Outer Continental Shelf: Debate Over Oil and Gas Leasing and Revenue Sharing
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 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 not to conduct offshore leasing or preleasing activity in areas covered by the annual legislative moratoria until 2000. In 1998 President Clinton extended the offshore leasing prohibition until 2012. This report provides background on the issues and examines the current status of relevant legislation.
Order Code IB10149
CRS Issue Brief for Congress
Received through the CRS Web
Outer Continental Shelf:
Debate Over Oil and Gas Leasing
and Revenue Sharing
Updated April 7, 2006
Marc Humphries
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Offshore Leasing System
Federal Distribution of OCS Revenues
Coastal Impact Assistance
Offshore Leasing Moratoria
Natural Gas-Only Proposals
Lease Sale 181 — Revisited
California Leases
Lease Development in the Gulf of Mexico
Barriers to Development
LEGISLATION
FOR ADDITIONAL READING
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Outer Continental Shelf:
Debate Over Oil and Gas Leasing and Revenue Sharing
SUMMARY
Several new bills related to oil and gas
in places other than Texas, Louisiana, Ala-
leasing in the outer continental shelf (OCS)
bama, and parts of Alaska — areas covered by
have been introduced in Congress. On Febru-
the annual legislative moratoria — until 2000.
ary 16, 2006, the Senate Energy Committee
In 1998, President Clinton extended the prohi-
held a hearing on its bill S. 2253, which would
bition until 2012.
require Lease Sale 181 to be offered within
one-year of passage. The Senate Energy panel
The Outer Continental Shelf Lands Act
passed S. 2253 by a vote of 16-5 on March 8,
(OCSLA) of 1953, as amended, provides for
2006.
oil and gas leasing of OCS lands in a manner
that protects the environment and returns
Lease Sale 181 has galvanized interest in
revenues to the federal government in the way
a number of related concerns. Some members
of bonus bids, rents, and royalties. OCSLA
of Congress used the hearing to argue for
requires the Secretary of the Interior to submit
greater coastal revenue sharing based on
five-year leasing programs that specify the
offshore production, others to promote natural
time, location, and size of the leases to be
gas-only leases in areas now off-limits. Some
offered.
members are calling for much more limited
access to offshore federal areas.
States with offshore energy development
have been seeking to receive a direct share of
The OCS moratoria, which prohibit
the federal revenues generated by those activi-
leasing on most federal offshore lands, have
ties. Currently, the affected states receive
been an important issue in the debate over
revenue indirectly from offshore oil and gas
energy security and the potential availability
leases in federal waters. This is in contrast to
of additional domestic oil and gas resources.
states with onshore leases on federal lands,
Congress has enacted the moratoria for each
which receive a direct share of the oil and gas
of fiscal years 1982-2006 in the annual Inte-
leasing revenues.
rior Appropriations bill. Proponents of the
moratoria contend that offshore drilling would
The possibility of oil and gas production
pose unacceptable environmental risks and
in offshore areas covered by the moratoria has
threaten coastal tourism industries.
sparked sharp debate in Congress. A proposal
to require the Department of the Interior to
President George H.W. Bush, in 1990,
conduct a comprehensive inventory of OCS
responding to pressure from the states of
oil and natural gas resources drew heated
Florida and California and others concerned
opposition, although it was ultimately in-
about protecting the ocean and coastal envi-
cluded in the Energy Policy Act of 2005 (P.L.
ronments, issued a Presidential Directive
109-58, Section 357). The report was pub-
ordering the Department of the Interior not to
lished in February 2006. Opponents of the
conduct offshore leasing or preleasing activity
OCS inventory saw it as a first step toward
lifting the OCS leasing moratoria.
Congressional Research Service ˜ The Library of Congress
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MOST RECENT DEVELOPMENTS
Several new bills related to oil and gas leasing in the outer continental shelf (OCS) have
been introduced in Congress. On February 16, 2006, the Senate Energy Committee held a
hearing on its bill S. 2253, which would require Lease Sale 181 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 used the hearing to argue 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.
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 estimated 8.5 billion barrels (bbo) of known oil reserves
(82% in the Gulf of Mexico [GOM]) and 29.3 trillion cubic feet (tcf) of natural gas (95% in
the GOM). In the undiscovered resource category, the DOI estimated about 86 bbo (51% in
the GOM) and 420 tcf of natural gas (55% in the GOM). The Minerals Management Service
(MMS) has introduced its proposed five-year leasing program for 2007-2012. Areas currently
in the OCS moratoria along the Atlantic coast, the North Aleutian Basin (Alaska), and the
central GOM (under proposed redrawn boundaries) are included in the proposed leasing
program. There would be no leases in the redrawn eastern GOM planning area.
