[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3334 Introduced in House (IH)]







105th CONGRESS
  2d Session
                                H. R. 3334

To provide certainty for, reduce administrative and compliance burdens 
associated with, and streamline and improve the collection of royalties 
 from Federal and outer continental shelf oil and gas leases, and for 
                            other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             March 4, 1998

Mr. Thornberry (for himself, Mrs. Cubin, and Mr. Brady) introduced the 
    following bill; which was referred to the Committee on Resources

_______________________________________________________________________

                                 A BILL


 
To provide certainty for, reduce administrative and compliance burdens 
associated with, and streamline and improve the collection of royalties 
 from Federal and outer continental shelf oil and gas leases, and for 
                            other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Royalty 
Enhancement Act of 1998''.
    (b) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Rights, obligations, and responsibilities.
Sec. 4. Costs responsibility.
Sec. 5. Transporter charges.
Sec. 6. Imbalances.
Sec. 7. Royalty-in-kind for trucked, tankered, or barged oil or gas.
Sec. 8. Limitations on application.
Sec. 9. Reporting.
Sec. 10. Audit.
Sec. 11. Lease terms not affected.
Sec. 12. Eligible and small refiners.
Sec. 13. Applicable laws.
Sec. 14. Indian lands.
Sec. 15. Effective date; regulations.

SEC. 2. DEFINITIONS.

