Drilling Revenues: A Funding Stream for Energy Innovation?

One of the major challenges in structuring a large-scale push to accelerate clean energy innovation is figuring out how to fund it in a time of austerity. The International Energy Agency estimates a global shortfall of tens of billions a year in public clean energy research, development and demonstration (RD&D). Domestically, several leading authorities in industry and government have persuasively argued that the federal clean energy innovation budget – now around $4 billion – needs to be tripled or more to have the best shot at producing the kinds of scalable clean technologies we need to displace fossil fuels. So big investment boosts are clearly needed – yet, as the House budget debate has made painfully clear, there’s little interest in even maintaining RD&D at its current meager levels, let alone increasing it. And carbon pricing, which would be a logical place to look for revenues, is also not in the cards this Congress.

 

In this austere environment, we thus need to be looking for alternative, dedicated revenue streams wherever we can find them – which brings us to drilling revenues. Just last week, Senator Murkowski proposed dedicating a slice of drilling revenues for state financing of clean energy projects. That proposal was problematic in the details, but it’s the right kind of thinking. The federal government typically brings in anywhere from $5 billion to $7 billion in a given year in revenues from offshore oil and gas. While some of these revenues are shared with states or designated for conservation, most are deposited directly into the U.S. treasury for no specified purpose. It’s high time Congress specified a purpose – by creating a new, dedicated trust for energy innovation.

 

This trust fund would help fund the range of innovative activities that are currently threatened by fiscal austerity, including basic research at the national labs, radical innovation at ARPA-E, public-private partnerships elsewhere at DOE, and eventually, a future financing authority like a Clean Energy Deployment Administration or similar entity to get new technologies off the ground, or a reverse auction that drives steady cost declines during deployment, as has been proposedby Rep. Devin Nunes.

 

This is the real connection between drilling and energy security. Drilling might help to marginally cut our massive oil imports, but it will never come close to replacing them entirely, and it will do next to nothing to impact the price at the pumpwhile introducing obvious environmental risks through the potential for spills and increased greenhouse gas emissions. Drilling is an oversold endeavor, even with stronger safety regulations in place. But using the money generated by drilling to redouble our efforts for viable fossil fuel alternatives? Now we’re onto something. Creating this trust fund today, using general oil and gas revenues, would allow us to roughly double our investments in these activities. This fund would supplement – not replace – the normal appropriations process, which needs to provide a steady baseline and a buffer against revenue fluctuations from market price swings.

 

But this potential revenue stream is already facing a big drop in a few years: Gulf of Mexico states will start receiving 37.5% of drilling revenues by 2016, carving into the federal share as part of the Gulf of Mexico Energy Security Act (GOMESA). So to avoid this dropoff, we also need to find creative ways to increase drilling revenues beyond just stampeding for more oil. One obvious answer: by boosting the royalty rate on new drilling activities. The current offshore rate is 12.5% of production market value in most places, though it’s 18.5% in the Gulf. The Administration appears to favor this step, and it’s worth noting that many other nations already collect a greater shareof their offshore revenues than we do. Boosting royalty rates makes sense on its own, but makes even more sense if you tie this revenue boost directly to clean energy. If we’re heading for an eventual expansion of offshore drilling – which might yield an extra million barrels of oil a day – then a five percent increase coupled with steadily rising oil and gas prices could eventually yield a couple billion dollars a year, and this amount would grow over time as new resources replace old ones under the prior rate. The Administration can and should increase royalties on its own, but Congress would need to step in and ensure that these revenues go towards energy innovation.

 

One challenge to this is that you wouldn’t see these increased revenues for at least a few years, since the government only collects royalties on producing wells. So the smart thing would be to couple this rate increase with more short-term steps, like rolling back oil and gas tax subsidiesimmediately and redirecting those new revenues to clean energy (one can dream), or start asking for higher bids or fees up front. Again, even these steps wouldn’t obviate the need to increase traditional appropriations. But, they would help.

 

Another challenge is the push from the states to get a greater share of those federal revenues. There are two problems with this view. First, it runs counter to the fact that the resources in federal waters belong to the nation entire, as would the potential benefits of energy innovation. Revenue-sharing prioritizes coastal states ahead of others, and while an argument could be made that states should receive some revenues to offset the risks of spills, one must take care not to move too far in the other direction. And, of course, those revenues make the political economy around drilling expansion even harder to overcome.

 

Second, while state revenue sharing could make sense if it were dedicated to energy innovation at the state level, this is not what has been proposed, nor the primary motivation. But even then, states lack the Department of Energy’s existing innovative capacity and coordinating ability, and thus it’s not at all clear a path that circumvents the federal level is optimal.

 

Nevertheless, revenue-sharing has long been a goal of policymakers from coastal states who want both to expand drilling, by making the political economy of coastal drilling much more explicit, and to increase the revenues they can bring home from said drilling. This thinking is embedded in the Outer Continental Shelf Lands Act, which provides for limited disbursements to the states, and the aforementioned GOMESA. And it also is driving recent effortsby Senators Landrieu and Murkowski to speed up the GOMESA timetable and expand revenues from offshore renewable sources like wind and tidal. Their attempt fortunately failed in the Senate Energy and Natural Resources Committee last week, thanks in part to opposition from committee chair Senator Jeff Bingaman and others.

 

Drilling revenues have always been seen as an important contribution to federal budgets, and policymakers who oppose revenue-sharing are right to do so. But here’s my challenge to all of them: don’t just look to keep those revenues flowing into federal coffers – make sure they’re being used as productively as possible. That means dedicating those revenues to the search for clean alternatives to oil, and maximizing those revenues however possible. That, and not expanded drilling, is the real path to energy security.