A House Resources Committee bill (HR 4761) that would open up more areas of the Outer Continental Shelf (OCS) to oil and natural gas drilling and would give states a greater share of the royalties from offshore production would cost the federal government $11 billion over the next decade if enacted, the Congressional Budget Office (CBO) said in a new report.

The CBO calculated that HR 4761 would bring in about $18.5 billion in new revenue to the federal government, but would cost it more than $28 billion over the 2007-2016 period.

The “estimated impact is dominated” by the revenue-sharing provisions in the bill that would allocate about $20.6 billion in offshore production royalties to coastal states over the 10-year period, said the CBO, which provides budget analyses of congressional and administration proposals. The bill, which the House is expected to take up Thursday, would repeal the existing royalty-sharing program with states for a savings of $2 billion over 10 years.

With respect to the royalty-sharing provisions, “we estimate that roughly $18.9 billion of payments [to coastal states] would come from leases we expect to generate receipts under current law, taking into account proposed changes to the fiscal terms of such leases. We estimate that the balance of payments — $1.7 billion — would come from leases issued pursuant to HR 4761.”

This appears to confirm the Bush administration’s greatest concern with the House bill — that it would deprive the U.S. Treasury of royalty receipts on existing oil and gas production, and potentially would worsen the nation’s budget deficit.

Helping to offset the royalty loss, the bill would impose a “Conservation of Resources” fee on producers who refuse to pay royalties on production from leases negotiated in 1998 and 1999 that omitted price thresholds. Absent the price triggers, some producers have been able to forego the payment of royalties on production from these leases.

The fee would be set at $9/barrel of oil and $1.25/MMBtu of natural gas and would apply retroactively to volumes produced since Oct. 1, 2005. The proposed fee would cost holders of the 1998 and 1999 leases more than royalty payments under renegotiated leases, according to the CBO. The CBO estimates that the 1998 and 1999 leases would pay an additional $11.4 billion over the next 10 years, assuming producers “opted to pay royalties instead of the proposed fee.”

HR 4761 also would levy a new “Conservation of Resources” fee on new and existing leases that are not in production, retroactive to Oct. 1, 2005. The CBO estimates that this fee would increase offsetting receipts to the federal government by about $1.1 billion.

The federal government further would receive revenues from leasing in new coastal areas. The CBO estimates that leasing these new areas would increase federal receipts from bonuses, royalties, rental payments, and conservation of resources fees by a total of $4 billion over the next 10 years. “Although CBO cannot predict the extent to which states would choose to allow leasing” within 100 miles of their coasts, as specified in HR 4761, “CBO assumes that there is a 50% chance that most states would allow some leasing to occur. Under the deadlines specified in the bill, CBO expects that some leasing in new areas would occur toward the end of fiscal year 2007, resulting in additional receipts starting in 2008.”

The House measure also would allow producers holding deepwater leases issued between 1996 and 2000 to renegotiate those leases to incorporate the new price thresholds spelled out in the bill. “Because the price thresholds in the bill are higher than the prices reflected in the existing lease contracts — especially for natural gas — CBO expects that most firms would choose to renegotiate their existing leases.” This provision would cost the federal government about $1.2 billion in lost revenues over the next decade.

Further, the bill would reduce the royalty rate for production from shallow waters to equal the royalty rate for deepwater production — 12.5%. “CBO expects that lowering the royalty rate on new leases in shallow water would reduce federal royalties, but would also increase bonus bids for new leases in that area because of the increased profitability of those leases.”

The CBO calculates the provision would increase offsetting receipts by about $100 million over the next five years (reflecting higher bonus bids in the near term), but would increase direct spending by the federal government by about $500 million over the next decade (reflecting the net effect of royalty losses once production begins on the leases).

The measure also proposes a number of other provisions that would reduce the amounts paid to the government by offshore leaseholders. For example, it would allow lessees to exchange, within two years of enactment of the bill, existing oil and gas leases that are located within 100 miles of the coasts of California or Florida for certain tracts being offered for leases in other areas. And it would allow those holding a producing leases to relinquish any portion of the lease deemed productive in exchange for royalty incentives on the portion retained by the lessee. The CBO estimates that these provisions would increase direct spending by the federal government between $50 million and $100 million during the 2007-2016 period.

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