "Participating lessees indicate that they anticipated administrative savings if MMS were to institute a gulf-wide gas royalty in-kind program. These savings would be realized through reductions in reporting requirements, audit interface, and litigation."

Industry responds

Oil companies were less enthusiastic about the test. Andrew Hoyle, Enron Oil & Gas Co. marketing vice president, said the pilot program required producers to file even more reports to MMS.

He said, "The marketing contract was unlike most industry contracts in that certain provisions were very one-sided in favor of MMS," and his firm would not have signed it with any other company.

"It involved penalties for the marketer's failure to take 100% of the gas volume, indemnification of MMS for any penalties due to gas pipeline imbalances, and the right of the MMS to terminate the contract at any time without liability."

G.S. Patterson, Amerada Hess Corp. manager of gas plant supply and property management, said MMS lost about 14¢/Mcf on the gas Amerada Hess provided from two leases compared with the revenue MMS would have received under the conventional method.

He said if MMS expands the royalty in-kind process to all offshore gas production, a potential for significant disruption exists if markets are not given time to adjust to a 2 bcf reshuffling of contracts.

Larry Nichols, president and chief executive officer of Devon Energy Corp., said the certainty of the royalty in-kind method benefits government as well as the producer.

"Once delivered, the royalty obligation under the lease is satisfied. One question always asked is 'What is market value?' When taken in-kind, market value is the price that MMS receives from the willing purchasers. In-kind provides flexibility for both MMS and the gas producer in an ever changing and evolving gas market."