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 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 not to conduct offshore leasing
or preleasing 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, while 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 Department of the Interior 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.
Although there was no similar OCS leasing provision included in the Senate budget
reconciliation package, there was interest in the Senate in leasing additional acreage,
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immediately, within Lease Sale 181 (discussed later in this report) in the eastern GOM. The
current proposal of S. 2253 reflects that ongoing interest. 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 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. OCSLA requires the
Secretary of the Interior to submit five-year leasing programs that specify the time, location,
and size of the leases to be offered. Each five-year leasing program entails a lengthy multi-
step process including 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.
The offshore leasing program is administered by the Minerals Management Service
(MMS), an agency within the Department of the Interior. 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 (not referenced on map below), and the Chukchi
Sea/Hope Basin (see Figure 2). To date, nine of the twelve GOM lease sales and four of the
seven 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.
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 bonus bid is determined for each tract
offered. Over 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 the surge in
bonus revenue.1 Bonus bids totaled $523.4 million in FY2004. 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.”2 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 are being produced. Bonding requirements are
1 Department of the Interior, FY2002 Budget Justifications, p. 63.
2 A royalty-in-kind payment would be in the form of barrels of oil or cubic feet of natural gas.
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$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.
Federal Distribution of OCS Revenues
Federal revenues from offshore leases were estimated at $5.3 billion in FY2004 by the
MMS. Over the previous 10 years (1994-2003) revenues from federal OCS leases had
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
$5.3 billion revenue in FY2004, $4.6 billion was from royalties.
Figure 1. Distribution of Revenue from Federal and Indian
Leases, FY2004 (millions of dollars)
These revenues are split among various government accounts. Revenues from the
offshore leases are statutorily allocated among the coastal states, 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 1. The states’ share from offshore
leases was $75.8 million out of $1,248.7 million in total state receipts. States receive 27%of
OCS receipts closest to state offshore lands under section 8(g)3 of the OCSLA amendments
3 The 8(g) revenue stream is the result of a 1978 OCSLA amendment that provides for a “fair and
equitable” sharing of revenues from 8(g) common pool lands. These lands are defined in the
amendments as submerged acreage lying outside the 3-nautical mile state-federal demarcation line,
typically extending to a total of 6 nautical miles offshore but which 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, then were paid out between 1986 and 2001.
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of 1985. A dispute over what was meant by a “fair and equitable” division of those receipts
was not settled until 1985 with the enactment of P.L. 99-272.4
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.
Coastal Impact Assistance
States with offshore energy development in federal waters5 have been seeking to return
a significant portion of the federal revenues generated to these states. 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 energy development occurs within
those jurisdictions on federal lands, and seek revenues that will help coastal states respond
to adverse onshore effects of offshore energy development. Coastal destruction has received
more attention in Louisiana, where many square miles of wetlands are being lost to the ocean
each year. And one of the causes of this loss is thought to be wide-spread energy related
development. 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,
as noted above.
There are two fundamental purposes for revenue sharing programs, according to the
Coastal Impact Assistance Working Group (an MMS advisory group): 1) to 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.6
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.
4 Department of the Interior, Minerals Management Service, Mineral Revenues 2000, p. 95.
5 State jurisdiction is typically limited to 3 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 9 nautical miles and for Louisiana, 3 imperial nautical miles. Federal
jurisdiction extends, typically, 200 nautical miles seaward of the baseline from which the breadth
of the territorial sea is measured.
6 Coastal Impact Assistance, Report to the OCS Policy Committee from the Coastal Impact
Assistance Working Group. October 1997.
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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 Texas, Louisiana, Alabama, and
parts of Alaska until 2000 — the same areas covered by the annual moratoria. In 1998
President Clinton extended the presidential offshore leasing prohibition until 2012.
The FY2006 Interior 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 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 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 MMS
current five-year (2002-2007) leasing plan but is contained in the proposed leasing program
for 2007-2012.
