US Interior budget request contains cost increases

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Feb. 3 -- US Interior Secretary Ken Salazar said the nation’s oil and gas industry will remain an important contributor to resource management as he presented the Department of the Interior’s proposed fiscal 2011 budget on Feb. 1. He also said industry would have to pay more to produce those resources.

Noting that he has ordered the US Bureau of Land Management to review its royalty rates, which he said are 20-30% less than what Texas collects, Salazar said, “We believe taxpayers should get a fair return on their resources.”

He also noted that markets—and not federal policies—will determine how extensively oil and gas resources on public lands are developed. “Some people will argue that a smaller number of rigs drilling reflects less interest. The fact is they aren’t out there right now because natural gas prices are depressed,” Salazar said.

The budget request anticipates fiscal 2011 revenue of $10 million from a new onshore inspection fee, which Interior said would cover 25% of expected oil and gas inspection costs, $10 million from a proposed doubling of an offshore inspection fee established under the 2010 budget, and $2.5 million from a $4/acre fee for nonproducing leases.

DOI also will ask Congress to repeal Section 365 of the 2005 Energy Policy Act, which diverts mineral leasing receipts from the US Department of the Treasury to a BLM permit processing fund and prohibits BLM from charging producers for processing onshore drilling permit applications. BLM would promulgate regulations to begin charging to process the applications once the provision was repealed.

Asked if the additional costs might prove excessive for producers, Salazar replied: “I think the oil and gas industry will do just fine.”

Negative impacts
In a Feb. 2 position paper, the Independent Petroleum Association of Mountain States warned that the higher costs would remove capital from domestic energy development and production, and cost more jobs.

“Operating on federal lands is already much more time-consuming and costly compared to operating on private lands,” it said. “The sum total of all the negative proposals from DOI and the increase in fees and taxes will be a decrease in production on federal lands, a reduction of jobs that result from the productive use of public lands, and a decrease in the production of energy owned by Americans.”

DOI’s budget request proposed saving money by having producers pay a bigger share of programs’ administrative costs. The IPAMS position paper noted that the industry “already more than pays for the administration of the federal onshore gas and oil program by return $46 for every dollar spent. When income and other taxes are factored in, companies return $123 for every dollar spent administering the program.”

The proposed inspection fees, nonproducing acreage fee, and royalty rate increases would be in addition to $36.5 billion of tax increases in the proposed federal budget which would reduce capital investment in domestic oil and gas by 30-50%, said Marc W. Smith, IPAMS executive director.

“Every day, I hear concerns from our members about whether they will be able to continue developing energy in the West,” Smith said, adding, “I have to wonder if shutting down all energy production on public lands is the ultimate goal of this administration. They are forgetting that these are vital energy resources that belong to all Americans.”

Drilling permit pilot
In an interview following DOI’s budget presentation, BLM Director Robert V. Abbey said a pilot program designed to facilitate drilling permit application processing will be retained. “We’ve learned a lot from it, particularly the benefit of involving other government agencies and stakeholders before the final decisions are made,” he told OGJ.

He also said new onshore leasing guidelines that he and Salazar announced on Jan. 6 were a response to an increasing number of protests and their resulting delays. Protests were filed against half of BLM’s proposed oil and gas leases during 2009, he pointed out. “We’re not naive. We realize our reforms won’t satisfy everybody,” Abbey added. “But by proceeding more carefully, we’ll be better able to defend our decisions if they’re challenged in court.”

DOI’s fiscal 2011 budget request anticipated a nearly 45% increase in receipts to an estimated $13.98 billion from fiscal 2010’s projected $9.65 billion from coal and hard-rock mineral as well as oil and gas activity. US Outer Continental Shelf receipts were expected to jump $3.69 billion year-to-year, or 102%, to $7.23 billion. Onshore receipts were budgeted to climb by $651 million, or 16%, to $4.04 billion.

Salazar said he expected to make announcements soon which he hoped will clarify uncertainties surrounding the department’s offshore oil and gas leasing program. But he added that DOI and MMS have had to address two 5-year OCS programs simultaneously, which has caused delays.

The proposed budget said that the OCS program for 2007-12 includes six lease sales in fiscal 2011, including two in the Gulf of Mexico and one in the Beaufort Sea off Alaska. It said that a “special interest” sale in Alaska’s Cook Inlet also could be held. “However, the resolution of ongoing litigation and the level of industry interest in certain frontier areas may affect the number of sales actually held,” it continued.

Royalty management
MMS would receive $364.8 million under the proposed budget, $16.5 million more than the enacted level for fiscal 2010. The money includes $10 million to terminate the royalty-in-kind (RIK) program and move back to the more traditional cash-based royalty-in-value program, MMS officials said.

A reduction in outlays from royalty receipts previously used to fund RIK activities will offset a requested appropriations increase to enhance compliance activities and increase audit capacity, they indicated.

“This budget request will enable us to effectively terminate the RIK program without any net increase in the cost of our royalty management work,” MMS Director S. Elizabeth Birnbaum said in a statement. “It reflects our commitment to ensuring that our federal and American Indian energy and minerals revenues are accurately reported and paid in compliance with laws, regulations, and lease terms.”

The request also contains $4.4 million to fund technology to assess oil and gas potential and fair market value of OCS tracts offered for lease, according to MMS. It said that the money would be used to fund inspections, which have increased because of the number of new deepwater facilities on the OCS. Additional resources totaling $3.7 million will be used to improve royalty compliance and ensure companies are paying proper royalties on processed and transported gas, it added.

MMS and BLM also would receive more money for renewable energy projects under the proposed budget, reflecting a major Obama administration priority. “We’re very aware of climate change and the need to consider potential impacts,” Abbey said. “We also recognize that there’s still a lot of oil and gas left to develop—responsibly—on our public lands.”

Contact Nick Snow at nicks@pennwell.com.

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