Toward an Optimal Oil and Gas Leasing System*

Abstract

The four principal leasing systems—work program, royalty, profit share (including rent resource tax), and bonus bidding—are reviewed relative to their efficiency in maximizing and collecting the present value of economic rents. Empirical research is shown to support theoretical conclusions that the most efficient system appears to be bonus bidding, without a fixed royalty, with leases issued in perpetuity, with environmental and other regulations required to pass a benefit/cost test, and with elimination of any nationalistic or other barriers to entry.