U.S. Secretary of the Interior Ken Salazar on Sept. 16 announced he is reforming and restructuring the department’s management of U.S. energy resources, starting with the termination of the Minerals Management Service’s controversial Royalty-in-Kind program that accepts oil and natural gas from producers in lieu of cash royalties.

In testimony to the House Natural Resources Committee, Salazar described administrative actions he is taking to develop a comprehensive energy strategy on U.S. public lands and the Outer Continental Shelf.

He also discussed his recommendations for congressional legislation that can help the department to more effectively manage energy leasing and revenue programs on behalf of American taxpayers.

A spokesman for DOI confirmed that the agency will not take any new contracts for the RIK program, on the heels of Salazar’s testimony. Spokesman Frank Quimby said that the termination will take a while to phase-in since the department has some contracts that are in effect until Sept. 30, 2010.

“Clearly, the department’s energy leasing and royalty programs have not been working as they should and the American people have not been receiving the full benefits from these valuable assets,” Salazar said. “After a thorough review of the controversial Royalty-in-Kind program, I am today announcing a phased-in termination of the program and an orderly transition over time to a more transparent and accountable royalty collection program.”

He added, “The balanced and efficient development of conventional and renewable energy on the public domain is a pillar of President Obama’s comprehensive national strategy and essential for reducing our country’s dependence on foreign oil, building a clean-energy economy, and addressing the challenges of climate change.”

The Interior Department manages 500 million acres of land, one-fifth of the U.S. land mass, and another 1.7 billion acres of the Outer Continental Shelf. These resource-rich areas currently provide about 30 percent of the nation’s domestically produced conventional energy and offer some of the highest quality wind, solar and hydrokinetic energy resources available for development today.

The department’s Bureau of Land Management manages onshore energy resources on federal lands, while the MMS oversees offshore oil and natural gas development as well as future wind development on the U.S. Outer Continental Shelf, which currently provides 27 percent of the nation’s domestic oil production and about 14 percent of its domestic natural gas production.

The termination of the MMS RIK program will be overseen by the Assistant Secretary for Lands and Minerals Management, Wilma Lewis, Liz Birnbaum, the Director of MMS, and Bob Abbey, the Director of the Bureau of Land Management.

The current RIK program involves the federal government excessively in oil and gas markets and the Government Accountability Office has found the program may not ensure fair return to the Treasury.

Salazar said he is continuing to review options for additional improvements for coordination between MMS and BLM in on- and-offshore leasing and revenue management policies related to domestic energy production.

He said he intends to bring needed coordination and strategic guidance to the department’s programs and to its implementation of significant reforms, including recommendations for improvement from the reports of the GAO and the Office of the Inspector General.

The GAO released a report on Sept. 14 stating that the MMS is owed an estimated $21 million in oil and gas production royalties, but lacks the information necessary to calculate the full amount due as a result of incorrect reporting methods.

U.S. Senate Committee on Energy and Natural Resources Chairman Jeff Bingaman, D-New Mexico, stated that the committee will examine the DOI’s plan to reform management of energy resources.

"GAO's rebuke of the way Interior collects royalties is just the latest red flag that the American people are not getting a fair return for the oil and gas resources that they own," said Bingaman. "We'll be taking a careful look at the Administration's proposals to overhaul the flawed royalty management program."

American Petroleum Institute President Jack Gerard reacted negatively to the move to end the RIK program, saying that Salazar’s decision would have an impact on U.S. oil production, jobs and revenue for government.

“The Royalty-in-Kind program, which collected $6.6 billion in oil and gas deliveries in fiscal 2008, is one of the government’s largest sources of non-tax revenue,” said Gerard, whose organization represents oil and gas companies. “The program is an effective means of ensuring that the American people receive fair compensation for development of federal resources.”

He added, “Terminating this straight-forward method of handling royalty payments runs the risk of raising administrative costs and adding additional layers of paperwork required to determine the value of oil and gas production. The government’s Minerals Management Service itself noted administrative efficiencies brought on by the program, and pointed out that another of benefits of RIK is the reduction in costly lawsuits tied to product valuation.”

Gerard said the oil and natural gas industry was ready to work with the Obama administration to improve the royalty-collection system so Americans enjoy the benefits of increased domestic development.

“Raising the cost of bringing much-needed domestic supplies online in the United States is not the way to achieve energy and economic security,” he added.

Companies that develop and produce oil and gas from federal lands and waters are required to report their production volumes and other data to the MMS and pay royalties. In fiscal year 2008, the MMS collected an estimated $2.4 billion in royalty-in-kind, in the form of RIK gas. The difference between MMS’s entitled percentage of gas and the percentage it actually receives is referred to as a gas imbalance.

The GAO found that the MMS is forgoing revenues for gas royalties because it does not provide enough assurance that it accurately and promptly identifies and collects on RIK gas imbalances. In one case, the MMS has been negotiating with a company for more than two years regarding a $900,000 imbalance, according to the GAO report.