A Model For Calculating The Economic Value Of An Outer Continental Shelf Lease Sale

Abstract

ABSTRACT This paper describes a cash flow model used by the U.S. Department of the Interior to estimate the potential economic value of an Outer Continental Shelf lease sale. The development of the model equations for cash bonuses, royalties, taxes, corporate profits and stockpile savings is presented. The model is employed herein to generate unofficial estimates of these expected outputs from upcoming OCS Lease Sale No. 49. INTRODUCTION The U.S. Department of the Interior conducts auction sales in which the rights to explore and develop tracts on the Outer Continental Shelf (OCS) are leased to private industry. Prior to holding a particular sale, the Department must decide which tracts to offer, which leasing systems and lease stipulations to apply, and when (if at all) to conduct the sale. In making these decisions, the Secretary considers the effect of the available options on 1) the potential economic value of the tracts in the proposed sale, 2) the estimated distribution of value between the public (primarily in the form of government receipts) and private industry (in the form of corporate profits), 3) the predicted net environmental consequences, usually measured in physical terms, and 4) the likely secondary economic impact on the relevant on-shore areas. For each OCS lease sale, private industry has to determine the extent of pre-sale exploration activities to undertake, the specific tracts to bid on, and the magnitude of its bids. In order to make the best decisions on these matters, the potential aggregate economic value and profitability of individual OCS lease sales and classes of tracts within a given lease sale need to be properly estimated. This paper describes a cash flow model that is currently being used by the interior Department to estimate the economic value of the tracts, or classes of tracts, in a proposed OCS lease sale. The model outputs are presented to the Interior Secretary when he is deciding upon the content of a particular lease sale. These outputs include estimates of the aggregate cash bonuses, royalties, taxes, and corporate profits. (Owing to their modest size relative to the notational complexity involved, rental payments are not included in the version of the model presented herein). In addition, the model computes the estimated savings from potential reductions in the required size of the Strategic Petroleum Reserve. The model utilizes inputs that are taken primarily from a publicly available document - the Environmental Impact Statement (EIS) for the specific lease sale being analyzed. Thus, private industry can use this model to make pre-sale aggregate lease sale estimates based upon essentially the same inputs employed by the Interior Department. The next section discusses the main assumptions and considers their implications on the model formulation and outputs. Afterwards, the basic model equations are derived, and these relations are used to estimate the projected output values for Mid-Atlantic OCS Sale No. 49, scheduled to be held in February 1979. ASSUMPTIONS This section describes the basic assumptions that are maintained throughout the paper. The first assumption is that the outputs to be calculated can be adequately estimated by considering only two scenarios. In the first, the sale area contains some oil and/or gas, i.e., it is hydrocarbon prone, and the expected amount of conditional supply is found and produced. In the other scenario the sale area is not hydrocarbon prone, hence no oil or gas is found, but some exploration costs are expended.