    In this Act:
            (1) Affiliate; affiliated.--
                    (A) The term ``affiliate'' or ``affiliated'' means 
                that a person controls, is controlled by, or is under 
                common control with another person. Affiliation shall 
                be determined on a lease-by-lease and asset-by-asset 
                basis.
                    (B) For purposes of this Act, based on the 
                instruments of ownership--
                            (i) Ownership in excess of 50 percent 
                        constitutes control.
                            (ii) Ownership of at least 10 percent and 
                        not more than 50 percent creates a rebuttable 
                        presumption of control if each owner has a 
                        separate and independent right to control or 
                        utilize the capacity of the asset.
                            (iii) Ownership of less than 10 percent 
                        creates a presumption of noncontrol which the 
                        Secretary may rebut if he demonstrates actual 
                        or legal control, including the existence of 
                        interlocking directorates.
            (2) Compensatory royalty.--The term ``compensatory 
        royalty'' means a payment made to a royalty owner as 
        compensation for loss of income that it may suffer due to a 
        lease being drained of oil and gas by wells drilled on lands 
        adjacent to the lands subject to the lease.
            (3) Compression.--The term ``compression'' means the 
        process of raising the pressure of gas.
            (4) Condensate.--The term ``condensate'' means liquid 
        hydrocarbons (normally exceeding 40 degrees of API gravity) 
        recovered at the surface without resorting to processing. 
        Condensate is that stabilized mixture of liquid hydrocarbons at 
        atmospheric pressure that results from condensation of 
        petroleum hydrocarbons existing initially in a gaseous phase in 
        an underground reservoir.
            (5) Delivery point.--The term ``delivery point'' means--
                    (A) for a lease premise for which a production 
                measurement meter is approved in accordance with 
                applicable laws before the date of enactment of this 
                Act--
                            (i) subject to clause (ii), the existing 
                        approved meter location, or
                            (ii) subject to clause (ii), a delivery 
                        point requested by a lessee and approved in 
                        accordance with subparagraph (B); or
                    (B) for a lease premise for which no production 
                measurement meter is approved before the date of the 
                enactment of this Act, that point on or near the lease 
                premises, approved by the appropriate agency in 
                accordance with applicable laws and regulations, where 
                lease production can be measured and reported in a 
                manner that is practical, economical, and verifiable, 
                except that such point may be at a location off the 
                lease premises where, if necessary, production can be 
                allocated back to the lease premises.
            (6) Eligible small refiner.--The term ``eligible small 
        refiner'' means a refiner that--
                    (A) has applied to the Secretary for certification 
                as an eligible small refiner;
                    (B) has a total crude oil and condensate refining 
                capacity (including the refining capacity of any person 
                who controls, is controlled by, or is under common 
                control with such refiner) not exceeding 100,000 
                barrels per day;
                    (C) is a corporation, company, partnership, trust 
                or estate organized under the laws of the United States 
                or of any State, territory, or municipality thereof, or 
                is a person who is a United States citizen; and
                    (D) has continuously operated a refinery in the 
                United States for no less than 6 months immediately 
                preceding the date of application for certification as 
                an eligible small refiner.
            (7) Eligible small refiner portion.--The term ``eligible 
        small refiner portion'' means the portion of all royalty oil 
        volumes required to be offered for sale to eligible small 
        refiners. The eligible small refiner portion shall be 40 
        percent of all royalty oil volumes, unless the Secretary 
        determines that a greater share is in the public interest.
            (8) FERC.--The term ``FERC'' means the Federal Energy 
        Regulatory Commission.
            (9) Field.--The term ``field'' means a geographic region 
        situated over one or more subsurface oil or gas reservoirs that 
        encompasses at least the outermost boundaries of all oil and 
        gas accumulations known to be within those reservoirs 
        vertically projected to the land surface.
            (10) Force majeure.--The term ``force majeure'' means 
        foreseen and unforeseen acts of God, strikes, lockouts, or 
        other industrial disturbances, acts of the public enemy, wars, 
        blockades, insurrections, riots, epidemics, landslides, 
        lightning, hurricanes or storms, hurricane or storm warnings 
        which, in the judgment of the party affected by such event, 
        require the precautionary shutdown or evacuation of Production 
        facilities, earthquakes, fires, floods, washouts, disturbances, 
        explosions, accidental breakage to lines of pipe, machine 
        breakage, freezing of wells or lines of pipe, partial or entire 
        failure of wells, and any other cause of a similar nature 
        beyond the reasonable control of the party affected which 
        renders that party unable to carry out its obligations under 
        this Act.
            (11) Gas.--The term ``gas'' means any fluid, whether 
        combustible, noncombustible, hydrocarbon, or nonhydrocarbon, 
        that--
                    (A) is extracted from a reservoir;
                    (B) has neither independent shape nor volume;
                    (C) tends to expand indefinitely; and
                    (D) exists in a gaseous or rarefied state under 
                standard temperature and pressure conditions.
            (12) Gathering.--The term ``gathering'' means the movement 
        of lease production to a central accumulation point on the 
        lease, unit, or communitized area, or to a central accumulation 
        point off the lease, unit, or communitized area approved by the 
        Secretary.
            (13) GISB.--The term ``GISB'' means the Gas Industry 
        Standards Board, as incorporated in the State of Delaware on 
        September 26, 1994.
            (14) Lease operator; operator.--Each of the terms ``lease 
        operator'' and ``operator'' means any person, including a 
        lessee, who has control of or who manages operations on lease 
        premises on Federal onshore lands or who has been designated as 
        an operator on the outer continental shelf by applicable law.
            (15) Lease premises.--The term ``lease premises'' means all 
        land and interests in land owned by the United States that are 
        subject to an oil and gas lease issued under the mineral 
        leasing laws, including mineral resources of mineral estates 
        reserved to the United States in the conveyance of a surface or 
        non-mineral estate.
            (16) Lease production.--The term ``lease production'' means 
        any produced oil or gas that is attributable to, originating 
        from, or allocated to a Federal onshore or an outer continental 
        shelf lease premises.
