Off-Shore Drilling Bans, Delays Cost Government Revenue

by Rob Bluey, Contributing Author: Billions of dollars in potential oil revenue that could help close the federal deficit is being lost as a result of President Obama’s anti-drilling agenda.
Production in the Gulf of Mexico – which normally accounts for about 30 percent of all U.S. production - is expected to drop this year by 220,000 barrels per day, according to projections from the U.S. Energy Information Administration.

With oil currently at $90 a barrel and the royalty rate at 18.75 percent, that equals $3.7 million in lost revenue each day. If the agency projections hold over the course of the year, the federal government would lose more than $1.35 billion from Gulf royalty payments this year.

The number grows even larger when coupled with a lack of Gulf lease sales and fewer rental payments. Those three components -- royalties, leases and rent -- make up a sizeable amount of government revenue.

The looming shortfall is raising red flags on Capitol Hill. Sen. David Vitter, R-LA, an outspoken critic of the Obama administration’s drilling moratorium and the subsequent slowdown in permitting, first called attention to it in September. “It’s not only about job loss along the Gulf Coast -- the federal government is losing revenue as a result of the administration’s misguided moratorium,” Vitter explained. “I’ve been attacking the moratorium from multiple angles and will continue to do so until drilling can fully resume.”

Interior Secretary Ken Salazar canceled a Gulf lease sale last October. He postponed another in the central Gulf of Mexico, originally scheduled for March, until 2012. One planned for October 2011 in the western Gulf also could be delayed until 2012. That would make 2011 the first year since 1965 that the federal government has failed to hold a lease sale in the Gulf.

Bonus bids from lease sales averaged about $1 billion in 2009 and 2010, according to data from the U.S. Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE). The lack of lease sales ultimately means the government will collect less in rent payments by lease holders. Offshore rents currently generate more than $200 million per year.

The Gulf revenue decline comes as Obama’s oil spill commission is recommending new fees for oil companies - a scenario that could be avoided if the government removed barriers to exploration and production.

“Over the years, offshore production royalties have provided billions of dollars to the U.S. government,” said National Ocean Industries Association President Randall Luthi, former director of the Minerals Management Service, which predated BOEMRE. “Now, at a time when Congress is looking to maximize efficiency without raising taxes, there sits millions of dollars per day uncollected,” he said.

The Obama administration has dismissed the financial impact. The revenue loss would be “negligible,” Rebecca Blank, under secretary for economic affairs at the Department of Commerce, told a Senate committee in the fall. “It is difficult to speculate now on the specific impact the moratorium would have over the five- or 10-year budget window, but one would expect the impact on the deficit to be negligible,” Blank wrote to the Senate Committee on Small Business and Entrepreneurship in September. “Revenues may be higher or they may be lower depending on future years’ oil prices and the time profile of production,” Blank said.

Energy experts said the administration’s policies are certain to have long-term consequences for the industry. “You continually need new discoveries and new production coming online to replace what’s being depleted,” said Andy Radford, senior policy adviser at the American Petroleum Institute. “These wells taper off over time -- the ones that are producing now -- so without a continual flow of new discoveries and new production, the number will continue to decrease.”

A report from the economic forecasting firm IHS Global Insight estimated that federal, state and local taxes related to the Gulf, combined with royalty payments, totaled $19 billion in 2009. Royalties, bonus and rent payments made up more than $6 billion of that number. That pot of money could go a long way toward deficit reduction. And that’s from the Gulf alone.

Significant additional revenues would be generated if the federal government opened access to exploration and production in areas currently closed to development such as the eastern Gulf of Mexico, portions of the Rocky Mountains, ANWR, and the Atlantic and Pacific coasts. A recent study conducted by Wood Mackenzie for the American Petroleum Institute estimated that increased access to those areas would bring $150 billion into federal coffers by 2025.

Why leave so much money uncollected, especially in a time of rising deficits?
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Rob Bluey is director of the Center for Media and Public Policy at The Heritage Foundation. This article which first appeared as an op-ed in the Washington Examiner was submitted to the ARRA News Service editor for reprint by contributing author Rob Bluey.

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