APPLICATION OF A METHOD FOR EVALUATING ALTERNATIVE OIL AND GAS LEASING SYSTEMS
Abstract
A substantial portion of oil and natural gas in the United States lies under portions of the Outer Continental Shelf owned and managed by the federal government. Under the 1978 Outer Continental Shelf Lands Act ammendments, the Department of Interior was required to use new bidding systems on between 20 and 60 percent of all tracts leased in a given sale. The proposed systems would utilize a variety of bidding variables in addition to the traditional bonus, including the royalty rate and a profit share. Fixed payments could include higher royalties, sliding-scale royalties, fixed profit shares, and bonuses. The following study develops and applies a method for determining how bidders will react to some of the new systems. This evaluation assumes that the new systems succeed in generating a higher number of bids per tract offered. A game-theoretic bidding model with multiplicative strategies can be used to generate the relative bid levels achieved by the new systems relative to those of existing bonus systems with the assumption of more bidders per tract. For some types of probability distributions representing resource-value uncertainty, their parameters can be estimated with maximum likelihood methods using bid data from previous OCS sales. The projected bid levels and resource uncertainty parameters then become inputs into a reservoir model which generates estimates of total government revenue, costs per barrel, and the number of tracts actually reaching production under each system studied. The number of wells, tax parameters, well costs, prices, and other parameters relevant to the year in which the sale took place also become inputs to the reservoir model. The main conclusion of this study is that there is no need to exclude the use of any of the alternative systems studied in oil and gas lease sales. For most sales, they provided more total revenue to the public than the current bonus system would have at comparable levels of competition without reducing the number of tracts reaching production.
Degree
Ph.D.
Subject Area
Economics
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