Industry wants MMS to step up RIK pilot tests

Patrick Crow
Washington, D.C.
[email protected]

Four industry groups say the U.S. Minerals Management Service should move more aggressively to test programs for taking oil and gas royalties in kind (RIK).

Industry has been critical of MMS's proposals to change the rules under which royalty values are calculated and has urged MMS to take more of the production in kind and market that itself (OGJ, Sept. 1, 1997, p. 36).

Last week, the American Petroleum Institute, the Domestic Petroleum Council, the Independent Petroleum Association of America, and the Mid-Continent Oil & Gas Association responded to a MMS report on RIK pilot programs. They said MMS should delay its royalty valuation rules until RIK is thoroughly tested.

They said, "To us, RIK is an appropriate and valid procedure to determine value, and we encourage any steps MMS takes to move toward RIK.

"Over the past year, the valuation of royalties has become an important subject of debate. In fact, MMS is in the process of making dramatic and untested revisions to its valuation procedures. RIK can be an important solution to clearing up many of these valuation issues that exist and to create certainty in royalty valuation."

The groups said MMS is targeting three areas for pilot studies but should "look at many more geographic areas, because the success and potential of RIK programs cannot be determined only by a few select locations.

"Market conditions vary across the country. MMS must recognize this and develop strategies that address such geographic differences. A broader investigation is vital in developing workable RIK programs."

The study

In its paper, MMS noted the U.S. has traditionally received most of its royalties as a cash percentage of the sales proceeds realized by producers, although most federal mineral leases permit the government to receive its royalty share in kind.

MMS exercised this provision for the first time during a 1995 natural gas marketing pilot in the Gulf of Mexico.

The study concluded that properly implemented RIK programs could be workable, yield positive net revenues, and be administratively more efficient for all parties, where appropriate.

It said MMS may be able to get more value for its gas by aggregating volumes and marketing them at downstream centers.

The report recommended RIK pilots for Wyoming oil production, Gulf of Mexico gas production, and production off Texas.

It said a Gulf of Mexico gas RIK pilot has the highest potential for success because of the magnitude and concentration of supply and production and transportation infrastructures.

The report did not recommend widespread use of oil RIK programs "due to uncertainty in revenue implications."

MMS said that before proceeding with RIK pilot programs, it will conduct a detailed revenue impact analysis to assess the market risks and costs MMS would face.

Cynthia Quarterman, MMS director, said, "We are excited about the potential for RIK programs to both streamline the royalty reporting and auditing process and to enhance revenues to the U.S. treasury.

"However, more detailed analyses are required before we can commit to the next step, which would be one or more pilot projects to test the hypotheses."