Increased access and revenue sharing: a marriage that must endure

Talk in Washington for the last month has swirled around the fiscal cliff, sequestration, tax rates, and the stare down between the White House and the House of Representatives. Not surprisingly, there was room for little else in the lame duck Congress. However, with the 113th Congress now under way, energy will hopefully once again be a topic of interest.

Recent studies and projections predict the United States will be a world leader in oil and gas production within the next generation. This was truly unthinkable just 10 years ago. Unconventional natural gas and oil have changed the way the country, and the world, see the US energy industry. Yet, Washington needs to remember that saying something does not make it so, even if it is said over and over again. A good example is the claim that the current administration has opened the pathway to record oil and gas production in the US. While it is true that oil and gas production is up, it is estimated that 96% of the increased production has come from state and private lands. Since these areas are not controlled by the federal government, the increased production is not a result of this administration's policies.

To reach the lofty predictions of being a world leader in oil and natural gas production, the US will need to explore and develop the resources located both above and below federal lands. The continued development of unconventional energy sources, such as wind on the surface of federal lands and waters, will help lessen the reliance on foreign oil, particularly oil from OPEC countries. However, that effort must also be coupled with the exploration and development of more reliable domestic energy sources - oil and natural gas from below the surface of federal lands and waters. And there is a lot that has yet to be explored.

Due to federal policies, about 85% of offshore lands, referred to as the outer continental shelf (OCS), have been closed to exploration and development for about 30 years. The US offshore energy industry has accomplished yeoman's work in the 15% of the OCS that has been available for exploration and development. The largest of that 15% is a portion of the Gulf of Mexico. Currently, the Gulf of Mexico supplies about 30% of the country's oil and about 11% of its natural gas. Much to the surprise of many, the lands off the coast of California also provide oil and gas, even though new exploration and development has been banned for more than a generation due to federal policies. Offshore Alaska offers a bright promise of more offshore oil and gas, but any development there is accompanied by federal delays and often complex litigation. Should Shell be able to finish its exploratory wells in the Beaufort and Chukchi seas of Alaska next year, there will hopefully be a better idea of the potential resources located in that region.

To be a world leader in oil and natural gas production, the country needs to open up more of the 85% of the OCS that is currently closed, and the 113th Congress has the opportunity to do so. And doing so may help the US reach that goal even sooner than predicted. One of the roadblocks to opening up more area has been disagreement among congressional players as to the role of revenue sharing with the states. Onshore states receive almost 50% of the bonus bids, rents, and royalties paid by energy companies for the opportunity to develop oil and natural gas on federal lands or through federal leases. The concept of sharing offshore rents, royalties, and bonus bids with the coastal states has not been as widely accepted and, ironically, it has a short history involving states near the Gulf of Mexico -- which provide the bulk of the nation's offshore oil and gas. Efforts to increase the amount available to coastal states and increase the number of states available for revenue sharing have not been successful to date. This Congress may be different, as there appears to be greater support for revenue sharing and a greater interest in opening up more of the OCS to exploration and development. This is important as one of the key selling points of revenue sharing has been the expectation that increased revenue sharing would mean increased access since more states would be enticed by the potential of realizing a new revenue stream.

Opening new areas could also result in a financial boon to the US if the past is prologue. Royalties, rents, and bonus bids from offshore areas brought in nearly $18 billion in 2008, $5.7 billion in 2009 and more than $5 billion in 2010 to the US Treasury. But to continue to bring in additional revenue the country needs more offshore lease sales. And to get more offshore lease sales, the US needs to open up more of the 85% of the OCS that is now off limits.

There are logical areas waiting for the go ahead from the federal government. The eastern Gulf of Mexico may very well have oil and natural gas resources similar to the central Gulf, but that will not be known until companies have an opportunity to actually explore. Since there is already infrastructure in the Gulf of Mexico, exploration and development could take place in a relatively short time. The same is true for off the coast of California. The House of Representatives in the 112th Congress passed legislation, though stalled in the Senate, which would have opened up an area off the coast of Virginia, the southeastern US and provided for additional sales off the coast of Alaska. It will take more time in these areas to build up the infrastructure, but if the lease sales were to occur, the process could begin. These areas could help make real the current predictions of the US being a world leader in the production of natural gas and oil.

It is imperative that Congress keeps an eye on that eventual prize of increasing US production, energy reliability, and energy security. To do that, I urge congressional leaders to remember that increased offshore revenue sharing must be wedded to increased access. There may very well be a temptation to allow for future revenue sharing but to punt on tough questions regarding access to new areas. Such a result would not further the efforts of the United States to become the world energy leader and would deprive the US Treasury and other coastal states of a new revenue source. This is not the time to tread water in our efforts to increase our long-term energy security, reliability and, what was thought to be impossible a few years ago, our energy independence.

Randall Luthi
President, National Ocean Industries Association

This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to David Paganie at[email protected].