The recent 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 last Thursday.

“I think it represents a pretty clear trend. You have three data-points now — Lease 200, Lease 201 and the Freeport-McMoRan LNG [facility],” said Kevin Book, senior vice president of energy policy analysis for Friedman, Billings, Ramsey & Co. Inc., an Arlington, VA-based financial services firm.

Louisiana Gov. Kathleen Blanco first flexed her muscle when she rejected in May McMoRan Exploration Co.’s application to build a liquefied natural gas (LNG) project — the Main Pass Energy Hub — offshore Louisiana, he noted. Her concerns about the project included revenue sharing for the coastal states and the use of open rack vaporization technology, which uses seawater to warm the LNG instead of natural gas (see NGI, May 15).

Blanco then challenged in court the MMS’s Lease Sale 200 in the western Gulf of Mexico on the grounds that the Interior Department agency failed to conduct a thorough environmental review that included the impacts of Hurricanes Katrina and Rita on the state’s wetlands. While the court allowed the sale to proceed in August, Louisiana won a major concession from the federal government last week — it has agreed not to hold any leases sales off the state’s coast until a comprehensive environmental review is completed. The environmental analysis probably will not be concluded before June of next year, said Book.

This means that the next Central Gulf of Mexico sale (Lease Sale 201) that’s scheduled for March 2007 will have to be pushed back, he told NGI. “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. But “that assumes [there’s] no injunction…no further fighting.”

Book believes the concessions won by Louisiana could have a snowball effect. “When one producing state demands and receives concessions at a certain level, it’s just a matter of time before other producing states look for them too,” he said. With energy commodity prices high, Book said states, the resource holders, are in a position akin to producing nations where they can renegotiate the terms of agreements.

With respect to Louisiana alone, “the conclusion to this would come if Louisiana’s desires are satisfied or the oil [and natural gas] prices fall,” he said.

Delayed lease sales in the Gulf could “potentially [push] out demand for drilling and seismic studies and [defer] arrival of new supply,” Book wrote in a research note issued last 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. Many believe it was the catalyst behind Louisiana’s lawsuit to stop Lease Sale 200. 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 resisted the Senate’s narrower version that would open up more acreage in the eastern Gulf to producers. They staunchly support the House’s more comprehensive offshore bill. 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 terms of the MMS-Louisiana settlement, which was announced last Monday, the Interior agency has agreed not to conduct any oil and natural gas lease sales off the coast of Louisiana until it completes an environmental review that assesses the impact of last year’s hurricanes on the state’s wetlands and infrastructure. In exchange, Louisiana has said it would dismiss its lawsuit challenging the MMS’ Lease Sale 200 (see NGI, 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, Gov. Blanco noted.

Blanco called the settlement a “victory,” saying it “will ensure that our state has a real seat at the table, controlling our own fate as the federal government’s number one offshore energy partner — the heart of America’s energy coast.”

Interior also viewed the settlement in a positive light. “Resolving this dispute by agreement rather than litigation benefits our nation’s energy security by assuring we can move ahead on the leases issued in Lease Sale 200,” said Steve Allred, Interior’s assistant secretary for land and minerals management.

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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