NEWS ARTICLES | September 08, 2008
New Offshore View for Coastal States
By Coral Davenport | CQ Weekly | Link to article
In the summer of 2006, Louisiana Sen. Mary L. Landrieu rallied fellow Democrats around a bill that would open 8.3 million acres in the Gulf of Mexico to offshore drilling — and, for the first time, give her state a share in the profits.
Louisiana lawmakers had tried for decades to get their state a piece of the revenue from Gulf drilling. But this time Landrieu had powerful leverage: As the one-year anniversary of Hurricane Katrina approached, she capitalized on the nation’s sympathy to help rebuild her state.
In impassioned speeches on the Senate floor, Landrieu said channeling oil royalties to coastal states like Louisiana would help restore eroding wetlands and prevent future disasters. Tears trickled down her face when, as part of her appeal, she hosted the screening of a documentary on how the hurricane’s wrath affected New Orleanians.
Ultimately, the strategy of recasting oil royalties as Katrina aid worked. She won the support of Democratic Leader Harry Reid of Nevada, who helped get the bill enacted later that year.
In the process, Landrieu also set an important precedent that has changed the calculus in today’s debate over offshore drilling. Other states, many of which are facing budget shortfalls due to the fall in housing prices, the rise in unemployment and a slowdown in the broader economy, see the potential for an additional source of revenue in offshore drilling.
This new revenue equation is part of the reason for a shift toward support for drilling in some states that had once opposed it — even among some Democrats who had long viewed offshore drilling as anathema.
At the time of the 2006 debate, Landrieu — often cited as the oil industry’s best friend in the Democratic Party — made clear that she was aware it would encourage other states to support offshore drilling in the future, lured by the promise of getting their own taste of royalties. Before then, 100 percent of the leases and royalties that oil companies pay to drill in federal waters went straight into federal coffers — a state of affairs that has long galled Gulf Coast lawmakers.
“In the future, should a coastal state explore drilling, we think they could use this as an example. This sets a precedent,” Landrieu said at the time.
That precedent is now having an impact in places where lawmakers have for more than two decades stood united against offshore drilling. Governors of three coastal states — Virginia, Georgia and Florida — have now endorsed some form of offshore exploration. Even in Santa Barbara, Calif., where a major oil spill in 1969 kicked off the national move to ban offshore drilling, the county Board of Supervisors in August urged Gov. Arnold Schwarzenegger to consider opening up their corner of the Pacific for drilling.
On the surface, the apparent shift in sentiment over allowing drilling has been driven by a public outcry over gasoline prices. But the Louisiana precedent means that, for the first time, coastal states could get a piece of the profits of offshore drilling, to the tune of hundreds of millions dollars in new revenue. And while any oil discovered offshore isn’t likely to come to market for more than 10 years, state revenue from offshore leases to oil companies might start flowing much sooner — an alluring prospect to states whose budgets for roads, schools and basic amenities are squeezed tighter.
In an interview last month, just a few days before the third anniversary of Katrina, Landrieu said she’s pleased that the possibility of revenue sharing now appears to be helping tip the balance toward drilling in some states.
“If the states step up and say, we will open up our coast, and whatever the federal government gets will be shared with the states who can use that money — and they would be free to use that money for infrastructure or tax reduction — I think that’s very attractive for states like Virginia, Georgia, South and North Carolina — and that’s hundreds of millions of dollars a year.”
Supporters of the idea hail it as a treasure chest that could expand U.S. oil supplies while helping states help themselves. Opponents view it as a Pandora’s box that would open up U.S. coasts to environmental degradation, while plundering federal receipts as the national government faces the likelihood of record deficits.
What was controversial in the 2006 law wasn’t opening up the acres to oil exploration: The area had previously been designated for drilling by the Clinton administration, though that was halted by President Bush in what was seen as a favor to his brother, Florida Republican Gov. Jeb Bush. But the revenue-sharing provision channeled 37.5 percent of drilling royalties to the closest coastal states — and away from the federal Treasury. Royalties from drilling on federal lands — on and offshore — now average about $9 billion a year, according to the Interior Department’s Minerals Management Service.
According to Congressional Budget Office projections at the time, drilling leases and royalties from the 8.3 million acres opened in the 2006 law would generate about $1 billion in federal receipts and $405 million in revenue for the four affected states over the following 10 years. Louisiana would receive almost half the state money based on a formula that allocated shares according to each state’s distance from production. Landrieu’s office estimates that Louisiana will get $40 billion over 50 years.
Difficult to Resist
Coastal states took notice right away: Four months after the law went into effect, the Virginia state legislature — backed by Democratic Gov. Tim Kaine, Republican Sen. John W. Warnerand Democratic Sen. Jim Webb — requested that the Interior Department lift the offshore exploration moratorium off Virginia’s coasts. The state’s lawmakers, meanwhile, said they hoped to duplicate the Gulf Coast formula and channel new money into improving strained infrastructure. And now, that revenue-sharing formula is expected to be part of bipartisan legislation expected to be introduced in both the House and Senate as early as this week.
