Royalty in Kind Provides Mutual Benefits for Producers and the Government

Companies must pay a royalty to the federal government as one of their obligations for producing oil and gas on property owned by the federal government. The royalty payment is based on the value of the oil and gas produced. For onshore leases, the Minerals Land Leasing Act prescribes that a royalty share of 1/8 of the value of production be paid to the government. For most offshore leases, the Outer Continental Shelf Lands Act sets forth a royalty rate of 1/6 the value of production.

Under the current mineral leasing statutes, the royalty share of the value produced can be paid in cash or "in kind" (barrels of oil and cubic feet of gas) at the election of the Department of the Interior’s Minerals Management Service (MMS). Up until recently, royalty in kind accounted for only a small portion of the total royalties collected, but after exploring the option through several pilot projects, the MMS now takes nearly 40% of its royalties in kind (RIK).

If the MMS wants its royalties in kind, the producer works out an arrangement for delivery of the 1/6 or 1/8 royalty share at a time and place prescribed by the MMS. Taking royalties in kind is a valuable option for the government to have at its disposal and industry supports its use where it makes good business sense for the government to do so.

RIK Provides Benefits to All Stakeholders
RIK provides the Government with the flexibility to dispose of its royalty share as it sees fit, selling the production or consuming it for some federal or federal-supported activity.

RIK creates the potential for enhancing revenues by allowing the government to manage or perform at a profit some of the post-production marketing services usually performed by industry.

RIK reduces the administrative burden for government and industry because it relies less on auditing application of complex valuation methodologies. Audits can instead focus on production volume reporting, resulting in significantly lower administrative costs without compromising producer accountability.

RIK avoids the uncertainty inherent in valuation of certain transactions, which in the absence of an actual sale requires estimating the value of production; this saves time, administrative cost and the extra time and cost associated with resolving royalty valuation disputes at the agency or in the courts.

RIK offers certainty for the producer and the government that the royalty obligation is fulfilled once the correct amount of oil or gas is delivered.

Many improvements have been made in the MMS pilot programs since the initial Gas Pilot of 1995. The current operational RIK programs in Wyoming, Texas coastal waters and the Gulf of Mexico show that RIK works well. As the MMS and industry gain experience in RIK programs, more cost savings and benefits will continue to be realized. The MMS is considering several new or expanded RIK projects as it becomes more experienced in taking its royalties in kind and more skillful in marketing the oil and gas for the country’s benefit.