And the revenue generated by drilling off Virginia’s coast? $40 million over 10 years.
U.S. Rep. Jim Moran, D-8th, recently spoke on the U.S. House floor against drilling off the shores of Virginia, saying the small amount of government money it would produce is not worth the environmental risk. "And the revenue generated by drilling off Virginia’s coast? $40 million over 10 years," he said on Feb. 15. We wondered about Moran’s seemingly low estimate for revenues, recalling predictions made by many drilling advocates -- including Gov. Bob McDonnell -- that Virginia’s government stands to gain at least $250 million a year. So we looked into the congressman’s claim. Moran was railing against H.R. 3408, which would authorize drilling federally owned oil shale and calls for leases in several coastal regions, including Virginia. Many state officials, including McDonnell and Democratic Senators Mark Warner and Jim Webb, support offshore drilling, saying it could provide needed jobs, energy and money for the state. Virginia was included in the federal government’s offshore drilling plan last decade. But President Barack Obama rescinded that in 2010, canceling the sale of leases of 4 million acres off Virginia’s coast after the Deepwater Horizon disaster in the Gulf of Mexico. A bill that would have allowed drilling 50 miles or more off Virginia’s coast died in the House of Representatives last May. Moran’s office, to back the congressman’s claim, used the Congressional Budget Office cost estimate for that bill in arguing against H.R. 3408. The CBO report does say that the federal government will collect only $40 million over the next 10 years. But the analysis, ordered by the House Committee on Natural Resources, is confined to a tiny portion of the government revenue that drilling could generate. Should the Virginia coastal waters be opened for drilling, oil companies would submit bids to the Interior Department for leasing space on the ocean floor and upfront bonus payments they would make to the government for the right to test and drill. The CBO’s $40 million figure is merely an estimate of the bonus payments that would come from drilling off Virginia’s coast, according to Spencer Pedersen, a spokesman for the House Interior Committee. The CBO has not projected other government revenues the venture would produce. The big money, however, would start once oil production began, likely toward the end of the decade. Companies would pay royalties to the federal government that are expected to generate tens of millions of dollars annually during the early years of drilling, and many hundreds of millions of dollars down the road. Energy companies pay the federal government an 18.75 percent royalty on offshore oil and natural gas production. Typically, royalty payments represent about 90 percent of federal revenue from leasing activity on public lands. Virginia officials are hoping for a 37.5 percent cut from all of the offshore drilling payments to the federal government--bonus bids, lease payments and royalties. The federal government shares 37.5 percent with Gulf Coast states. A number of steps must occur, however, before money, oil or natural gas starts flowing. Congress must approve legislation, such as H.R. 3408, that would include the ocean floor off Virginia in a leasing plan, and the president must sign it. Obama, during his State of the Union address early this year, called for increased U.S. oil production and endorsed new lease sales in the Gulf of Mexico and off Alaska’s northern coast. But the president has not indicated whether he’s willing to lift his 2010 moratorium on Atlantic Coast drilling. Should the Virginia coast become part of the plan, the CBO report says the lease sale would not likely occur until 2015. Next, the winning companies would need to map the ocean floor and explore the resources with a few test bores. If the tests were successful, the companies would request a permit from the federal government to build an oil rig. All those steps take time; experts, including a consultant for the American Petroleum Institute, said drilling wouldn’t start until at least 2018 or 2019. There are wide-ranging estimates of the potential government revenues from drilling off Virginia’s coast. We tried to come up with our own number using middle-of-the-road projections for the cost of energy and the amount of offshore resources. The Energy Information Administration’s projection for inflation-adjusted price of a barrel of oil through 2035 is $137.02. Natural gas for the same period is expected to have an average cost of $6.53 per thousand cubic feet. The Bureau of Ocean Energy Management estimated in 2011 that the seabed in the Atlantic Ocean caps 3.3 billion barrels of oil and 31.28 trillion cubic feet of natural gas. The Virginia coast comprises about 10 percent of the Atlantic shore, so if the resources and revenue are distributed proportionally, and we assume a 37.5 percent share to the states, the federal government would receive average $410.3 million annually and pay Virginia a $153.8 million cut. The governor’s estimates of annual state revenue of about $250 million uses energy industry estimates based on the upper end of oil and natural gas resource projections. But both estimates are an average annual amount over 30 years of production; it would take more than a decade for production to ramp up, according to the API consultant. In the early years of drilling, the state should expect to realize less than a fifth of the revenues that would come in when oil rigs hit full production. There’s one more big if: The 2011 estimates of the quantity of oil and natural gas in the region are based on surveys that are 40 to 50 years old. There’s really no way to know how much is under the shelf until exploration is done. Our ruling Moran, opposing legislation that would open Virginia’s coast to drilling for oil and natural gas, said the venture would generate only $40 million in government revenue over the next 10 years. The Democrat based his claim on a CBO report but misinterpreted what it said. The $40 million figure refers to a minor source of the revenue Virginia and Washington would share: upfront bonus payments energy companies would give the federal government for the right to test and drill. Beyond the $40 million, the companies would pay to lease space on the ocean floor. But more importantly, Moran omits that the companies would pay royalties on the offshore oil and gas they produced, which make up about 90 of the revenues for federal and state governments. In the early years of drilling, which could begin in 2018 or 2019, the royalties could produce tens of millions. Down the road -- beyond the 10-year period Moran addressed -- the royalties could translate into many hundreds of millions annually. Nothing is certain about drilling off Virginia’s coast, but Moran misused a very limited projection to create a misleading characterization of the venture’s potential. We rate his statement Mostly False.
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