The Role of Information in U.S. Offshore Oil and Gas Lease Auctions

Abstract

This paper describes the U.S. offshore oil and gas lease sales conducted by the Department of the Interior since 1954. Several decisions are discussed, including bidding for leases, the government's decision whether to accept the highest bid, the incidence and timing of exploratory drilling, and the formation of bidding consortia. Equilibrium models of these decisions that emphasize informational and strategic issues and that account for institutional features of the leasing program are analyzed, and their predictions compared to outcomes in the data. AN IMPORTANT ASPECT of any market is the information available to partici- pants. The social and private costs of information imperfections are com- pounded in strategic settings, where participants may exploit informational asymmetries. Information can play a crucial role in an auction. A seller (or a buyer in a procurement auction) often resorts to an auction market because of uncertainty about the market price for the item in question. That is, the seller is uncertain about others' willingness to pay. At the same time, buyers may be uncertain about their rivals' valuations of the item, and they may be uncertain about the value of the item for themselves, such as when there is an unknown common valuation component. If one buyer has access to information superior to that of its rivals, such as a more precise signal of the item's worth on a future resale market, informational rents may be obtained. Even if buyers have symmetric information, in the sense of equally precise signals, they must account for the winner's curse in uncertain environments because the item will be won by the buyer with the most optimistic assessment of the item's worth. Buyers have incentives to pool information or to gain an advantage by learning of a rival's intentions. If ex post signals of the item's worth are available, the seller can increase profits by making payment contingent on the ex post signal, say via a royalty payment that supplements any fixed payment. However, if the buyer can affect the value by ex post actions, a moral hazard problem arises, and excessive reliance on a royalty rate may distort incentives. The game is not zero-sum, so inefficiencies may result.