            (17) Lessee.--The term ``lessee'' means any person to whom 
        the United States issues an oil and gas lease, or any person to 
        whom operating rights under an oil and gas lease have been 
        assigned.
            (18) Merchantable condition; marketable condition.--Each of 
        the terms ``merchantable condition'' and ``marketable 
        condition'' means the condition of oil or gas that is 
        sufficiently free of impurities to meet the requirements of or 
        is accepted by the transporter of production from that lease 
        premises, royalty oil, or royalty gas. Whether or not lease 
        production is in merchantable condition shall not affect the 
        responsibility for the bearing of costs of gathering or 
        transportation, as provided by this Act.
            (19) Minimum royalty.--The term ``minimum royalty'' means 
        that minimum amount of annual royalty that a lessee must pay, 
        as specified in the lease or in applicable leasing regulations.
            (20) Net profit share lease royalty prior to payout.--The 
        term ``net profit share lease royalty prior to payout'' means 
        the specified share of the net profit from production of oil 
        and gas as provided in the lease.
            (21) Oil.--The term ``oil''--
                    (A) means a mixture of hydrocarbons that exists in 
                the liquid phase in natural underground reservoirs and 
                remains liquid at atmospheric pressure after passing 
                through surface separating facilities; and
                    (B) includes condensate.
            (22) Oil and gas lease; lease.--Each of the terms ``oil and 
        gas lease'' and ``lease'' means any contract, profit-share 
        arrangement, or other agreement issued or maintained in 
        accordance with the Outer Continental Shelf Lands Act (43 
        U.S.C. 1301 et seq.) or the Mineral Lands Leasing Act (30 
        U.S.C. 181 et seq.) and issued or approved by the United States 
        that authorizes exploration for, extraction of, or removal of 
        oil or gas.
            (23) Operating rights.--The term ``operating rights'' means 
        the interest created by a lease or derived therefrom 
        authorizing the holder of that interest to enter upon the lease 
        premises to conduct drilling and related operations, including 
        production of oil or gas from such lands in accordance with the 
        terms of the lease. A record title owner is the owner of 
        operating rights under a lease except to the extent that the 
        operating rights or a portion thereof have been transferred 
        from record title.
            (24) Person.--The term ``person'' means an individual 
        natural person, proprietorship, firm (private or public), 
        corporation, business, limited liability company, 
        unincorporated association, association, State, partnership, 
        trust, consortium, joint venture, joint stock company.
            (25) Processing; process.--Each of the terms ``processing'' 
        and ``process''--
                    (A) means any process designed to remove elements 
                or compounds (hydrocarbon and nonhydrocarbon) from oil 
                or gas;
                    (B) includes absorption, adsorption, or 
                refrigeration; and
                    (C) does not include lease or field processes, such 
                as natural pressure reduction, mechanical separation, 
                heating, cooling, dehydration, and compression on the 
                upstream side of the delivery point.
            (26) Producing; produced; production.--The term 
        ``producing'', ``produced'', or ``production'' means the act of 
        bringing hydrocarbons to the surface.
            (27) Qualified marketing agent.--The term ``qualified 
        marketing agent'' means a person with whom the Secretary has 
        contracted to receive, handle, transport, deliver, market, 
        process, dispose of, broker, or sell, or any combination 
        thereof, royalty oil or royalty gas taken in kind by the United 
        States from, or that is attributable to, an oil and gas lease.
            (28) Regulated pipeline; regulated facility.--Each of the 
        terms ``regulated pipeline'' and ``regulated facility''--
                    (A) means a pipeline, truck, tanker, barge, or 
                other modality of carriage for oil or gas, the 
                operation of which is subject to regulation by a State 
                governmental authority or Federal governmental 
                authority (or both) with respect to the rates that may 
                be charged shippers for transportation service; and
                    (B) includes, but is not limited to--
                            (i) a pipeline performing the interstate 
                        movement of gas subject to regulation by the 
                        Federal Energy Regulatory Commission under the 
                        Natural Gas Act (15 U.S.C. 717 et seq.);
                            (ii) a pipeline whose movements of oil are 
                        subject to regulation by the Federal Energy 
                        Regulatory Commission under the Interstate 
                        Commerce Act (49 U.S.C. 1 et seq.); and
                            (iii) any pipeline, truck, tanker, barge or 
                        other modality of carriage for Oil or Gas whose 
                        rates for carriage are regulated by a 
                        governmental authority under State law.
            (29) Royalty gas.--The term ``royalty gas'' means that 
        fraction or percentage of gas produced from or attributable to 
        lease premises, that the United States as lessor is entitled to 
        take in kind under the terms of an oil and gas lease.
            (30) Royalty oil.--The term ``royalty oil'' means that 
        fraction or percentage of oil produced from or attributable to 
        lease premises, that the United States as lessor is entitled to 
        take in kind under the terms of an oil and gas lease.
            (31) Royalty share.--The term ``royalty share'' means that 
        fraction or percentage of royalty oil or royalty gas (or both) 
        produced from or attributable to lease premises, that the 
        United States as lessor is entitled to take in kind under the 
        terms of an oil and gas lease.
            (32) Secretary.--The term ``Secretary'' means the Secretary 
        of the Interior.
            (33) Tender.--The term ``tender'' means the act by which a 
        lessee makes royalty oil or royalty gas produced from lease 
        premises available to the United States for receipt.
            (34) Transportation; transport.--Each of the terms 
        ``transportation'' and ``transporting'' means any movement 
        (including associated or related activities to facilitate 
        movement such as compression and dehydration) of royalty oil or 
        royalty gas. Such terms include any movement of royalty oil or 
        royalty gas downstream of the delivery point, including 
        movement described in this paragraph. Such terms may include--
                    (A) the movement of unseparated, bulk production 
                away from the lease premises to a point distant from 
                the lease premises; and
                    (B) the movement of separated, identifiable 
                production downstream of a well on the lease premises 
                to any point that is not on, and is not adjacent to, 
                the lease premises, unit, or communitized area, as 
                approved by the Secretary.
            (35) Transporter.--The term ``transporter'' means a person 
        or entity who is transporting or providing transportation.
            (36) United states.--The term ``United States'' means the 
        United States of America and any agency, department, or 
        instrumentality thereof.

