Order Code RL33493
CRS Report for Congress
Received through the CRS Web
Outer Continental Shelf:
Debate Over Oil and Gas Leasing
and Revenue Sharing
Updated August 14, 2006
Marc Humphries
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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Outer Continental Shelf: Debate Over Oil and Gas Leasing
and Revenue Sharing
Summary
Oil and gas leasing in the Outer Continental Shelf (OCS) has been an important
issue in the debate over energy security and domestic energy resources. The
Department of the Interior (DOI) released a comprehensive inventory of OCS
resources in February 2006 that estimated reserves of 8.5 billion barrels of oil and
29.3 trillion cubic feet (tcf) of natural gas. Another 86 billion barrels of oil and 420
tcf of natural gas are classified as undiscovered resources. Congress has imposed
moratoria on much of the OCS since 1982 through the annual Interior appropriation
bills. Proponents of the moratoria contend that offshore drilling would pose
unacceptable environmental risks and threaten coastal tourism industries.
Several bills related to oil and gas leasing in the OCS have been introduced in
the 109th Congress. On June 29, 2006, the House approved H.R. 4761, the Deep
Ocean Energy Resources Act of 2006, to allow states, using specified criteria, to
petition the Secretary of the Interior to lease in the federal OCS offshore the state.
The bill would also provide coastal states with a share of revenues generated from
offshore oil and gas production. Currently, the affected states receive revenue
indirectly from offshore oil and gas leases in federal waters. This is in contrast to
states with onshore leases on federal lands, which receive a direct share of the oil and
gas leasing revenues.

On February 16, 2006, the Senate Energy Committee held a hearing on Senator
Domenici’s bill, S. 2253, which would require controversial Lease Sale 181 in the
eastern Gulf of Mexico to be offered within one year of passage. The Senate Energy
panel passed S. 2253 by a vote of 16-5 on March 8, 2006. Lease Sale 181 has
galvanized interest in a number of related concerns. Some Members of Congress
argued for greater coastal revenue sharing based on offshore production, others to
promote natural gas-only leases in areas now off-limits. Some Members are calling
for much more limited access to offshore federal areas. Because of the various
interests, Senate leaders agreed to new language on July 12, 2006, that would
increase the amount of acreage made available for lease (about 8.3 million acres),
provide coastal states with a share of the revenues generated from offshore leases
(37.5%), and extend the buffer zone within which leasing would not be allowed to
125 miles from Florida. The new bill S. 3711, which passed the Senate August 1,
2006, is described below.
President George H.W. Bush, in 1990, responding to pressure from the states
of Florida and California and others concerned about protecting the ocean and coastal
environments, issued a presidential directive ordering the DOI not to conduct
offshore leasing or preleasing activity in places other than Texas, Louisiana,
Alabama, and parts of Alaska until 2000. In 1998, President Clinton extended the
prohibition until 2012. Leasing procedures are specified by the Outer Continental
Shelf Lands Act (OCSLA) of 1953, as amended.
This report replaces CRS Issue Brief IB10149, Outer Continental Shelf: Debate
Over Oil and Gas Leasing and Revenue Sharing, by Marc Humphries.

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Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Offshore Leasing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Federal Distribution of OCS Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Coastal Impact Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Offshore Leasing Moratoria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Natural Gas-Only Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Lease Sale 181 — Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
California Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Royalty Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Lease Development in the Gulf of Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Barriers to Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
109th Congress Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. MMS 5-Year Program Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Figure 2. Distribution of Revenue from Federal and Indian Leases,
FY2005 (millions of dollars) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 3. Eastern Gulf of Mexico and Sale 181 Area . . . . . . . . . . . . . . . . . . . . . 10

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Outer Continental Shelf: Debate Over Oil
and Gas Leasing and Revenue Sharing
Most Recent Developments
Oil and gas leasing in the outer continental shelf (OCS) has been a major energy
issue in the 109th Congress. On June 29, 2006, the House approved H.R. 4761, the
Deep Ocean Energy Resources Act of 2006, by a vote of 232-187. The bill would
allow states, using specified criteria, to petition the Secretary of the Interior to lease
the OCS adjacent to state waters. The Secretary would amend the current five-year
lease program to allow lease-sales to occur in areas covered by the petition unless
there is less than one year remaining in the current five-year lease program. If that
is the case, the Secretary would then include those lease sales in the next five-year
program. The version of the bill approved by the committee is very similar to the
measure as introduced by Representative Jindal (described under “109th Congress
Legislation,” below).
One significant difference involves royalty suspensions. The House -passed bill
would allow lessees from the period 1995-2000 (those covered under the Deep Water
Royalty Relief Act of 1995) to request and the Secretary of the Interior to agree to an
amendment of their leases, containing royalty relief to include price thresholds in the
amounts of $40.50 per barrel of oil and $6.75 per million BTU of natural gas. There
were leases let in 1998 and 1999 without any price thresholds. In addition, a
conservation of resources fee of $9/barrel of oil and $1.25 per million BTU for gas
would be established and applied to producing deepwater leases (>200 meters) that
do not contain price thresholds. A conservation of resources fee of between $1 and
$4 an acre would also be established for all non-producing leases.
On February 16, 2006, the Senate Energy Committee held a hearing on S. 2253,
which would require controversial Lease Sale 181 in the eastern Gulf of Mexico to
be offered within one year of passage. The Senate Energy panel passed S. 2253 by
a vote of 16-5 on March 8, 2006.
Lease Sale 181 has galvanized interest in a number of related concerns. Some
Members of Congress argued for greater coastal revenue sharing based on offshore
production, others to promote natural gas-only leases in areas now off-limits. Some
Members are calling for much more limited access to offshore federal areas. Because
of these various interests, Senate leaders agreed to new language on July 12, 2006,
that would increase the amount of acreage (to about 8.3 million acres), provide
coastal states with a share of the revenues generated from offshore leases (37.5%),
and extend the buffer zone within which drilling will not be allowed to 125 miles
from parts of Florida. On August 1, 2006, the Senate approved S. 3711 by a vote of
71-25. The bill, S. 3711, is described in more detail below. Also, for further

