Oil and gas companies would face new fees and higher royalty rates under President Barack Obama’s federal budget proposal.
Proposed permit processing charges, annual inspection fees and increases in royalty rates aim to pay for the government’s oversight of onshore and offshore drilling while also boosting “the return to taxpayers from mineral production on federal lands and waters,” according to an administration budget document.
“Taxpayers could earn a better return through more rigorous oversight and policy changes, such as charging appropriate fees and reforming how royalties are set,” the budget summary said.
Under the administration’s fee proposal, offshore drillers would face a charge of up to $30,500 per inspection for rigs operating in more than 500 feet of water and a fee of $31,500 for platforms and other facilities above the water line that have more than 10 wells.
Although platforms and production facilities are inspected annually under federal law, the administration now is preparing to inspect mobile offshore drilling units — and is proposing the new fee for those rig reviews that could take place monthly.
All told, the offshore inspection fees would raise $65 million in the 2012 fiscal year that begins Oct. 1, up from $10 million in fiscal 2010, according to budget documents.
The White House said proposed inspection fees for onshore oil and gas leases would raise an estimated $38 million in fiscal 2012 — enough to nearly offset the $40 million the Bureau of Land Management spends annually managing its compliance inspection program.
Interior Secretary Ken Salazar said the goal was to make energy developers — not taxpayers — pay for the cost of inspections.
“Oil and gas operators should be paying for the cost of these inspections,” Salazar told reporters on a conference call. “The inspection regime that is proposed in this budget (for offshore and onshore development) is premised on the fact that industry should pay.”
Similar fees were proposed late last year for offshore leases as a way to improve offshore drilling oversight at the new Bureau of Ocean Energy Management, Regulation and Enforcement. But they have been opposed by the American Petroleum Institute and other industry trade groups, which say the money should instead come from the billions oil and gas companies already send the federal treasury each year in royalties and bonus bids.
“We’re providing plenty of revenue and are happy to continue doing so,” said Marty Durbin, API’s executive vice president of government affairs. It’s important to make sure the ocean energy bureau and Interior Department “have all the resources they need, but that would be the more appropriate place to get that revenue.”
Randall Luthi, head of the National Ocean Industries Association, said the administration was unfairly asking “that industry pay even more for the cost of permitting and inspections.”
He noted that offshore oil and gas production generated $8.3 billion in royalties, $237 million in rent and $9.4 billion in lease bids in 2008. In 2010, the government took in $4 billion in royalties, $245 million in rent and $979 million in lease bids from offshore development.
“The $500 million to restructure BOEMRE and to increase personnel could be more than covered by that existing revenue,” Luthi said. “It would be far cleaner and avoid any appearance of conflict to use the revenue from lease bids, rents or royalties as appropriated by Congress.”
Obama is seeking more than $358.4 million for the ocean energy bureau — formerly known as the Minerals Management Service. That would be a boost of $119 million — or 50 percent — over fiscal 2010 spending on work done by the agency.
According to a budget document, the money would pay for hiring “new oil and gas inspectors, engineers, scientists and other key staff to oversee industry operations.” It also would be used to “establish real-time monitoring of key drilling activities, conduct detailed engineering review of offshore drilling and production safety systems and implement more aggressive review of company oil spill response plans.”
As an incentive for congressional oil and gas industry allies to support the new fees and funding, the White House promises that “these reforms will also facilitate the timely review of offshore (drilling) permits.” Industry leaders and Gulf Coast lawmakers have complained that the government is moving too slowly in vetting applications to drill offshore since new safety mandates were imposed after last year’s oil spill.
Salazar said the spending on BOEMRE was essential to standing up a “robust” agency to conduct offshore drilling oversight. He noted that for years, the government’s offshore programs had “atrophied” without enough funding.
“We have spent a significant amount of our time undertaking major reforms because as a policy matter we want to have safe drilling and oil and gas production in the nation’s oceans,” Salazar said. “But in order to do that we’re going to have to have a robust agency that can undertake those functions.”
Obama wants to charge oil companies new user fees for processing permits to drill on federal lands and waters.
And the administration is proposing to boost the royalty rates that companies pay for oil and gas produced on federal lands. Offshore royalty rates of 18.5 percent would not be affected, but Salazar said he is studying how to boost the 12.5 percent rate that has been charged for onshore development for decades.
“The 12.5 percent royalty rate that is in place right now is a royalty that has been in place . . . as far back as 1920,” Salazar said. “It is time, from our point of view, to make sure the principle of getting a fair return for the American taxpayer is honored.”
The White House also proposes establishing new “use it or lose it” style fees for non-producing oil and gas leases. Designed “to encourage more timely production,” the administration says the diligent development fees — initially set at $4 per acre — would raise a projected $25 million in fiscal 2012.
Oil and gas industry leaders argue there are already enough financial incentives discouraging companies from sitting inactive on drilling leases.
Separately, in its budget proposal Monday, the administration is renewing its appeal for Congress to triple — to 90 days — the amount of time the government has to review proposed offshore drilling projects. The White House first asked for that change after the Deepwater Horizon disaster, but it is opposed by the oil and gas industry and supporters in Congress, including Sens. Mary Landrieu, D-La., and Lisa Murkowski, R-Alaska.
Below is the administration’s summary of proposed oil and gas inspection fees for the outer continental shelf:
SEC. 109. (a) In fiscal year 2012, the Secretary shall collect non-refundable inspection fees, which shall be deposited in the “Ocean Energy Management” account, from the designated operator for facilities subject to
inspection under 43 U.S.C. 1348(c).
(b) Annual fees shall be collected for facilities that are above the water line, excluding drilling rigs, and are in place at the start of the fiscal year. Fees for fiscal year 2012 shall be:
(1) $10,500 for facilities with no wells, but with processing equipment or gathering lines;
(2) $17,000 for facilities with one to ten wells, with any combination of active or inactive wells; and
(3) $31,500 for facilities with more than ten wells, with any combination of active or inactive wells.
(c) Fees for drilling rigs shall be assessed for all inspections completed in fiscal year 2012. Fees for fiscal year 2012 shall be:
(1) $30,500 per inspection for rigs operating in water depths of 500 feet or more; and
(2) $16,700 per inspection for rigs operating in water depths of less than 500 feet.
(d) The Secretary shall bill designated operators under subsection (b) within 60 days, with payment required within 30 days of billing. The Secretary shall bill designated operators under subsection (c) within 30
days of the end of the month in which the inspection occurred, with payment required within 30 days of billing.