SEC. 3. RIGHTS, OBLIGATIONS, AND RESPONSIBILITIES.

    (a) Rights, Obligations, and Responsibilities of the United 
States.--
            (1) General rule.--Except as otherwise provided in section 
        8 of this Act, all royalty oil and royalty gas accruing to the 
        United States under any oil and gas lease shall be taken in 
        kind by the United States at the applicable delivery point for 
        each lease premises.
            (2) Ownership and receipt by united states.--Ownership of 
        all right, title and interest in royalty oil and royalty gas 
        produced from oil and gas lease premises governed by this Act 
        shall remain in the United States until sale or other 
        disposition by the United States. Nothing in this Act shall 
        limit the right of the United States to have royalty oil or 
        royalty gas stored after its production in such tanks or other 
        surface facilities as the lessee may be expressly obligated to 
        furnish under any applicable lease term. The United States 
        shall not delay or defer the receipt of lease production, delay 
        receipt of new production, or physically segregate the royalty 
        share prior to receipt by the United States. The United States 
        shall have custody, possession, and responsibility attendant 
        thereto for royalty oil and royalty gas at and beyond the 
        delivery point.
            (3) Selection of and contracts with a qualified marketing 
        agent.--(A) Except as provided in subsection (b), the Secretary 
        shall, for each lease premises, contract with a person to act 
        as a qualified marketing agent to market and dispose of royalty 
        oil and royalty gas. Each qualified marketing agent shall be 
        authorized to advise and consult with the Secretary on the sale 
        and disposition of the royalty oil and royalty gas and to 
        directly sell and broker the royalty oil and royalty gas.
            (B) To be eligible for a contract under this paragraph to 
        act as a qualified marketing agent, a person must have the 
        expertise necessary to receive, handle, transport, deliver, 
        market, process, dispose, broker, or sell royalty oil and 
        royalty gas in accordance with this Act. Under rules 
        promulgated by the Secretary, the Secretary may designate any 
        person as ineligible to act as a qualified marketing agent 
        under this paragraph by reason of such person's relationship to 
        persons engaged in the handling, gathering, transporting, 
        marketing, processing, or purchasing of oil or gas.
            (C) The Secretary shall contract with not more than one 
        qualified marketing agent for each lease premises for royalty 
        oil and not more than one qualified marketing agent for each 
        lease premises for royalty gas.
            (D) The Secretary shall solicit competitive bids for 
        contracts for qualified marketing agents. The Secretary shall 
        promulgate final rules within 12 months after the date of the 
        enactment of this Act regarding the competitive manner in which 
        qualified marketing agents shall be selected.
            (E) The compensation of each qualified marketing agent--
                    (i) shall be determined and made by the Secretary 
                without further appropriation based on the services to 
be performed by the qualified marketing agent; and
                    (ii) shall be established in the contract between 
                the qualified marketing agent and the United States.
            (F) Except as otherwise provided in subsection (b), the 
        Secretary shall be solely responsible for obtaining and 
        contracting with qualified marketing agents and shall be 
        authorized to pay qualified marketing agents from proceeds 
        derived from the sale of royalty oil and royalty gas without 
        further appropriation.
            (G) Each contract shall--
                    (i) require the qualified marketing agent to 
                dispose of and sell royalty oil and royalty gas in an 
                open, nondiscriminatory, and competitive manner; and
                    (ii) prohibit the qualified marketing agent from 
                precluding any person from competing for the handling, 
                gathering, transporting, marketing, processing, or 
                purchasing of royalty oil and royalty gas solely by 
                reason of the person being a lessee or person 
                affiliated with a lessee, qualified marketing agent, 
                gatherer, royalty payor, transporter, processor or 
                purchaser.
            (4) Transportation costs.--Each contract under paragraph 
        (3) shall require the Secretary to bear the costs of any 
        transportation of royalty oil and royalty gas without further 
        appropriation as specified by this Act incurred prior to the 
        sale or other disposition of the royalty oil and royalty gas by 
        the qualified marketing agent.
            (5) Processing.--The qualified marketing agent under 
        paragraph (3) shall--
                    (A) have the right to process royalty oil and 
                royalty gas, after receipt at the delivery point, for 
                the recovery and sale of valuable products; and
                    (B) require the Secretary to bear any applicable 
                costs of exercising such right without further 
                appropriation.
            (6) Compliance with standards.--In taking in kind, 
        processing, and shipping royalty oil and royalty gas, the 
        United States and its qualified marketing agent shall comply 
        with all procedures which are customary or required of 
        processors and shippers, including but not limited to the 
        applicable FERC-approved GISB standards, nominations of 
        volumes, scheduling of deliveries, and the movement of oil or 
        gas in or through the facilities of the initial transporter and 
        any subsequent transporter. The Secretary and his qualified 
        marketing agent shall assume responsibility and any liability 
        associated with such duties.
            (7) Fair market value requirements.--The net proceeds 
        received by the United States from the sale of royalty oil and 
        royalty gas are deemed to satisfy in full the Secretary's 
        responsibility to receive fair market value as defined by any 
        applicable statute or lease provision.
    (b) Rights, Obligations and Responsibilities of States.--
            (1) Selection of qualified marketing agents.--At its option 
        and for the mutual benefit of the United States and the State, 
        a State entitled to revenues under the provisions of section 35 
        of the Mineral Leasing Act (30 U.S.C. 191) or section 8(g) of 
        the Outer Continental Shelf Lands Act (43 U.S.C. 1353) may 
        elect to act on behalf of the Secretary in selecting qualified 
        marketing agents to sell or dispose of royalty oil or royalty 
        gas produced from lease premises within the State or from 
        section 8(g) lease premises adjacent to the State, whichever is 
        applicable. If it makes such an election, the State shall enjoy 
        all the rights and assume all obligations that the United 
        States would otherwise have under this Act. If a State selects 
        a qualified marketing agent that has contracted to market 
        production from State leases, the contract with the qualified 
        marketing agent shall be on terms no less favorable to the 
        interests of the United States than the contract with the 
        State. A State may make such an election from time to time in 
        accordance with paragraph (4).
            (2) Compliance with requirements.--A State that elects to 
        act under this section shall--
                    (A) exercise such rights in accordance with the 
                requirements established by this Act governing royalty 
                in kind; and
                    (B) be subject to the rights, responsibilities, and 
                obligations of the United States under this Act, as may 
                be applicable, including those set forth in subsection 
                (a).
            (3) Notice; effective period of election.--A State may 
        elect to act under this section after giving the Secretary 90 
        days notice. The election is effective 90 days after the date 
        the Secretary receives notice of the election. The election 
        shall remain in effect for a period of not less than 3 years. 
        After the initial term, a State must give sufficient notice to 
        the United States, but in no event less than 180 days, to 
        terminate an election period.
            (4) Covered oil and gas.--A State's election under this 
        subsection shall apply to all royalty oil and royalty gas 
        within the State and section 8(g) lands adjacent to the State, 
        as applicable.
            (5) Existing contracts.--If a contract between a qualified 
        marketing agent and the United States exists that has not 
        expired, the State's election shall be subject to that existing 
        contract.
            (6) Limitation on deductions from state share of 
        receipts.--If a State makes an election under this section, 
        payment of the State's share of receipts for the sale of 
        royalty oil and royalty gas shall be made without deductions 
        for costs applicable to the services provided by the State 
        under the net receipts sharing provisions of the Mineral 
        Leasing Act.
    (c) Rights, Obligations, and Responsibilities of the Lessee.--
            (1) Effect of tender by lessee.--A lessee shall tender 
        royalty oil and royalty gas to the United States at the 
        delivery point for each lease premises, except as provided in 
        section 6. Upon such tender for any lease premises, all royalty 
        obligations of the lessee shall be considered fulfilled and 
fully satisfied for the amount tendered, including any express or 
implied obligation or duty to market, except as provided in section 6. 
If the United States fails to take in kind the entire volume tendered, 
the lessee's obligation or duty shall nonetheless be fully satisfied.
            (2) Measurement of lease production.--A lessee shall 
        measure or cause to be measured lease production, including 
        royalty oil and royalty gas, at the delivery point in 
        accordance with any applicable laws and lease terms.
            (3) Termination of responsibilities of lessee.--A lessee 
        shall have no responsibility or obligation for royalty oil or 
        royalty gas after tendering it in accordance with paragraph (1) 
        and shall not be liable for any costs or liability downstream 
        of the delivery point associated with the royalty oil or 
        royalty gas.
            (4) Reporting and recordkeeping.--With respect to royalty 
        oil and royalty gas taken in kind by the United States, a 
        lessee shall not be subject to the reporting and recordkeeping 
        requirements of the Federal Oil and Gas Royalty Management Act 
        (30 U.S.C. 1701 et seq.) or other applicable laws for any 
        lease, other than records or reports necessary to verify the 
        quantity of royalty oil or royalty gas produced from a lease 
        premises.
    (d) Rights, Obligations, and Responsibilities of Qualified 
Marketing Agents.--
            (1) In general.--In accordance with the terms of its 
        contract with the United States, a qualified marketing agent 
        shall--
                    (A) advise and consult with the United States 
                regarding the terms and conditions of sales to 
                purchasers;
                    (B) arrange for the receipt, handling, 
                transporting, delivery, marketing, processing, 
                disposition, brokering and sale of royalty oil and 
                royalty gas; and
                    (C) be authorized to enter into sales contracts on 
                behalf of the United States.
            (2) Movement of royalty oil and royalty gas.--A qualified 
        marketing agent shall be authorized to make any arrangements 
        necessary to move royalty oil and royalty gas downstream of the 
        applicable delivery point, and shall be authorized to enter 
        into transportation and processing contracts on behalf of the 
        United States.
            (3) Requirement to take.--A qualified marketing agent shall 
        be required to take 100 percent of the royalty share tendered 
        by the lessee from each lease premises on a daily basis.
            (4) Enhancement of revenues to united states.--In handling, 
        marketing, and disposing of royalty oil and royalty gas, a 
        qualified marketing agent shall utilize its experience and 
        expertise to seek opportunities to enhance revenues to the 
        United States, including opportunities for the sale of royalty 
        oil and royalty gas at or away from the lease premises, 
        depending on the facts and circumstances relevant to receiving, 
        handling, transporting, delivering, marketing, processing, 
        disposition, brokering, and sale of the royalty oil or royalty 
        gas.
            (5) Affiliate transactions.--Qualified marketing agent 
        sales to itself or an affiliate shall be made in accordance 
        with the following standards:
                    (A) When selling royalty oil and royalty gas to an 
                affiliate, a qualified marketing agent shall not give 
                preference to an affiliate, including but not limited 
                to, favoring the affiliate with lower sales prices, 
                rights of first refusal or more favorable terms than 
                those offered to nonaffiliated purchasers of royalty 
                oil and royalty gas.
                    (B) The managing employees of the qualified 
                marketing agent shall periodically certify that it has 
                complied with these provisions. The civil penalty 
                provisions of section 109(d) of the Federal Oil and Gas 
                Royalty Management Act of 1982 (30 U.S.C. 1719(d)) and 
                the criminal penalty provisions section 110 of such Act 
                (30 U.S.C. 1720) shall apply to any qualified marketing 
                agent who violates subparagraph (A).

