Offshore Oil Lease Research Articles

Common Values, Unobserved Heterogeneity, and Endogenous Entry in US Offshore Oil Lease Auctions

Although an auction of drilling rights is often cited as an example of common values, formal evidence has been limited by the problem of auction-level unobserved heterogeneity. We develop an empirical approach for first-price sealed-bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. We show that important features of the model are nonparametrically identified and apply a semiparametric estimation approach to data from US offshore oil and gas lease auctions. We find that common values, affiliated private information, and unobserved heterogeneity are all present. Failing to account for unobserved heterogeneity obscures the evidence of common values. We examine implications of our estimates for the interaction between affiliation, the winner’s curse, the auction rules, and the number of bidders in determining the aggressiveness of bidding and seller revenue.

Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions

In a environment, some market participants have private information relevant to others' assessments of their own valuations or costs. Economic theory shows that this type of informational asymmetry can have important implications for market performance and market design. Yet even for the classic example of an oil lease auction, formal evidence on the presence and strength of common values has been limited by the problem of auction-level unobserved heterogeneity that is likely to affect both participation in an auction and bidders' willingness to pay. Here we develop an empirical approach for first-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. We show that important features of the model are nonparametrically identified and apply a semiparametric estimation approach to data from U.S. offshore oil and gas lease auctions. Our empirical results show that common values, affiliated private information, and unobserved heterogeneity - three distinct phenomena with different implications for policy and empirical work - are all present. Failing to account for unobserved heterogeneity obscures the empirical evidence of common values. We examine the implications of our estimates for the classic revenue ranking of sealed bid auction designs, and for the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.

US Gulf of Mexico Production Projected To Hit Record High

The deepwater US Gulf of Mexico (GOM) sector has struggled since the onset of the oil price downturn in 2014, but as costs settle and operators establish new standards for running efficient projects, this year may be a significant turning point for the industry in the region. In January, Wood Mackenzie published a report predicting that production of oil and gas in the deepwater GOM will reach an all-time record high this year, with more than 1.9 million BOPD, surpassing the previous record set in 2009 by nearly 10% and representing 13% growth year over year. William Turner, Wood Mackenzie’s senior research analyst and lead author of the report, Deepwater GoM: 5 Things to Look for in 2018, said that, more than 2 months into the calendar year, the level of activity in the region is still on track to meet expectations. However, recent developments may have an effect on that trajectory. Policy Impacts In January, the US Department of the Interior (DOI) announced a proposal to place more than 90% of federal offshore land containing oil and gas—including land in the GOM—up for auction between 2019 and 2024. In February the DOI’s Royalty Policy Committee issued a recommendation for lower royalty rates for offshore oil and gas drilling on sea-bed owned by the US government. If approved, royalties from off-shore drilling would drop from 18.75% to 12.5%, the lowest royalty rate per-mitted. The US Bureau of Ocean Energy Management (BOEM) had already relaxed royalty rates to 12.5% for some shallow-water leases in August 2017. With the WTI and Brent crude prices still hovering in the low $60s as of early March amidst relatively high supply, the recommendation could make it more attractive for operators to look at bidding for offshore oil leases in the GOM. Turner said while the decision on the royalty came faster than anticipated, it is likely the US federal government wanted it in place before Lease Sale 250 on 21 March. At the time of this writing, it was scheduled to be the largest regionwide sale in US history, with 77.3 million acres offshore Texas, Louisiana, Mississippi, Alabama, and Florida avail-able for exploration and development. The sale includes approximately 14,700 unleased blocks located in the GOM’s Western, Central, and Eastern planning areas. The BOEM estimated that these blocks contain about 90 billion bbl of undiscovered technically recoverable oil and 327 Tcf of undiscovered technically recoverable gas. The royalty rate may have a bigger impact on operators’ decision making in the coming months. For instance, Turner said it is possible that Total may try to rebid for leases in the North Platte field—where it holds a 40% working interest—rather than taking over operation of its holdings from Cobalt International Energy.

Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions

An oil lease auction is the classic example motivating a common values model. However, formal testing for common values has been hindered by unobserved auction-level heterogeneity, which is likely to affect both participation in an auction and bidders' willingness to pay. We develop and apply an empirical approach for first-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. The approach also accommodates spatial dependence and sample selection. Following Haile, Hong and Shum (2003), we specify a reduced form for bidder entry outcomes and rely on an instrument for entry. However, we relax their control function requirements and demonstrate that our specification is generated by a fully specified game motivated by our application. We show that important features of the model are nonparametrically identified and propose a semiparametric estimation approach designed to scale well to the moderate sample sizes typically encountered in practice. Our empirical results show that common values, affiliated private information, and unobserved heterogeneity - three distinct phenomena with different implications for policy and empirical work - are all present and important in U.S. offshore oil and gas lease auctions. We find that ignoring unobserved heterogeneity in the empirical model obscures the presence of common values. We also examine the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.

A Note on Idle Oil and Gas Platforms (Idle Iron) in the Gulf of Mexico

U.S. federal regulations require that an offshore oil and gas lease be cleared of all structures within one year after production on the lease ceases. Recently, the Minerals Management Service has begun to encourage operators to remove idle oil and gas platforms (known as "idle iron") on producing leases in a more timely manner. The purpose of this note is to quantify the amount of idle iron that exists in the Gulf of Mexico and to describe its geographic distribution and ownership patterns.­

A transaction cost model of contract choice: The case of petroleum exploration

The growing literature on transaction costs posits that the structures of contracts involving exchange under uncertainty are influenced by the costs incurred by the contracting parties prior to, as well as after, a contract is signed. This research investigates the contractual responses to the substantial uncertainty attending the exchange of rights to underground petroleum deposits. It develops a transaction cost model to explain the payment structure found in these contracts. The model identifies the major transaction costs associated with the payment types used in oil and gas exploration contracts, including ex ante measurement costs and ex post production inefficiencies, and explains their effect on contract structure. Testable implications concerning variations in the payment structure of petroleum exploration contracts are generated and tested using data from private oil and gas mineral rights leasing contracts in four western states. The study has direct public policy significance in that it delineates the implications of different payment structures of oil and gas leasing contracts. These implications can be used to evaluate proposals to reform federal oil and gas leasing policies. In addition, while there has been considerable analysis of federal offshore oil and gas leasing contracts, there has been a dearth of research on private onshore oil leasing practices. This study helps to fill this empirical void.

How crude: Advocacy coalitions, offshore oil, and the self-negating belief

Although the Advocacy Coalition Framework (ACF) offers a promising approach for the study of policy change, other social science perspectives – specifically including human ecology – point to competing expectations. The ACF proposes that external perturbations are a necessary precondition for policy change; by contrast, work in human ecology draws attention to the potential for autogenic succession– cases where people or organizations act in ways that bring about their own demise. This difference in perspectives is tested with respect to a policy subsystem that has been found to offer a valuable context for examining ACF expectations, namely the U.S. federal program for offshore oil leasing. Many developments within this program have been quite consistent with ACF expectations; the rise to power of a new governing coalition in 1981, for example, did lead to a decided shift in policies, and the National Academy of Sciences did play roughly the role predicted by ACF. In addition, however, key sources of policy change were set in motion by members of the governing coalition itself – based on actions that were quite consistent with the policy core beliefs of the governing coalition, but not consistent with the assessments by independent scientists. The experience suggests that what is needed is not so much a rejection of the ACF as its refinement. Even without ‘external perturbations,’ members of the governing coalition have the potential to undercut their own interests, if only because of the potential power of the self-negating belief. Ironically, this potential may be the highest in precisely those cases where the governing coalition has the greatest apparent ability to impose its own beliefs, and the lowest level of apparent need to respond to alternative or competing views.

Designing auctions for offshore petroleum lease allocation

Offshore oil leases may be awarded by an auction system or through an administrative system based on an evaluation of the applicant's financial and technological capability. It is well known that allocating leases by administrative decision is economically inefficient and therefore dissipates potential resource rent. In most cases, severe restrictions are also put on the possibilities to trade leases in secondary markets. It is therefore unlikely that trade in secondary markets can provide a complete solution to correcting inefficiencies in the initial lease allocation system. It is essential to choose a primary lease allocation system that directly addresses the public policy and economic objectives of the petroleum activities. In several industries such as telecommunications (the electromagnetic spectrum) and the aviation industry (airport slots), where the problem of allocating scarce public resources has been addressed for some time, we have seen a trend towards allocation of exclusive rights by administrative decision being replaced by allocation by auction. In this paper, the design of auctions for allocation of petroleum leases is discussed. In addition other issues are considered, i.e. how public policy objectives can be addressed through the design of the auction and to what extent the authorities should rely on auctions as the sole instrument to capture resource rent.

