Governor Riley Says Offshore Drilling Risk Outweighs Royalties--Are Present Royalties Misused?

"No, put your finger down, mine say I am going up there"

*(UPDATE ADDED 8/30/2010 at end)

A  recent Birmingham News article reported on Alabama Governor Bob Riley's trip to Washington to meet with Kenneth Feinberg in an attempt to increase Alabama's royalty share from the Gulf oil/gas leases "six years earlier than originally planned." *Alabama already receives almost $500 million annually from the royalties, subsequent trust fund investment income, bonuses and severance taxes--so, where's the fire Governor?

Mr. Riley goes to Washington to do some arm twisting that may reduce the six year wait and he is using the Gulf disaster as justification, while failing to mention that Alabama has been using most of the oil/gas royalties revenue for pet projects like road building and big business enticements while excluding offshore disaster preparedness as a 2006 bill was intended to assist with.

To fully understand this situation some background history must be included.

In 2006, when legislation passed in Washington to increase the royalties starting in 2012 and increasing substantially by 2017, it was not fast enough for Riley--he had to find somebody to go after for more cash to fund his pet projects and turned on the very interests that have been providing the second greatest source of revenue to Alabama; oil and gas.

He proposed a "revenge tax" on on these same energy companies because of a 2008 state court ruling that gave the energy companies a refund in overpaid state taxes. Riley's tax slap was met with harsh criticism:

Riley's move amounts to little more than budgetary blackmail, and Americans in other states should beware of cash grabs like these which ultimately will reach into their wallets.

The governor's support of the tax hike is linked to a recent state-court ruling that energy companies operating off the state's shores were entitled to $63 million in refunds of overpaid taxes. The problem, however, was that the Legislature had already accounted for that money to fill out next year's budget.

Despite having signed budgets early in his career that boosted per-capita spending by double digits and subsequently allowing outlays to grow at a healthy rate, Riley seems to have little interest in significantly paring back expenditures now. So he's teamed up with all-too-eager lawmakers to hike taxes by the amount of the energy companies' refund (and more in the future), in effect punishing them for winning their lawsuit. Indeed, some supporters of the scheme have hinted at scuttling the bill if only "Big Oil" would forego its legally won refunds.

Mr. Impatient sounds more like Don Corleone and his henchmen; you pay now or you pay later, either way you pay. He was already in a huff over the six year delay and decided he would show Big Oil and Gas a thing or two by going after the money through the court system and his legislative minions--his gamble did not pay off much to his chagrin.

Riley has been so busy building his legacy by jetting around on the taxpayer's dime, aggressively recruiting big business into the state, that ol' Bingo Bob has a dilemma of sorts--he's made a lot of grand promises and finds himself running short on hard cash to cover them. Let's see just how much Alabama has been getting and ponder the reason why Riley says "it isn't enough":

According to the *Geological Survey of Alabama, the state receives direct benefits of $500 million a year from its oil and gas industries in the form of lease bonuses, royalties, trust fund investment income and severance taxes.

More than half of Alabama's natural gas in 2007 was produced either from coal beds or onshore wells. But almost all of the direct benefits are derived from one source--offshore natural gas production. And while about $40 million of that came from severance taxes--the great bulk of those funds were generated by royalty payments.

In each year from 2003-2008, those payments have topped $240 million, with a high of $355 million collected in 2006. In 2007, royalties topped $250 million, with $210 million of that coming from one company, Exxon Mobil, which also paid $30 million of the offshore severance taxes.

*Petroleum Systems, Geological Survey of Alabama/Alabama State Oil and Gas Board

That big dollar amount kind of makes the Alabama Supreme Court verdict payout reduction against ExxonMobil make a little more sense now. Alabama thought it could "trust" ExxonMobil, like Riley claims they can "trust" BP in the ugly open spat between the state AG and Riley over the lawsuit filed against BP by the AG, but it appears ExxonMobil and their lawyers pulled a fast one and beat Riley and Co. at their own game.