SEC. 4. COSTS RESPONSIBILITY.

    (a) Merchantable Condition.--The lessee shall bear the costs of 
placing royalty oil and royalty gas in merchantable condition at the 
delivery point, if not produced in such condition at the well: 
Provided, however, That gathering and transportation costs under this 
Act shall be governed solely by section 4(b) and section 5, and 
responsibility for such costs shall not be dependent upon whether the 
royalty oil or royalty gas is in merchantable condition at the time of 
gathering or transportation.
    (b) Gathering and Transportation of Royalty Oil and Royalty Gas.--
            (1) Gathering.--The lessee shall bear the costs of 
        gathering royalty oil and royalty gas.
            (2) Transportation.--The United States shall bear the costs 
        of transporting royalty oil and royalty gas to and beyond the 
        delivery point until disposition or sale by the United States. 
        Transportation costs shall include associated or related 
        activities to facilitate movement, such as the costs of 
        compression and dehydration associated with transportation. The 
        movement of unseparated, bulk production away from the lease 
        premises to a point distant from the lease premises and the 
        movement of separated, identifiable production away from a well 
        on the lease premises to any point not on or adjacent to the 
        lease premises, unit or communitized area shall be considered 
        transportation. Transportation costs shall be governed solely 
        by the definitions and provisions in this Act relating to 
        transportation and responsibility for the payment of such costs 
        shall not be dependent upon whether the royalty oil or royalty 
        gas is in merchantable condition at the time of transportation.
    (c) Limitation on Lessee's Responsibility for Costs.--With respect 
to all royalty oil and royalty gas taken in kind by the United States, 
the lessee shall bear no costs other than those specifically identified 
in this section. After the royalty share is taken in kind, the United 
States shall dispose of and market its royalty oil and royalty gas and 
the lessee shall have no obligation to dispose of or market the United 
States royalty share of production.
    (d) Reimbursement of Costs.--In bearing the cost of transporting 
royalty oil and royalty gas, the United States shall reimburse the 
lessee for transportation costs without further appropriation in 
accordance with the provisions of subsection (b) of this section and 
section 5.

SEC. 5. TRANSPORTER CHARGES.

    (a) Determination.--The lessee or its affiliate shall determine and 
calculate, where applicable, the transportation charges governed by 
this Act in accordance with subsections (b) and (c).
    (b) Reimbursement for Transportation Costs Prior to the Delivery 
Point.--
            (1) Transport by regulated pipeline or facility.--
        Reimbursement to a lessee for costs of transporting royalty oil 
        and royalty gas produced by the lessee and subsequently 
        transported through a regulated pipeline or facility before the 
        delivery point shall be--
                    (A) for nonaffiliated transactions, the actual rate 
                paid under the tariff by the lessee; or
                    (B) for affiliated transactions, the lower of the 
                tariff rate or the actual rate paid under the tariff.
            (2) Transport by shipment-by-shipment tariff jurisdiction 
        pipeline or facility.--Reimbursement to a lessee for 
        transportation costs incurred to transport royalty oil through 
        a pipeline or facility for which jurisdiction for purposes of a 
        tariff is determined on a shipment-by-shipment basis, shall be 
        the tariff rate for all shipments by the lessee through the 
        same pipeline or facility if there is a shipment through the 
        pipeline or facility to which a tariff applies.
            (3) Transport by unregulated pipeline or facility.--(A) 
        Reimbursement to a lessee for transportation costs incurred to 
        transport royalty oil or royalty gas through an unregulated 
        pipeline or facility before the delivery point shall be--
                    (i) for nonaffiliated transactions, the actual 
                costs incurred by the lessee; or
                    (ii) for affiliated transactions--
                            (I) if third party oil or gas is being 
                        transported through the pipeline or facility, 
                        the weighted average (by volume) third party 
                        charge; or
                            (II) if no third party oil or gas is being 
                        transported through the pipeline or facility, 
                        not to exceed the pipeline or facility owner's 
                        or its affiliate's costs of operating the 
                        pipeline or facility, including a return on 
                        undepreciated capital investment, subject to 
                        paragraph (4).
            (B) For purposes of subparagraph (A)(ii)(II) the term 
        ``costs of operating'' means the sum of the following:
                    (i) Direct operating, maintenance, and repair costs 
                and expenses.
                    (ii) Indirect costs (including but not limited to 
                costs such as information systems, business services 
                and technical services) allocated to the pipeline or 
                facility, in an amount not exceeding 15 percent of the 
                amount of direct costs that applies under clause (i).
                    (iii) An allowance for capital investment 
                calculated on the basis of either of the following, as 
                may be, elected by the lessee:
                            (I) depreciation, plus a return on the 
                        undepreciated capital, or
                            (II) a return on depreciable capital 
                        investment.
                Return under subclauses (I) and (II) shall be at a rate 
                equal to twice the rate payable for bonds with a 
                Standard and Poor's industrial BBB bond rating.
            (4) Allowance of higher transportation costs.--If the 
        amount specified in paragraph (3)(A)(ii) does not adequately 
        reflect the costs of the transportation services provided by a 
        lessee or its affiliate, the lessee may request a different 
        transportation reimbursement from the Secretary. For pipelines 
        in more than 200 meters of water, the Secretary may allow a 
        higher rate of return, sufficient for an investment in the 
        fabricating, installing, operating, and maintaining such 
        pipelines as compared to pipelines in waters of less than 200 
        meters.
            (5) Restriction on disclosure.--The United States and its 
        qualified marketing agent shall keep confidential and shall not 
        disclose the transportation charge or any facts or information 
        related thereto used by a lessee or its affiliate for 
        reimbursement under this subsection.
    (c) Charges for Transportation Costs Beyond the Delivery Point.--
            (1) In general.--Charges by the lessee or its affiliate for 
        transportation of royalty oil or royalty gas through an 
        unregulated pipeline or facility beyond the delivery point 
        shall be a negotiated rate, that--
                    (A) shall not exceed the highest rate charged for 
                transportation provided to a third party, if third 
                party oil or gas is being transported through the 
                pipeline or facility; or
                    (B) shall be the fair commercial value of the 
                transportation services provided by the lessee or its 
                affiliate if no third party oil or gas is being 
                transported through the pipeline or facility.
            (2) Determination of commercial value.--The standard to be 
        used to determine the value/commercial value for purposes of 
        paragraph (1)(B) shall be based upon the transportation 
        services provided and not on the ownership of the pipeline or 
        facility by the lessee or its affiliate.
    (d) Arbitration.--
            (1) In general.--If negotiations between a qualified 
        marketing agent and an entity owning the pipeline or facility 
        do not result in a mutually agreeable charge for transportation 
        under subsection (c), then either party may, at any time during 
        the negotiation, require that such matter be submitted to 
        arbitration in accordance with this subsection.
            (2) Selection of arbitrators.--Any dispute regarding a 
        charge for transportation that is not resolved by agreement 
        shall be determined by a panel of 3 arbitrators upon written 
        notice given by either party to the other, which notice shall 
        also name one arbitrator. The party receiving such notice 
        shall, within 10 business days thereafter, by written notice to 
        the other party, name the second arbitrator, or failing to do 
        so, the first party who gave notice shall name the second 
        arbitrator. The two arbitrators so appointed shall name the 
        third, or failing to do so within 5 business days then upon the 
        request of either party, the third arbitrator shall be a 
        certified arbitrator appointed by a professional arbitration 
        association. Whether appointed by the two party-named 
        arbitrators or by a professional arbitration association, the 
        third arbitrator shall be knowledgeable about and experienced 
        in the transportation of oil or gas or both, as applicable.
            (3) Hearing.--An arbitration hearing shall be held within 
        20 calendar days following the selection of the third 
        arbitrator. At the hearing, each party shall submit a proposed 
        transportation rate and evidence to support such rate as it 
        sees fit.
            (4) Decision.--The panel of arbitrators shall determine 
        which of the rates submitted by the parties shall be the 
        transportation charge used. The arbitrators shall render a 
        written decision within 10 calendar days after the hearing 
        under paragraph (3) based on a majority vote of the 3 
        arbitrators. Such decision shall be final and binding on the 
        United States, the qualified marketing agent, and the lessee 
        and its affiliate, and shall be enforceable in any court having 
        jurisdiction.
            (5) Expenses.--Each party shall bear its expenses of 
        prosecuting its own case in any arbitration, and the parties 
        shall share equally any other expenses of the arbitration, 
        including compensation for the third arbitrator at a rate that 
        is fair and reasonable to the United States.
            (6) Use of employee of party as arbitrator.--(A) Any 
        arbitrator named by the parties may be a permanent or temporary 
        officer or employee of the Federal or a State Government, or an 
        employee of any party to the dispute, if all parties agree that 
        the arbitrator may serve.
            (B) In implementing this paragraph, the Secretary may use 
        the services of one or more employees of other agencies to 
        serve as arbitrators to be named by the Secretary. The 
        Secretary may enter into an interagency agreement that provides 
        for the reimbursement by the user agency or the parties of the 
        full or partial costs of the services of such an employee.
            (7) Limitation on disclosure.--Any party (including the 
        United States and its qualified marketing agent) to an 
        arbitration proceeding shall keep confidential and shall not 
        disclose the results of the arbitration or any facts, evidence, 
        or information related thereto provided in confidence to the 
        arbitrators.
            (8) Interim rate.--(A) The royalty oil and royalty gas 
        shall be transported at the disputed rate during the interim 
        period, subject to an obligation to refund if the rate is later 
        reduced as a result of arbitration.
            (B) Any refund under subparagraph (A) shall be made with 
        interest at the average short-term rate as specified in section 
        6621 of the Internal Revenue Code of 1986.
            (9) Delay or curtailment of production prohibited.--At no 
        time during such arbitration or dispute shall lease production 
        be delayed or curtailed.