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discussion of the bill, see the Senate Committee on Energy and Natural Resources
news release July 21, 2006, on their website at [http://energy.senate.gov/public/] and
see [http://energy.senate.gov/public/index.cfm?FuseAction=PressReleases.Detail
&PressRelease_id=235040&Month=7&Year=2006].
A conference agreement on the two very different OCS bills (H.R. 4761 and S.
3711) is expected to be difficult. Some Senators insist on maintaining the language
of the Senate bill, more narrow in scope, as the final bill, whereas the House seeks
to incorporate its language that would lift the leasing and drilling moratoria in the
OCS and also offer natural gas-only leases. Both bills contain language that would
significantly increase the share of revenues to the states from federal leases in the
OCS.
Royalty relief, particularly for deep water projects, has come under closer
scrutiny since it was revealed in a February 2006 New York Times article that leases
issued during 1998 and 1999 did not contain price thresholds for royalty relief (above
which royalties apply). As a result, those leaseholders continue to pay no federal
royalties, even though oil prices are at an all-time high. An amendment contained in
the House-passed FY2007 Interior and Environment appropriations bill (H.R. 5386)
would require the holders of leases awarded in 1998 and 1999 to renegotiate their
leases or not be eligible to bid on future offshore lease sales.
The Department of the Interior (DOI) conducted a comprehensive inventory of
OCS oil and natural gas resources, as required by the Energy Policy Act of 2005 (P.L.
109-58, Section 357). In the inventory, the DOI provided mean estimates of 8.5
billion barrels of known oil reserves and 29.3 trillion cubic feet (tcf) of natural gas;
82% of the oil and 95% of the gas is in the Gulf of Mexico (GOM). In the
undiscovered resource category, the DOI estimated about 86 billion barrels (51% in
the GOM) and 420 tcf of natural gas (55% in the GOM).
During the summer of 2005, the Minerals Management Service (MMS)
introduced its proposed five-year leasing program for 2007-2012. Areas currently
covered by OCS moratoria along the Atlantic coast, the North Aleutian Basin
(Alaska), and the central GOM are included in the proposed leasing program. There
would be no leases in the eastern GOM planning area, which has been redrawn to
provide for more accuracy in boundaries between states and planning areas.1
Background and Analysis
Oil and gas leasing has been prohibited on most of the outer continental shelf
(OCS) since the 1980s. Congress has enacted OCS leasing moratoria for each of
fiscal years 1982-2006 in the annual Interior and Related Agencies Appropriations
bill (now the Interior and Environment and Related Agencies Appropriations bill),
allowing leasing only in the Gulf of Mexico (except near Florida) and parts of
Alaska. President George H.W. Bush in 1990 issued a presidential directive ordering
the Department of the Interior (DOI) not to conduct offshore leasing or preleasing
1 Federal Register, vol. 71, no. 1, Jan. 3, 2006, Notices, p. 127.

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activity in areas covered by the annual legislative moratoria until 2000. In 1998,
President Clinton extended the offshore leasing prohibition until 2012.
Proponents of the moratoria contend that offshore drilling would pose
unacceptable environmental risks and threaten coastal tourism industries, whereas
supporters of expanded offshore leasing counter that more domestic oil and gas
production is vital for the nation’s energy security.
The possibility of oil and gas production in offshore areas covered by the
moratoria has sparked sharp debate in Congress. A proposal to require the DOI to
conduct a comprehensive inventory of OCS oil and natural gas resources drew heated
opposition, although it was ultimately included in the Energy Policy Act of 2005
(P.L. 109-58, Section 357). Opponents of the OCS inventory saw it as a first step
toward lifting the OCS leasing moratoria.
The Senate Energy and Natural Resources Committee passed a bill (S. 2253) to
require that acreage within Lease Sale 181 (discussed later in this report) in the
eastern GOM be available for lease. Industry analysts believe this area contains
significant natural gas deposits. The area of interest, not included in the moratoria,
was removed from the original lease sale by the DOI because it was considered too
close to Florida’s coastline, and was placed off-limits until after the current five-year
leasing program (2002-2007). Most of the eastern GOM and the Pacific and Atlantic
coasts are included in the OCS moratoria.
Offshore Leasing System
The Outer Continental Shelf Lands Act (OCSLA) of 1953, as amended,
provides for the leasing of OCS lands in a manner that protects the environment and
returns revenues to the federal government in the form of bonus bids, rents, and
royalties.2 OCSLA requires the Secretary of the Interior to submit five-year leasing
programs that specify the time, location, and size of the areas to be offered. Each
five-year leasing program entails a lengthy multistep process that includes
environmental impact statements. After a public comment period, a final proposed
plan is submitted to the President and Congress. The latest plan went into effect July
1, 2002. Public hearings for the 2007-2012 leasing program are underway. States
and interest groups are filing comments on future lease sale areas for the 2007-2012
leasing program.3
The offshore leasing program is administered by the Minerals Management
Service (MMS), an agency within the DOI. The MMS is scheduled to conduct 20
OCS oil and natural gas lease sales during the current five-year program from 2002-
2007. Half of those sales will be in the western or central Gulf of Mexico (GOM),
two in the eastern GOM and the remainder around Alaska. Alaska’s lease sales will
be held in the Beaufort Sea, Norton Basin, Cook Inlet, and the Chukchi Sea/Hope
2 43 U.S.C. 1331 et seq.
3 Federal Register Notice, 70 FR 49669.

