Louisiana explores options for collecting more offshore oil revenues

New Orleans CityBusiness, Mar 1, 2004 by Richard Slawsky

Louisiana's share of federal revenues collected by the U.S. Department of the Interior in 2003 more than doubled the 2002 amount thanks to oil and natural gas price increases.

As drillers head out into the deeper waters of the Gulf, however, that revenue source may be in danger of drying up. Federal incentives are luring drillers to deeper waters, leaving the state torn between encouraging growth and maintaining a valuable revenue stream.

What it appears like is that the main reason for the increase was strong prices, said Patrick Etchart, DOI Minerals Management Service spokesman. There were some new leases but it's primarily a reflection of stronger prices.

Louisiana's $31.5 million share of MMS royalty payments for 2003 compared favorably to $13.4 million in 2002. In 2001, royalty payments topped $31.1 million.

There was a big increase in prices in 2001, around the time of the California energy crisis and the Enron scandal, Etchart said. Prices dropped back down in 2002.

States are entitled to a share of the mineral revenues collected from federal lands within that state's boundaries. States receive 50% of revenues from onshore federal lands.

Coastal states are also entitled to a share of revenues from offshore tracts. While the first three miles off Louisiana's coast belong to the state, the area beyond the three-mile zone is considered federal property. The zone between three and six miles is known as the 8(g) zone, as designated by the 1953 federal Outer Continental Shelf Lands Act.

States receive a 27% share of the production in the 8(g) zone. Beyond that point, however, the state's share drops to zero.

Total payments to the 36 states receiving mineral revenue shares totaled more than $1 billion - more than 45% higher than the $753 million distributed in 2002.

All states don't necessarily see the same percentage increase, Etchart said. It depends on the type of mineral they are producing.

Wyoming topped the list by receiving more than $503 million. New Mexico was second with $318 million and Colorado was third with $62.7 million. Louisiana was fifth on the payout list.

Money collected from offshore royalty payments goes into the Louisiana Education Quality Trust Fund. The remainder of MMS royalty payments go into the state's general fund, according to Larry Wall, spokesman for the Louisiana Mid-Continent Oil and Gas Association.

Compared to what is made out there, Louisiana doesn't get a big share, Wall said. For a state like Wyoming, they have a lot of federal land in the state's borders.

In March 2003, the MMS and the state of Louisiana signed an agreement to jointly develop and implement a royalty-in-kind payment program for production in the offshore 8(g) zone. Under terms of the agreement, the state has the option of receiving its share of revenues in the actual commodity, rather than cash, to sell or use as it sees fit.

For many years the state had considered the potential for enhancing royalty revenues by taking royalty in kind but had never devoted the resources required for an adequate test, said Jack Caldwell, secretary of the Louisiana Department of Natural Resources. Through this partnership with MMS, however, the state will gather both knowledge and experience at little cost. This experience will hopefully lead Louisiana to better-informed decisions regarding royalty in kind from state lands and water bottoms.

Over the past several years, the state has tried to capture a bigger share of the money made in offshore waters beyond the 8(g) zone. The recently-shelved federal energy bill contained provisions designating a percentage of offshore revenues to help combat coastal erosion. The failed Conservation and Reinvestment Act of 2000 also contained provisions for designating a portion of those revenues to the states.

Since 1997, the number of deepwater drilling projects rose from 13 to more than 65 in 2002. According to Roy Francis, executive director of the LA 1 Coalition, a nonprofit working to improve the Louisiana Highway 1 energy corridor, the return to the state decreases as the number of deepwater projects increases.

The LA 1 Coalition estimates existing deepwater reserves of 71 billion barrels of oil, of which 56 billion barrels remain to be discovered. Shallow water has only 15 billion barrels remaining to be discovered, according to LA 1.

We generate $3 billion to $5 billion off the coast of Louisiana, Francis said We do everything we can to support the drilling activity but we don't get to share in that wealth.