The Impact of Financial Restructuring and Changes in Corporate Control on Investment and Employment in the U.S. Petroleum Industry

This article investigates the effects of changes in market conditions and the financial structure of domestic petroleum firms on employment and investment in offshore oil leases. Important theoretical issues include the extent to which managerial power in firms has been challenged by intervention from financial markets and institutional investors and the effects of changes in financial control on employment and inventory investment. A pooled cross-section time series data set was assembled for forty large oil companies for 1978–1989. A dynamic analysis of company employment levels and investment in offshore oil leases in the Central Gulf of Mexico reveals that falling oil prices and lower domestic oil consumption reduced spending on offshore leases. Some support was found for the agency theory's claim that lower free cash flow reduced spending on offshore leases in the late eighties. Support was also found for an executive defense strategy (Useem 1993), where petroleum company managers reduced lease spending and employment as an adaptation to changes in market fundamentals and external threats from capital markets and institutional investors.

Jurisdiction and offshore petroleum in Australia: creating symmetry between the Commonwealth and states by sharing benefits and avoiding costs

This article examines the federal legislative regime for governing offshore oil development in Australia. Adopting an evolutionary perspective, the article considers how the Australian petroleum regime has been able to avoid the ‘asymmetry of costs and benefits’ which have shut down the offshore oil leasing program on the US west coast. To this end, it is shown that the Petroleum (Submerged Lands) Act has overcome jurisdictional issues by creating a partnership between the federal and state governments, enabling both to share in the benefits of policy making. This joint decision-making structure is narrowly focused upon exploitation, though, and does not deal with environmental issues outside of its original scope. The absence of a complementary regime to fill this policy gap permits environmental costs to go unaccounted in petroleum development. This shortcoming notwithstanding, the Petroleum (Submerged Lands) Act provides a useful model by which federal/state jurisdictional limitations can be overcome. Ocean and coastal issues are currently receiving political attention in Australia, and it is timely for the cooperative governance model to be revisited and also extended to other marine policy sectors. Moreover, joint authority approaches could be considered by other federations struggling with offshore jurisdiction issues.

Exploration prior to oil lease allocation: A comparison of auction licensing and allocations based on size of work programme

Off-shore oil leases may be awarded by an auction system or by a system based on discretionary factors, such as the size of work programme. Companies' decisions on the optimal bid premium (in auctions) or optimal proposed work programme (in discretionary systems) are complicated by another choice variable: the amount of exploration to conduct prior to bidding or applying for the lease. It is demonstrated that in the case of auctioned oil leases pre-bid exploration may yield strategic benefits to the exploring company. In work programme based allocations, however, an expected reduction in resource uncertainty will not always improve the profitability of the optimal work programme, so that situations can be demonstrated where even costless exploration is ex ante unprofitable. Furthermore, allocation on the basis of work programme size risks awarding leases to companies with higher resource uncertainty and lower lease valuations. These are arguments demonstrating the merits of allocation by auction rather than by companies' declared work programmes.

Benthic Biological Studies of the Southwest Florida Shelf

Between 1980 and 1987, the U.S. Department of the Interior funded a series of benthic studies of the continental shelf off southwestern Florida. The goal was to gather environmental information in order to make decisions about offshore oil leasing. One major study element was habitat mapping. Fourteen transects were surveyed geophysically (side scan sonar, subbottom profiler) and visually (underwater video and still cameras), and the results were compiled in atlases showing the distribution of substratum types and visually distinct benthic communities. Rock outcrops were rarely seen and usually of low relief (<1 m), but patches of reef-associated sessile epifauna such as sponges, hard corals, gorgonians, ascidians, and bryozoans occupied 31% of the seafloor surveyed. Most of the sessile epifauna were seen on hard bottom covered by a thin sand veneer, or on biogenic rubble layers (shell rubble, coralline algal nodules). A second major study element was benthic station sampling. Fifty-five stations were sampled from two to twelve times each, and over 1,500 species of epibiota and over 1,100 species of macroinfauna were identified. The species composition of both hard- and softbottom communities varied primarily in relation to water depth.