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Basin (see Figure 1). To date, 9 of the 12 GOM lease sales and 4 of the 7 Alaska
lease sales have taken place. MMS defines the OCS as submerged lands, subsoil,
and seabed between the seaward extent of states’ jurisdiction and the seaward extent
of federal jurisdiction.
Figure 1. MMS 5-Year Program Areas
Source: Minerals Management Service, 2002-2007-Year Leasing Program.
Lease sales are conducted through a competitive, sealed bonus bidding process,
and leases are awarded to the highest bidder. Successful bidders make an up-front
cash payment, called a bonus bid, to secure a lease. A minimum acceptable bonus
bid is determined for each tract offered. During the past 13 years, annual bonus
revenues have ranged from $85 million in 1992 to $1.4 billion in 1997. Bidding on
deepwater tracts in the mid-1990s led to a surge in bonus revenue.4 Offshore bonus
bids totaled $565 million in FY2005. In addition to the cash bonus bid, a royalty rate
of 12.5% or 16.66% is imposed on the value of production, depending on location
factors, or the royalty is received “in-kind.”5 The rate could be higher than 16.66%
depending on the lease sale. Annual rents are $3-$5 per acre, with lease sizes
generally ranging from 2,500-5,760 acres. Initial lease terms of 5-10 years are
standard, and leases continue as long as commercial quantities of hydrocarbons are
being produced. Bonding requirements are $50,000 per lease and as much as $3
million for an entire area. The Secretary of the Interior may reduce or eliminate the
royalty established by the lease in order to promote increased recovery.
4 Department of the Interior, FY2002 Budget Justifications, p. 63.
5 A royalty-in-kind payment would be in the form of barrels of oil or cubic feet of natural
gas.

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Federal Distribution of OCS Revenues
Federal revenues from offshore leases were estimated at $6.3 billion in FY2005
by the MMS. During the previous 10 years (1995-2004), revenues from federal OCS
leases reached as high as $7.5 billion in 2001. Revenues were as low as $3.2 billion
in 1999. Higher prices for oil and gas are the most significant factors in the revenue
swings. Of the $6.3 billion revenue in FY2005, $5.5 billion was from royalties.
These revenues are split among various government accounts. Revenues from
the offshore leases are statutorily allocated among the coastal states, the Land and
Water Conservation Fund, the National Historic Preservation Fund, and the U.S.
Treasury. For distribution of all revenue from federal leases, see Figure 2. States
receive 27% of OCS receipts closest to state offshore lands (drainage tracts) under
section 8(g)6 of the OCSLA amendments of 1985 (P.L. 99-272). In FY2005, this
share was $72.3 million out of $1,705 million in total state on-shore and offshore
receipts. A dispute over what was meant by a “fair and equitable” division of the 8(g)
receipts was settled by the 1985 OCSLA amendments.7
For onshore public domain leases, states generally receive 50% of rents,
bonuses, and royalties collected. Alaska, however, receives 90% of all revenues
collected on public domain leases.8
6 The 8(g) revenue stream is the result of a 1978 OCSLA amendment that provides for a
“fair and equitable” sharing of revenues from section 8(g) common pool lands. These lands
are defined in the amendments as submerged acreage lying outside the three-nautical mile
state-federal demarcation line, typically extending to a total of six nautical miles offshore
but that include a pool of oil common to both federal and state jurisdiction. The states’ share
of the revenue (27%) was established by the OCSLA amendments of 1985 (P.L. 99-272) and
is paid directly to the states. Payments to the states previously had been placed in escrow,
which were then paid out between 1986 and 2001.
7 Department of the Interior, Minerals Management Service, Mineral Revenues 2000, p. 95.
8 However, the manner is which royalties are split between states and the federal government
differs. For all states except Alaska, direct royalties under the Mineral Leasing Act (MLA)
are divided equally (50-50) between the state in which the deposits are located and the
federal government. The MLA also provides that all states except Alaska get back 40% from
the Reclamation Fund (established by the Reclamation Act of 1902), in effect giving each
state 90% of the royalties and the federal government 10%. Alaska does not receive
allocations from the Reclamation Fund, so to equalize royalty treatment among the states,
the Alaska Statehood Act and the Federal Land Policy and Management Act provide that
Alaska’s royalty share is 90% of the direct royalties (rather than 50%).

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Figure 2. Distribution of Revenue from Federal and Indian
Leases, FY2005 (millions of dollars)
Source: MMS, Minerals Revenues Management, 2006.
Coastal Impact Assistance
States with energy development off their shores in federal waters9 have been
seeking a larger portion of the federal revenues generated in those areas. They
particularly want more assistance for coastal areas that may be most affected by
onshore and near-shore activities that support offshore energy development.
Proponents of these proposals look to the rates at which funds are given to
jurisdictions where onshore energy development occurs within those jurisdictions on
federal lands. Coastal destruction has received more attention in Louisiana, where
many square miles of wetlands are being lost to the ocean each year. One of the
causes of this loss is thought to be widespread energy-related development.
Currently, the affected states receive revenue indirectly from offshore oil and gas
leases in federal waters. This is in contrast to the direct revenues to states that have
onshore federal leases within their boundaries, as noted above. On the other hand,
opponents point out the budget implications as a result of the loss of federal
revenues.
There are two fundamental purposes for revenue sharing programs, according
to the Coastal Impact Assistance Working Group (an MMS advisory group): (1) to
9 State jurisdiction is typically limited to three nautical miles seaward of the baseline from
which the breadth of the territorial sea is measured. However, the state jurisdiction off the
Gulf Coast of Florida and Texas extends nine nautical miles and for Louisiana, three
imperial nautical miles. Federal jurisdiction extends, typically, 200 nautical miles seaward
of the baseline from which the breadth of the territorial sea is measured.

