Will revenue sharing spur more offshore drilling?

April 30, 2012

Platts McGraw-Hill

The oil and natural gas industry would love to set up drilling rigs in the federal waters offshore states such as Florida, California and North Carolina, but a number of hurdles have long stood in the way of such development. Among these is the federal government’s general prohibition against sharing drilling-related royalties with affected states, which has made some of them unwilling to put their shorelines at risk to potential oil spills. But Washington’s longstanding opposition to revenue sharing may change after the November elections, several key lawmakers said in interviews with Platts. 

And if the US does change course and adopt a revenue-sharing policy, some experts believe that coastal states such as North Carolina — which could use the money to address its sizeable budget deficit — may rethink their vigorous opposition to oil and gas drilling off their shores. 

“It takes away some of the arguments for coastal states that have previously been opposed to oil and gas development,” said Christopher Guith, vice president of policy at the US Chamber of Commerce’s Energy Institute. “When you allow the state to reap some of the benefits and not just have all the risk, then the state is more willing to make a reasonable and informed decision” in favor of drilling.

Senator Jeff Bingaman, a New Mexico Democrat, has for years used his influence as the chairman of the powerful Senate Energy and Natural Resources Committee to derail revenue-sharing bills proposed by his colleagues. Bingaman argues that since the Outer Continental Shelf is a federal resource, all oil and gas royalties that are collected from drilling there should go the US Treasury, as opposed to being parceled out to a small number of host states.

But Bingaman is retiring from the Senate at the end of the year — and in a rare occurrence, both of his potential successors favor some sort of oil and gas revenue-sharing arrangement. 

Senator Lisa Murkowski, an Alaska Republican, is in line to take the energy panel’s gavel if her party wins control of the chamber in the November elections. But Murkowski has long been an outspoken proponent of revenue sharing, so it would not be a surprise if she used her new authority to move the country in that direction.

What is surprising, though, is that the US may also adopt some sort of revenue-sharing policy even if the Senate remains in Democratic hands after the November elections. Senator Ron Wyden of Oregon, a liberal Democrat who has voted against revenue sharing in the past, is now saying that he would support the concept if his party holds onto the Senate in November, and he takes control of the energy committee.

“I thought the Congress ought to take some time and work out an equitable arrangement for revenue sharing so resources extraction on public lands can be managed to benefit and protect all the communities that have been affected by resource extraction, wherever they are,” Wyden said in an interview. “If I have the opportunity in the next Congress, I’m going to work with Democrats and Republicans on the committee to try to promote this kind of approach.”

There’s a lot of money at stake with revenue sharing. 

The royalties that oil and natural gas companies pay for the privilege of drilling on the OCS constitute the country’s second-largest single

source of revenue, exceeded only by the federal income tax. In fiscal 2011, federal offshore receipts from oil and gas activities totaled $6.5 billion, according to the Interior Department’s Office of Natural Resources Revenue. As recently as Fiscal 2008, those revenues topped $18 billon, according to Interior.

Environmentalists and some budget hawks have opposed giving costal states a share of oil and gas revenues in federal waters, arguing that revenue sharing would ultimately make states more likely to endorse offshore drilling, while also giving away billions in revenues that they say should go to federal coffers.

But Gulf Coast lawmakers, notably Senator Mary Landrieu, a Louisiana Democrat, have fought for years to direct a portion of offshore leases, royalties and bonus bids to states that host drilling off their shores. Landrieu and like-minded lawmakers say such revenue sharing is only fair, given that their states bear the environmental impacts of drilling and oil production — as well as disasters like the

2010 BP oil spill in the Gulf of Mexico.

To be sure, the US government does not have an absolute prohibition against revenue sharing. Six years ago, Congress passed a bill dubbed the Gulf of Mexico Energy Security Act, or GOMESA, that allows four Gulf states — Alabama, Louisiana, Mississippi and Texas — to receive 37.5% of the federal royalties and lease proceeds that Interior collects from companies that drill off of their coasts. But under GOMESA, those payments are not scheduled to start until 2017 — which is too long of a wait for Landrieu and other Gulf Coast lawmakers.