The Effect of Regret on Optimal Bidding in Auctions

While most models of auctions and competitive bidding assume that each bidder's utility for an outcome depends only on his own profit, we allow the utility to also depend on any regret that a bidder suffers after the fact and characterize when and how this affects bidding. Specifically, a winner might regret “money left on the table” in Federal offshore oil lease sales, while a loser might regret seeing an object sell for less than his own value for it. We show that for risk-neutral bidders who, after the fact, know the winner's price for the object, a bidder's optimal bidding strategy will not depend on the relative weight given to profit versus regret if both forms of regret weigh equally heavily. However, if bidders weight money-left-on-the-table regret more heavily, then the bid taker suffers. Likewise, if losers do not learn the winner's price, then the bid taker also suffers. Thus, the existing models' exclusion of regret from risk neutral bidders' utility functions affects the applicability of the resulting theory under certain, now clearly delineated, conditions.

Bidding Optimum Bonus for Federal Offshore Oil and Gas Leases

Summary. How a bidder should bid for federal offshore oil and gas leases offered by bonus bidding is detailed. Quantitative answers are given for bidders seeking to maximize value as well as reserves. The winner's curse is delineated. Further, it is shown how bidding as a joint venture rather than solo can diminish bidders' values. Introduction Consider an item of value V for which Bidder j offers a payment of value bj and each of n' other bidders offers a payment of value bi that is not necessarily equal for all n'bidders. Throughout, let all values be tax-adjusted and appropriately discounted present values. Bidder j "wins" with probability . The expected value to Bidder i. of the offered item is (1) Eq. 1 implies that n' is a stipulated nonnegative integer. When the number of bids competing with j's bid is a distribution of n', (2) and (3) The notation used hence will be E and p .. with the appropriate condition, n'or, implied by the context. Furthermore, let V= 1 such that E, bj and bi are fractions of V in Eq. 1. The foregoing describes the application treated here. The item of value offered is an oil and gas lease. A bonus in a sealed bid is the payment of value offered by bidders. The bidder offering the highest bonus "wins" the lease. How Should a Bidder Bid? Entirely new quantitative answers are given here. The answers depend, first of all, on what a bidder seeks most with bidding. Two distinct objectives can be considered:maximizing oil and gas reserves ormaximizing present values. The mathematical rule invoked with the first objective is to bid such that E=O. with the second objective, E is maximized. A reserve maximizer seeks reserves constrained only by the expectation of not losing economic present values. A value maximizer seeks the largest possible increase in economic present values with whatever reserves are coincident. First, bidding on a single lease with no constraints on the magnitude of the bid is considered. The next section defines a model and its assumptions leading to optimum bids when the number of competing bids, n', is stipulated. The third section extends the model by considering an uncertain number of competing bids. Then the assumptions of the model are justified. Joint venture bidding, the reasons for it, and the costs compared with solo bidding are discussed in the fifth section. Finally, the last section summarizes the conclusions. Bidding Against a Stipulated Number of Competing Bids for a Single Lease Consider Bidder j and n' bidders-individually indistinguishable-named i, all of whom will bid on an offered lease. The true, but unknown to all bidders, value of the lease is V=1. Bidder j estimates the value of the lease as, each of the n' other bidders estimates a unique value of the lease, . Assume that both j and all i obtain their estimates, and, as samples from a lognormal distribution with the geometric mean of V= 1 and variances and, respectively. Further assume that each Bidder i submits a bid, equal to the product of the individual bidder's and a bid fraction, common to all n' Bidders i. Consider Bidder j's bidding an amount, obtained by multiplying by j's bid fraction, . The outcome to Bidder j, E, is defined by the following function: (4) The frequency of j's winning -- i.e., submitting a bid higher than each of all n' bids from Bidders i -- can be written as follows: (5) Eq. 5 is rigorous. PSN is the cumulative unit normal probability function, and xmax, n'is the largest of n' samples from a unit normal distribution. JPT P. 1102^