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fund projects that will mitigate the environmental and economic impact of OCS
energy development, including the need for infrastructure and public services, and
(2) to help sustain development of nonrenewable energy sources.10
Two federal revenue sharing programs addressed coastal impacts from OCS
energy development: (1) the now-expired Coastal Energy Impact Program (CEIP),
established as an amendment to the Coastal Zone Management Act, and (2) the
Section “8(g)” zone program, established under OCSLA. A third program, the Land
and Water Conservation Fund, has also provided state funding from the OCS revenue
stream, but the distribution of those revenues has no connection with OCS activities.
Even the CEIP program was not considered a true revenue-sharing program because
its funding levels were not based on the amount of leasing activity in the OCS.
A new Coastal Impact Assistance Program is established under the Energy
Policy Act of 2005 (P.L. 109-58) as an amendment to Section 31 of the OCSLA (43
U.S.C. 1356a). Under this program, the Secretary of the Interior is to disburse,
without further appropriation, $250 million per year during FY2007-FY2010 to
producing states and political subdivisions according to specified allocations. The
states must submit plans on how they will spend these funds for approval by the
Secretary of the Interior. Among other things, the funds are designated for the
restoration of coastal areas, mitigation of damage to natural resources, the
implementation of federally approved conservation management plans, and for
infrastructure projects.
Several legislative proposals (discussed below) would require that a percentage
of revenue generated from offshore federal leases go to coastal states.
Offshore Leasing Moratoria
The offshore leasing moratoria began with the FY1982 Interior Appropriations
Act (P.L. 97-100), which prohibited new leases off the shore of California. The
imposition of other moratoria came about after many coastal states and
environmental groups contended that leasing tracts in environmentally sensitive areas
might lead to activities that could cause economic or irreversible environmental
damage. Eventually, the moratoria were expanded to include New England, the
Georges Bank, the mid-Atlantic, the Pacific Northwest, much of Alaska, and a
portion of the eastern Gulf of Mexico. Because of environmental and economic
concerns, Congress for the past two decades has supported annual moratoria on
leasing and drilling in the OCS. Congress enacted the moratoria for each of fiscal
years 1982-2006 through the annual Interior Appropriations bill.
President George H.W. Bush, in 1990, responding to pressure from the states
of Florida and California and others concerned about protecting the ocean and coastal
environments, issued a presidential directive ordering the Department of the Interior
(DOI) not to conduct offshore leasing or preleasing activity in places other than
10 Coastal Impact Assistance, Report to the OCS Policy Committee from the Coastal Impact
Assistance Working Group, October 1997.

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Texas, Louisiana, Alabama, and parts of Alaska until 2000 — prohibiting leasing in
the same areas covered by the annual moratoria. In 1998, President Clinton extended
the presidential offshore leasing prohibition until 2012.
The FY2006 Interior and Environment Appropriations Act (P.L. 109-54)
continued the leasing moratoria in other areas, including the Atlantic and Pacific
Coasts. An amendment to lift the moratorium in the eastern Gulf of Mexico was
offered (House Amendment 174, Representative Istook) on the House floor during
debate but was rejected on a point of order. An amendment (Representative Peterson)
that would have lifted the moratoria on offshore natural gas was defeated (see Roll
Call vote no. 192, May 19, 2005).
However, the FY2006 Interior Appropriations Act did not include language to
prohibit oil and gas leasing in the North Aleutian Basin Planning Area. The FY2004
law (P.L. 108-108) and FY2005 law (P.L. 108-447) similarly omitted this language.
There is reportedly some industry interest in eventually opening the area to oil and
gas development as an offset to the depressed fishing industry in the Bristol Bay area.
Environmentalists and others oppose this effort. The North Aleutian Basin Planning
Area, containing Bristol Bay, is not in the current MMS five-year leasing plan (2002-
2007) but is contained in the proposed leasing program for 2007-2012.
Despite the current Bush Administration’s interest in increasing the nation’s
energy supply, Interior Secretary Norton announced in December 2001 that it would
be up to the states to reconsider the leasing moratoria off their coasts. That position
was viewed as leaving the door open to leasing in areas now under the moratoria,
even though the Bush Administration officially supports the moratoria.
Natural Gas-Only Proposals
Under current law, all OCS lease sales include both oil and gas, and a lessee is
required to develop the gas or the oil once it is discovered. Natural gas-only leases
have been met with much skepticism by many experts in geology, who note that most
of these offshore fields are likely to contain both oil and gas. Further, industry might
be reluctant to bid on leases that did not transfer ownership of all discovered
resources. Proponents argue that production of natural gas only would lessen states’
concerns. Legislative proposals on natural gas-only leasing are summarized below.
Budget reconciliation provisions approved by the House Resources Committee
on October 26, 2005, would have required the Secretary of the Interior to offer
natural gas-only leases, allowed states to opt out of the OCS leasing moratoria, and
given states that allowed such leasing a larger share of royalty revenues. The House
Resources Committee appears to be interested in reviving that proposal (see H.R.
4241, below).
In addition, the bill would have imposed a statutory leasing prohibition through
June 30, 2012, on the OCS areas currently under moratoria and revoked the 1998
Clinton leasing prohibition that covers the same period. After June 30, 2012, the
proposal would have allowed states to petition for five-year moratorium extensions
for OCS areas within 125 miles of their coastlines.

