February 16, 2011 | Commentary on Gas Prices, Energy and Environment

Increased Oil Production Would Generate More Revenue than Obama’s Proposed Fees

Federal officials are on course to forfeit more than $1.35 billion this year from Gulf of Mexico royalty payments made by oil companies. Yet instead of boosting oil production to close the gap, President Obama is proposing new fees in its 2012 budget.

The fees would generate about $65 million from oil production in the Gulf of Mexico.

Obama’s oil spill commission recommended the fees last month as a way for the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) to cover inspections of drilling rigs and permit processing. The fees would apply to offshore drilling rigs, costing operators about $16,700 per inspection, according to Interior Secretary Ken Salazar.

Obama’s budget also proposes a new $4-per-acre fee on companies for not producing, an ironic levy, given the Department of Interior’s inaction on drilling permits since last year’s Deepwater Horizon oil spill disaster.

The administration is currently blocking at least 103 drilling plans for the Gulf of Mexico. Only two new deepwater drilling permits have been issued since Obama lifted the moratorium he imposed on drilling in June 2010. The two permits represent an 88 percent decrease from the historical average.

The future doesn’t look promising. According to data from the U.S. Energy Information Administration (EIA), production in the Gulf of Mexico is expected to fall by 250,000 barrels per day each year for the next two years. The Gulf of Mexico normally accounts for more than 25 percent of all U.S. production.

With oil hovering near $90 a barrel and the royalty rate at 18.75 percent, that equals $3.7 million in lost revenue each day for the federal government. Add it up over the course of a year and the federal government is losing out on $1.35 billion from oil companies.

Both of Louisiana’s senators criticized Obama’s budget for its impact on the oil and gas industry. Sen. Mary Landrieu, D-LA, said bluntly that it “doesn't meet my approval.”

Sen. David Vitter, R-LA, meanwhile, vowed to block the confirmation of an Interior Department official over the stalled permits. He singled out the proposed fees as the latest attack on American energy.

“Louisiana’s coastal economy has been stifled, but American taxpayers have been stuck with a bill of crippling national debt in part due to lack of domestic production in the Gulf of Mexico,” Vitter said. “The permitting process is already a real mess, so instead of increasing permitting fees, just issue permits -- which will bring in more money than increased fees anyway."

The offshore industry paid $8.3 billion in royalties, $237 million in rent and $9.4 billion in lease bids in 2008, according to government data. Last year those numbers dropped to $4 billion in royalties, $245 million in rent and $979 million in lease bids.

Lease sales -- which have provided significant government revenue in the past -- are usually held twice per year. But this year could mark the first time since 1965 the federal government has failed to hold a lease sale in the Gulf of Mexico.

“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,” said Randall Luthi, president of the National Ocean Industries Association. “The administration could generate much, if not all the requested revenue, just by conducting offshore sales.”

Rob Bluey is the director of the Center for Media and Public Policy at the Heritage Foundation.

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First appeared in The Examiner