U.S. House Drilling Plan Would Cost $11B Over a Decade – CBO

House offshore-drilling legislation slated for a floor vote this week will cost the government $11 billion between 2007 and 2016, according to an estimate by the nonpartisan Congressional Budget Office.

The House is expected to vote Thursday on the plan that relaxes costal drilling bans and shares offshore oil and gas production revenues with coastal states.

Most new costs in the proposal stem from sharing oil and gas lease bids and production revenues with coastal states and total $20.7 billion over 10 years, CBO says. But these costs are partially offset by provisions aimed at repairing flaws with the federal "royalty relief" incentive program.

The bill seeks to collect payments from Gulf of Mexico deepwater producers that hold late 1990s leases that allow royalty waivers yet lack "price thresholds" that end the subsidy when prices reach certain limits.

The bill authorizes the Interior Department to renegotiate the leases with producers to allow thresholds. It would assess a new fee on the production of companies that refuse to come to the table. CBO predicts that companies would agree to include price thresholds and pay an estimated $11.4 billion.

Also, the bill would generate an additional $4 billion by allowing leasing in some areas where it is now banned. Current bans cover both coasts, much of the eastern Gulf of Mexico and part of offshore Alaska.

The proposal would allow leasing in all waters more than 100 miles offshore and also allows leasing between 50 and 100 miles unless state legislatures and governors petition the federal government to prevent it. At less than 50 miles, leasing is banned unless states seek to "opt-out" of restrictions.

In areas where leasing is newly authorized under the bill, 50 percent of lease bids and royalties from leases greater than 12 miles from shore are shared with coastal states.

The bill creates an escalating revenue-sharing plan for states such as Louisiana where offshore production is already authorized. Payments from leases beyond 12 miles from shore begin at 6 percent and gradually increase to 50 percent by 2022, the study notes. For both types of areas, states receive 75 percent of revenues from leases within 12 miles.

Fifteen percent of total shared revenues toward new federal funds for natural resource enhancement, education and other needs.

Revenue sharing continues in perpetuity beyond the 10-year window that CBO studied. A preliminary estimate by Interior's Minerals Management Service last week projected the bill would cost the government $69 billion over 15 years.

But Rep. Richard Pombo (R-Calif.), chairman of the House Resources Committee, has argued that eventually production from areas where drilling is now banned will offset the costs of revenue sharing with states where offshore production already occurs.

Other costs, revenues

The CBO report estimates the costs for other sections of the bill as well. The section designed to fix the royalty incentive program allows new price thresholds that would apply to all deepwater leases issued between 1996 and 2000 -- not just the flawed 1998 and 1999 contracts.

The thresholds are, in fact, higher than then thresholds in current contracts from 1997, 1997 and 2000 leases. CBO expects most companies would renegotiate to allow the new thresholds. "Raising the price thresholds in the contracts would reduce the likelihood that a leasee would have to pay royalties if prices decline in the future," CBO states.

CBO predicts that this would reduce royalty collections by $1.2 billion over 10 years.

CBO also scored a provision that requires a uniform royalty rate for all new outer continental shelf leases (Greenwire, June 23). Currently, companies pay a higher royalty rate on shallow water production than deep water production.

The estimate assumes that Interior would set the new rate for all leases at the 12.5 percent that now applies to leases in waters greater than 400 meters. CBO predicts this would cost $500 million over 10 years.

The estimate also addresses several other provisions of the broad measure.

Copyright 2006 Greenwire. All Rights Reserved. Visit E&E Publishing for a free trial.

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