The Department of Interior (DOI) will be collecting significantly increased user fees from oil and gas companies operating offshore, the agency revealed in its budget for fiscal year (FY) 2012, which was proposed Monday. It also plans to raise the royalty rate for onshore production on federal lands and collect fees for nonproducing leases.

The object of the increased fees, according to Interior Secretary Ken Salazar, is to cover the cost of the oversight by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM). "For more than 30 years this agency [BOEM and its predecessor the Minerals Management Service] has been very seriously underfunded. It is an atrophied organization."

The 2012 budget for BOEM will be $500 million, which he said amounted to $134 million over 2010 levels. Interior is completely revamping the organization.

The funding will go to hire new oil and gas inspectors, engineers, scientists and other key staff to oversee industry operations; establish real-time monitoring of key drilling activities; conduct detailed engineering reviews of offshore drilling and production safety systems; and implement more aggressive reviews of company oil spill response plans. These reforms will also facilitate the timely review of offshore oil and gas permits.

"The industry should be paying the cost of the inspections," the secretary said, pointing out the department is hiring 110 new inspectors and significantly upgrading the inspection process following the Deepwater Horizon well explosion in the Gulf of Mexico (GOM) last year.

Annual inspections of drilling rigs in shallow waters will cost $10,500 per rig while the annual cost for inspecting deepwater rigs will be $16,700. The offshore royalty rate of 18.5% will remain in place, but the department will be looking to increase the 12.5% onshore royalty rate, which has not been adjusted since 1920, the secretary said.

DOI expects Outer Continental Shelf royalties to come in at $5.9 billion, up from the $3.5 billion estimated to be collected in 2010. The higher figure is in part based on the increased price of oil. The public received about $9 billion in 2010 from fees, royalties, and other payments related to oil, gas, coal and other mineral development on federal lands and waters.

"New fees that would drive investment and jobs elsewhere at the time of tremendous uncertainty is simply bad public policy and would not produce the needed revenues for the federal treasury," said Randall Luthi, president of the National Ocean Industries Association. "The best way for the federal government to raise more revenue for the Treasury would simply be to restart economic activity in the Gulf and get folks back to work."

The Obama administration proposes to end $3.6 billion in subsidies for oil, natural gas and coal in FY 2012. It's unlikely, however, that Obama's proposal to end these subsidies will go anywhere in Congress this year. The president made similar proposals in his FY 2010 and 2011 budgets, and they languished on Capitol Hill.

"In the president's search for 'easy' revenue, he appears once again to be endorsing a series of tax changes that will result in fewer American jobs, less government revenue and a tightening of our already dangerous dependence on foreign, unstable energy," said Barry Russell, president of the Independent Petroleum Association of America.

Overall the administration's DOI 2012 budget was set at $12 billion, which was approximately the same as FY 2010. While funding for clean energy solar and wind projects was increased, there were significant cuts in the budgets of the U.S. Geological Service and construction programs across the department and some tribal program reductions. The salaries of department employees also will be frozen for another year.

Another government agency, the Commodity Futures Trading Commission (CFTC), will also be collecting a significant portion of its budget from user fees.

The budget call for the CFTC to get a funding increase for fiscal 2012 of $139.2 million for a total budget of $308 million. The near doubling of the CFTC funds from its $168 million allocation in 2010 and its funding under the continuing resolution for 2011 of $169 million is necessary to carry out the congressional mandate under the Dodd-Frank financial reform act, the administration said.

However, no more than $191 million of the total would come from the Treasury. The administration proposes to collect $117 million the first year and $588 million through 2016 from user fees paid by the industry the CFTC regulates.

This is similar to other government regulatory agencies. For instance, the Federal Energy Regulatory Commission is entirely funded by user fees.The CFTC budget proposal states the administration will submit a legislative proposal for the user fees in 2011.

CFTC commissioners' reaction to the Obama administration's proposal for user fees was mixed. "Those who suggest that we can do the job of regulating hundreds of trillions in additional trading on our current budget are either misinformed, uninformed or they look at inadequate funding as a way to starve the agency in the hope that regulatory reforms will be delayed or derailed," said Commissioner Bart Chilton.

Commissioner Scott O'Malia opposed the proposed user fee. "This 'user fee' is a currently unauthorized and uncollectable tax to offset $117 million in new spending. This means it creates a hole in the budget that the House and Senate Appropriations committees must backfill in order to meet the needs of the Commission. This is a disingenuous effort that only puts us further behind the requested funding level and will continue to add to the federal deficit," he said.

For the Environmental Protection Agency (EPA), the administration seeks a FY 2012 budget of $8.97 billion, which is 13% below the FY 2010 budget of $10.3 billion. Because Congress has been passing continuing resolutions (CR) every three months to fund the federal government, there are no comparative budget figures for FY 2011.

Obama also has proposed cutting the Low Income Energy Assistance Program (LIHEAP), which is currently funded at $5.1 billion, in half for FY 2012.

The administration proposed a $2.5 billion cut in the program. LIHEAP is a block grant program under which the federal government gives states annual funds to operate home energy assistance programs for low-income households that struggle to heat their homes in the winter and cool them during the summer.

In a CR proposed Friday, House Republicans are aiming to cut Interior's budget by 14% for the remainder of the current fiscal year (FY 2011). But the EPA is expected to suffer the biggest budget cut of the year at the hands of Republicans -- $3 billion -- which would greatly limit its ability to address global warming. While House Republicans have more clout over budgetary issues in the new Congress, they still face opposition from the Democratic-controlled Senate and White House.

"Talk of 'handcuffing' the EPA (or even eliminating it all together) is quite in vogue these days...[But] we're not convinced that a Republican effort to ask the American voted to choose between his/her health and the economy is a vote-getter over the long term to the Republicans' advantage," wrote energy analysts Christine Tezak and Brian E.K. Kerkhoven with Robert W. Baird & Co.

"We think that 'handcuffing' the EPA through the budget process is going to be harder than many of our friends and sources in Washington believe it will be," they said in their 36-page "Energy & Environment Policy Playbook" on Monday.

Politico reported that House Republicans are proposing to defund the White House energy adviser's office. Carol Browner recently announced that she is departing as Obama's energy and climate adviser. The White House did not say whether they would seek a successor.

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