Royalty-screwed: Big Oil likes to confuse severance taxes with cleanup costs

Sen. Mary Landrieu eyes offshore royalties for coastal reclamation.


Sen. Mary Landrieu eyes offshore royalties for coastal reclamation.

In August, Sen. Mary Landrieu argued that Louisiana deserves a greater share of oil royalty payments, maybe even rates equal to those received by mineral-rich states in the interior, such as Wyoming. With the additional proceeds from offshore production, Landrieu argues, the state can fund its urgent coastal restoration needs:

“Failure is no option. I don’t know if anybody knows where any other money is, but I don’t. If we do not get this [royalty] money, we cannot secure this coast and build the levees we need.”

In fact, Landrieu was well aware of another possible source of money. BP is about to be on the hook for a massive fines related to the 2010 oil spill, and Louisiana will use its share of those billions to jumpstart restoration projects.

Also, the Southeast Louisiana Flood Authority-East’s coastal erosion lawsuit against 97 oil, gas and pipeline companies had been announced in July and — importantly— Landrieu signalled tentative support when she said, “I think we should seek justice everywhere we can find it.

In 2006, Landrieu successfully shepherded legislation that, beginning in 2017, will increase Louisiana’s royalties from our vast offshore assets. Unfortunately, a $500 million cap prevented the act from being the coast’s saving grace. Landrieu wants to rectify that by removing the cap.

State coastal czar Garret Graves identified increased royalties as a prong in the state’s strategically sequenced tripartite coastal strategy. (It’s a complicated affair.) The other two prongs include BP oil spill money (natch), and “battling with the Army Corps of Engineers over its management of the Mississippi River.” It’s apparently a delicately balanced little stratagem, and Graves is hopping mad at the flood authority lawsuit because it has disturbed the Jindal administration’s priority sequence of coastal restoration funding mechanisms.

One thing is clear, though: The Jindal administration, the oil and gas lobby, and presumably the majority of the state Legislature are not thrilled by the flood authority’s lawsuit. They would prefer that the state’s $50 billion Master Plan to restore the coast be funded through an increased share of oil and gas royalties.

The royalty issue takes on increased importance in light of BP’s recent transformation from “contrite to combative.” Perhaps alarmed by increased potential expenses related to the oil spill, the once-apologetic oil giant has gone from vowing to “make things right” to basically mounting a PR campaign to say it is being victimized by fraudulent Louisianans. Thus it seems that BP will not be paying additional fines or judgements, without first exhausting all of its legal options. And that will likely mean years of delay.

So the royalty option assumes more importance. And this suits the oil and gas companies fine. Restoring the coast with oil and gas royalties gives the illusion that oil giants are paying to fix the coast that they helped to disappear (by slicing it apart with pipelines and navigation channels). However, they’re not paying anything more than than they used to. Increasing royalties for Louisiana come out of the federal government’s share, not Big Oil’s coffers. It’s additional money for the state, and less for the federal budget.

Flood authority vice chairman John Barry explained in his masterful Lens op-ed:

The industry wants it [the coast] fixed, but they want taxpayers to pay for the damage they did, either in taxes or flood insurance rates. If we succeed in getting a bigger share of offshore revenue, we’re getting it from the federal treasury.  From taxpayers in Rhode Island and Oregon — and in Louisiana. The industry won’t be paying a penny more.

This gets to the heart of the royalty dilemma. The rhetoric surrounding the argument Landrieu makes for increased royalties for Louisiana — “we deserve our fair share” and “we need this money to fix our coast” — subtly conflates two different issues.

Royalties, or more accurately, severance taxes, are compensation for the right to extract non-renewable mineral wealth. It’s for removing mineral assets, like oil, that can only be exploited once. Royalties are not a repair cost for extraction, or compensation for environmental impact.

Everyone who touts increased royalties as the smart play toward funding the coastal reconstruction Master Plan is misleading you. They are trying to link royalties and coastal restoration in the public’s mind, as a solution to the problem.

