ELIGIBLE REFINER OIL ROYALTY-IN-KIND PROGRAM

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management II
(Feb 1998)
CHAPTER 17B
ELIGIBLE REFINER OIL ROYALTY-IN-KIND PROGRAM
Vernon B. Ingraham
Minerals Management Service
Denver, Colorado

TABLE OF CONTENTS

SYNOPSIS

I. INTRODUCTION

II. BACKGROUND

III. CURRENT ELIGIBLE REFINER OIL RIK PROGRAM

IV. PROBLEMS WITH CURRENT ELIGIBLE REFINER OIL RIK PROGRAM

V. DESCRIPTION OF THE ELIGIBLE REFINER OIL RIK PILOT

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I. INTRODUCTION

A. In June 1996 the Royalty Policy Committee — an advisory committee established by the Secretary of the Interior consisting of industry, State government, Indian, and Federal agency representatives — recommended to the Secretary of the Interior that the Minerals Management Service (MMS) review the oil Royalty-in-Kind (RIK) program, stating that "The current method of administering the Federal oil RIK program is time consuming and burdensome on producers, small [eligible] refiners, and MMS."

B. An MMS study team was subsequently formed. Its September 1997 report recommended a pilot be conducted to test proposed changes to the eligible refiner oil RIK program. This report is available on the MMS Home Page (click on library and technical information).

C. The MMS, in conjunction with some of the refiners in the oil RIK program, began the 6-month pilot in January 1998. The pilot parallels the existing RIK program which, continues with actual current billing, reporting, and paying procedures. Pilot reporting is being conducted in a laboratory or theoretical environment. The MMS and the participating refiners will evaluate the results of the pilot by November 1998 and the MMS pilot team will make recommendations to the Director, MMS, in December 1998. Improvements to the eligible refiner oil RIK program will be implemented in the next RIK contracting cycle following termination of current RIK contracts in June 1999.

D. This pilot has been nominated as a National Performance Review Laboratory and, if designated, reports will be filed with the Office of the Vice President.

II. BACKGROUND

1. Pertinent Statutory Provisions

a. Statutory authority for onshore Federal leases: The oil RIK program is authorized by the Mineral Leasing Act of 1920 (MLA), as amended (30 U.S.C. § 192).

MLA states: "...inasmuch as the public interest will be served by the sale of royalty oil to refineries not having their own source of supply for crude oil, the Secretary of the Interior, when he determines that sufficient supplies of crude oil are not available in the open market to such

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refineries, is authorized and directed to grant preference to such refineries, in the sale of oil under the provisions of this section, for processing in such refineries and not for resale in kind, and in so doing may sell to such refineries at private sale at not less than the market price any royalty oil accruing or reserved to the United States under leases issued pursuant to this chapter...."

b. Statutory authority for offshore Federal leases: The oil RIK program is authorized by the Outer Continental Shelf Lands Act (OCSLA) of August 7, 1953, as amended (43 U.S.C. § 1334, 1353).

OCSLA states: "Whenever...the Secretary determines that small refiners do not have access to adequate supplies of oil at equitable prices, the Secretary may dispose of any oil which is taken as a royalty or net profit share accruing or reserved to the United States pursuant to any lease issued or maintained under this subchapter...by conducting a lottery for the sale of such oil, or may equitably allocate such oil among the competitors for the purchase...