President's Budget: Two Oil & Gas Reforms That Could Make a Difference

Making Industry Pay Fees More Than You Might For an Overdue Library Book: 

President Obama released the federal budget for Fiscal Year 2013, and in this package are included a number of common sense reforms that would improve how oil and gas resources are managed on the nation’s millions of acres of federal lands. Despite the fact that similar proposals in last year’s budget fell on the deaf ears of Congress, these reforms should be given greater consideration given that this nation is in the middle of an unprecedented oil and gas boom (in so much that the United States has become a net exporter of petroleum products).  For the FY 2013 cycle, two of these proposed reforms are of particular note: the first initiative would increase the fees for the inspection of oil and gas operations as managed by the Bureau of Land Management (BLM). The second notable proposal would greatly increase a diligence fee that is levied on oil and gas leases in order to prevent oil and gas companies from the current practice of squatting on federal lands by securing millions of acres of leases at bargain basement rates.

In the last two budget cycles, the administration has proposed charging a $6,500 inspection fee for new permits, to ensure that oil and gas drilling operations are being carried out in a lawful and safe manner, while also making certain that such operations are paying their fair share in royalties. BLM is proposing this inspection fee due to a series of Government Accountability Office (GAO) reports and findings that have established beyond a shadow of a doubt, that the voluntary and self-policing system that the oil and gas companies prefer and enjoy, is basically a recipe for malfeasance. To make matters even worse, recent budget cuts have also severely limited the BLM's ability to carry out even the most minimal of inspections. How bad are things? The GAO found that the average active drilling well is inspected once every 2-10 years – practically speaking, that means an individual drilling operation will receive only one federal inspection during its existence.

In late 2008, per GAO's recommendations, the BLM initiated a process to remedy these problems by proposing an inspection fee. BLM Director Bob Abbey testified in April of 2011 before the House Natural Resources Committee Subcommittee on Energy and Mineral Resources to further explain the reasoning behind this fee, "In 2012 the BLM will begin to charge a fee to recover inspection costs for the oil and gas program, allowing a savings of $38 million in requested funding. The fee would defray Federal costs and ensure continued diligent oversight of oil and gas production on Federal lands. Fee levels would be based on the number of oil and gas wells per lease so that costs are shared equitably across the industry." To put the Director’s testimony in more plain terms: at best, the U.S. taxpayer was losing millions of dollars in revenues given that BLM did not have the inspectors to assess, verify, and collect royalties. At worst, oil and gas companies were pocketing millions in the difference that should have been going to taxpayers. Industry predictably opposed this modest new fee, and have successfully defeated its adoption over the last two budget cycles.

Thumbnail image for Acres Producing vs Non Producing Acres FY2011.pngThe second reform would charge a more substantive rental fee for those acres that are leased by a company for oil and gas drilling, but remain idle. In this regard, the fossil fuel industry currently retain millions of acres of leases that are not producing – in all total, this amounts to 26 million acres of idled leases out of the 38 million acres of federal land leased for drilling. In fact, industry is paying practically nothing for these lands: between $1.50 to $2.00 an acre. Since most leases are held for 10 to 20 years, this is a paltry sum – people pay more for an overdue library book than what is paid by BLM lease holders. These low rents contribute to gross over speculation, a finding that was confirmed by the GAO that concluded in comparison to other states that also lease their public lands for oil and gas development, the federal rental rate is typically ten times lower than it is for comparable states like Texas. 

What is concerning about the upcoming budget battles is that we can expect the allies of the oil and gas industry to paint a false dichotomy: that increased fees and federal oversight over the nation’s federal lands is counterproductive in nurturing energy independence. That such measures will also cost taxpayers by limiting job growth and economic development. The irony of this position is that the further Congress continues to deny these agencies the tools necessary to fulfill their legal obligations to fully collect royalties (while also managing to conserve natural resources), the more likely these agencies will fail on all accounts.  If Congress truly wants the Interior Department to be successful in fulfilling its responsibility in developing domestic energy sources, it cannot at the same time handcuff and eliminate the tools the Interior Department are in desperate need of in order to succeed.

About the Authors

Bobby McEnaney

Director, Dirty Energy Project, Nature Program

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