More Money, More Problems

by Jeremy Alford

State officials discover that the billions the feds promised for coastal work two years ago have more than a few strings attached. It was as if coastal Louisiana had collectively hit the holiday Powerball when, two years ago this month, President George W. Bush signed into law the Gulf of Mexico Energy Security Act of 2006. The approval came just five days before Christmas, and it was indeed a generous gift — one that promised to keep on giving to the tune of $100 million annually, possibly even more.

Generations of Louisiana’s elected officials, dating back to former Gov. Earl K. Long, had been fighting to get the Bayou State’s “fair share” of offshore energy royalties — money that was flowing through Louisiana only to land in the federal treasury. The argument was simple enough: if Louisiana’s resources are going to be exploited, Louisiana should get something out of the deal.

With the stroke of his pen, Bush agreed, ending a 25-year moratorium on new Gulf drilling by opening for exploration 8 million acres of ocean floor in the Outer Continental Shelf. Louisiana’s cut from the new OCS leases was penciled in at 37.5 percent. The money, however, was to be delivered in two phases. The first, which brings Louisiana through 2016, might be called the Trickle Phase. It amounts to roughly $20 million to $40 for the entire period. The second, which we’ll call the Kahuna Phase, gushes at anywhere from $100 million to $300 million each year beginning in 2017. Then in 2055, a budget cap placed in the legislation will be removed, and Louisiana could realize as much as — believe it or not — $3 billion annually.

At the time of Bush’s approval, only a few limitations were actually mentioned in the legislation, most notably that the money could only be used for coastal protections, restoration projects, conservation efforts and the related planning and administration required on the state level. The rest of the regs were to be drafted by the U.S. Minerals Management Service, whose drafting deadline was this month. “So the rules are late,” says Garret Graves, the top coastal advisor for Gov. Bobby Jindal.

Aside from the waiting game state officials are playing on the promulgation of rules, they’re also trying to figure how best to capitalize on the promised revenue stream. After all, $100 million annually beginning in 2017 does nothing to deter the more than 100 yards of land coastal Louisiana loses every 50 minutes as a result of natural and man-made causes. That’s why the Legislature created the Coastal Protection and Restoration Financing Corporation, a quasi-public organization charged with selling off, securitizing, auctioning or borrowing against the future revenue stream so that real cash can be used now. By most accounts, it’s the largest such undertaking ever attempted by a state government. “We’re really paving new ground,” says Graves.

While there is a monumental up side to accelerating the revenue stream, there are also negatives. No matter how you do the math, Louisiana loses money in the long run because it will be selling off the scheduled payments for pennies, nickels or dimes on the dollar. This is the foundation for many anti-securitization arguments, but in this particular case, Louisiana has a solid counter-argument for wanting the dough ASAP. There’s also the threat of a downgraded credit or bond rating because the state would be eliminating a substantial source of income from future years.

Finally, Louisiana could lose credibility if it sells investors bad bonds that don’t perform. Remember, the state will be selling a revenue stream based largely on oil and gas production in the Gulf, which is unpredictable at best. There could be a simple drop in oil prices, a hurricane could rip everything to hell, or hydrogen might become the standard fuel for vehicles in 15 years. Who knows? So it’s understandable that, in the end, the financing corporation may choose to only sell half or less of the anticipated revenue stream. There’s even the potential for no sale at all. But based on similar schemes implemented by ports in New York and elsewhere, Louisiana Transportation Secretary William Ankner says the state should be able to work something out. “There is an appetite out there for this,” says Ankner, a board member of the financing corporation.

Still, it’s going to be a difficult sell and long in the making. The Minerals Management Service has issued draft rules for the Trickle Phase. Because only $20 million to $40 million is expected during that period, it’s unlikely the state will try to bond it out, Graves says. But if the MMS could get cracking on the Kahuna Phase and offer some kind of timeline for payouts and updated estimates of amounts, Wall Street might be more willing to deal right now. Ted Falgout, executive director of the Greater Lafourche Port Commission, oversaw a similar financing proposal for the expansion of La. 1, a vital energy link for Louisiana’s offshore oil and gas industry. He says investors and banks weren’t comfortable looking too far down the line, even though ample information was available to them. “Wall Street didn’t feel comfortable looking even 10 years down the line,” Falgout says. “We eventually got them to 20, but it took some coaxing.”

It’s doubtful the coastal financing corporation could do the same right now, given MMS’ reluctance to forecast further out. Moreover, it’s only one of the many bones of contention Louisiana officials have with MMS’ draft rules. For starters, MMS wants to take $600,000 to $1 million from the top of Louisiana’s promised revenue stream to fund its own administrative needs. Graves calls it “extraordinary and inappropriate.” MMS also wants to prohibit Louisiana from using the money as matching funds for other federal programs. The most egregious draft rule, though, may be MMS’ desire to limit eligible offshore royalties that Louisiana could collect to only oil and gas activities, even though the legislation passed by Congress and signed by the president was energy neutral. So, under the proposed rule, if wind energy becomes popular in the Gulf, Louisiana wouldn’t receive its fair share.

Graves says talks are ongoing with MMS and that Louisiana is fighting to change a few of the draft rules before they become permanent. Meanwhile, the state continues to build upon its master plan for the coast, which is estimated to cost as much as $100 billion. So far, only $17 billion has been identified and deposited into the bank. All of it will probably be spent within the next three years, Graves says. The rest of the cash, or a great deal of it, is locked up in the ongoing struggle with MMS — proof that there are always strings attached, especially when the gift is large.

Very few realized it at the time, but when President Bush signed the Gulf of Mexico Energy Security Act of 2006 into law, he created just as many dollars as problems for Louisiana. But, all in all, they aren’t altogether terrible problems to have.