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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 request a study of the potential oil and gas resources and leasing moratorium off
their shores. In addition, Secretary Norton would leave it up to the states to reconsider the
leasing moratoria off their coasts. Thus, at that time, there was no overarching executive
branch role in trying to lift the moratoria. Reaction to this stance had been somewhat mixed
because, as some saw it, she left 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 would likely be unwilling to leave any
oil in the ground if it were found. Proponents would like the states to be able to produce
natural gas off their coasts with less concern about potential damage from an oil spill.
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 its OCS proposal to the 2005 budget reconciliation package (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.
Lease Sale 181 — Revisited
Sales in the Eastern GOM have been especially controversial. A Bush Administration
plan (originating in the Clinton Administration) to lease 5.9 million acres in the Eastern
GOM sparked considerable debate, although this 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 many 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.
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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.”7
However, 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 enacting the proposal.
There are an estimated 6 tcf of natural gas and 930 million barrels of oil in the area. An
alternative bill (S. 2239/Martinez) would extend a buffer zone around Florida’s coast out
150 miles and would 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 plan seeks a lease sale within one-year of enactment of
the act as an attempt to make additional natural gas available and to 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. 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.
There are several blocks that were removed by the Administration from eastern GOM
Lease Sale 181 that 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 over a billion dollars has already been spent to obtain the leases.8
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.9 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.
7 Inside Energy Extra, October 6, 2005.
8 Inside Energy with Federal Lands, September 3, 2001.
9 Estimating future revenues with limited drilling is difficult at best because it is not possible
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.
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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.10
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 against MMS on January
9, 2002, by nine oil companies seeking $1.2 billion in compensation for their undeveloped
leases is pending further action. The suit was filed with the Court of Federal Claims in
Washington, D.C.
Recently, 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 has 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 NEPA studies 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 Diane Feinstein of California has urged that the MMS
conduct additional studies or, if not, have the leases terminated.11
In the meantime, on November 17, 2005, the U.S. Federal Court of Claims made a
determination in the breech-of-contract lawsuit filed by nine oil companies (Amber
Resources et al. v. United States) that the federal government breeched 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 judgement 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 judgement
is reached.
10 Ninth U.S. Circuit Court of Appeals, California v. Norton, 01-16637.
11 Inside Energy, August 22, 2005
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Figure 2. MMS 5-Year Program Areas
Lease Development in the Gulf of Mexico
The MMS reports12 that there is great potential in the Central and Western GOM
deepwater regions. And as a result of the Royalty Relief Act of 1995, there has been
significant investment made (in bonus bids and annual rents) by major and independent oil
and gas companies. However, very little exploration and development has yet to occur
within some of the deepwater regions that were leased since 1995. Overall, however, since
1995, deepwater production of oil has increased from 16% of total GOM production to
nearly 70% in 2005. And natural gas has risen from 3.8% of total GOM production to 38%
during the same period. The deepwater production in the GOM is promising and expected
to grow significantly over the next 20 years. There are, however, a limited number of rigs
available to drill and there are prospects elsewhere which could make any area available for
leasing less likely to get developed in the short-term.13
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, while a small and declining fraction
12 Department of the Interior, MMS, Deepwater Gulf of Mexico 2004: America’s Expanding
Frontier, OCS Report, MMS2004-021
13 Ibid, p. 107
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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 greater than 800 meters deep, 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 vigorously terminating expired
leases 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. While 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,14 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.
LEGISLATION
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 3.6 million acres available for leasing.
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
14 CRS analysts held frequent telephone conversations with MMS officials, and on January 18, 2005,
met in person for a conference of several hours.
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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. Leases
described in the bill under section f (2) would be subject to NEPA review. The executive
branch OCS moratoria would be extended through June 30, 2020.
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 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 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.
S. 2384 (Lott)
Gulf Coast Protection and Restoration Act of 2006. This bill would make available for
ease Area 181, 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
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 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 Resource, Energy and Commerce and Education and
the Workforce.
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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
those tracts that lie beyond 100 miles of their coastlines. The states’ share would eventually
reach 50% of the revenues generated from offshore leases under the phased-in plan. Leases
not under the phased-in plan would immediately receive 50% of the revenues generated from
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 leases 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 of this bill), 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.
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.
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
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Impact Assistance Plan; and royalty relief would be provided for lessees producing in deep
water. Introduce April 6, 2005; referred to Committee on Energy and Natural Resources.
S. 1765 (Landrieu)
Louisiana Katrina Reconstruction Act. Chapter One, 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
3 geographical miles to 3 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.
