Question 11 (Question 45 of Attachment B): What is the Department's analysis of its experience with respect to fair market value returns from: (a) The present cash bonus system on the Outer (a) My views on this question are set forth fully in the above-cited article at 775-777 and in the Nossaman OCS Study $$ 4.9, 11.8. (b-c) My views on these subjects are set forth in the above-cited article at 791-795. Question 12 (Question 46 of Attachment B): What, if any, evidence or analysis exists to indicate whether the system of cash bonus bidding encourages or discourages exploration and development, in contrast to alternative methods of leasing? In particular, what evidence or analysis is there: (a) (b) Whether bonuses paid by high bidders in competitive lease sales diminish the funds that otherwise would be available for exploration? Whether high cash bonuses paid by winners discourage independent operators from participating and reduce the number of serious contenders for leases, above and in addition to the high costs of operation in such places as the Outer Continental Shelf and the Arctic? (၁) (a) Whether payment of a high cash bonus selects a qualified and responsible operator who is the best able or most willing to undertake early exploration? Whether payment of a high cash bonus is a Comment: (a) It is difficult to isolate evidence that bonuses paid in competitive bidding diminish funds available for exploration, although this statement has frequently been made by potential resource entrants. See Nossaman OCS Study $11.16 at note 54. See also id at $8.17. Probably a more supportable conclusion would be that bonuses and exploratory costs cumulatively reduce the amount of funds available for entry into new areas. The very substantial growth of the ratio of indebtedness to equity among major oil companies in the past five years provides some evidence for this conclusion. See Krueger, "An Evaluation of the Provisions and Policies of the Outer Continental Shelf Lands Act," 10 Nat. Res. J. 763 (1970) at 784. (b) Again, there are statements frequently made which indicate that the high cash bonuses required to be paid discourage any independent operators from bidding on offshore leases and necessarily prevent them from participating in the development of offshore resources. The available evidence, however, clearly indicates that it is not the initial bonus but other costs of entry, such as the high costs of exploration and development, that discourage the independent operator from bidding for or participating in the shore resources. See Nossaman OCS Study the above-cited article at 785-786. development of off $11.18. See also (c) The high cash bidder on a given property may not be the best able or most willing to undertake early exploration. As a class, however, the high cash bidder has a greater incentive to be an efficient and willing (aggressive) explorer and developer. His investment in the property will be higher than would be that of others bidding and he would, therefore, have a greater motivation to recover it at an early date. A more subjective and somewhat conjectural conclusion that may be drawn is that the offering of the highest cash bonus in and of itself is evidence of an attitude that is more likely to bring early development of the property. I believe that this conclusion is a valid one, particularly where the winning bidder has bid much higher than other bidders ("left money on the table") as to a number of properties in the same offering. An example would be Humble Oil & Refining Company at 1968 Santa Barbara Channel lease sale. See Table 8-13 of Nossaman OCS Study. Question 13 (Question 50 of Attachment B): What, in summary, are the procedures for estimating the value of individual tracts considered for leasing, and what has been the experience with these procedures? Specif ically: (a) (b) How are pre-sale estimates of the minimum reasonable industry bid per tract calculated, by whom, and using data of what orgin? For the past three OCS sales, how many and (c) Are individual OCS tracts reevaluated after opening of bids but prior to award of a lease? If so, what information goes into the reevaluation, and how is it used? (a) What avenues are available within the Department to companies which may wish to appeal Departmental rejection of bids for certain tracts, and what information related to the value of such tracts do Departmental personnel who are handling such appeals have available to them? Comment: See question 6, supra. |