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Lease Sale 181 — Revisited
Sales in the eastern Gulf of Mexico (GOM) have been especially controversial.
A Bush Administration plan (originating in the Clinton Administration) to lease 5.9
million acres in the eastern GOM (Lease Sale 181) sparked considerable debate,
although the area was not under a leasing moratorium. No eastern GOM lease sale
had taken place since 1988. The Lease Sale 181 area was considered by opponents
to be too close to the shore and to environmentally sensitive areas. Some tracts were
as close as 17 miles from the Florida and Alabama coastline. The major concern of
those in Florida opposing the sale was impairing the value of tourism to the state. If
an accident were to occur, causing an oil spill, it could damage the state’s beaches
and thus the tourist industry. It also could severely affect the marine environment,
opponents contended.
The original area of 5.9 million acres, estimated to contain nearly 8 trillion cubic
feet (tcf) of natural gas and 396 million barrels of oil, was reduced to 1.47 million
acres after intense pressure from environmentalists and state officials. The reduced
Lease Sale 181 offered 256 blocks containing an estimated 1.25 tcf of natural gas and
185 million barrels of oil. The sale took place December 5, 2001.
Toward the end of the first session of the 109th Congress, Senator Pete
Domenici, Chairman of the Senate Energy and Natural Resources Committee,
expressed an interest in opening up offshore areas now under the moratoria in a push
to ease the “natural gas crisis.”11 The legislation he introduced (S. 2253) would be
limited to offering for lease a portion (3.6 million acres) of Lease Sale Area 181
within a year of enactment (see Figure 3). Based on revised MMS estimates
provided to the committee, there are about 6 tcf of natural gas and 930 million barrels
of oil (mbo) in the area to be leased under S. 2253. An alternative bill (S.
2239/Martinez) would extend a buffer zone around Florida’s coast out 150 miles and
would thus make available a much smaller area for Lease Sale Area 181 — about
740,000 acres.
The MMS’s proposed five-year leasing program includes a Lease Sale 181 area
that is smaller than the Domenici version but larger than the Martinez proposal. The
area recommended by the MMS is 2 million acres and estimated to contain 3.4 tcf of
natural gas and 530 mbo.
The Senate Energy Committee bill seeks a lease sale within one year of
enactment to make additional natural gas available and put downward pressure on
prices. This is unlikely to have any immediate impact on price by itself but may
contribute to a price decline in the long run. Even without Lease Sale 181, MMS
estimates that GOM production will increase from 3.7 tcf/year in FY2006 to 4.66
tcf/year in FY2010. Further, the Office of Management and Budget (OMB) estimates
that natural gas prices will fall from $9.13/Mcf in FY2006 to $6.25/Mcf in 2010.12
11 Inside Energy Extra, October 6, 2005.
12 DOI, MMS Budget Justifications FY2007, table 51, Federal Offshore Royalty Estimates,
p. 169.

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Figure 3. Eastern Gulf of Mexico and Sale 181 Area
Source: MMS U.S. Department of Interior, Minerals Management Service, Gulf of Mexico OCS
Region.
Several blocks removed by the Administration from eastern GOM Lease Sale
181 could become available for re-lease after 2007 as part of the Administration’s
new five-year leasing program. Industry groups contend that eastern GOM sales are
too limited, given what they say is an enormous resource potential, whereas
environmental groups and some state officials argue that the risks of development to
the environment and local economies are too great.
California Leases
Congress has banned additional drilling in the Santa Maria Basin and Santa
Barbara Channel areas where there are leased tracts. Companies unable to develop
their existing California lease holdings are seeking compensation from the federal
government. The companies contend that more than a billion dollars has already been

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spent to obtain the leases.13 In previous buyback settlements, firms have recouped
their bonus bid payments but lost possible future returns that would have been earned
if commercial production were achieved.14 In the case of the offshore California
leases, the Clinton Administration continued to extend the leases (through
suspensions) that were granted between 17-33 years ago, before the moratoria were
imposed.
The last suspension by MMS, in 1999, extended 36 of the 40 existing offshore
California leases at issue. This action was taken to give lease holders more time to
“prove up” oil reserves and for MMS to show consistency with state coastal zone
management plans, as required by 1990 amendments to the Coastal Zone
Management Act (P.L. 92-583). A state’s objection could prevent development of
the oil and gas leases.
On June 20, 2001, the U.S. District Court for the Northern District of California
struck down the MMS suspensions, potentially allowing the leases to expire, because
it held that MMS failed to show consistency with the state’s coastal zone
management plan. The Bush Administration appealed this decision to a three-judge
panel of the Ninth Circuit of Appeals in San Francisco on January 9, 2002, and has
proposed a more limited lease development plan that involves 20 leases, using
existing platforms and other necessary infrastructure. However, on December 2,
2002, the Ninth Circuit panel upheld the District Court decision.15 The Department
of the Interior did not appeal this decision and is currently working with lessees to
resolve the issue. A breach-of-contract lawsuit was filed in the U.S. Federal Court
of Claims against MMS on January 9, 2002, by nine oil companies seeking $1.2
billion in compensation for their undeveloped leases (Amber Resources et al. v.
United States).
After the lawsuit was filed, several oil and gas lessees involved in the dispute
submitted a new round of suspension applications to prevent lease termination and
loss of development rights. In response, the MMS prepared six environmental
assessments and found no significant impact for processing the applications.
However, under the Coastal Zone Management Act, a consistency review by MMS
and the state’s response to that review must occur before a decision is made to grant
or deny the requests. The State Coastal Commission ruled unanimously on August
11, 2005, that the lease suspensions should not be renewed. Following that decision,
on August 12, a U.S. District Court ordered the MMS to conduct additional studies
under the National Environmental Policy Act (NEPA) of the 36 leases under
suspension. MMS argued that it had presented sufficient evidence for the judge to
reach a decision on whether to allow MMS to grant further suspensions. Senator
13 Inside Energy with Federal Lands, Sept. 3, 2001.
14 Estimating future revenues with limited drilling is difficult at best because it is not
possible to determine the extent (if any) or quality of hydrocarbons. According to the MMS,
the leased area contains an estimated 1 billion barrels of oil and 500 billion cubic feet of
unproved reserves.
15 Ninth U.S. Circuit Court of Appeals, California v. Norton, 01-16637.