FOR ADDITIONAL READING
CRS Report RL31521. Outer Continental Shelf Oil and Gas: Energy Security and Other
Major Issues, by Marc Humphries.
CRS-13
CRS Issue Brief for Congress
Received through the CRS Web
Outer Continental Shelf:
Debate Over Oil and Gas Leasing
and Revenue Sharing
Updated April 7, 2006
Marc Humphries
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Offshore Leasing System
Federal Distribution of OCS Revenues
Coastal Impact Assistance
Offshore Leasing Moratoria
Natural Gas-Only Proposals
Lease Sale 181 — Revisited
California Leases
Lease Development in the Gulf of Mexico
Barriers to Development
LEGISLATION
FOR ADDITIONAL READING
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Outer Continental Shelf:
Debate Over Oil and Gas Leasing and Revenue Sharing
SUMMARY
Several new bills related to oil and gas
in places other than Texas, Louisiana, Ala-
leasing in the outer continental shelf (OCS)
bama, and parts of Alaska — areas covered by
have been introduced in Congress. On Febru-
the annual legislative moratoria — until 2000.
ary 16, 2006, the Senate Energy Committee
In 1998, President Clinton extended the prohi-
held a hearing on its bill S. 2253, which would
bition until 2012.
require Lease Sale 181 to be offered within
one-year of passage. The Senate Energy panel
The Outer Continental Shelf Lands Act
passed S. 2253 by a vote of 16-5 on March 8,
(OCSLA) of 1953, as amended, provides for
2006.
oil and gas leasing of OCS lands in a manner
that protects the environment and returns
Lease Sale 181 has galvanized interest in
revenues to the federal government in the way
a number of related concerns. Some members
of bonus bids, rents, and royalties. OCSLA
of Congress used the hearing to argue for
requires the Secretary of the Interior to submit
greater coastal revenue sharing based on
five-year leasing programs that specify the
offshore production, others to promote natural
time, location, and size of the leases to be
gas-only leases in areas now off-limits. Some
offered.
members are calling for much more limited
access to offshore federal areas.
States with offshore energy development
have been seeking to receive a direct share of
The OCS moratoria, which prohibit
the federal revenues generated by those activi-
leasing on most federal offshore lands, have
ties. Currently, the affected states receive
been an important issue in the debate over
revenue indirectly from offshore oil and gas
energy security and the potential availability
leases in federal waters. This is in contrast to
of additional domestic oil and gas resources.
states with onshore leases on federal lands,
Congress has enacted the moratoria for each
which receive a direct share of the oil and gas
of fiscal years 1982-2006 in the annual Inte-
leasing revenues.
rior Appropriations bill. Proponents of the
moratoria contend that offshore drilling would
The possibility of oil and gas production
pose unacceptable environmental risks and
in offshore areas covered by the moratoria has
threaten coastal tourism industries.
sparked sharp debate in Congress. A proposal
to require the Department of the Interior to
President George H.W. Bush, in 1990,
conduct a comprehensive inventory of OCS
responding to pressure from the states of
oil and natural gas resources drew heated
Florida and California and others concerned
opposition, although it was ultimately in-
about protecting the ocean and coastal envi-
cluded in the Energy Policy Act of 2005 (P.L.
ronments, issued a Presidential Directive
109-58, Section 357). The report was pub-
ordering the Department of the Interior not to
lished in February 2006. Opponents of the
conduct offshore leasing or preleasing activity
OCS inventory saw it as a first step toward
lifting the OCS leasing moratoria.
Congressional Research Service ˜ The Library of Congress
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MOST RECENT DEVELOPMENTS
Several new bills related to oil and gas leasing in the outer continental shelf (OCS) have
been introduced in Congress. On February 16, 2006, the Senate Energy Committee held a
hearing on its bill S. 2253, which would require Lease Sale 181 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 used the hearing to argue 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.
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 estimated 8.5 billion barrels (bbo) of known oil reserves
(82% in the Gulf of Mexico [GOM]) and 29.3 trillion cubic feet (tcf) of natural gas (95% in
the GOM). In the undiscovered resource category, the DOI estimated about 86 bbo (51% in
the GOM) and 420 tcf of natural gas (55% in the GOM). The Minerals Management Service
(MMS) has introduced its proposed five-year leasing program for 2007-2012. Areas currently
in the OCS moratoria along the Atlantic coast, the North Aleutian Basin (Alaska), and the
central GOM (under proposed redrawn boundaries) are included in the proposed leasing
program. There would be no leases in the redrawn eastern GOM planning area.