Legitimate Disagreement or Fraud?
In November 2007, the Alabama Supreme Court caused a bit of a stir, to say the least, when it overturned the jury’s punitive damage award due to the lack of evidence of fraud and reduced the compensatory damage award due to some finer points of contract interpretation. In its simplest terms, this case boils down to whether Exxon openly disagreed with DCNR as to the calculation methods or intentionally schemed to cheat the state out of royalties due under the leases. If the former was the case, the state would be limited to contractual remedies (basically unpaid royalties and interest). If the latter, the state would be entitled to punitive damages because of Exxon’s fraudulent conduct.

This is what happens when you play dangerous games with the big boys and think you are smarter than they are as we have warned about in previous postings. Alabama seems unable to learn that lesson and because of greed they offer themselves up for flogging on a regular basis. Big business, who pretends to be their friend, walks them right into the fight more often than not.

When Congress introduced that bill in 2006 giving billions of dollars in increased royalties to "four lucky states--Louisiana, Alabama, Mississippi and Texas" it almost did not pass. An "environmental sweetener" was added to the bill that pushed it through and it became law.

The added provision was intended to offset the risk these states are open to from offshore drilling. But here's Riley, telling the people of Alabama that they aren't getting enough of the royalties to respond to disasters like the BP Oil Spill:

Riley said the money is needed not only to recover from the BP Spill, but help the state defend against the next one. The governor, in an interview today after his meeting with White House senior adviser Valerie Jarrett, said Alabama would use the money to buy skimmers and oil boom, and to expand fisheries and "help the state defend against the next one." 

Louisiana passed legislation to set aside some of the royalty money for disaster mitigation and the voters approved it overwhelmingly, but Alabama, Mississippi and Texas never even considered doing the same:

(2007) Facing critical damage to its coastline, lawmakers in Louisiana moved last year to bar the state from using the drilling revenues for anything but wetlands and coastal preservation. Voters passed a referendum cementing the arrangement.

But the other three states – Alabama, Mississippi and Texas – have no such restrictions.

That was the unforeseen problem that happened when the US Congress passed this 2006 legislation--they realized after the fact that the environmental "sweetener" they used to get the bill passed was full of holes when they included language that royalty monies could be used on other projects instead of what the increase was intended for. Alabama, Mississippi and Texas quickly figured that out and exploited it to their advantage:

Four lucky states – Louisiana, Alabama, Mississippi and Texas – were slated to get billions in potential royalties, and lawmakers said the money would help reverse damage from offshore industry, paying for projects such as wetlands restoration and the purchase of sensitive coastal property for conservation.

But as budget planning gets under way, the states are beginning to realize that Congress gave them far more leeway than the political rhetoric in Washington suggested.

Particularly, one little-noticed sentence in the bill allows the states to spend their windfalls on “onshore infrastructure projects” to mitigate outer continental shelf activities. 

Translation: They can use it to pave roads, erect bridges, lay water lines or finish just about any other public works projects they can link to the coast.

“It is very tempting,” said Bill Walker, executive director of the Mississippi Department of Marine Resources. “I would not be surprised as these funds begin to come in and get larger and larger that there will be people at the state level saying we need to do this or that or the other thing. We’ll try to keep them focused on doing environmental and conservation things, but they make the rules.”

Riley wooed German steel giant ThyssenKrupp to Alabama and *his "sweetener" was $195,000,000.00 worth of "incentives" to seal the deal, although some reports say the figure was much higher:

Both Alabama and Louisiana offered incentives packages thought to be valued in excess of $400 million.

Louisiana's was heavy on cash -- its legislature approved $300 million in payments and this week promised another $100 million. The Times-Picayune of New Orleans reported early today that the total value of the package over time could have reached $2 billion.

Alabama's incentives deal is heavily dependent on tax breaks for everything from utility payments to capital costs, but would likely include substantial cash from Mobile city and county governments.

About three weeks ago, Mobile County Commissioner Mike Dean said the local contribution would be about $60 million, with the county putting forth $40 million of that. He later said those figures would change as negotiations continued.

Commissioner Stephen Nodine said this morning that while he wouldn't discuss specific figures, a countywide referendum will be held this summer to approve the county's incentive package.

This money came from the oil/gas royalty funds:

*Alabama offered incentives worth $195 million for ThyssenKrupp and $40 million for National Steel Car drawn from the Alabama Capital Improvement Trust Fund made up entirely from offshore natural gas royalties

We were notified that this file is coming back as "file not found" in Google searches. So because of that we are now presenting it in a reader form for the public to view. This document is not copyrighted and did appear in general Google searches until very recently. We wonder why this has occurred.

