[Congressional Record Volume 145, Number 60 (Thursday, April 29, 1999)]
[Senate]
[Pages S4456-S4458]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. NICKLES (for himself, Ms. Landrieu, Mr. Murkowski, Mr. 
        Domenici, and Mrs. Hutchison):
  S. 924. A bill entitled the ``Federal Royalty Certainty Act''; to the 
Committee on Energy and Natural Resources.


                     federal royalty certainty act

  Mr. NICKLES. Mr. President, I rise today to introduce the Federal 
Royalty Certainty Act. The domestic oil and gas industry is an 
essential element of the United States economy. The Administration 
needs to acknowledge the critical importance of this industry

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and stop hindering it with regulatory obstacles. Right now, our 
domestic oil and gas procedures are reeling from low oil prices. In 
Oklahoma alone, 50,000 jobs are dependent on the oil industry. Last 
year, we had over 350 producing oil rigs in the country, now we have 
slightly over 100. The industry is in a state of depression, not a 
decline, and these conditions pose a threat to our national security 
and our economy.
  The Administration's policies have failed domestic producers. What is 
needed is a comprehensive plan to maintain the viability of the 
domestic oil and gas industry. Part of that plan should be to eliminate 
or greatly reduce the administrative costs of the current royalty 
program with simple, clear and certain guidelines. We need to eliminate 
rules that are burdensome and excessively costly. The Nation cannot 
afford to allow the devastation of our domestic oil and gas industry to 
continue.
  We should be taking action to encourage growth in the industry. 
Instead, the Administration has advocated policies that undermine it. 
We must raise our country's awareness and reverse this course of action 
by providing relief from big government and burdensome regulations. We 
must provide this critical segment of our economy fairness and 
efficiency in their contracts with the federal government.
  Several years ago, I began taking a closer look at oil and gas 
produced from federal leases and the Department of the Interior's 
administration of those lease contracts. I was pleased when Congress 
passed the Royalty Simplification and Fairness Act which I introduced 
and which became law in August of 1996. What that Act accomplished was 
to streamline the accounting processes for federal royalties. While 
that Act made significant steps forward in simplifying the payment of 
federal royalties, the heart of the issue is still before us--what 
royalty does a lessee owe to the government under its lease contract 
for oil and gas produced from a federal lease? When a person or company 
contracts with the federal government, it should know exactly what is 
owed under the contract.
  While this should be a simple question with a simple and unambiguous 
answer, that is unfortunately not the case today. There appears to be 
multiple answers, changing answers and a morass of regulatory 
interpretations that change over time. Such regulatory obstacles 
prevent industry from knowing what they owe and being able to make 
business decisions with that knowledge. It also prevents the collection 
of royalties easily and efficiently. Having a clear understanding of 
the correct amount due is the central and critical element of any 
successful royalty management program. Without it, the program cannot 
operate fairly, efficiently or cost effectively.
  In January 1997, MMS issued a Notice of Proposed Rulemaking for a new 
oil valuation rule. The proposed rule was met with a firestorm of 
protests and thousands of pages of comments have ensued. Despite 
serious problems that have been raised with the proposal, its 
workability and its fairness, the Department has repeatedly stated that 
it will publish its rule as final. As a result, this Congress has 
imposed two moratoriums on the proposed rule and is in the process of 
imposing another. Congress and Industry have repeatedly attempted to 
initiate negotiations with DOI/MMS to no avail. The current moratorium 
continues until June 1, 1999. Secretary Babbitt has stated that the MMS 
would publish a final rule on June 1, 1999 and in Congressional 
briefings the MMS has stated that ``MMS does not believe that further 
dialogue on the rule would be productive.'' DOI Communications Director 
Michael Gaulding stated to Inside Energy that ``we're sticking to the 
position we've taken. It gives us an issue to demogogue for another 
year.'' Rather than perpetuate the moratoria I believe Congressional 
action is needed. I am therefore today introducing the ``Federal 
Royalty Certainty Act.'' This Act addresses and resolves issues related 
to royalties both when they are paid in value and in amount.
