President Obama's plan for expanding offshore drilling along some U.S. coastlines holds the promise of new oil and gas production on virgin Atlantic seabed so far untouched by drill bits.

But senators drafting a broad climate and energy bill on Capitol Hill are considering proposals that could do more to boost offshore production, giving states power over nearby waters and the promise of lucrative drilling revenues.

The drilling plan Obama announced this week canceled lease sales in Alaska, walled off the Pacific Coast to new drilling and blocked exploration in Alaska's Bristol Bay. At the same time, the president opened the door to new drilling leases along the Atlantic seaboard from Delaware to mid-Florida, following seismic research and environmental studies.

Mixing approaches

Legislation focused solely on capping emissions would never pass the current Congress, predicted Sen. Lindsey Graham, R-S.C., who is pushing the ideas in negotiations he is leading with Sens. John Kerry, D-Mass., and Joe Lieberman, independent-Conn.

The solution, Graham said, is to "combine concepts of controlling pollution and energy independence. That's where the votes are at."

The idea is risky. Every vote lured from oil-patch senators could be offset by lost support from coastal Democrats who worry that oil spills along neighboring states could contaminate their own shores.

States now take home 100 percent of the royalties and bids that energy companies pay to drill on waters in their jurisdiction, typically extending three miles from high-tide lines. Florida and Texas' territory stretches nine miles into the Gulf of Mexico.

Call of cash

But when drilling happens in federal waters outside the states' control, a quarter of the revenue is funneled to the Federal Land and Water Conservation Fund, a 45-year-old program that pays for government land purchases and local park projects.

The remainder goes entirely to the federal government, except for revenue from drilling in the Gulf of Mexico that can be split in half with Alabama, Louisiana, Mississippi and Texas.

Federal law now limits the 37.5 percent revenue sharing program to those states, but Senate climate bill negotiators are mulling expanding that to all coastal states.

Environmentalists fear that the prospect of drilling revenue would be too tempting for cash-strapped states struggling to balance budgets and pay for basic government services to resist.

"When you put cash in front of a financially starved legislature, everything looks more attractive," said Dan Jacobson, legislative director for Environment California. "If you dangle the idea of getting oil money," that could be irresistible to lawmakers "trying desperately to keep schools and hospitals open."

The result, Jacobson said, could be legislative battles pitting "the state's crown jewels versus the state's kids."

California project

Even without a new federal-state revenue sharing program to up the ante, the issue is a live one in California, where Gov. Arnold Schwarzenegger, who opposes most offshore drilling, wants to help close the state's $20 billion budget gap by allowing one specific drilling project near Santa Barbara.

If approved, Houston-based Plains Exploration and Production, Inc., would conduct the drilling in state territory, off an existing platform in federal waters. California bans drilling in state waters, but a loophole in the ban allows tapping an undersea oil field in state territory if some of the oil seeps into a federally controlled field.

With estimates of more than $100 million a year in royalties, the so-called Tranquillon Ridge project passed the California Senate in July before being rejected by the state Assembly.

Graham said Obama's drilling plan was "a good first step," but it needs more drilling incentives - including revenue sharing - to become a true "game-changer."

States' rights

Virginia's two Democratic senators, Jim Webb and Mark Warner, are pushing for a "fair and equitable formula" for sharing revenues that would guarantee their state gets a portion of the money from planned exploration in federal waters about 50 miles off their coast.

They also are considering provisions that would give states much more control over what happens near their coastlines, allowing them to opt in to drilling (and revenues) within 35 miles or opt out for a bigger buffer of 70 miles.

Other senators, including California Democrat Dianne Feinstein, like the idea of opt-out provisions as a way to protect states from nearby drilling, no matter what the federal government decides.

Any state that wants drilling should first "pass legislation affirming that it desires to open the shores off its coast," Feinstein said. "On such a substantial decision about the future of a state, a decision should be made by both the legislature and the governor."