[Congressional Record Volume 144, Number 41 (Thursday, April 2, 1998)]
[Senate]
[Pages S3148-S3155]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. NICKLES (for himself, Mr. Domenici, Mr. Murkowski, Mrs. 
        Hutchison, Mr. Breaux, and Mr. Craig):
  S. 1930. 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; to the Committee on Energy and 
Natural Resources.


                  The Royalty Enhancement Act of 1998

  Mr. NICKLES. Mr. President, once again, our domestic oil and gas 
producers are facing devastating losses due to a significant drop in 
oil prices. This crisis creates a dangerous situation for the industry 
and for our national security. Unfortunately, the policies and 
practices of the Administration have exacerbated the problem, not 
helped. If we are to maintain a viable domestic petroleum industry, we 
must reverse these practices. An important step towards this end is 
reforming the Department of Interior's erratic, ever-changing royalty 
valuation practices. The Royalty Enhancement Act, that I am introducing 
today, will reduce regulatory costs and promote development of federal 
oil and gas resources vital to our national security. It will also 
significantly reduce the administrative costs associated with the 
federal royalty payment system.
  Minerals Management Service (MMS), the agency within the Department 
of Interior given responsibility for administering royalties from 
federal leases, has imposed on oil and gas producers a bureaucratic 
labyrinth of rules and regulations. One of the most fundamental 
concepts of our society is the ability of any citizen, in particular, 
citizens who are parties to contracts with the federal government to be 
assured that the Federal government will not overreach and unilaterally 
interpret those contracts. Such a situation is what we have today with 
oil and gas producers who have contracted with the Federal government 
to expend their capital and resources to explore for, drill and produce 
valuable oil and gas reserves in the United States and offshore.
  In the past few years oil and gas producers, both independent and 
major, have become increasingly frustrated with the unwillingness by 
MMS to produce a simplified and certain valuation method that 
accurately captures the value of oil or gas at the lease. This is the 
value that a federal oil and gas lessee owes and the American taxpayer 
deserves to be paid.
  Recently, the MMS has proposed a new oil valuation rule which is the 
most administratively burdensome and complex method, available to the 
government. This new rule looks like the Clinton health care plan and 
makes the IRS code look simple. In short, the current MMS valuation 
system is badly broken and their outstanding oil proposal will only 
make it worth.
  In 1995, I introduced the Federal Oil and Gas Royalty Simplification 
and Fairness Act because of the importance of federal royalty revenues 
to the United States Treasury and States.

[[Page S3149]]