The proposal, which is expected to be packaged with provisions that would also reduce tax breaks for big oil companies and boost spending on renewable energy, has gained cautious support from Democratic presidential nominee Barack Obama and from House Speaker Nancy Pelosi, a die-hard opponent of offshore drilling.
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Drilling advocates see the prospect of royalty-sharing as a lure that could warm up fiscally strapped states to the prospect of drilling in their waters.
“There are definitely some states, including Virginia, that have budget shortfalls and are looking for new sources of revenue as the economy is slowing,” said Matt Letourneau, a spokesman for Sen. Pete V. Domenici, the senior Republican on the Senate Energy and Natural Resources Committee, who helped push through the 2006 law in the hope that it would set a precedent for other states. “The average voter is not aware of the revenue-sharing agreement — but where you start seeing some of the interest is in state legislators and governors, who are aware of the fact that there is potential revenue, and that added incentive makes the prospect of offshore drilling easier to pass.”
Opponents of the idea — environmentalists and budget watchdog groups alike — concede the lure may be tough to resist.
“Drilling proponents have hit on an issue that has resonated with cash-strapped states,” said Tyson Slocum, an energy analyst with the advocacy group Public Citizen, which opposes expanding drilling. “There’s no question that states are really struggling with raising revenue, and some states are attracted to the prospect of nabbing a much bigger piece of the pie. The question is whether states’ fiscal policies take precedent, or tourism and marine preservation.”
So far in the Senate, the only coastal state Democrat to bite has been Virginian Jim Webb — and even Webb says he supports drilling for natural gas, rather than oil (although geologists say that when drilling for one, you’re just as likely to hit the other).
“A portion of the royalties from such extraction activities would come to Virginia at a time when our state leaders are trying hard to fund much-needed programs,” Webb said in June. “These royalties could potentially be used in the development of clean energy technologies, transportation and infrastructure projects, and for reducing the tax burden for our citizens.”
A Fiscal Precedent
But if the prospect of new money is attractive to coastal states, it also draws vocal opponents who see what they call a dangerous fiscal consequence. The strongest voice against royalty-sharing is New Mexico Democrat Sen. Jeff Bingaman, chairman of the Senate Energy Committee. Bingaman isn’t opposed to drilling: He has pushed several proposals to expand oil exploration in the eastern Gulf of Mexico. But, he says, the outer continental shelf, where offshore drilling takes place, is owned by the federal government, not the states — and channeling profits from drilling there to coastal states depletes the federal Treasury of money meant to benefit all the states.
“The federal government owns the OCS. To say each coastal state will make a decision as to whether or not the federal government develops the resource off of the shore of that coast out 200 miles just doesn’t make good sense to me,” Bingaman said.
“If, in fact, as the president says, we need these resources for our national needs, why should we give both the governor and the state legislature of each of these coastal states the ability to veto that?” Bingaman said. “We’ve never done that in our history, and I think it would be crazy. Also, of course, we’re the ones at the federal level who are running the deficit. Why should we be giving away large amounts of future revenue to individual states, instead of using that money to pay down the debt or do something?”
Those concerns are echoed by budget watchdogs who argue the Gulf state precedent set in the 2006 law was ill-advised because it will encourage other states to raise claims.
“Those should be public resources. Revenue developed that far offshore should go to the federal Treasury for programs that benefit the entire U.S.,” said Autumn Hanna, senior program director for the centrist group Taxpayers for Common Sense. “States are in need of that money, but so is the federal government, with the record deficit we are facing.”
Landrieu and other advocates of offshore revenue sharing are quick to point out that Bingaman’s home state of New Mexico, along with many other Western states, already receives a share of oil and gas drilling revenue from leases on federally owned land within their borders. States where there is inland oil and gas drilling get 50 percent of federal royalty receipts.
But Bingaman and many analysts draw a distinction: Drilling on land is different from drilling offshore in federally owned waters. Analysts say it is consistent with federal policy for a coastal state to share revenue from drilling on land — but not out in the water.
That’s the fiscal philosophy that environmentalists hope will prevail — at least long enough to keep any other coastal states from following the lure of new revenue to promote offshore drilling.
“For now, the position of virtually all coastal states, with the exception of three — Virginia, Georgia and Florida — is to support keeping the ban. The Carolinas are surrounded by folks who are caving in,” said Richard Charter, a government relations consultant with the Defenders of Wildlife Action Fund. “I would not automatically assume that the revenue sharing would be enough to win over states like California and New Jersey.”
And, in recent months, governors of several states, including Maine, Maryland, Oregon, Washington and both North and South Carolina have spoken against lifting the ban.
But Charter said that as the fall elections approach, the dynamics are continuing to shift and the pressure is ratcheting up on both sides of the drilling issue. “I think more governors are going to weigh in as Congress reconvenes,” he said.