SEC. 6. IMBALANCES.

    (a) Requirement To Resolve Imbalances.--
            (1) In general.--If the amount of royalty oil or royalty 
        gas production taken by the United States from a lease premises 
        during a calendar month differs from the amount of royalty oil 
        or royalty gas production attributable to that lease premises 
        for that calendar month, and the difference results from the 
        circumstances described in paragraph (2), the difference (in 
        this section referred to as a ``royalty share imbalance'') 
        shall be resolved in accordance with this section.
            (2) Circumstances.--The circumstances referred to in 
        paragraph (1) are the following:
                    (A) A force majeure event at the delivery point 
                that prevents the United States transporter from 
                receiving royalty oil or royalty gas.
                    (B) A failure by the United States or its qualified 
                marketing agent to receive, transport, and market its 
                royalty oil or royalty gas tendered for a one-time 
                occurrence of not more than 3 consecutive days in any 
                calendar quarter.
                    (C) A difference between the amount made available 
                to the United States at the delivery point by the lease 
                operator on behalf of the lessee and the United States 
                royalty share of total production.
    (b) Imbalance Accounts.--
            (1) Maintenance of information.--Each lease operator shall 
        maintain information on the quantity of royalty oil and royalty 
        gas produced from or attributable to each lease premises and 
        the amount of royalty oil or royalty gas production taken by 
        the United States from each lease premises. The information 
        shall include--
                    (A) the quantities of royalty oil and royalty gas 
                taken in kind by the United States at the delivery 
                point;
                    (B) the quantities of royalty oil and royalty gas 
                produced from and attributed to the lease premises; and
                    (C) the current month and cumulative royalty share 
                imbalances.
            (2) Report.--(A) Each lease operator shall--
                    (i) submit a royalty share imbalance report to the 
                qualified marketing agent for the United States with 
                respect to the lease no later than 60 days after the 
                expiration of each month of production from the lease; 
                or
                    (ii) if all information for the report is not 
                available by such date, file or cause to be filed with 
                the qualified marketing agent a report that contains 
                estimated quantities, and file a revised final report 
                showing actual quantities no later than 60 days after 
                information on all actual quantities is received.
            (B) The royalty share imbalance report submitted under 
        subparagraph (A) to the qualified marketing agent shall 
        constitute formal notice of a royalty share imbalance, which 
        shall be remedied in accordance with subsection (c).
    (c) Managing Imbalances.--
            (1) In general.--If a royalty share imbalance occurs during 
        any calendar month, the lease operator shall work with the 
        United States (through its qualified marketing agent) to settle 
        the royalty share imbalance in a manner consistent with the 
        existing production balancing agreements or practices among 
        operating rights owners.
            (2) Royalty oil imbalance.--In the case of a royalty share 
        imbalance with respect to royalty oil, and in the absence of 
        multiple operating rights owners, additional quantities of oil 
        may be taken by either a lessee or the United States to 
        expeditiously settle such royalty share imbalance as soon as is 
        reasonably practicable, as determined by the lease operator.
            (3) Royalty gas imbalance.--(A) In the case of a royalty 
        share imbalance with respect to royalty gas during any calendar 
        month and in the absence of multiple operating rights owners, 
        the lease operator shall work with the United States (through 
        its qualified marketing agent) to arrange for increased or 
        decreased quantities of gas to be taken beginning the month 
        after receipt of such notice by the qualified marketing agent, 
        to expeditiously settle such royalty share imbalances as soon 
        as is reasonably practicable.
            (B) Additional quantities taken in a month by either a 
        lessee or the United States to reduce a royalty share imbalance 
        with respect to royalty gas shall not exceed 25 percent of that 
        month's royalty gas.
            (C) Until final settlement pursuant to subsection (d), 
        royalty share imbalances with respect to royalty gas shall be 
        reduced chronologically in the order in which they were 
        created.
    (d) Final Imbalance Report and Final Settlement.--
            (1) Final imbalance report.--Upon permanent cessation of 
        production from a lease, the lease operator shall file a final 
        imbalance report that--
                    (A) contains the information described in 
                subsection (b); and
                    (B) states that the lease premises has permanently 
                ceased production and that a royalty share imbalance 
                exists.
            (2) Final settlement.--The parties to a royalty share 
        imbalance shall settle such royalty share imbalance using the 
        same final settlement procedures as set forth in the existing 
        production balancing agreement between the operating rights 
        owners, if any. In the absence of such an agreement, within 60 
        days of the final imbalance report, each party that received 
        excess quantities shall, at its option, make delivery of the 
        excess quantities or make a cash payment, to the parties who 
        received insufficient quantities. The cash payment shall be 
        based on the net proceeds (in terms of actual value received) 
        from the sale of such excess quantities for value at the lease 
        premises or the lessee may make delivery of the imbalance 
        volume. No interest shall accrue, prior to the date of any 
        settlement, on any imbalance.