  This bill amends the Outer Continental Shelf Lands Act and the 
Minerals Lands Leasing Act and provides that when payment of royalties 
is made in value, the royalty due is based on oil or gas production at 
the lease in marketable condition. When royalty is paid in kind, the 
royalty due is based on the royalty share of production at the lease. 
If the payment (in value or kind) is calculated from a point away from 
the lease, the payment is adjusted for quality and location 
differentials, and the lessee is allowed reimbursements at a reasonable 
commercial rate for transportation, marketing, and processing services 
beyond the lease through the point of sale, other disposition, or 
delivery
  My bill will codify the fundamental, longstanding principle that 
royalty is due on the value of production at the lease. The Department 
of the Interior recognizes this principle and very recently has said 
``royalty payments [should be] based on no more than the value of 
production at the lease'' (News Release, MMS 2/5/98), there should be 
agreement on this codification. This legislation provides proper 
adjustments when sales are made downstream of the lease to arrive at 
values that equal the value of production at the lease. In addition, 
this legislation includes a consistent basis for valuation of royalty 
both onshore and offshore. Importantly, this legislation also resolves 
many of the core issues related to the proposed rule on oil valuation 
in a manner that is fair and equitable to the people of the United 
States and the producers who have entered into contracts with the 
federal government. These provisions will reduce the costs of a 
complicated system that spawns disputes, while preserving the 
taxpayer's right to a fair return for its resources. As I have said on 
many occasions, we need to reduce unnecessary, burdensome and 
excessively costly regulations. We need a little common sense.
  In summary, all interested parties need to work together to arrive at 
a workable, permanent solution--a system whereby the government can 
collect what is due in a manner that is simple, certain, consistent 
with lease agreements and fair to all parties involved. The Royalty 
Fairness bill was a significant first step to simplify and eliminate 
regulatory obstacles in the Department's accounting procedures. I 
believe that the Federal Royalty Certainty Act is an important next 
step.
  Mr. DOMENICI. Mr. President, I want to commend Senator Nickles for 
developing this legislation. Simply stated, it stands for the 
proposition that there has never been, is not now, nor ever shall be a 
``duty to market.''
  If you read a federal oil and gas lease there is no mention of a duty 
to market. It has been Mineral Management Services' (MMS) position that 
the duty to market is an implied covenant in the lease. And this 
legislation says that MMS is wrong.
  Let me back up, and explain the issue and why this legislation is 
needed.
  Oil and gas producers doing business on federal leases pay royalites 
to the federal government based on ``fair market value.'' Under the 
Clinton Administration, this is easier said than done. One of the long 
standing disputes between the Congress and the Mineral Management 
Service (MMS) has been the development of workable oil royalty 
valuation regulations that can articulate just exactly what fair market 
value is.
  Cynthia Quarterman, the former director of the MMs, set out the 
Interior Department's position that fair market value includes a ``duty 
to market the lease production for the mutual benefit of the lessee and 
the lessor,'' but without the federal government paying its share of 
the costs. Many of these costs are transportation costs and they are 
significant. MMS calls it a duty to market, I call it federal 
government mooching.
  This bill states Congressional intent: No duty to market, no federal 
government mooching. And let me be clear, whether there is a duty to 
market is a matter exclusively within the jurisdiction of Congress. It 
is not the job of lawyers at the MMS to raise the Congressionally set 
royality rate through the back door.
  And, the so-called ``duty to market'' is a back door royalty 
increase--make no mistake about it.
  The MMS has been unable to develop workable royalty valuation rules 
and Congress has had to impose a moratorium on these regulations. The 
core issue has been duty to market.
  For this reason, I hope the Senate Energy and Natural Resources 
Committee will act expeditiously on this

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legislation. In this period of hard economic times for the oil and gas 
industry, the oil royalty valuation issue should be resolved with 
certainty, fairness and without a hidden royalty rate increase.
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