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Highlights

The determination of royalty payments for natural gas produced from outer-continental shelf (OCS) leases falls to the Minerals and Management Service (MMS). Gas royalty payments are determined by multiplying the gross sales value by a royalty rate. Disagreement over the interpretation of key values in the formula has led to several lawsuits between MMS and the gas industry. With the deregulation of the gas market, determining the sale of gas produced and sold from OCS leases has become more difficult. To help resolve these pricing issues, MMS is pilot-testing a royalty-in-kind program. Royalty-in-kind payments mean that royalty payments are paid in the form of physical gas. MMS and the industry believe that this is an appropriate solution to some pricing issues, but that it is not suitable to all transactions.

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