How Oil and Gas Leases Work
ROBERT SIEGEL, host:
After yesterday's White House announcement on offshore drilling, we wondered who gets the money from offshore leases - the federal government or the states.
So for the answer to that and other questions, we've called upon law Professor John Lowe of Southern Methodist University. He's the author of "Oil and Gas Law in a Nutshell."
Welcome to the program.
Professor JOHN LOWE (Southern Methodist University): Thank you very much.
SIEGEL: And tell me first, if a company bids on a lease to drill offshore and gets the lease, to whom does he pay his rent?
Prof. LOWE: Well, it depends where that lease is located. We have a fairly complicated structure of federal statutes that basically gives most of the states the right to income from leases within three nautical miles of the edge of their land and then gives them a share of the lease revenues that go to the federal government.
Twenty-seven and a half percent of the revenues that go to the federal government come back to the states for leases that are within another three nautical miles from the edge of the three-nautical mile limit from the shoreline. And then the Gulf Coast states, after Rita and Katrina, cut a special deal and they get 50 percent of the Outer Continental Shelf royalties.
SIEGEL: So this is a rich and varied answer to this question as to how much the states get.
Prof. LOWE: That's correct. It depends where the leases are located and which states are involved, and it's a lot of money. In fiscal year 2006, there were nearly $8 billion of bonuses and royalties generated to the federal government.
SIEGEL: But, Professor Lowe, you're talking about some distances of three nautical miles and another three nautical miles and then some more miles. Yesterday's announcement involved drilling 50 miles or more off the Virginia coast and 125 miles or more off the Florida coast.
First of all, say, 125 miles off the Florida coast, is that actually U.S. sovereign water out there 125 miles offshore?
Prof. LOWE: It's what we call the Exclusive Economic Zone, out to 200 miles. The president's announcement was structured to try to minimize conflict with state jurisdiction.
SIEGEL: And out there, does the state still have a claim to revenue from the leases that are struck so distant from the shore?
Prof. LOWE: At the moment, no, if we are talking about leases off of the Eastern Seaboard of the United States. But I think we can anticipate that the Congress people and the senators are going to line up and claim the same sorts of revenue sharing that has been given since 2006 to Alabama, Texas, Mississippi and Louisiana.
SIEGEL: So the principle here is the revenue goes first to the federal government and then whatever the states can get out of the federal government, through Congress, they can get.
Prof. LOWE: I think that's a fair assessment. And the greater number of states off which oil and gas development is taking place, the larger is the potential group of Congress people and senators who are going to line up to support that kind of legislation.
SIEGEL: Once the government determines what area will be put up for bid, how large do you imagine a typical lease would be for? How much seabed?
Prof. LOWE: Well, typically offshore leases are 5,760 acres. It's done on a block basis and they last - they have a primary term, meaning a period during which the industry can think about drilling and prepare to drill of five to 10 years.
This is a long and complicated process. We are not likely to see any additional drilling activity taking place, certainly not for a year and probably for two or three years.
SIEGEL: Well, Professor Lowe, thank you very much for talking with us today.
Prof. LOWE: Thank you, Robert. It's a pleasure.
SIEGEL: That's John Lowe, law professor at Southern Methodist University. He has written, among other books, "Oil and Gas Law in a Nutshell."
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