Could States Benefit From Revenue Sharing in the Atlantic?

Chris Carnevale | April 20, 2015 | Energy Policy, Offshore Drilling

To commemorate the 5th anniversary of the Deepwater Horizon tragedy and in the lead up to Hands Across the Sand on May 16, SACE is publishing a blog series highlighting some of the issues that Atlantic coastal communities may face in the process of the U.S. Department of Interior’s misguided attempt to open the Atlantic to offshore drilling. This is the first post of the series.

Courtesy U.S. Coast Guard

Proponents of offshore drilling in the Atlantic will often mention the large economic opportunity offered by revenue sharing–or a portion of the money oil companies pay to the federal government to lease the offshore production areas. In fact, revenue sharing is a key part of the economic equation that suggests how offshore drilling may appear to be worthwhile. The gigantic flaws with this argument are that revenue sharing does not exist for the Atlantic (it exists primarily in the Gulf states); it would not exist for the Atlantic without an act of Congress; and even if it were to be established by Congress for the Atlantic, it would likely only recoup losses of natural resource lost to oil & gas extraction, not necessarily generate net economic benefits, if it were modeled off of revenue sharing for the Gulf. Let’s dig into each of these points to see more about the truth about revenue sharing in the Atlantic.

Revenue Sharing Does Not Exist For The Atlantic And Would Take An Act Of Congress To Establish

There are two primary legal mechanisms of revenue sharing established in the Gulf of Mexico. The first mechanism is the Outer Continental Lands Act, Section 8(g), passed by Congress in 1953, which states that for offshore production within three nautical miles of the state/federal water boundary (3 miles offshore in most states), 27 percent of revenues will be split with the state/s. Since the currently proposed Atlantic offshore drilling would be nowhere close to the 8(g) line, or within 6 nautical miles from shore, and would instead be at least 50 miles from shore, this revenue sharing mechanism does not apply to proposed Atlantic drilling.

The second mechanism is the Gulf of Mexico Energy Security Act of 2006 (GOMESA). GOMESA was a bill passed by Congress in 2006 that sought in part to beef up revenue sharing with Gulf states that host offshore drilling. GOMESA expanded the geographic area eligible for revenue sharing beyond the 8(g) line for Gulf states and set up a system in which 37.5% of revenue goes to the states, but only for Texas, Louisiana, Mississippi, and Alabama. It is worth noting that GOMESA doesn’t even come into full effect until 2016 (a 10-year ramp up) thus it is so new that it is not even fully functional yet. Therefore, revenue sharing beyond the 8(g) line for the Atlantic would require an additional act of Congress, and if passed, it may take many additional years until states see the benefit of such policy.

Revenue Sharing Only Recoups Losses of Natural Resources Lost To Oil & Gas Extraction And Is Not Necessarily A Net Economic Benefit

The revenue that comes into the states is not a blank check to the state, however. One of the arguments commonly made by proponents of offshore drilling is that we could use the revenue generated by offshore drilling to fix our roads or invest in schools, yet according to the already-existing funding formula, neither of those uses would be allowed. There are just five approved uses of funds from revenue sharing, and all of them are just mitigation measures to counteract the environmental degradation from oil and gas development in the first place:

(A) Projects and activities for the purposes of coastal protection, including conservation, coastal restoration, hurricane protection, and infrastructure directly affected by coastal wetland losses.

(B) Mitigation of damage to fish, wildlife, or natural resources.

(C) Implementation of a federally-approved marine, coastal, or comprehensive conservation management plan.

(D) Mitigation of the impact of outer Continental Shelf activities through the funding of onshore infrastructure projects.

(E) Planning assistance and the administrative costs of complying with this section.

GOMESA was passed primarily with the understanding that the Gulf coast had endured decades of environmental degradation from the oil and gas industry and since it can be argued that this activity serves the national interest, it should be compensated by national funds. Republican Congressman Garrett Graves from Louisiana says that, as reported by the Times-Picayune, “Louisiana and other off-shore producing states have paid an environmental price as a result of oil and gas production that serves the entire United States. It is only appropriate […] to provide a share of off-shore revenue sharing for coastal restoration efforts.” No such statement can be made about the Atlantic given that we have not suffered decades of environmental degradation, and it only makes sense that we, as coastal citizens, should never want to be in a position in which this argument can be made.

Sadly though, it is questionable whether or not oil and gas revenue sharing funds are an adequate amount to even recoup losses, let alone profit. Cyn Sarthou, executive director of the Gulf Restoration Network, recently reported in an op-ed that Louisiana is losing a football field’s worth of wetlands every 45 minutes, largely due to the construction and operation of navigation, drilling, and pipeline canals to service the oil and gas industry. The State of Louisiana estimates that it will take $50 billion to restore the wetlands, but the oil and gas revenue won’t even come close to paying this cost.

Add to the equation the fact that oil and gas revenue sharing is the subject of an ongoing political football game, and the allure of revenue sharing diminishes further. Earlier this year, the federal budget suggested slashing oil and gas revenue sharing with Gulf states, sparking a firestorm of criticism from Gulf coast politicians.

As we have explained here, revenue sharing for Atlantic states is highly speculative and may not even be a net-benefit to our economy when you consider the impacts and losses to our costal economies that would be impacted by drilling, and therefore should not be viewed as an incentive to open the Atlantic to offshore drilling.

Chris Carnevale
Chris is SACE’s Climate Advocacy Director. Chris joined the SACE staff in 2011 to help with building public understanding and engagement around clean energy solutions to the climate crisis. Chris…
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