LA Makes a Pitch for a Share of BP's New Gulf Oil Find

On Thursday, I wrote about the announcement of a new giant oil field discovered by BP in the Gulf of Mexico. It’s in 4,100 feet of water, and the well is over 35,000 feet deep. If it turns out to be as big as BP hopes it is, it might be BP’s biggest Gulf find and deliver half the output of Prudhoe Bay. Big field.

On Friday comes
word that Bobby Jindal and the State of Louisiana have their eye on the prize.

This will be interesting.

It’s not that Louisiana is really entitled to anything. Contrary to popular conception, from 1947 until the law was changed in 2006, coastal states had no claim on the oil and gas resources located seaward of the state boundary – 10 milles offshore in Texas and 3 miles in Louisiana.

In 2006, largely as a result spotlight of the 2005 hurricanes, the coastal state congressional delegations, led by Sen. Mary Landrieu (D-LA), successfully argued that it was appropriate to share 37.5% of the Feds’ cut with the coastal states, instead of the same money going into the general fund. (Inland states, like Wyoming, get up to a 50% cut of royalties from Federal lands within their borders. In one recent year, WY’s share of Federal royalties was nearly $1 billion, vs around $25 million for LA, IIRC.)

But the change in the royalty scheme applies only to leases granted after the law changed. Many of the deepwater leases where the giant fields are being found are older than that, BP’s Tiber discovery among them.

Louisiana has pledged the money it collects through revenue-sharing toward rebuilding the state’s eroding coastline, a problem exacerbated by the countless offshore pipelines cut through the marsh to reach oil refineries. But new federal estimates suggest that Louisiana will earn far less from the revenue-sharing arrangement than initially thought. Coastal planners are meanwhile scrambling to bankroll multibillion-dollar restoration plans.

When Congress passed the 2006 revenue-sharing bill, Louisiana politicians hailed the end of a decades-old battle to win compensation for the state’s role in offshore fuel production. Estimates at the time put Louisiana’s take at roughly $20 million a year until 2017, after which point the state would earn more than $500 million a year.

But those numbers were wildly optimistic, according [to Garret Graves, chairman of the Coastal Protection and Restoration Authority], who said the Minerals Management Service recently downgraded its revenue estimates.

Graves said Louisiana will receive about $7 million in offshore revenue this year and would likely get less than $4 million annually until 2017. After that year, Louisiana will be lucky to get $150 million a year, a far cry from the half-billion dollar figure touted in 2006.

“This would be a legislative fix,” Graves said of the plan to broaden the revenue-sharing agreement.

But the first dollar of revenue is a long way off and none too certain. Oil companies rarely advertise the size and scope of a new big discovery based on the results of a single well.

Big questions also remain about the viability of BP’s Tiber well, or any other production from the lower-Tertiary, which could take a decade or more to yield returns.

BP is still appraising its first major discovery in the formation, a 2006 prospect known as Kaskida. Tiber, located 250 miles southeast of Houston, must undergo similar assessments “to determine the size and commerciality of the discovery,” according to a statement from BP.

Other factors, such as changes in the market price of oil, will also come into play. Tiber could have as much as three billion barrels of oil, of which BP will be lucky to extract one billion barrels, said Eric Smith, associate director of the Tulane Energy Institute.

“BP will spend the better part of 10 years and several billion dollars to bring this one on stream some time after 2017,” Smith wrote in an e-mail.