The BP Oil Spill: State and Federal Revenue Impacts

June 8, 2010

The House may pass a four-fold increase in oil taxes within the week to pay for the BP cleanup and any future oil spills. The tax hike from the current rate of 8 cents to 32 cents per barrel will be directed to the Oil Spill Liability Trust Fund, which was first funded after the Exxon Valdez spill and the passage of the Oil Pollution Control Act of 1990. The tax provision is part of an extenders bill, H.R. 4123.

In Louisiana, controversy brews over the state's inability to levy severance tax on BP. Louisiana collects a severance tax from companies extracting oil and other natural resources from land and sub-surface land within the state's territorial boundaries. The state severance tax rate on oil is 12.5% of value per 42-gallon barrel, but only applies to oil extracted from land within three miles of Louisiana's coast line. The state's taxing jurisdiction runs out far before the Deepwater Horizon exploratory well begins, 41 miles off the Louisiana coast. BP recently paid the state a $25 million advance for expenses, which local newspapers report is being used to reimburse state agencies such as the Department of Wildlife and Fisheries, the Department of the Military, and the Department of Public Safety. Part of the company's payments will also go toward legal actions that Louisiana is taking against BP, which are estimated to cost around $20 million.

Louisiana may stand to benefit from BP's liability to the federal government as well. Congress first seriously considered sharing revenues with the coastal states after Hurricane Katrina, proposing a plan that directs 37.5 percent of federal offshore oil drilling royalty payments to coastal states beginning in 2017. The plan is backed heavily by Sen. Mary Landrieu (D-La), who is now encouraging Congress to enact the proposal as quickly as possible to deal with the Gulf oil spill. The possibility of royalty revenue-sharing with Louisiana raises the question of what amount BP might owe in royalties from the oil spill. News sources report that BP is subject to an 18.75 % royalty under its 2008 land lease with the Minerals Management Service (MMS), but royalty provisions typically kick in when an oil well enters commercial production.

Even as the exploded well had not reached commercial production, BP could still be liable to the United States and to Louisiana for damages from royalties lost, under the Oil Pollution Act of 1990 ("OPA"). Section 2702 of the OPA states in relevant part that "[n]otwithstanding any other provision or rule of law, and subject to the provisions of this Act, each responsible party for a vessel or a facility from which oil is discharged, or which poses the substantial threat of a discharge of oil, into or upon the navigable waters or adjoining shorelines or the exclusive economic zone is liable for the removal costs and damages specified in subsection (b) of this section that result from such incident…", including revenue losses such as "taxes, royalties, rents, fees, or net profit shares due to the injury, destruction, or loss of real property, personal property, or natural resources, which shall be recoverable by the Government of the United States, a State, or a political subdivision thereof."

The House Committee on Natural Resources Chairman, Rep. Nick J. Rahall (D-W.Va.), recently sent letters to Attorney General Eric Holder and Secretary of the Interior Ken Salazar, requesting that the government ensure that royalties are collected on any oil or natural gas recovered from the spill. News sources quote Rep. Rahall as writing to the Secretary that "[t]here should be no question that the American people, who are already suffering through an environmental disaster of historic proportions, will receive every cent they are entitled to," and that BP be "required to pay all royalties due from the sale of any collected oil, and instruct the Minerals Management Service to be vigilant in ensuring that such royalties are collected and the American taxpayers receive their rightful share." MMS Director Liz Birnbaum will likely face questions from the Chairman on this subject during the Committee's oversight hearings.

BP also faces uncapped liability under a little-known Clean Water Act civil damages provision. A Reuters Special Report estimates that the Environmental Protection Agency could levy fines up to $4,300 per barrel leaked into the Gulf.


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