Governor's steps lead toward offshore royalties

When Gov. Bob McDonnell signed a law last week requiring that most of Virginia's royalties from offshore drilling be spent fixing the state's transportation system, his running mate said it was fulfilling a campaign promise to repair the overburdened network.

But before state officials can start writing checks for new roads, they have to convince Congress to give Virginia a share of those royalties.

That won't be easy, say some congressional aides and industry experts, given that some key members of Congress oppose sharing and non-coastal states won't want to give up what they consider a national resource.

The next few years will be critical ones for Virginia leaders as they seek to tap into offshore resources. The federal government has been making plans to sell oil and gas leases as soon as 2011 to private businesses that want to explore and drill in a tract about 50 miles off the Eastern Shore. The triangular-shaped area contains 130 million barrels of oil and 1.1 trillion cubic feet of natural gas, according to the U.S. Department of Interior.

President Barack Obama said last year he wants to develop a national energy strategy before proceeding with drilling in the Atlantic.

Interior Secretary Ken Salazar is expected to announce in the coming weeks whether the lease sales will take place as planned or be postponed. If the leases are granted, exploration could begin in about 2012.

Should drilling be successful and the commonwealth get a cut of the federal payments, the benefits would be huge. If Virginia's share is similar to the Gulf states, it would collect about $38 million to $56 million a year in royalties for 20 to 30 years, according to an analysis by the state's Department of Planning and Budget.

McDonnell acknowledged it won't come easy. "I realize we've got a long way to go," he said just before signing a law that requires 70 percent of state royalties be spent on transportation projects, with the remainder to be used for local improvements and a coastal energy research group.

Lt. Gov. Bill Bolling said the new legislation keeps their pledge from last year's election to pay for needed road projects with offshore revenues. "We're delivering on that promise with these bills," he said during the signing event.

U.S. Sen. Jim Webb, D-Va., is likely to introduce legislation this year that would give Virginia a share of royalties, his office said.

Awaiting his bill will be U.S. Sen. Jeff Bingaman, chairman of the Senate Energy and Natural Resources Committee and a strong opponent of royalty sharing. The New Mexico Democrat doesn't oppose offshore drilling but argues that the outer continental shelf and its riches belong to the entire nation - not just to the states closest to them.

"You basically have the coastal states versus the interior states....There are a number of senators who consider this little more than a grab by those states," said Bill Wicker, a spokesman for Bingaman's committee.

Royalties from offshore drilling "are one of the top sources of revenue for the U.S., amounting to billions of dollars each year. Given the enormous demands on the federal treasury and our need to reduce the deficit, the fiscal consequences of such a loss would be devastating," Wicker said.

In the House, among the more prominent opponents is U.S. Rep. Ed Markey, a Massachusetts Democrat, who heads the Select Committee on Energy Independence and Global Warming.

Markey believes "there are always dangers when you have royalties funneled to particular states," said Eben Burnham-Snyder, spokesman for Markey's committee. "That could be seen as a political buyout for some of the adverse effects of offshore drilling."

In 2006, Thelma Drake, then a Republican congresswoman from Virginia Beach, helped sponsor a bill in the House that would give Atlantic Coast states a share of offshore royalties, but the measure died in the Senate.

At the time, President George W. Bush "wasn't crazy about sharing the royalties," Drake said.

But that tide may be turning, said Jack Coleman, a veteran government attorney specializing in energy and minerals who helped draft bills - including Drake's - to open up more coastal areas to offshore drilling.

"It may not happen this year, but this is an issue that has gotten legs," said Coleman, who retired last year and now works as a consultant. As the federal government has removed moratoriums on offshore drilling on the East Coast, there has been a gradual shift in resistance to sharing royalties, he said.

A milestone was in 2006 when Congress, responding in part to the devastation from Hurricanes Katrina and Rita, approved sharing federal royalties for lucrative oil wells far out into the Gulf of Mexico. Louisiana, Alabama, Mississippi and Texas began collecting 37.5 percent of royalties from Gulf wells in federal waters. Prior to the change, the states collected a small percentage of royalties from fewer wells close to shore.

That legislation, which passed over the objection of Bingaman, is a foundation that Virginia wants to build on.

"What's fair is fair," McDonnell said. "For them to have 37.5 percent on the Gulf and zero in the Atlantic Coast would not be equitable."