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Diane Feinstein of California has urged that the MMS conduct additional studies or,
if not, allow the leases to terminate.16
In the meantime, on November 17, 2005, the U.S. Federal Court of Claims made
a determination in the Amber Resources lawsuit that the federal government breached
its contract with the lessees regarding the 36 offshore California leases. Although the
government was ordered to repay the lessees $1.1 billion, the judge deferred a final
judgment until additional claims (such as recovery of sunk costs) are resolved. If a
settlement is reached, the MMS would automatically terminate the leases. This
action would then negate any further action on the consistency determinations. Thus,
no further action will be taken by the Department of the Interior to address the
concerns of the California Coastal Commission until a final judgment is reached.
Royalty Relief
Royalty relief is commonly granted to assure full production of offshore oil and
gas. OCSLA authorizes the Secretary of the Interior to grant royalty relief in order
to promote increased oil and gas production. There are generally four royalty relief
categories in the GOM: Deepwater, Shallow Water Deep Gas, End-of-Life, and
Special Case. Royalty relief under the End-of-Life and Special Case categories was
already in place under OCSLA before the Deep Water Royalty Relief Act of 1995
(DWRRA). The DWRRA expands the Secretary’s authority to use royalty relief as
an incentive for leasing federal OCS Gulf of Mexico deepwater. Under DWRRA,
the Secretary of the Interior may reduce royalties if production would otherwise be
uneconomic.17 Threshold price levels were established in 1995, above which the
relief is discontinued. In 2004, the threshold price was $33.55 per barrel for
deepwater oil and $4.19 per million BTUs for deepwater natural gas. The threshold
price levels are adjusted annually for inflation.18
Royalty relief for OCS oil and gas producers has been debated during
consideration of FY2007 Interior appropriations. On February 13, 2006, the New
York Times reported that the MMS would not collect royalties on leases awarded in
1998 and 1999 because no price threshold was included in the lease agreements
during those two years. Without the price thresholds, lease holders may produce oil
and gas up to specified volumes without paying royalties no matter what the price.
The MMS asserts that placing price thresholds in the lease agreements is at the
discretion of the Secretary of the Interior. However, according to the MMS, the price
16 Inside Energy, Aug. 22, 2005
17 A brief description of royalty relief programs offered by the MMS can be found on its
website at [http://www.gomr.mms.gov/homepg/offshore/royrelef.html]. A more detailed
analysis of the royalty relief programs is contained in the following report: Department of
the Interior, MMS, Guidelines for the Application, Review, Approval, and Administration
of the Deepwater Royalty Relief Program for Pre-Act Leases and Post-2000 Leases,
appendix 1 to NTL no. 2002-No2, February 2002.
18 Price threshold levels for deepwater oil and gas can be found on the MMS website.

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CRS-13
thresholds were omitted by mistake from 576 offshore leases during 1998 and 1999.19
The House Government Reform Subcommittee on Energy and Resources, as well as
the MMS, is investigating how the omission occurred.
A House committee amendment to the FY2007 Interior appropriations bill
would require the Secretary of the Interior to include price thresholds in all leases
with royalty relief provisions (based on $34.71/barrel of oil and $4.34/thousand cubic
feet of natural gas) and require the Secretary to renegotiate leases to conform with
current price threshold levels. The committee language, however, was removed
from the bill on a point of order during the House floor debate. Subsequently, the
House agreed to an amendment that would prohibit funds in the bill from being used
to issue new leases to current lessees that do not have price thresholds in their leases
under royalty relief. This provision would not affect the shallow water deep-gas
leases with price threshold levels currently around $9.90/thousand cubic feet.
Opponents of the amendment argue that the companies with valid leases, even
though without price thresholds, should not be penalized and that the provision could
result in breach-of-contracts lawsuits by the companies.
According to the MMS, production from the deep gas-shallow water wells is
estimated to account for about 70% of the royalty-free production from 2006-2012,
whereas production from leases signed in 1998 and 1999 is estimated to account for
30% of the total royalty-free production during the six-year period. The total value
of foregone royalties over the six-year period is estimated by MMS at about $9.5
billion.
Lease Development in the Gulf of Mexico
The MMS reports that there is great potential in the central and western Gulf of
Mexico (GOM) deepwater regions (> 400 meters).20 Spurred by the Royalty Relief
Act of 1995, significant investment has been made, including bonus bids and annual
rents by major and independent oil and gas companies. Overall, since 1995,
deepwater production of oil has increased from 16% of total GOM production to
nearly 70% in 2005. Deepwater natural gas has risen from 3.8% of total GOM
production to 38% during the same period. The deepwater production in the GOM
is expected to continue growing over the next 20 years. There are, however, a limited
number of rigs available to drill, and there are prospects elsewhere that could make
any area available for leasing less likely to get developed in the short-term.21
Moreover, very little exploration and development have yet to occur within some of
the deepwater regions that were leased since 1995.
19 This information is from discussions with Walter Cruickshank, Deputy Director of MMS,
during April, 2006.
20 Department of the Interior, MMS, Deepwater Gulf of Mexico 2004: America’s Expanding
Frontier, OCS Report, MMS2004-021.
21 Ibid, p. 107.

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CRS-14
The amount of development of leases is significantly different in shallow and
deep regions. In the West and Central Gulf region, at less than 400 meters deep,
about 40% of the leased tracts have been producing since the 1990s, whereas a small
and declining fraction of currently leased tracts have been explored but did not
produce. About 40% of the active leases at this depth have not been explored.
In the narrow region between 400 and 800 meters, most of the relatively few
leases have not been explored, but a small and increasing number have begun
production. This pattern is even clearer in the region deeper than 800 meters, where
a large number of leases have been let, especially since 1995, and only a small
fraction of them have been explored.
A major stimulus to exploration and development of a promising lease is the
approach of the end of the lease term. MMS officials contend they are allowing
leases to expire and putting them up for reletting. MMS officials point out that, with
a 10-year lease period, the many deepwater leases let in the mid-1990s will be
running out in the next few years, which may stimulate increased activity in that
region.
Barriers to Development
The high proportion of deepwater leases that have not been explored, in light of
the high productivity of those that have been developed, raises questions of barriers
that may be impeding full development of the region’s potential. Although even
developed regions have many leases that are not explored, the fact that more than
90% of deepwater leases have not been explored stands out.
According to MMS officials interviewed by CRS,22 the major factor in
determining exploration is the high cost of activity in the deepwater region, and also
the relatively few rigs that are available to operate there. Financing oil exploration
and development is an extremely complex process, frequently involving secondary
markets for leases and farming out development to obtain financing. According to
MMS, no barriers exist to discourage or penalize innovative and flexible financing
schemes.
109th Congress Legislation
S. 726 (Alexander)
Natural Gas Price Reduction Act. Several provisions focus on the OCS: a
coastal state can request an estimate of the oil and natural gas lying seaward of the
state; a state can opt out or consent to the current OCS moratoria; states or lessees
would have the option to restrict OCS development to natural gas; states would
receive at least 12.5% of all qualified production revenues, which would be
distributed to those states with an approved Coastal Impact Assistance Plan; and
22 CRS analysts held frequent telephone conversations with MMS official and, on January
18, 2005, met in person for a conference of several hours.