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 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 not to conduct offshore leasing
or preleasing 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, while 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 Department of the Interior 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.
Although there was no similar OCS leasing provision included in the Senate budget
reconciliation package, there was interest in the Senate in leasing additional acreage,
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immediately, within Lease Sale 181 (discussed later in this report) in the eastern GOM. The
current proposal of S. 2253 reflects that ongoing interest. 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 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. OCSLA requires the
Secretary of the Interior to submit five-year leasing programs that specify the time, location,
and size of the leases to be offered. Each five-year leasing program entails a lengthy multi-
step process including 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.
The offshore leasing program is administered by the Minerals Management Service
(MMS), an agency within the Department of the Interior. 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 (not referenced on map below), and the Chukchi
Sea/Hope Basin (see Figure 2). To date, nine of the twelve GOM lease sales and four of the
seven 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.
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 bonus bid is determined for each tract
offered. Over 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 the surge in
bonus revenue.1 Bonus bids totaled $523.4 million in FY2004. 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.”2 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 are being produced. Bonding requirements are
1 Department of the Interior, FY2002 Budget Justifications, p. 63.
2 A royalty-in-kind payment would be in the form of barrels of oil or cubic feet of natural gas.
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$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.
Federal Distribution of OCS Revenues
Federal revenues from offshore leases were estimated at $5.3 billion in FY2004 by the
MMS. Over the previous 10 years (1994-2003) revenues from federal OCS leases had
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
$5.3 billion revenue in FY2004, $4.6 billion was from royalties.
Figure 1. Distribution of Revenue from Federal and Indian
Leases, FY2004 (millions of dollars)
These revenues are split among various government accounts. Revenues from the
offshore leases are statutorily allocated among the coastal states, 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 1. The states’ share from offshore
leases was $75.8 million out of $1,248.7 million in total state receipts. States receive 27%of
OCS receipts closest to state offshore lands under section 8(g)3 of the OCSLA amendments
3 The 8(g) revenue stream is the result of a 1978 OCSLA amendment that provides for a “fair and
equitable” sharing of revenues from 8(g) common pool lands. These lands are defined in the
amendments as submerged acreage lying outside the 3-nautical mile state-federal demarcation line,
typically extending to a total of 6 nautical miles offshore but which 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, then were paid out between 1986 and 2001.
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of 1985. A dispute over what was meant by a “fair and equitable” division of those receipts
was not settled until 1985 with the enactment of P.L. 99-272.4
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.
Coastal Impact Assistance
States with offshore energy development in federal waters5 have been seeking to return
a significant portion of the federal revenues generated to these states. 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 energy development occurs within
those jurisdictions on federal lands, and seek revenues that will help coastal states respond
to adverse onshore effects of offshore energy development. Coastal destruction has received
more attention in Louisiana, where many square miles of wetlands are being lost to the ocean
each year. And one of the causes of this loss is thought to be wide-spread energy related
development. 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,
as noted above.
There are two fundamental purposes for revenue sharing programs, according to the
Coastal Impact Assistance Working Group (an MMS advisory group): 1) to 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.6
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.
4 Department of the Interior, Minerals Management Service, Mineral Revenues 2000, p. 95.
5 State jurisdiction is typically limited to 3 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 9 nautical miles and for Louisiana, 3 imperial nautical miles. Federal
jurisdiction extends, typically, 200 nautical miles seaward of the baseline from which the breadth
of the territorial sea is measured.
6 Coastal Impact Assistance, Report to the OCS Policy Committee from the Coastal Impact
Assistance Working Group. October 1997.
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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 Texas, Louisiana, Alabama, and
parts of Alaska until 2000 — the same areas covered by the annual moratoria. In 1998
President Clinton extended the presidential offshore leasing prohibition until 2012.
The FY2006 Interior 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 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 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 MMS
current five-year (2002-2007) leasing plan but is contained in the proposed leasing program
for 2007-2012.
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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 request a study of the potential oil and gas resources and leasing moratorium off
their shores. In addition, Secretary Norton would leave it up to the states to reconsider the
leasing moratoria off their coasts. Thus, at that time, there was no overarching executive
branch role in trying to lift the moratoria. Reaction to this stance had been somewhat mixed
because, as some saw it, she left 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 would likely be unwilling to leave any
oil in the ground if it were found. Proponents would like the states to be able to produce
natural gas off their coasts with less concern about potential damage from an oil spill.
