Thursday, June 19, 2008

What could be news about oil

Suppose for a moment that Congress listens to President Bush's remarks Wednesday and removes the decades-old ban on offshore drilling for oil and natural gas on the Outer Continental Shelf. Who wins, aside from the oil industry?

Uncle Sam, of course.

Why? Because the U.S. government collects royalty payments and upfront cash from oil companies that lease federal lands for oil and gas exploration and production.

The U.S. Interior Department's royalty rate for deep-water drilling in the Gulf of Mexico is 18.75%--up from 12.5% two years ago. This move helped the government take in $7 billion in offshore royalties, rents and bonuses from oil companies drilling in U.S. waters last year.

The government's take would undoubtedly increase if the offshore drilling ban were lifted, though by how much is not immediately clear.

Royalty revenue-sharing agreements would have to be worked out between the states and the feds. One government official estimates that if enough land were made available for drilling, the upfront cash paid to Uncle Sam for one lease agreement could reach $1 billion.

But it's not all about the federal coffers. Plenty of businesses outside of the Beltway stand to make some handsome gains as well. Though profits would most likely ripple throughout the industry, Chevron (nyse: CVX - news - people ), Shell, BP (nyse: BP - news - people ) and Anadarko Petroleum (nyse: APC - news - people ), which have some of the largest offshore operations in U.S. waters, are the most likely winners.

But hold those speculative bets for now.

Bush's call to Congress Wednesday was little more than a political gesture. At a time when the average national price of gas is $4.08, according to the U.S. Energy Information Administration, it builds upon a similar proposal earlier this week by Sen. John McCain, the presumptive Republican presidential nominee. Florida Gov. Charlie Crist, frequently mentioned as vice presidential pick for McCain, was once an opponent of offshore drilling but now favors it.

As Election Day draws near, Congress will become increasingly reluctant to pass any controversial legislation, and energy policy certainly falls under this header. Moreover, by calling for the offshore ban to be lifted, McCain can claim to be doing something to stem high energy prices without going so far as to call for drilling in Alaska's Arctic National Wildlife Refuge--something Bush also urged Wednesday.

The offshore drilling debate boils down to an argument over leasing government waters for oil and natural gas exploration and production. Since 1982, the federal government has prohibited this, along most of the Outer Continental Shelf. In 1990, President George H.W. Bush issued an executive order not to conduct further offshore leasing or pre-leasing activities, with exceptions in much of the Gulf of Mexico and parts of Alaska. That order stands until 2012, though a 2006 law expanded leasing in the Gulf of Mexico somewhat.

Bush says he'll drop the executive order if Congress first lifts its 26-year-old ban. But even if lawmakers acted tomorrow, it would be years before the infrastructure could be put in place to support additional drilling. The eastern Gulf of Mexico would be the most likely place to see additional drilling in the near future. Oil companies believe the region holds the greatest potential for new exploration and is the nearest to existing infrastructure.

The biggest wrinkle in the plan, however, may come from the states most likely to profit from the scheme. Many in tourist-dependent Florida would oppose drilling close to the state's western coast. And some states already have in place their own prohibitions against offshore drilling. A new law lifting the federal ban could instigate a string of lawsuits by states seeking to challenge the U.S. government on the issue. For others, revenue-sharing agreements could stall the process.

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