The purpose of that legislation was to streamline and simplify the 
royalty management program for the over 20,000 federal lessees who are 
required to file over 3,000,000 reports annually. Despite the 
bipartisan support for my bill, MMS resisted this much needed reform 
during the entire legislative process. Fortunately, Congress saw the 
wisdom and need for the law and sent it to the President and it became 
effective in August, 1996.
  Why is Congressional action needed, Mr. President? Despite the 
obvious importance of the oil and gas industry to our national economy 
and global stability, the MMS has failed to get the message we sent 
them in 1996 that the American people can no longer tolerate their 
ineffective and inefficient bureaucracy. The MMS valuation rules 
contain complicated formulas that can be both confusing and inaccurate. 
These ambiguous rules lead inevitably to expensive disputes and 
litigation that unnecessarily drain resources of the federal government 
and the lessees.
  To ensure that the American people receive their full and fair value 
of production royalties from oil and gas produced on federal lands, we 
need to create a royalty valuation system that provides certainty, 
simplicity and fairness to the federal government, States, oil and gas 
producers and the American taxpayers. Only by doing this will companies 
want to take the risk of spending their capital to develop and produce 
federal oil and gas for our nation's use and benefit. It is important 
that we maintain the viability of existing production on federal lands 
and encourage development of the new frontiers of production in the 
deep waters off our coastlines.
  Mr. President, my colleagues from New Mexico, Alaska, Texas and 
Louisiana, Senators Domenici, Murkowski, Hutchison and Breaux, join me 
today in introducing the Royalty Enhancement Act which is the Senate 
companion of H.R. 3334, a bill introduced this session by Congressman 
Thornberry. This bill cuts through the horrendously complicated and 
ambiguous current rules and provides certainty, simplicity and fairness 
to both the taxpayers and the companies who enter into oil and gas 
leases with the federal government.
  This legislation will replace the current complicated and complex 
system of royalty valuation with a much clearer, simpler method of 
royalty payment that would avoid valuation disputes. This method will 
allow companies to pay the federal government its royalty share in 
actual barrels of oil or cubic feet of natural gas.
  The bill contains a comprehensive well-designed royalty payment 
method that will streamline auditing and accounting systems for both 
the government and the producers and will reduce administrative costs. 
Reduced costs will help keep production economic for a longer period, 
extending the life of producing wells and thus providing more royalties 
from this continued production. The best way to be absolutely certain 
that the government receives fair market value at the lease is for the 
government to take production in-kind and have it marketed and sold by 
qualified private sector marketers who possess the expertise and 
experience to receive the best value for the United States.
  Mr. President, it is not fair to subject companies who produce oil 
and gas on federal lands to the whim of the MMS with their record of 
retroactive second-guessing of valuation years after oil and gas has 
been produced and sold. It is fundamentally unfair to the American 
people for the agency's uncertain and ambiguous rules and practices to 
create delay in receipt of royalty revenues to the Treasury and to bear 
the expense of the government's bureaucracy. For these reasons, I am 
introducing the Royalty Enhancement Act of 1998.
  Mr. President, I ask unanimous consent that the bill be printed in 
the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1930

       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 the 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 only 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 does not constitute 
     control.
       (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) 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 encompass at least the outermost boundaries of all oil 
     and gas accumulations known to be within those reservoirs 
     vertically projected to the land service.
       (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

[[Page S3150]]

     of the party affected which renders that party unable to 
     carry out its obligations under this Act. Force majeure as 
     used in this Act shall not include market conditions.
       (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 unseparated, unidentifiable lease production upstream of 
     the delivery point to a central accumulation point on or 
     immediately adjacent to the lease premises, unit, or 
     communitized area.
       (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, according to the terms of the joint operating 
     agreement or any other agreement or method by which an 
     operator is designated, 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 first transporter of royalty oil and 
     royalty gas from that lease premises either prior to or at 
     the delivery point. 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 Land 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, 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), upstream or 
     downstream of the delivery point of royalty oil or royalty 
     gas that is not gathering as defined herein including 
     movement described as transportation in this paragraph. Such 
     transportation shall include but not limited to--
       (A) the movement of unseparated, unidentifiable lease 
     production to a point not on or immediately adjacent to the 
     lease premises, unit, or communitized area; and
       (B) any movement of separated, identifiable lease 
     production regardless of whether such movement is on or off 
     the lease premises, unit or communitized area.
       (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 
     agency.--(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

[[Page S3151]]

     this Act. Under rules promulgated by the Secretary, the 
     Secretary may designate any person as ineligible or place 
     other requirements on a person to act as a qualified 
     marketing agent for a particular lease premises under this 
     paragraph by reason of such person being affiliated with 
     persons engaged in the, transporting, processing, or 
     purchasing of oil or gas for that lease premises.
       (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.
       (8) To further the purposes of this Act the Secretary shall 
     be provided the greatest latitude in contracting with 
     qualified marketing agents to market and dispose of royalty 
     oil or royalty gas, contracts with qualified marketing agents 
     under this Act shall be exempted from otherwise applicable 
     federal procurement and property disposition laws, including 
     but not limited to the Armed Services Procurement Act of 
     1947, 10 U.S.C. 2304, et seq. or the Federal Property 
     Administration Services Act, 41 U.S.C. 253, et seq., or their 
     implementing regulations.
       (4) Transportation Cost.--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 United States and its 
     qualified marketing agent shall separately contract with 
     transporters, purchasers, and processors. 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 shall 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 with 
     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) and 
     in no event shall regulations be applicable to a State which 
     do not apply in substance to the United States to the extent 
     required by applicable law.
       (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 RECORD 
     KEEPING 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

