Federal Offshore Oil and Gas Lease Bonus Bid Rejection Policy: Past and Present
- John Lohrenz (Gulf Oil E and P Co.) | Elmer L. Dougherty (U. of Southern California)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- November 1983
- Document Type
- Journal Paper
- 1,951 - 1,955
- 1983. Society of Petroleum Engineers
- 7.4 Energy Economics
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- 67 since 2007
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Policy concerning rejection of bids for U.S. government Policy concerning rejection of bids for U.S. government federal offshore oil and gas leases offered to the market recently has been changed. Technical analyses presaging this change are given here. An initial technical assessment of the new policy compared with the old is presented. presented. Introduction
In 1968, the U.S. government began preparing presale estimates of record for offshore oil and gas leases offered to the market. Previously, informal estimates, now not of record, were made, resulting in the rejection of 5.8% of the leases that otherwise would have been issued. After 1968, the rejection rate more than doubled! The policy that led to that rejection rate has recently been changed. The change parallels a previous study and follows that study closely in time. The purpose of this work is twofold. The issues and technical study that underlie the policy change are traced and summarized. Also, technical assessments based on data under the new policy are made.
Fair Market Value and Government Estimates of Lease Value
The presale estimates prepared and recorded by the U.S. government were used to decide which leases to issue and which should have all bids rejected. The objective written in law is that the government should obtain fair market value for leases issued. Under the old policy, these presale estimates were considered necessary "to assure [that] the Federal government receives fair market value for lands leased....." That policy position became an argued issue elsewhere as well as in the previous technical study. Opposite that position was the viewpoint that fair market value is determined only by cash, or equivalent, exchanges between actual willing sellers and buyers. Government estimates, never required to meet that test, could not be considered to affect fair market value. So argued those opposing the old policy position. In March 1983, the U.S. Dept. of Justice issued a statement that more or less administered a coup de grce to the old policy vis-...-vis fair market value and government estimates: "Our position... is that the high bid on a tract will generally represent fair market value for that tract, absent collusion or other irregularities in the bidding process." This Dept. of Justice position is implicit in the new rejection policy.
What Is an Offered Lease Worth?
The next question is obvious. To whom? The answer relevant to rejection policy is the owners of the leases offered. The owners are, of course, the collected citizens. The issue is: what is the value of an offered lease to the collected citizens as owners of that lease? The question can be answered mathematically as follows.
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