SEC. 7. ROYALTY-IN-KIND FOR TRUCKED, TANKERED, OR BARGED OIL OR GAS.

    (a) Application.--This section shall apply to royalty oil or 
royalty gas produced from onshore or offshore lease premises for which 
there is no pipeline connection at the well such that the royalty oil 
or royalty gas is transported by truck, tanker, or barge from the lease 
premises.
    (b) Selection of Transporter.--
            (1) In general.--To further the efficient and cost-
        effective taking of royalty oil or royalty gas in kind from 
        such lease premises, the qualified marketing agent shall select 
        and utilize a transporter who is transporting oil or gas for a 
        lessee from the lease premises, or for the operator of the 
        lease premises.
            (2) Exception.--Royalty oil or royalty gas taken in kind 
        may be transported in any other manner agreed to by the 
        qualified marketing agent and the lessee or lease operator.
    (c) Relationship to Other Laws.--
            (1) Laws regarding oil or gas transportation.--This section 
        shall not alter or abridge any State or Federal law regulating 
        the transportation of oil or gas by truck, tanker, or barge.
            (2) Federal royalty prepayment provisions.--Nothing in this 
        Act shall modify, abridge, or alter the provisions of section 
        7(b) of the Federal Oil and Gas Royalty Simplification and 
        Fairness Act (30 U.S.C. 1726) with respect to the prepayment of 
        royalty.

SEC. 8. LIMITATIONS ON APPLICATION.

    (a) Lease Royalty Clauses and Royalty Payments.--This Act does not 
apply to royalty payments of the following types:
            (1) Compensatory royalties.
            (2) Minimum royalties.
            (3) Net profit share lease royalties prior to payout.
    (b) Prior Royalty Rate Reduction Determinations.--This Act shall 
not modify or alter any royalty rate reduction determination made by 
the Secretary before or after the date of enactment of this Act. The 
amount of royalty oil and royalty gas taken in kind by the Secretary 
shall be the amount calculated by such reduced royalty rate.
    (c) Audit of Eligible Small Refiner.--The Secretary shall have the 
right to audit the reports of eligible small refiners related to the 
volume of royalty oil received as are required under the provisions of 
this Act during normal business hours, at reasonable times, to verify 
the accuracy of such reports.

SEC. 9. REPORTING.

    (a) Reporting by Lessee.--A lessee shall provide or cause to be 
provided all volume reports required under the oil and gas lease to the 
United States, but shall be relieved of the obligation of providing any 
royalty related and all royalty-in-value reports for any royalty oil or 
royalty gas taken in kind by the United States required pursuant to the 
oil and gas lease terms or applicable statutes. A lessee shall make 
available or cause to be made available such information as is 
customarily provided to third party sellers of lease production on a 
timely basis.
    (b) Reporting by Qualified Marketing Agent.--A qualified marketing 
agent shall provide or cause to be provided to the United States any 
valuation or related royalty reports required by the Secretary.

SEC. 10. AUDIT.

    (a) Audit of Lessee.--The Secretary shall have the right to audit 
the reports of lessees related to the volume of oil and gas produced as 
are required under this Act during normal business hours, at reasonable 
times, to verify the accuracy of such reports.
    (b) Audit of Qualified Marketing Agent.--The Secretary shall have 
the right to audit the reports of qualified marketing agents required 
under this Act during normal business hours, at reasonable times, to 
verify the accuracy of such reports. Any information and records 
regarding sales of royalty oil and royalty gas shall be obtained, where 
necessary, from a qualified marketing agent and nonaffiliated purchaser 
shall be subject to audit.

SEC. 11. LEASE TERMS NOT AFFECTED.

