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Analyst: States Gaining Leverage over Feds in Offshore Negotiations

The settlement between the Minerals Management Service (MMS) and the state of Louisiana that puts a hold on future lease sales off the state's coast is part of an emerging trend in which states are gaining greater leverage and are renegotiating the terms of oil and natural gas production with the federal government, said a top energy analyst Thursday.

"When one producing state demands and receives concessions, it's just a matter of time before other producing states look for them too," said Kevin Book, senior vice president of energy policy analysis for Friedman, Billings, Ramsey & Co. Inc., an Arlington, VA-based financial services firm. "The conclusion to this would come if Louisiana's desires are satisfied or the oil [and natural gas] prices fall," he told NGI.

While the MMS-Louisiana settlement resolved the state's legal challenge to MMS' Lease Sale 200 that was held in August, Book believes the agreement will impact other leases sales. For one, it will push back the next Central Gulf of Mexico sale (Lease Sale 201) that's scheduled for March of 2007, he said. "It's my understanding that it's been delayed. It will not happen in March of '07." It could be rolled into the Interior offshore lease sales that are scheduled for August and December of next year, he noted.

Postponed lease sales could "potentially [push] out demand for drilling and seismic studies and [defer] arrival of new supply," he wrote in a research note issued Thursday. "From a broader perspective, we highlight this as part of a trend spurred by high prices that is likely to continue until [Gulf of Mexico] states win a portion of federal production revenues."

A greater share of federal royalties from offshore production is a key goal of Louisiana. But Book gives slim odds to Congress passing legislation this year that would give Louisiana and other Gulf coastal states a bigger slice of the royalty pie. "We don't see a very large chance of an offshore drilling bill happening that would do that."

The Senate offshore leasing bill, which would increase royalties for Gulf coastal states, is a "very fragile deal" that would fall apart if House Republicans try to make any changes to it. So far, House leaders have opposed accepting the Senate's narrower version. But that could change during the lame duck session if Democrats take back the majority in the November elections, Book noted.

Faced with the prospect of a Democrat-led Congress, Republicans might say "'we're better off with something [on offshore leasing] than nothing.' But even that's not a guarantee," he said.

Under the MMS-Louisiana settlement, the Interior Department agency has agreed to halt all future oil and natural gas lease sales off the coast of Louisiana until it completes an environmental review that takes into account the impact of Hurricanes Katrina and Rita on the state's wetlands and infrastructure (see Daily GPI, Oct. 25). In exchange, Louisiana has said it would dismiss its lawsuit challenging the MMS' western Gulf of Mexico Lease Sale 200, which took place in August (see Daily GPI, July 31).

The settlement allows Interior to issue leases to companies for the offshore parcels that they acquired the rights to develop under Lease Sale 200, the MMS said. Sixty-two companies turned in high bids of $340.9 million during the August sale. But no exploration plan will be allowed on the Lease Sale 200 parcels until the MMS has completed its comprehensive environmental review, Louisiana Gov. Kathleen Blanco noted. The environmental analysis will probably not be concluded before June of next year, said Book.

The Department of Justice, Interior, the state of Louisiana and the American Petroleum Institute have agreed to the final terms of the settlement, according to Interior. All parties to the agreement must submit their settlement agreement for approval to the U.S. District Court for the Eastern District of Louisiana in New Orleans.

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