Testing the continuity of individual bid density functions: Some further results

This brief paper analyzes the bidding behavior in OCS oil auctions of six individual bidders (using solo bids only) and of a consortium bidder over the period 1963–1979. Included are bidders that bid over the entire period, one that bids for only a short time at the beginning, and one that first makes such bids in 1970. Our findings strongly support those reported in an earlier paper for five bidders and a brief, three-auction sample period: bidders commonly utilize multiple bids of single dollar values within a given auction. The strength of the present results – for three of the seven bidders, over 30% of the bids made fell into this category – further buttresses our conjecture that the use of continuous bid functions is inappropriate for modelling offshore oil lease auctions.

A Model for the Distribution of the Number of Bids on Federal Offshore Oil Leases

Not all Outer Continental Shelf (OCS) federal oil leases receive the same number of bids. Indeed, while some leases receive over a dozen bids, many others receive no bids at all. This leads to uncertainty in the number of bids a lease will receive—uncertainty of potential concern to both bidders and bid takers. We develop a model that suggest there are three fundamentally different types of leases—those with “no,” “low,” and “high” competition. This provides a basis for bidders and bid takers to explicitly account for some of the differences among leases when preparing bids and when evaluating the bidding. Although we specifically study only OCS federal oil leases, our overall approach and insights should apply equally well to many other situations with uncertain numbers of bids, including mineral leasing in general, as well as military procurement and construction contracting.

California's Coastal Program: Larger-than-Local Interests Built into Local Plans

Abstract Now twelve years old, the independent California Coastal Commission has developed effective, binding partnerships (in the form of certified local coastal programs) with many of the sixty-seven city and county governments along the state's 1,100-mile coastline. During that time, it has survived several hundred bills introduced in the state legislature to kill or cripple California's coastal program, has engaged in a pitched battle with the U.S. Department of the Interior over the federal offshore oil leasing program, and has scored planning successes in providing public access to the shoreline and creating transfer-of-development-credit programs in Big Sur and the Santa Monica Mountains. Two aspects of California's coastal program have proved to be critical: the nurturing of state/local relationships and the establishment of an independent coastal conservancy agency. Despite its successes, however, long-term questions remain about the ability of even a vigorous state/local regulatory program to pr...

Statistical Methods Applicable to Selected Problems in Fisheries Biology and Economics

The methods by which fishery scientists estimate fish population size are reviewed. These include tagging, cohort analysis, random sampling and catch per unit of effort indexes. Elementary statistical considerations are introduced to discuss some of the properties of the methods. For example, we model the effect of spatial patchiness on random sampling and the effect of sample size on tagging estimates. Next, the Poisson, negative binomial, and gamma distributions and their interrelations are discussed. In particular, these three distributions form a do-it-yourself kit for making models of the fisherman's catch per trip. One policy tool suggested for fishery regulation is the auction of licenses. Smiley has extended the bidding models of Wilson and Rothkopf and applied them to empirical data on offshore oil lease bids. We discuss Smiley's model, which could provide information about fishermen's expectations and learning about abundance, if and when auction schemes are implemented for fisheries. Finally, w...

Oil and Gas Developments in Atlantic Coastal Plain and Outer Continental Shelf in 1983

Exploratory drilling in the Atlantic coastal plain region declined slightly in 1983. Four wells were spudded during the year: 2 in the offshore Baltimore Canyon area and 2 onshore in Lee County, North Carolina. One North Carolina well was drilled, and the other was being tested at year end. In April, 4,050 tracts were offered in the mid-Atlantic lease offering (OCS Sale 76), the first area-wide offering of offshore oil and gas leases under the Department of the Interior's new streamlined leasing system. Bids of $86,822,680 were exposed on 40 tracts, and 37 tracts were subsequently leased. In July, 3,082 tracts were offered in the south Atlantic lease offering (OCS Sale 78). Bids of $14,562,040 were exposed on 11 tracts, and all high bids were accepted. Seismic data acquis tion decreased 64% below the 1982 level to 13,166 line-mi (21,189 line-km).

Federal Offshore Oil and Gas Lease Bonus Bid Rejection Policy: Past and Present

Summary 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. .....................(1) JPT p. 1951