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During the past decade, MMS conducted
several feasibility studies and pilot projects to determine if taking
royalty-in-kind (in the form of product) as opposed to royalty-in-value
(cash payments) is in the nation’s best interests. The RIK program
generates revenues by competitively selling the in-kind commodities in the
marketplace. Among the objectives of the effort are to return fair value on
the public’s royalty assets, reduce regulatory costs and reporting
requirements, shorten the compliance cycle, and improve overall business
efficiencies.
The latest report examines two earlier natural gas pilot projects. In one,
the "GSA Pilot," MMS took gas from offshore Texas leases and provided the
gas to another Federal agency, the General Services Administration, for use
in its facilities. That pilot was intended to further test MMS’s ability to
sell its royalty share of gas in-kind, and to provide gas to the GSA with a
savings to the government.
The GSA Pilot provided MMS with valuable experience in initiating and
managing RIK contracts, and insight into which types of sales and
transportation agreements are more beneficial to the government. Partly
because of the complexities of the transactions and partly because of the
fact that the MMS could not contract directly for transportation, the report
noted, the GSA Pilot did not provide MMS with any revenue "uplifts."
Revenue uplifts were achieved in the second pilot, referred to as the
"Greater Gulf of Mexico Pilot." This pilot expanded the RIK program to
select leases across the Gulf of Mexico and tested MMS’s ability to
effectively sell larger portions of its royalty gas from the Gulf of Mexico.
The expanded Greater Gulf of Mexico Pilot included nine pipeline systems for
varying lengths of time. During the period of the study, the MMS sold in
excess of 202 million MMBtu of gas with a value of slightly more than $767
million. Overall, the report concluded, "MMS realized an estimated uplift
of approximately $3.5 million or $0.030 per MMBtu" over what the government
would have earned by taking its royalties in value, or as cash payments.
MMS’ goal is to get fair market value from RIK sales. The assessment,
combined with other reviews of RIK sales, indicate that efficiencies are
being realized, transaction cycle times are being reduced, and that MMS can
expect some RIK revenue uplifts from negotiating favorable transportation
and gas processing agreements because of the size of the federal royalty
portfolio. Previous analyses indicate MMS is achieving revenue increases of
generally one to three percent more than cash royalties.
The selected use of RIK sales for both gas and oil, combined with taking
royalty-in-value payments when economics indicate that is the best approach,
will help ensure taxpayers receive fair value.
The July 2004 release of the Five Year Royalty- in- Kind Business Plan
signified that the RIK program was moving to an operational phase from the
previous pilot projects. The business plan incorporated suggestions from
the Government Accountability Office (formerly the General Accounting
Office) and from MMS’s commercial consultant, the Lukens Energy Group of
Houston, Texas, to clearly outline program objectives and to comprehensively
measure RIK program performance.
As such, the plan includes measurable
operational and administrative goals aimed at increasing efficiencies and
effectiveness of the government’s management of mineral royalties, with an
emphasis on internal controls.
MMS will continue to evaluate the effectiveness of the RIK program through
annual reports to Congress and additional analyses.
MMS, part of the U.S. Department of the Interior, oversees 1.76 billion
acres of the Outer Continental Shelf, managing offshore energy and minerals
while protecting the human, marine, and coastal environments through
advanced science and technology research. The OCS provides 30 percent of
oil and 23 percent of natural gas produced domestically, and sand used for
coastal restoration. MMS collects, accounts for, and disburses mineral
revenues from Federal and American Indian lands, with Fiscal Year 2004
disbursements of approximately $8 billion and more than $143 billion since
1982. The Land and Water Conservation Fund, which pays for acquisition of
state and federal park and recreation land, gets nearly $1 billion a year.
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