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DOE Phases Out Oil, Gas R&D in Budget; Interior Raises User Fees by $27M

The nation's top three energy-related agencies, the departments of Energy, Interior and Transportation, shared in the general cutback for domestic spending in President Bush's $2.57 trillion budget proposal for fiscal year 2006, which featured increased funding for the military and for international programs.

The budget plan, which was submitted to Congress last Monday, proposed a 2% cut in funding for the Department of Energy (DOE) to $23.4 billion in fiscal year 2006; a 1% cut for the Department of Interior (DOI) to $10.6 billion; and a 1% decrease for the Department of Transportation (DOT) to $57.5 billion. The Federal Energy Regulatory Commission requested a budget of $220.4 million, up from $210 million in fiscal year 2005, to support the expansion of its market oversight and investigation efforts.

As part of its proposed budget, the DOE announced that it was terminating all research and development (R&D) activities relating to oil and natural gas. This decision, which will have a greater affect on small producers of unconventional resources, drew sharp rebukes from Sen. Jeff Bingaman of New Mexico, the ranking Democrat on the Senate Energy and Natural Resources Committee, and the American Gas Association (AGA).

"There are a lot of disappointments in this budget request, but the administration's decision to cut off all technology support to our domestic oil and gas industry is completely wrong-headed. Our domestic production is declining, and the geologic formations containing petroleum that are left are increasingly unconventional. We need enhanced technology in order to access them," he said.

"Independent producers make up the overwhelming majority of the industry operating onshore in the United States, and they are too small to carry out research and development."

DOE's oil and gas R&D programs were awarded $78.7 million by Congress in the current fiscal year, Bingaman said. The new budget request provides only $20 million for close-out activities.

"Given the president's call in his State of the Union address...for 'reliable supplies of affordable, environmentally responsible energy,' we are surprised that the administration has asked Congress to eliminate funding for research that leads to greater supplies of natural gas with less environmental impact," said AGA President David Parker. He noted that AGA will seek to persuade Congress to restore funding for gas supply research programs.

AGA's Parker noted that the R&D program helped to pioneer horizontal drilling technology, "which allows developers to drill underground for up to six miles beyond a single drilling pad -- thus extending natural gas supplies without an increase in environmental impact." Also being "zeroed out" is a DOE program that promoted safer, more reliable gas distribution systems, he said.

The oil and gas industry also got some bad news from DOI. As part of its budget, the department called for expanded permit processing fees for onshore minerals and a new permitting fee for Outer Continental Shelf (OCS) leases. It also said that OCS rental rates, which have been frozen over the past decade, will rise with the rate of inflation.

This proposal "will shift the costs from taxpayers and allow DOI to better process lease or permit applications as demand increases," the department said. The proposed fees are expected to generate approximately $27 million in 2006 ($19 million from Interior's Minerals Management Service and $8 million from Bureau of Land Management).

The AGA, which represents gas distributors, expressed concern about the Interior Department's proposal for expanded permit processing fees for onshore minerals. "Although pleased that BLM is requesting additional funds to speed up the paperwork process to generate more production more quickly, we are concerned that consumers will ultimately pay higher energy bills as a result of these increased user fees," Parker noted.

Delays in the processing of permit applications have been a constant problem at the BLM. While it shouldn't take more than 30 days for the BLM to process a producer's application to drill in the InterMountain West, many independent producers there have said it actually takes more than 140 days, he said.

Interior Secretary Gale Norton dismissed a reporter's suggestion that the higher user fees may discourage energy development at such a critical time. She said the increased funds generated by the fees will allow Interior's BLM to deal more effectively with the backlog of oil and gas permits, which she believes will spur energy development.

On the plus side, the DOI budget assumes that Alaska's Arctic National Wildlife Refuge (ANWR) will be open to energy development by around 2007, with initial bonus lease sales amounting to $2.4 billion.

Because it will add $2.4 billion to federal coffers, Norton believes Congress should consider ANWR as part of the budget reconciliation process rather than in a comprehensive energy bill. This year is the "strongest opportunity for passage of ANWR," she told reporters.

Although some producers have exited the chief lobbying group for ANWR, notably ConocoPhillips, Norton said she believes there continues to be "strong support" from the domestic energy industry to open the coastal plain (1002 area) of ANWR to oil and gas drilling. Interior estimates that the 1002 areas holds between 5.7 billion and 16 billion barrels of recoverable reserves.

The DOE has budgeted $86 million for the Energy Information Administration (EIA) to provide data collection programs in the next fiscal year, as well as to make improvements in the reporting system for petroleum and natural gas data.

While the Transportation Department faced a cut in its overall budget, more money was set aside in fiscal year 2006 (total $116 million) for the DOT's Pipeline and Hazardous Materials Safety Administration to carry out inspections and policy responsibilities involving natural gas and hazardous products pipelines.

Lastly, the AGA singled out the Bush administration's decision to budget less money for the Low-Income Home Energy Assistance Program (LIHEAP). The president has requested $1.8 billion in regular LIHEAP funding, plus $200 million in contingencies for fiscal year 2006. This compares to $1.88 billion in regular funding, plus $297.6 million in contingencies for the current fiscal year.

"While the president's budget request for LIHEAP represents a 4.3% decline from the program's current funding level, this proposed decrease is not surprising," Parker said. "AGA will work with social service agencies, non-profit organizations and other energy groups to bring LIHEAP funding for FY2006 up to a level that recognizes the impact of higher energy costs on low-income families."

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