[[Page S3152]]

     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 employee 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)) 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, unidentifiable 
     lease production to a point not on or immediately adjacent to 
     the lease premises, unit or communitized area and the 
     movement of separated, identifiable lease production 
     regardless of whether such movement on or off 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 and 
     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 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 negotiated charge for 
     transportation under subsection (c), then the qualified 
     marketing agent on behalf of the Secretary or the entity 
     owning the pipeline or facility 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 arbitrator 
     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 permanent or temporary 
     officer or employee of the Federal or State Government, or an 
     employee of any party to the dispute, if all parties agree 
     that the person may serve.
       (B) In implementing this paragraph, the qualified marketing 
     agent on behalf of the Secretary may use the services of one 
     or more employees of other agencies to serve as arbitrators 
     to be named by the qualified

[[Page S3153]]

     marketing agent. 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 dispute 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; or
       (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 
     through its qualified marketing agent 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 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 and 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 Lease Operator.--A lease operator on 
     behalf of the 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 lease operator on behalf of 
     the 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 Lease Operator.--The Secretary shall have the 
     right to audit the reports the Lease Operator files on behalf 
     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.

[[Page S3154]]

     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 lessee 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 lessees 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 premise, 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. The Secretary shall 
     maintain a current list of all Eligible Small Refiners. Upon 
     the selection of a Qualified Marketing Agent by the 
     Secretary, the Secretary shall promptly notify all Eligible 
     Small Refiners of the selection of the Qualified Marketing 
     Agent. The notification shall contain the name and address of 
     the Qualified Marketing Agent as well as a brief description 
     of the federal leases and lease products to be marketed by 
     that Qualified Marketing Agent. Within 15 days after notice 
     by the Secretary, any Eligible Small Refiner who is 
     interested in receiving Royalty Oil from the leases of the 
     Qualified Marketing Agent, shall submit a Notice of Interest 
     to the Qualified Marketing Agent. The Notice shall generally 
     state the volumes location and quality of Royalty Oil desired 
     by the Small Refiner. When marketing Royalty Oil, the 
     Qualified Marketing Agent shall contact the Small Refiner(s) 
     who has (have) submitted a Note of Interest and shall offer 
     to sell the 40% portion to the Small Refiner(s) who submitted 
     a Notice. The Small Refiner shall purchase such Royalty Oil 
     at the weighted average price for the remaining volumes of 
     like quality at the same location sold by the Qualified 
     Marketing Agent.
       (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 3 small 
     refiners, 3 qualified marketing agents and 3 lesses 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 and prevailing industry 
     practices and procedures.
       (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 no later than 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.

  Mr. DOMENICI. Mr. President, the current royalty system is an 
elaborate after-the-fact game of ``Gotch ya.''
  Producers are put in the unenviable position of being second-guessed, 
some times years later, by the Minerals Management Service (MMS). This 
current system is unfair to oil and gas producers. It is expensive and 
inefficient for the federal government.
  Under the current system, only the lawyers benefit. It results in a 
lot of law suits and big legal bills.
  The MMS tried to fix the system by proposing a ``producer is always 
the loser rule.''
  Under the proposed rules, (now abandoned) the producers would have 
always lost. The MMS tried a rule tying the fair market value to the 
NYMEX.
  If producers sold their production for less than the NYMEX price, 
they would have had to pay the royalty on the ``phantom'' income i.e. 
the difference between the price they actually received and the NYMEX 
price. If, on the other hand, they sold their production for more than 
the NYMEX, they would have had to pay the royalty on the amount they 
actually received. This would have been a very unsatisfactory approach.
  Fortunately, most independent producers don't have to use that 
approach. However, the existing valuation formula for calculating fair 
market value is complicated, fraught with exceptions, and hard to 
administer.
  The question: What is fair market value for oil is not as simple as 
it sounds.
  Some of the variable factors include the quality or refinery value of 
crude oil; the transportation costs necessary to move that oil to a 
refiner; relative access to various refineries or markets which may 
value a particular type of crude oil differently; the supply, vis-a-
vis, the demand for certain types of oil or alternative supplies, and 
whether the contract is a long-term or short-term commitment made by 
either the refiner or the producer.
  Other factors that influence value include: the volume of the crude 
oil produced at the lease. This could affect the unit logistical costs; 
seasonality; and service requirements of the producer.