Don’t be misled. Louisiana’s fair share of the mineral wealth is one issue. If we should get a larger percentage of revenues — the same share interior states receive — that would be wonderful. However, oil and gas companies’ responsibility for our coastal mega-problem is a separate issue. We would deserve increased royalties even if the coast was healthy and flourishing like it was a hundred years ago. As Barry says, Big Oil should pay more to fix the coast that they helped break. If the state acquires more royalty funds and directs them to restore the coast, instead of other urgent needs, that’s still a tremendous sacrifice.

Granted, the odds are long against the lawsuit being successful. Even if it were, oil and gas companies, like BP, will probably use every legal and political device at their disposal to avoid paying judgments promptly. So, increased royalties might become one of Louisiana’s last best politically feasible solutions to fund coastal restoration.

But don’t be fooled, if that’s how it plays out. Taxpayer’s will be paying for the destruction of our coast by the world’s richest corporate sector. Big Oil had a chance to step up, and instead they let the “little people” —as a BP exec once called us— take the hit.

I call that getting royalty-screwed.

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  • Thank you Senator Landrieu, but we still fiddle more to football- than notice the fire and man named Graves digging holes.
    Like it or not, the Lawsuit = Leverage
    Like her or not- Senator Landrieu + seniority = Power- and has positioned herself to use it.
    Senator Vitter, Steve Scallese and other Republicans- open your eyes- do the same- even if it’s not in public-
    Trial lawyers? Come on… Think long term job creation and how little power y’all have in Washington. Work with the plaintiffs named- make them use their political clout to sell Washington on a deal that pays them tax credits for Louisiana Wetland creation. Have them admit guilt to fix-
    They have the geologists, engineers, and work force most qualified to move and make mud- put to em work and make up for lags in OG markets- no rig work? Go build land.
    Best from Freret Street Uptown NOLA.
    Andy Brott

  • Jenel Hazlett

    “The rhetoric surrounding the argument Landrieu makes for increased royalties for Louisiana — “we deserve our fair share” and “we need this money to fix our coast” — subtly conflates two different issues.”
    Only if you let it. What the good Senator is saying is that we deserve BOTH: money to fix the coast that was broken by Oil Gas Exploration and LA Politicians (the lawsuit and BP fines) and revenue from Oil & Gas tax revenues (yes it goes into our state coffers and not the Feds but as you say this is NO different than the inland states and why should it be different?).
    Seems to me you’re doing a pretty good job of conflating yourself.

  • Mike Stagg

    In Edwin Edwards’ final term as governor, the oil and gas industry sought and won approval for a severance tax exemption on oil and gas extracted via fracking. The argument was that the technology was considered experimental and the exemption would entice oil and gas companies to try the technology (developed in the 1940s) on land rigs in Louisiana. The Haynesville Trend natural gas field bonanza proved that technological experiment of directional drilling and fracking were, in fact, viable beyond a doubt. Yet, the exemption on fracked minerals remains, costing the state hundreds of millions of dollars in severance tax revenue in the Haynseville Trend alone — and that was primarily a gas only field.

    There are an estimated 7 BILLION barrels of oil in the Tuscaloosa Marine Trend which runs through parts of the Florida Parishes and into Central Louisiana. If that exemption on fracked minerals remains in place, it will cost the state Billions of dollars in lost revenue. Severance taxes were the heart of the feel good story about how great the oil and gas industry has been for Louisiana.

    The industry and its lobbyists — like many other conservatives — now reject the idea of the commons, believing that only private interests have value. They believe that the money they pay landowners and their wildly inflated economic impact numbers constitute the only obligation they owe to the people of this state for taking our shared mineral wealth out of the ground.

    Severance taxes are the legal manifestation of the limited claim of the commons — every Louisiana citizen — on the mineral wealth of this state. The severance tax on oil is 12%, which (when it is collected) is split between the company and the landowner. The oil and gas industry would rather not honor that claim. The state of Louisiana, under the Jindal administration, appears to agree.