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 its OCS proposal to the 2005 budget reconciliation package (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.
Lease Sale 181 — Revisited
Sales in the Eastern GOM have been especially controversial. A Bush Administration
plan (originating in the Clinton Administration) to lease 5.9 million acres in the Eastern
GOM sparked considerable debate, although this 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 many 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.
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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.”7
However, 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 enacting the proposal.
There are an estimated 6 tcf of natural gas and 930 million barrels of oil in the area. An
alternative bill (S. 2239/Martinez) would extend a buffer zone around Florida’s coast out
150 miles and would 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 plan seeks a lease sale within one-year of enactment of
the act as an attempt to make additional natural gas available and to 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. 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.
There are several blocks that were removed by the Administration from eastern GOM
Lease Sale 181 that 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 over a billion dollars has already been spent to obtain the leases.8
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.9 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.
7 Inside Energy Extra, October 6, 2005.
8 Inside Energy with Federal Lands, September 3, 2001.
9 Estimating future revenues with limited drilling is difficult at best because it is not possible
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.
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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.10
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 against MMS on January
9, 2002, by nine oil companies seeking $1.2 billion in compensation for their undeveloped
leases is pending further action. The suit was filed with the Court of Federal Claims in
Washington, D.C.
Recently, 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 has 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 NEPA studies 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 Diane Feinstein of California has urged that the MMS
conduct additional studies or, if not, have the leases terminated.11
In the meantime, on November 17, 2005, the U.S. Federal Court of Claims made a
determination in the breech-of-contract lawsuit filed by nine oil companies (Amber
Resources et al. v. United States) that the federal government breeched 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 judgement 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 judgement
is reached.
10 Ninth U.S. Circuit Court of Appeals, California v. Norton, 01-16637.
11 Inside Energy, August 22, 2005
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Figure 2. MMS 5-Year Program Areas
Lease Development in the Gulf of Mexico
The MMS reports12 that there is great potential in the Central and Western GOM
deepwater regions. And as a result of the Royalty Relief Act of 1995, there has been
significant investment made (in bonus bids and annual rents) by major and independent oil
and gas companies. However, very little exploration and development has yet to occur
within some of the deepwater regions that were leased since 1995. Overall, however, since
1995, deepwater production of oil has increased from 16% of total GOM production to
nearly 70% in 2005. And natural gas has risen from 3.8% of total GOM production to 38%
during the same period. The deepwater production in the GOM is promising and expected
to grow significantly over the next 20 years. There are, however, a limited number of rigs
available to drill and there are prospects elsewhere which could make any area available for
leasing less likely to get developed in the short-term.13
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, while a small and declining fraction
12 Department of the Interior, MMS, Deepwater Gulf of Mexico 2004: America’s Expanding
Frontier, OCS Report, MMS2004-021
13 Ibid, p. 107
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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 greater than 800 meters deep, 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 vigorously terminating expired
leases 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. While 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,14 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.
LEGISLATION
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 3.6 million acres available for leasing.
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
14 CRS analysts held frequent telephone conversations with MMS officials, and on January 18, 2005,
met in person for a conference of several hours.
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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. Leases
described in the bill under section f (2) would be subject to NEPA review. The executive
branch OCS moratoria would be extended through June 30, 2020.
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 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 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.
S. 2384 (Lott)
Gulf Coast Protection and Restoration Act of 2006. This bill would make available for
ease Area 181, 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
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 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 Resource, Energy and Commerce and Education and
the Workforce.
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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
those tracts that lie beyond 100 miles of their coastlines. The states’ share would eventually
reach 50% of the revenues generated from offshore leases under the phased-in plan. Leases
not under the phased-in plan would immediately receive 50% of the revenues generated from
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 leases 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 of this bill), 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.
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.
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
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Impact Assistance Plan; and royalty relief would be provided for lessees producing in deep
water. Introduce April 6, 2005; referred to Committee on Energy and Natural Resources.
S. 1765 (Landrieu)
Louisiana Katrina Reconstruction Act. Chapter One, 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
3 geographical miles to 3 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.
FOR ADDITIONAL READING
CRS Report RL31521. Outer Continental Shelf Oil and Gas: Energy Security and Other
Major Issues, by Marc Humphries.
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