Maximizing Federal Natural Gas Royalties

I conducted research to enable the US Minerals Management Service (MMS) to maximize natural gas royalties. MMS is the agency of the US Department of the Interior responsible for managing mineral royalties. As part of managing royalties, MMS decides whether to accept royalties in value (cash payment, RIV) or in kind (physical transfer of gas, RIK). When MMS collects RIK, it also decides how to transport, process, and sell the natural gas. RIK is a fairly new program for MMS, which began continuous collection of RIK under a pilot study in 1998. As its RIK program grew, MMS sought my assistance to improve its decision processes for converting RIV to RIK and for choosing among transportation, processing, and sales options. (This is not an army matter; I worked on this project while I was a doctoral student at the Colorado School of Mines.) I provided data-processing applications to improve predictions of royalty volumes and assessments of existing royalty values. To support decisions concerning conversion of royalties from RIV to RIK, I developed a goal-price metric that accounts for a variety of market conditions. This metric compares favorably to alternatives that MMS was using or considering. I used an optimization model to evaluate conversion and contract alternatives so as to maximize total royalties. MMS began using the results of this research in 2002 and continues its use today. The first project it analyzed using these results provided a net royalty increase of $3.4 million over the first contract year.