Oil and natural gas producers decried President Obama’s budget proposal for fiscal year (FY) 2013, which seeks to rescind $41 billion in tax breaks over the next decade and tack on a number of new fees, calling the plan an about-face from his commitment in the State of the Union (SOU) address to support greater domestic energy development.

“The president’s 2013 budget plan returns to the well of bad ideas and backtracks on his State of the Union commitment. Instead of advancing constructive pro-development policies, his budget plan calls for increased taxes on America’s oil and natural gas industry,” said Jack Gerard, president of the American Petroleum Institute. “Increasing our taxes would push oil and natural gas investment overseas…After a handful of years, we would see less domestic energy production — particularly of natural gas — more imports, fewer new jobs, and eventually depressed tax, royalty and other revenues.”

While the Obama administration believes repealing the tax breaks would only affect Big Oil producers (ExxonMobil Corp., Royal Dutch Shell plc, ConocoPhillips, Chevron Corp. and BP plc), the Independent Petroleum Association of America (IPAA) said it would take a greater toll on the thousands of small oil and gas producers, which depend on the tax breaks more than the majors.

In addition, the IPAA said the Obama administration’s proposed budget “piles additional roadblocks to U.S. oil and natural gas development in the form of hiked royalty payments and increased user fees for producers operating on federal lands. The attempt to restrict federal land access flies in the face of President Obama’s promise for an ‘all-of-the-above’ energy strategy” in the SOU speech.

The president has proposed rescinding oil and gas tax breaks for four years in a row, and he has been met with opposition in Congress at every turn (see NGI, May 2, 2011). It’s not likely that this year will be any different, particularly with Republicans in control in the House.

Interior Secretary Ken Salazar believes tax incentives for most of the industry have outlived their usefulness. “I think at a time oil and gas companies are selling oil in the neighborhood of $90-100 bbl and are having the largest profits that oil and gas companies have ever made in the history of the world, that there is no need for them to continue to have subsidies from the American government.”

On Capitol Hill last week, Salazar said he planned to raise royalty rates for oil and gas produced on public land by 50% to 18.75% from the existing 12.5%. He did not say when the department would do this. Interior does not need the authorization of Congress to hike the rates.

“We just think this is a real mistake,” said Dan Naatz, IPAA’s vice president of federal resources. “While Interior is of the impression that an increase in royalty rates will increase revenue generated for the federal government, the reality is that such a motion will deter production, reduce investment and cost the nation millions of dollars in investment opportunity,” said IPAA President Barry Russell.

Interior’s overall budget request for FY 2013 is $11.5 billion, up $97.9 million from the enacted level for the current year. The budget would cover the period from Oct. 1 through the end of September 2013. As part of the Interior budget, the administration is seeking to impose a $4/acre fee on nonproducing federal leases on lands and waters to provide an incentive for producers to either get their leases into production or relinquish them so that the tracts can be leased to and developed by other parties. This so-called “use-it-or-lose-it” fee is projected to generate revenues of $13 million in 2013 and $783 million over the next 10 years, according to Interior.

The Obama administration also proposes to repeal parts of the Energy Policy Act (EPAct), which currently bar Interior’s Bureau of Land Management (BLM) from establishing cost-recovery fees for processing applications for oil and gas permits to drill. Interior estimates that eliminating the EPAct barrier could result in savings of $18 million in 2014 and $36 million over two years.

Interior proposes to shift the costs of inspections onto the energy industry. It favors an inspection fee for onshore oil and gas drilling, which could bring in $48 million in fiscal year 2013, the department estimates. And it seeks to hike the existing inspection fee for offshore inspections to recoup a total of $65 million in 2013 from $62 million in the current fiscal year.

The administration proposes to continue with a $6,500 fee for processing a drilling permit, which is expected to generate approximately $32.5 million in offsetting collections in 2013. It also calls for a repeal of the royalty incentives for certain deep gas production on the OCS.

With respect to individual agencies within Interior, the administration has proposed $1.1 billion in FY 2013 for BLM, which is essentially flat compared with the 2012 enacted budget; $164 million for the Bureau of Ocean Energy Management, an increase of $3.3 million from the enacted level for 2012; and $222 million for the Bureau of Safety and Environmental Enforcement (BSEE), which is nearly $25 million more than the enacted level for 2012. BSEE is the offshore enforcement arm of Interior.

The proposed Interior’s U.S. Geological Survey (USGS) will be party to an interagency effort with the Department of Energy (DOE) and the Environmental Protection Agency (EPA) to research fracking technology in FY 2013 (see related story). Interior has requested $13 million (in addition to an existing base of $6 million) for USGS to study fracking.

“I think the best thing that we can do is stand up the natural gas industry and support it as the president has directed us to do by making sure the people in the United States have confidence that hydraulic fracking is not creating environmental problems,” Salazar said.

EPA’s proposed budget provides $81 million for Science to Achieve Results (STAR) grants to conduct research in key areas such as fracking, potential endocrine disruptors, and green infrastructure. Of that total, about $14 million will be directed to fracking research.

“Building upon ongoing research and collaborating with the Department of Energy and the USGS, a total $14 million investment will begin to assess potential impacts of hydraulic fracturing on air quality, water quality, and ecosystems,” the EPA budget proposal said. “The EPA also will release an Interim Report on the Impacts of Hydraulic Fracturing on Drinking Water Resources in 2012.”

EPA’s overall budget was cut for the third year in a row. The president proposes $8.344 billion in spending for EPA in FY 2012, which is $105 million below the agency’s enacted level for FY 2012.

DOE’s budget includes $12 million for the multi-agency research effort on fracking. “The money would fund a research program to improve safety of natural gas development including hydraulic fracturing…to allow drillers access to vast new supplies of natural gas,” the DOE budget proposal said. The research is in response to “critics [who] say it has led to pollution of air and water.”

The administration proposes to increase the budget for the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration by $75 million to $276 million to ensure greater pipeline safety.

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