Republicans’ Offshore Drilling Plan Would Expand Dysfunctional System

The response to the politically opportunistic call by the Bush Administration and John McCain to expand offshore oil drilling is being framed primarily in environmental terms. The drilling, which would do nothing in the short term to address soaring gasoline prices, would indeed create serious risks for the coastlines of Florida and California and would worsen global warming.

Yet there is another compelling reason to oppose the plan: the federal system of offshore leasing has been characterized by gross mismanagement that has allowed big oil companies to avoid paying billions of dollars in royalties. There is no reason to doubt that an expansion of drilling leases would bring more of the same.

For those who missed this particular scandal, here is some background. Commercial offshore oil drilling was pioneered in the late 1940s by Kerr-McGee Corp. While little thought was given to environmental issues at the time, there were disputes between the federal government and coastal states over which should control the leasing process. The 1953 Outer Continental Shelf Lands Act gave the states control over the first three miles (more for Texas and the Gulf Coast of Florida), and the feds took over after that up to the 200-mile territorial limit.

There wasn’t much controversy over offshore drilling until 1969, when an undersea well off the coast of Santa Barbara, California suffered a blowout and leaked 200,000 gallons of oil that contaminated 35 miles of coastline. This led to state and federal restrictions on offshore drilling in new areas. Periodically over the past 30 years, the oil & gas industry and its allies in Congress have tried to ease the limits but were shot down.

Defeated in its effort to get access to more offshore areas, the industry sought to make its existing drilling more profitable by pressing for reductions in the royalties it had to pay the federal government through the Interior Department’s Minerals Management Service (MMS). In the mid-1990s, when energy prices were relatively low (oil was at about $16 a gallon barrel), Congress gave in to industry pressure and passed legislation in 1995 providing “royalty relief.”

The law contained safeguards to prevent a windfall for drilling companies by terminating the relief when oil prices rose above a certain level, but Clinton Administration officials failed to include those provisions in some 1,000 deepwater leases it signed in 1998 and 1999.

That oversight would come to haunt the federal government. As oil prices rose in 2004 to the point at which royalty relief should have ended on those leases, the cost to the Treasury in lost revenue rose to billions of dollars. Once the situation became publicly known, thanks to reporting by Edmund Andrews of the New York Times, some oil companies agreed to renegotiate the leases, while others such as Exxon Mobil and Chevron refused.

Complicating the situation, Kerr-McGee (now part of Anadarko Petroleum) later brought a legal challenge against the safeguards, making the dubious argument that Congress never intended to give MMS the authority to impose them. Last year the drillers received a favorable ruling in the case, prompting the Government Accountability Office to estimate recently that, if the decision is upheld, the loss of revenue from leases signed from 1996 through 2000 could be as high as $53 billion.

The federal government is also likely being cheated on leases signed after 2000. In 2006, several MMS auditors publicly charged that they had been pressured by their superiors to terminate investigations of underreporting of royalties related to leases not subject to royalty relief.

This is the dysfunctional system that the Republicans want to expand. One is tempted to ask: Is this really about increasing oil supplies—or creating another giveaway for Big Oil?