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CRS-15
royalty relief would be provided for lessees producing in deep water. Introduced
April 6, 2005; referred to Committee on Energy and Natural Resources.
S. 1765 (Landrieu)
Louisiana Katrina Reconstruction Act. Chapter 1, Domestic Offshore
Reinvestment Act of 2005, Title VI, would give 50% of the revenue generated from
an OCS lease sale to the adjacent coastal state. From the state’s share, 35% would
be paid directly to the political subdivisions in that state. The funds would be
deposited into a trust fund, used for identified purposes, and allocated according to
an established formula. Chapter 2, Offshore Fairness Act of 2005, would, among
other things, extend the seaward boundaries of Louisiana from three geographical
miles to three marine leagues, contingent on the state meeting certain conditions
within five years after the date of enactment of this law. Introduced September 22,
2005, referred to the Committee on Finance.
S. 2239 (Martinez)
Permanent Protection for Florida Act of 2006. A “Florida Exclusion Zone”
would be established 150 miles off the coast of Florida within which no leases could
be offered and would thus be withdrawn and excluded from any MMS five-year
leasing program. Certain leases in the eastern Gulf of Mexico (GOM) planning area
would be relinquished in exchange for royalty forgiveness from producing leases in
the central and western GOM planning areas. Nothing in the bill would preclude the
Department of Commerce from designating the Florida Exclusion Zone a marine
sanctuary, preclude inspection and repair of subsea pipelines, affect recreational
activities, or limit any military activities. Certain leases would be subject to NEPA
review. The executive branch OCS moratoria would be extended through June 30,
2020. Referred to the Committee on Energy and Natural Resources.
S. 2253 (Domenici)
To require the Secretary of the Interior to offer the Lease Sale Area 181 of the
Gulf of Mexico for oil and gas leasing. The lease sale “181 Area” defined in the bill
would be offered for sale for oil and gas leasing within one year after the date of
enactment. Areas excluded would be any area within 100 miles from the Florida
coastline and areas east of the “Military Mission Line,” unless otherwise agreed to
by the Secretary of Defense. This act would make as much as 3.6 million acres
available for leasing. Approved by the Committee on Energy and Natural Resources
on March 8, 2006, by a vote of 16-5, S.Rept. 109-240.
S. 2290 (Pryor)
Reliable and Affordable Natural Gas Energy Reform Act of 2006. S 2253
would amend Section 8 of the Outer Continental Shelf Lands Act (43 U.S.C. 1337).
Under this amendment, the Secretary of the Interior would have the option to offer
natural gas leases in the moratoria areas as part of the 2007-2012 leasing program.
Regulations would be written to allow for the conversion of a natural gas lease to an
oil and gas lease with consent of the adjacent state governor and the lessees. The
Secretary of the Interior would amend the 2007-2012 leasing program to include the
original Lease Sale 181 area and conduct such sales before June 30, 2007. The
governor could petition the Secretary for an extension of the areas withdrawn from
leasing or an adjacent area 125 miles from the coastline of the state for a period
initially not longer than five years. An additional five years may be added. The

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CRS-16
governor could also petition to open areas now off limits for natural gas leases or oil
and gas leases. The Secretary would weigh environmental issues before issuing a
decision. States would receive 50% of the revenue stream from the leases (bonus
bids, royalties, and rents) off their coastline. The revenue sharing would apply to all
offshore leases. Existing offshore California or Florida leases located completely
within 100 miles of their coastlines would have the option of exchanging the lease
for a natural gas lease elsewhere. Referred to the Committee on Energy and Natural
Resources.
S. 2384 (Lott)
Gulf Coast Protection and Restoration Act of 2006. This bill would make Area
181 available for lease, as identified in the Final OCS Leasing Program for 2002-
2007, within one year of enactment of the legislation. Producing states would receive
50% of the qualified revenue generated from the leases in Area 181 each year. The
bill specifies how that money is to be used by the producing states. Introduced March
8, 2006. Referred to the Committee on Energy and Natural Resources.
S. 3711 (Domenici)
Gulf of Mexico Energy Security Act of 2006. S. 3711 would direct the
Secretary of the Interior to offer lease sales within the 181 Area, primarily in the
Central Gulf of Mexico as defined in the bill, within one year after enactment of this
legislation. The 181 Area (defined in the bill) is part of the original Lease Sale 181
contained in the Outer Continental Shelf (OCS) 1996-2001 5-Year Leasing Program
before the area was scaled back by the Secretary of the Interior. The 181 Area, as
defined in the bill, covers about 2.5 million acres. In addition, the bill would direct
the Secretary to offer for lease, as soon as practicable, an area south of the 181 Area
known as 181 South Area. This area covers about 5.8 million acres. 181 South Area
is currently under the OCS leasing moratoria but is under consideration by the
Minerals Management Service (MMS) in its proposed 2007-2012 5-Year Leasing
Program. The MMS estimates that together, these two areas covered by the bill
contain 5.8 trillion cubic feet of natural gas and 1.26 billion barrels of recoverable
oil. Senate passed S. 3711 on August 1, 2006 by a vote of 71-25.
Areas where preleasing and leasing activity would be excluded under the bill
and placed under moratorium until 2022, would be east of the Military Mission Line
(about 230 miles from Florida’s west coast), within 125 miles of Florida in the New
Eastern Gulf of Mexico Planning Area, and within 100 miles of the State of Florida
in the New Central Gulf of Mexico Planning Area. Current lessees within the
prohibited areas in the New Eastern and Central Gulf of Mexico Planning Areas
could exchange those leases for bonus or royalty credits (valued at the amount paid
in bonuses and rents on existing leases) for another lease in the Gulf of Mexico.
Revenue sharing provisions in the bill would allow for Gulf producing states
(defined as Alabama, Mississippi, Louisiana, and Texas) to receive 37.5% of
revenues generated from leases held in the 181 Area and 181 South Area beginning
FY2007. Beginning in FY2017 and thereafter, the Gulf producing states would also
receive 37.5% of the revenues generated from leases awarded within the 2002-2007
planning area, including historical leases (described in Sec. 5(b)(2)(C) of the bill).
Distribution among the Gulf producing states would be determined by the Secretary
of the Interior according to a formula to be developed that would accomplish a