    In accordance with the terms of oil and gas leases issued by the 
Secretary, the Secretary shall exercise the right to be paid oil and 
gas royalties in amount pursuant to this Act and lessees shall pay such 
oil and gas royalties in amount pursuant to provisions of this Act. 
Nothing in this Act shall alter or abridge the rights of a lessee under 
an oil and gas lease, including the right to explore for, operate, 
drill for, or produce oil and gas or to otherwise operate the lease. 
The rights, duties, or obligations that exist between the United States 
and a lessee which arise under an oil and gas lease with respect to oil 
or gas used on the lease premises or gas unavoidably lost prior to the 
delivery point shall not be affected, abridged, or altered by this Act. 
When oil or gas is used on, or for the benefit of, a lease premises at 
a facility handling production from more than one lease premises, or at 
a facility handling unitized or communitized production, the 
proportionate share of each lease's production (actual or allocated) 
necessary to operate the facility may be used royalty-free.

SEC. 12. ELIGIBLE AND SMALL REFINERS.

    (a) Sale of Royalty Oil to Eligible Small Refiners.--(1) The 
Secretary shall direct qualified marketing agents to offer for sale to 
eligible small refiners the eligible small refiner portion in 
accordance with the provisions set forth in this section.
    (2) The sale of royalty oil from the eligible small refiner portion 
to an eligible small refiner is intended for processing, or trading for 
equivalent barrels for processing, in the eligible small refiner's 
refineries located in the United States and not for resale in-kind or 
value.
    (3) The Secretary shall annually review and recertify or withdraw 
the continuing eligibility of previously certified eligible small 
refiners.
    (4) The eligible small refiner portion shall be offered to eligible 
small refiners from royalty oil volumes to be sold by each qualified 
marketing agent. If there are successful offers for all royalty oil 
volumes to be sold, the eligible small refiner portion price shall be 
the weighted average price of the 40 percent of royalty oil volumes to 
be sold for which the lowest successful offers have been received. If a 
part of the royalty oil volumes to be sold does not receive a 
successful offer, for weighted average pricing purposes, that part 
shall be valued using the price of the lowest successful offer.
    (5) Nothing in this section shall preclude any eligible small 
refiner from participating in any open and advertised or negotiated 
sale by qualified marketing agents. Royalty oil volumes obtained by any 
eligible small refiner in any open and advertised or negotiated sale 
shall not be included in calculating limitations on eligibility as 
defined in subsection (b).
    (b) Limitations on Eligibility.--No eligible small refiner may 
purchase royalty oil from the eligible small refiner portion for 
delivery at a rate that exceeds 60 percent of the combined crude oil 
and condensate distillation capacity of that eligible small refiner's 
currently operating refineries located in the United States unless the 
Secretary determines that it is in the public interest to allow all 
eligible small refiners to purchase royalty oil at a greater rate. The 
Secretary shall promulgate rules and regulations to determine an 
eligible small refiner's current operating capacity.
    (c) Fees, Creditworthiness, and Surety Requirements.--(1) The 
purchase of royalty oil from the eligible small refiner portion 
pursuant to this section shall not be subject to any fees or charges 
not required of all purchasers of royalty oil.
    (2) The Secretary shall establish conditions for each eligible 
small refiner's creditworthiness at the time of determining and 
reviewing eligibility.
    (3) Creditworthiness requirements for eligible small refiners shall 
not exceed standard industry requirements governing non-Federal crude 
oil purchasers, and the Secretary may not require surety in excess of 
the estimated value of 60 days anticipated deliveries of royalty oil 
from the eligible small refiner portion to individual eligible small 
refiners.
    (d) Eligible Small Refiner Advisory Panel.--The Secretary shall 
convene an eligible small refiner advisory panel to assist in 
developing policies and procedures to implement the provisions of this 
Act. The eligible small refiner advisory panel shall be comprised of 
representatives from not less than 5 small refiners who have 
participated in the small refiner program established pursuant to 
section 36 of the Mineral Leasing Act (30 U.S.C. 192) or section 1353 
of the Outer Continental Shelf Lands Act (43 U.S.C. 1353).
    (e) ____.--Pursuant to the recommendations of the Small Refiner's 
Advisory Group, the Secretary shall develop and implement procedures to 
ensure a fair and equitable opportunity for interested eligible small 
refiners to purchase royalty oil from the eligible small refiner 
portion.
    (f) Reports on RIK.--The Secretary may require any eligible small 
refiner to submit a report demonstrating the eligible small refiner's 
compliance with subsection (a)(2).
    (g) Repeal of Existing Royalty-in-Kind Authority.--Section 36 of 
the Mineral Leasing Act (30 U.S.C. 192) and section 1353 of the Outer 
Continental Shelf Lands Act (43 U.S.C. 1353) are repealed.

SEC. 13. APPLICABLE LAWS.

    (a) Movement, Disposition, and Sale of Royalty Oil and Royalty 
Gas.--In arranging for the movement, disposition and sale of royalty 
oil and royalty gas, the United States and its qualified marketing 
agents shall be subject to all laws that apply to the movement, 
disposition, and sale of oil and gas.
    (b) No Additional Priority of Service or Movement.--In any 
pipeline, truck, barge, railroad, or other carrier downstream of the 
delivery point, royalty oil and royalty gas shall not be afforded a 
priority of service or movement, nor assigned a capacity right which is 
superior to that identified in--
            (1) the contract for carriage of royalty oil and royalty 
        gas entered into by the transporter with the United States or 
        the qualified marketing agent; or
            (2) the tariff applicable to such carrier, if any.
    (c) Meaning of Terms Used.--The meaning of the terms used in this 
Act shall be supplemented by reference to generally accepted accounting 
principles.
    (d) Laws Applicable to Stripper or Marginal Production Not 
Affected.--Nothing in this Act shall modify, abridge or alter the 
provisions of the Deep Water Royalty Relief Act of 1995 (43 U.S.C. 
1337), or any other Federal law applicable to stripper or marginal 
production.

SEC. 14. INDIAN LANDS.

    This Act shall not apply with respect to Indian lands.

SEC. 15. EFFECTIVE DATE; REGULATIONS.

    (a) In General.--Except as provided in subsection (b), this Act 
shall become effective 18 months after the date of enactment of this 
Act, and shall apply with respect to the production of oil and gas on 
or after the first day of the month following the effective date of 
this Act.
    (b) Regulations.--The Secretary shall issue all regulations 
required for implementation of this Act within one year after the date 
of enactment of this Act.
                                 <all>