A carrot for North Carolina?

There is evidence that a broader revenue-sharing plan could tip the scales in at least one state that has opposed offshore drilling in the past: North Carolina. Governor Bev Purdue, a Democrat, opposed offshore oil and gas development when she first took office in 2009. But she has gradually softened her position in recent years, in part because of the prospects of her state sharing in some of the royalties that the federal government would collect from drilling.

An advisory committee that Purdue formed to study the issue said a federal revenue-sharing plan would be necessary for North Carolina to benefit from offshore drilling. The panel, called the Governor’s Scientific Advisory Panel on Offshore Energy, urged the state’s US senators and House members to push for revenue sharing.

“North Carolina’s congressional delegation should take appropriate action to provide revenue and royalty sharing for any offshore oil and gas development in waters off the North Carolina coast,” the panel said in its report. “Revenue and royalty sharing are essential components to North Carolina’s development of offshore energy.”

That panel estimated that if the state received 27% of revenues from leases, royalties and bonus bids in federal waters offshore North Carolina — as is the case for Louisiana and several other states with existing production — North Carolina would reap from $66 million to $400 million annually. Over the lifetime of the reserves, that could total up to $12 billion, the panel said.

Greens worried

But the potential for cash-poor state governments to get hooked on offshore energy dollars is exactly what worries some environmental groups, who oppose revenue sharing.

“You’re taking resources that are owned by the entire American public, and you’re bribing a select group to entice them to have drilling off their coasts,” said Ben Schreiber, an analyst at the environmental group Friends of the Earth. 

Jacqueline Savitz, senior campaign director for Oceana, which opposes offshore drilling, said Virginia is another state where revenue sharing is being used as a political tool, with Republican Governor Bob McDonnell pushing for new oil and gas developments to pay for transportation projects ever since he launched his campaign in 2009.

“His messaging around why we ought to be drilling off of Virginia was essentially, ‘Look how great it’s going to be when [we] get the revenue to support [our] highway system,’ “ Savitz said. “And they don’t even have revenue sharing” under federal law. Wyden, for his part, said he would heed the concerns that environmental groups have expressed about revenue sharing when looking at revising the US’ longstanding policy on the practice.

“Anybody who looks at my record in terms of environmental protection knows I’m going to factor in strong environmental protection approaches in terms of dealing with this and other issues,” he said.

Wyden said his newfound support for revenue sharing stems in part from Interior’s decision to revamp Interior’s royalty-collection practices in 2009. Interior took that action after the Government Accountability Office, the investigative arm of Congress, found that the US was losing out on tens of millions of dollars in royalty payments every year because of poor record-keeping practices and other problems. GAO also revealed that some Interior employees had engaged in unethical behaviors — including drug use and sexual relationships — with their industry counterparts.

“You have new rules to avoid these types of conflicts,” Wyden said. “You have another reason to take a fresh look at how to do this.”

The Chamber of Commerce’s Guith said he was surprised to hear that Wyden is open to some revenue sharing, and added that it bodes well for how the Oregon Democrat might perform if he wins the committee gavel.

“It’s a good sign that if he becomes chairman, he’ll continue on a tradition of the Energy and Natural Resources Committee chairman being open, and more important, being a consensus builder, as opposed to trying to veer toward ideology, which really has not happened in a very long time,” Guith said.

Landrieu, in a recent interview on the “Platts Energy Week” television program, said she sees Wyden as a fellow supporter of revenue sharing.

“He has signaled that he will be able [to support it] in the future, and I take him at his word,” Landrieu said. For his part, Bingaman has no plans to revisit the revenue-sharing issue before he retires, according to his spokesman, Bill Wicker.

“Jeff’s long-time, principled position on revenue sharing is I think well known and understood, and will not change,” Wicker said. “If they would like to bring revenue sharing back up, it would be coming from them. As far as Bingaman’s concerned, we dealt with revenue sharing [earlier], and have moved on.”

— Keith Chu