Manufacture Alabama 

The report also shows that additional monies from the royalties go to the counties, so the state paid for the TK deal twice from the royalty amounts. We would bet that when Baldwin County got a nice fat check that it came with instructions on where to spend it.

How the money breaks down according to the MA document:

Alabama's royalty money is broken up into categories with 65% of it going to the Alabama Trust Fund where it is supposed to be invested for the "benefit of the citizens", 10% of that, a paltry sum, goes to Forever Wild to protect "vital land and water areas" and the other 90% goes into the General Fund.

State General Fund accounts are replete with opportunities to misappropriate, fund pork projects and act as cover for all kinds of bait and switch schemes--it is no accident states define them as "general."

The only item in there that bears even the slightest resemblance to an environmental function is the 10% to Forever Wild. This is additional support for the assertions of Alabama's openly hostile attitude towards anything that is not based in big business. The MA crew are instrumental in carrying out this war on environmental regulations and are made up of some of the biggest offenders:

Who's on MAs BOD:

Board of Directors:
Allen Sanders, Chairman AbitibiBowater
David Carroll, Secretary Hunt Refining Company
Ron Fantroy, Treasurer Shaw Industries Group
Don Forst, International Paper
Terry Patterson, Toray Carbon Fibers America, Inc.
Paul Vercher, U.S. Steel (majority landowner in NBeltline route is US Steel)

President of MA: George Clark
Chief executive and lobbyist for MA.  Prior to becoming president, He was Alabama Industry and Manufacturers only president, helping to start the association in 1996.
Served two terms in the Alabama House of Representatives and was the chief sponsor of the Heritage Trust Fund which invested Alabama's oil/gas royalties. He also sponsored accompanying legislation that infused $520 million to infrastructure, upgrading roads, bridges and the Port of Mobile.

Seth Hammett, Speaker of the House, just received the "leadership" award from MA.

These big-in-the-britches MA boys even have an annual "Washington Fly-In":

Manufacture Alabama has scheduled the Annual Washington Fly-In for June 8-10. The Fly-In is a great opportunity to meet with our Congressmen and Senators and to discuss issues that are presently affecting your business and Alabama’s manufacturers.
We will keep you posted as more details unfold.

2010 Manufacture Alabama Newsletter

(if links do not work at any time, alert us as we do have the files saved)

Swoop-in is probably a much more appropriate term--reminiscent of vultures after roadkill.

Since so much of the royalty money is going to road projects we make the following connection into other recent news items:

This cozy relationship between big business, the Alabama legislators, Washington (gatekeeper of the federal crapulus dollars) and the Road Builders Association explains news stories and issues that the Birmingham News has been dutifully positively reporting, for the most part, such as; elevated Highway 280, Trinity Hospital move, Corridor X and the Northern Beltline and lest we forget...WRQs proposed 886 acre Vincent Hills quarry in Vincent, Alabama.

All that rock has to come from somewhere and apparently the other 5 quarries in Shelby County, Alabama aren't enough to supply the projects or is it maybe that the the parent company of WRQ, Vecellio and Grogan, who is one of the largest road builders in the nation, already has their place in ALDOTs projects?

 Could it also be the proximity of the Vincent Hills quarry to Highway 280?

From the Encyclopedia of Business, 2nd Ed--mining:

The high cost of transporting crushed stone has dictated that stone be mined and quarried as near as possible to the market centers or manufacturing plants that use it.

Riley craves the slot in Alabama history crediting him as the governor who fixed the Highway 280 problem and with influential friends (a big cement contractor being one) in the Vincent/Sterrett area that attend the First Baptist Church of Vincent, (which Riley visited "quietly" not long ago), there's some smoke coming from the woodpile. Vincent was not chosen by chance--it was deemed the sacrifice zone on purpose and BARD representing WRQ was an equally calculated move.

Big business always gets its way in small town Alabama or in either political party.

