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Companies usually pay royalties, which are used to preserve sensitive land, but a provision in the Area 181 leases allows for a royalty break.
By CRAIG PITTMAN
© St. Petersburg Times, published August 12, 2001
If and when oil and gas rigs sprout in Area 181 of the eastern Gulf of Mexico, Florida is unlikely to reap any of the jobs or economic development that generally accompany them, according to federal officials.
Virtually all the onshore support necessary for the offshore rigs is already in place, serving the 4,000 or so rigs scattered across the central and western gulf.
Florida can expect only two benefits from exploration in Area 181:
More oil and gas for use as fuel.
The preservation of environmentally sensitive land, purchased using millions of dollars in royalties that the offshore companies pay into the Land and Water Conservation Fund.
But with the second one, there's a catch.
Those payments, made in exchange for using public land, are supposed to mitigate any damage that offshore drilling does.
However, when U.S. Interior Secretary Gale Norton announced in July that the government would be selling leases in Area 181, the notice of sale included a provision allowing offshore companies to get a break on the royalties charged, as an incentive to encourage their participation.
Companies are exempted from paying any royalty on the first 12-million barrels of oil they find. The royalty rate is 12.5 percent of the oil's value.
The U.S. Minerals Management Service, which regulates the offshore industry, estimated in February that such breaks can be worth tens of millions of dollars, but only if the wells drilled actually find oil or gas.
"We look at it as not just an incentive but as a way of cutting the cost of doing business," said David Mica of the Florida Petroleum Council, pointing out that the scaled-back version of 181 consists entirely of leases in very deep water, where exploration can be especially risky.
"The deeper you go, the higher the risk that's associated with the capitalization," Mica said. "Even with the best seismic imaging, you still have only a 30 percent chance of finding the resource."
Drilling opponents question the need for royalty relief on 181, given the industry's eagerness to open up the eastern gulf to drilling and recent reports that the industry is so flush with profits that some companies, such as Shell, are having a hard time figuring out what to do with all the money.
The Petroleum Finance Co., a Washington, D.C., consulting company, says the industry is sitting on nearly $40-billion in cash, and the figure is likely to balloon in coming months.
"It's absurd," said Mark Ferrulo of Florida Public Interest Research Group, pointing out the oil industry is "not hurting very much at all."
In a February notice in the Federal Register, the MMS acknowledged that talking about royalty relief "at a time when oil and gas prices are unusually high" might seem foolish.
"Some may question the need to continue leasing incentives," the MMS wrote. "We believe royalty suspension remains necessary . . . because prices can fall as well as rise."
- Times researcher Caryn Baird contributed to this report.
Drilling leases to go to auction in December (July 21, 2001)