[[Page S3155]]

  Another question more complicated than it sounds is this: What are 
the appropriate, allowable, deductible expenses?
  Under the current system it costs the MMS about $60 million annually 
to debate this question and to administer our royalty collection 
program. It takes several hundred employees, many of them auditors, to 
oversee the current royalty program. In contrast, royalty-in-kind 
programs in Canada need only 33 employees to administer their approach.
  With a royalty-in-kind system, the producer would give some of its 
production from the federal lands as a royalty-in-kind payment.
  A royalty-in-kind program is an accurate way to determine a fair 
market value. The federal government would sell its share of the oil on 
an open and competitive market. What you can sell it for is, per se, 
fair market value. That is the essence of what the ``Royalty-in-Kind'' 
Program, along with the use of the Qualified Marketing Agents 
(``QMA''), would allow.
  The goal should be treating the producers fairly, maximizing revenues 
for the federal government, and distributing an accurate amount of 
royalties to the states.
  The bill being introduced today by Senator Nickles, Murkowski, 
Hutchinson and I would provide a better way for the federal government 
and the Minerals Management Service (MMS) to collect, with certainly, a 
fair value for its crude oil.


                         provisions of the bill

  The federal government would take its royalty ``in kind'' at the 
applicable delivery point for each federal onshore and offshore lease.
  Title of the royalty share taken in-kind would be in the name of the 
federal government.
  The U.S. would contract with qualified marketing agents (QMAs).
  The federal government would select a QMA for each lease on a 
competitive bid basis.
  States entitled to revenues under the net receipts sharing provisions 
of the Mineral Leasing Act or Section 8(g) of the Outer Continental 
Shelf Lands Act would be allowed to elect to select the QMA.
  In selecting a QMA, the State would act for the mutual benefit of the 
State and the federal government. The payment from the federal 
government to any State for its share of royalty taken in-kind from 
federal leases within a State's boundary would not be subject to cost 
deductions under the net receipts sharing provisions of the applicable 
statutes.
  The lessee must tender the royalty share at the delivery point. This 
would completely satisfy the lessee's royalty obligation.
  The lessee would bear the costs of place royalty oil and royalty gas 
in a merchantable condition at the delivery point. The lessee would be 
responsible for gathering costs. Transportation costs would be borne by 
the federal government.
  Mr. President, this is an excellent approach. My only concern is that 
the final legislative product adequately address the problem of the 
marginal well that produces a few barrels a day and is in an isolated 
area. The legislation needs to make sure that there is a workable 
mechanism for these isolated wells.
  I also note that some, including the New Mexico state lands 
commissioner, have suggested a multi-state pilot program prior to 
moving to the nation-wide royalty-in-kind program. I respect those 
views.
  I hope, that as we move through the hearing process the Committee can 
take testimony on whether to proceed with a multi-state pilot program 
or whether existing pilots have provided sufficient information for us 
to implement a national program.
  I want to recognize Senator Nickles for his leadership on this issue 
and look forward to working with him, Senator Murkowski and Senator 
Hutchison on moving this legislation through the process so that we can 
start a royalty-in-kind program in the near future.

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