Senator Roger Bedford-D goes right along with Governor Riley-R and licks his chops for "other uses" for this money and his support once again makes the point that there is no difference in either party in this state:

“Any time you have new revenue, you have a great deal of new ideas on how to spend it,” said Alabama State Sen. Roger Bedford, D-Russellville, who chairs the chamber’s General Fund Finance Committee. “I don’t see it as a zero sum game. There may be enough money to do several types of projects.”

Bedford said lawmakers have begun discussing various ideas for using the windfall and that he would like to see it invested in economic development projects involving alternative energy.

The line about alternative energy is laughable, Drummond and Alabama Power will never sit still for that one and Bedford knows it, but he has to say it for the Washington powers holding the federal purse strings that are touting alternative energy. Claiming you will use it for AE is much more likely to get the federal money train rolling and Bedford was clever in his response to say the "right things" and disguise "economic development" as one of the Dems platform issues.

But the fact remains that this state is flush with hundreds of millions in royalty money every year, and if they had been smart they would have followed suit with Louisiana and set aside some of this money to serve its original purpose that Riley is storming about now--a fund to protect Alabama from the consequences of another big spill. That would have helped Alabama's Gulf Coast citizens and businesses immensely this year.

Governor, with all due respect, your words are as empty as the fund you did not create despite Congress' intent when they handed you the promise of greater revenues. Alabama will not do what they should do with an adequate amount of the funds because they have legislated prudence with this issue right out of existence and will spend, spend, spend to stay in the big boys ocean of cash. "Citizens interests" have been ordered out of the water by Montgomery.

Should another disaster happen and we have the same problems as we did in this last catastrophe, the citizens of Alabama ought to "fly-in" to Montgomery with the tar and feathers in tow and use both very liberally on all of the goats on the hill posing as elected servants of the people.

(disclaimer: we are not advocating violence of any nature against any state official with that statement; its intent is satirical opinion only.)

***UPDATE

 We feel it is pertinent to add this to the posting and have chosen to do so in this manner rather than as a separate item.

Comment section of Bham News Editorial pub. 8/29/2010

It seems the public is finally starting to connect the dots re: Vincent quarry, elevated Hwy. 280 and the Trinity Hospital move:

TRUTH2SEEK August 29, 2010 at 10:52PM
Let's see if I understand this. We have had increasing traffic congestion for years on 280. So Con Review Board gave Scrushy approval to put a hospital just south of the intersection with I459. Scrushy got caught before finishing it and Health South sold it to Daniel. Now they want to sell it for $40 mil. Trinity Hospital snaps it up because the City of Birmingham will give them the money to buy it so that Irondale won't get the Trinity relocation. Irondale got suckered into this relocation of Trinity and spent several million to get the site ready. Now Irondale is out a bundle and Birmingham will be out a bigger bundle if CON approves.
If this goes through, we will have to do something about the traffic that has gotten bad over the years. It will be worse by adding several thousand cars a day to the current use since doctors and nurses and sweepers and cleaners have to get to work. And the patients and their families will be adding their cars to the mix. Now we REALLY have a traffic problem!
What to do? We must completely change the layout for 280 and probably need to add elevated lanes to it so that people who live in Shelby County can get to and from work without having to put up with the Trinity Hospital traffic.
Fortunately, people are opening a quarry not far away. So building materials for the elevated highway will be handy.
But what about money to build? We will sell bonds, of course, just as Jefferson County sold bonds for the sewers. It may cost close to a billion bucks but don't worry. We can take care of that with a few added taxes even if the schools will have to cut back a bit.
I may have missed something here. It does not seem right, but I think i have it now.

DUENNZWEI August 30, 2010 at 2:34AM
truth... You cracked the code. Is collusion a prosecutable offense? Cuz this smells like the the proverbial FIX is in.
Shelby County has plenty of quarries, so why the full court press for another one in Vincent?
Ah, yes, the cost of transporting rock is a mine's biggest expense. So the closer the quarry to, oh, say a proposed $800 million Hwy 280 paving project, the happier the road builders, developers, highway department, etc.
With ALDOT getting a resolution from the city of Vincent supporting the 280 plan, and BARD successful in getting the Vincent City Council to approve the quarry, and with the state pushing so desperately for for the toll road, can we guess what the CON board's decision will be on the hospital?

Daniel Corporation the owner of the Health South Building is also a BARD member. The pervasive theme in all of these projects is, wait for it...BARD.