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CRS-17
distribution inversely proportional to the respective distances from the coastlines to
the center of the lease tracts. The minimum amount available to any of the Gulf
producing states would be 10% of the qualified revenues. The Secretary would pay
20% of the state’s share to its coastal political subdivisions. The Land and Water
Conservation Fund (currently funded from OCS revenues) would receive 12.5% of
the qualified revenues and the Federal General Treasury would receive 50% of those
revenues. An annual net spending cap of $500 million (on revenues shared with the
states) above receipts in the newly opened areas is included in this bill.
H.R. 4241
Budget Reconciliation. Ocean State Options Act of 2005. Included in Title VI
of the House Resources Committee recommendation to the House budget
reconciliation package. Coastal states could opt out of the OCS leasing moratoria
and consider natural-gas-only or oil and gas leases, and receive a larger share of OCS
revenues. The proposal would repeal the comprehensive inventory of OCS oil and
gas passed earlier in the Energy Policy Act of 2005 (P.L. 109-58). Approved by the
Resources Committee October 26, 2005, by a vote of 24-16.
An amendment to the House budget reconciliation bill removed the Ocean
States Options Act of 2005 from the bill.
H.R. 4318 (Peterson)
Outer Continental Shelf Natural Gas Relief Act. All provisions to prohibit
preleasing and leasing natural gas in the OCS would be revoked. The presidential
withdrawal of certain OCS areas would also be revoked with respect to natural gas.
The governors of affected states could reject any lease within 20 miles of the
coastline of their state. The OCSLA would be amended to require in each five-year
leasing program at least 75% of the unleased acreage be offered for natural gas
leasing in each planning area. A revenue-sharing plan on new federal natural gas
leases would give 40% of the revenue stream to the states. Natural-gas-only leases
could be issued by the Secretary of the Interior subject to regulations established by
the Secretary. Existing oil and gas leases could be restricted to the development of
gas-only, and the Secretary could issue such a lease prior to the end of the current
five-year leasing program (2002-2007) without amending the program. The
Secretary could also include natural gas-only leases in the next (2007-2012 ) leasing
program. Introduced November 15, 2005. Referred to the Committees on
Resources, Energy, and Commerce and Education and the Workforce.
H.R. 4761 (Jindal)
Domestic Energy Production Through Offshore Exploration and Equitable
Treatment of State Holdings Act of 2006. The Outer Continental Shelf Lands Act
(OCSLA, 43 U.S.C. 1331 et seq.) would be amended by this bill. The Secretary of
the Interior would establish regulations for natural gas-only leases in the OCS. The
value of the leases for bidding purposes would exclude the value of any potential
crude oil. However, oil could be produced if the adjacent state government did not
object. Phased-in revenue sharing plans for the adjacent states would be established
for tracts within 100 miles of their coastlines and for tracts that lie beyond 100 miles
of their coastlines. The states’ share would eventually reach 42.5% of the revenues
generated from offshore leases under the phased-in plan. Leases not under the
phased-in plan would immediately receive 42.5% of the revenues generated from

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CRS-18
offshore leases between 4 marine leagues and 100 miles off the states’ coastlines.
Using specified criteria, the state may petition the Secretary to lease in the OCS
within the state’s adjacent zone. The Secretary would amend the current five-year
lease program to allow lease-sales to occur in areas covered by the petition unless
there is less than one year remaining in the current five-year lease program. If that
is the case, the Secretary would then include those lease sales in the next five-year
program. The OCS leasing program would offer at least 75% of “available unleased
acreage” in each OCS planning area. The state may also petition the Secretary to
extend the withdrawal up to five years for each petition.
Lessees would submit a development and production plan to the Secretary for
review. The bill would establish a Federal Energy Natural Resources Enhancement
Fund to monitor wildlife and fish habitats and air and water quality. The federal law
that bars leasing and pre-leasing activity for oil and gas leasing in the OCS would no
longer apply. The Minerals Management Service would be called the National Ocean
Resources and Royalty Service.
A Federal Energy and Mineral Resources Professional Development Fund
would be established and funded to carry out the Energy and Mineral Schools
Reinvestment Act (see Section 23), which would amend P.L. 98-409 (30 U.S.C. 1221
et seq.) — Maintenance and Restoration of Historic and Petroleum and Mining
Engineering Programs. Introduced February 15, 2006. Referred to the Committee
on Resources. Committee Hearings held on June 14, 2006.
Approved by the House Resources Committee on June 21, 2006, by a vote of
29-9, and by the House on June 29, 2006, by a vote of 232-187. Significant
amendments to the original Jindal bill (H.R. 4761) include provisions on royalty
suspensions and a fee on non-producing leases. The Committee-passed bill would
allow lessees from the period 1995-2000 (those covered under the Deep Water
Royalty Relief Act of 1995) to request and the Secretary of the Interior to agree to an
amendment of their leases to include price thresholds in the amounts of $40.50 per
barrel of oil and $6.75 per million BTU of natural gas. There were leases let in 1998
and 1999 without the price thresholds. In addition, a conservation of resources fee
of $9/barrel of oil and $1.25 per million BTU for gas would be established and
applied to producing deepwater leases (>200 meters) that do not contain price
thresholds. A conservation of resources fee of $3.75 per acre would also be
established for all non-producing leases.

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