AUGUST 24, 1972 RESPONSE OF ROBERT B. KRUEGER TO U.S. SENATE COMMITTEE ON INTERIOR AND INSULAR AFFAIRS Question 1 (Question 8 of Attachment A): Does the present system of leasing or disposal for each energy resource provide sufficient incentive for early exploration and development? Do the current size of lease tracts for the various energy minerals, acreage limitations on lease holdings, and length of lease terms deter exploration and/or development of any energy resource on public lands? Comment: The current system of leasing with respect to the Outer Continental Shelf provides sufficient incentive for early exploration and development in light of the existing and predictable high cost of entry. The Outer Continental Shelf Lands Act, which requires an oil and gas lease to cover an area not exceeding 5,760 acres, but contains no acreage restrictions with respect to sulphur or other minerals, would appear to be sufficiently flexible with respect to operating procedures. To lengthen the period of the lease drilling term or to expand the size of the leasehold estate could cause higher cash bonus bids to be made but might deter competition. It has been suggested that the timing and size of Federal offshore lease sales will detrimentally influence the entry of smaller firms into offshore exploration. There appears, however, to be no evidence that smaller firms can be induced into effective competition, even if sales were spaced farther apart or the size of the tracts were reduced. The experience of the Bureau of Land Management with the leasing of small tracts indicates, in fact, that the smaller firms per se are not individually capable of competing for leases in the Outer Continental Shelf. The "start up" and initial exploratory drilling costs of offshore development, which are approximately the same whether a small or a full tract is leased, are sufficiently high as to preclude the entry into competition for Outer Continental Shelf resources of smaller oil and gas firms, except where acting jointly, irrespective of lease period or the size of leased tracts. Question 2 (Question 9 of Attachment A): In which cases, if any, do elements of the present system encourage speculative nonproductive holding of resources on the public lands? (a) Consider particularly Noncompetitive leasing of onshore oil and 85-197 O 7323 gas; (b) The system of prospecting permit and pre- (c) The indefinite term and twenty-year review of coal leases; and (a) The location-patent system for uranium ore. Comment: Where there is noncompetitive leasing of oil and gas tracts or where the leasehold is awarded competitively by royalty bidding, speculative nonproductive holding of resources is encouraged. Where the operator has invested little or no money in the mineral estate and is under an obligation only to pay a limited annual rental fee, he is under little or no burden to explore the leasehold estate and will have a high incentive to speculate. A short drilling term or substantial annual work requirements will improve the situation but there will nonetheless remain the possibility without competitive bidding that a resource may be allocated without fair market value being received for it by the resource owner. See Krueger, "An Evaluation of the Provisions and Policies of the Outer Continental Shelf Lands Act," 10 Nat. Res. J. 763, 778-780, 786-795 (1970). Question 3 (Question 10 of Attachment A): Does the present system of leasing or disposal of each energy resource provide for receipt of fair market value by the government for the resource? Consider particularly the four instances named in question 9. In each instance where the government generally receives less than fair market value, what benefit does the public receive from leasing or disposal programs in which receipt of fair market value is not a principal objective? Comment: With respect to offshore mineral leases in the outer continental shelf, the present system does overall provide for the receipt of the fair market value of the leasehold estate. Where the government generally receives less than the fair market value from a leasing program, it is very questionable whether the public receives any benefit that it would not otherwise have. The very fact that fair market value has been paid ordinarily provides incentive for early development and maximizes the revenue to the government, both through bonus and early royalties. Question 4 (Question 11 of Attachment A): What is the experience to date with respect to classes of enterprise engaging in exploration and production operations involving energy minerals on public lands? Does the present system of leasing or disposal for any of the major onshore and offshore energy resources unduly favor some classes of enterprise (for example, large integrated firms)? What is the relationship between classes of enterprises presently engaged in development of energy resources on public lands and the rate of exploration and production with respect to the development of coal, oil shale, and geothermal energy? Comment: To date experience has shown that with respect to the Outer Continental Shelf only the larger firms and combinations of smaller firms can effectively engage in exploration and development due to the high cost of entry. This fact does not, however, indicate any infirmity in the system or that large firms are "unduly favored." It indicates only that offshore oil and gas development requires large capital resources which typically are possessed only by the larger firms. With respect to onshore oil and gas, due to the relative ease of entry and the less expensive exploratory costs the system does permit entry by both large and small firms. See Chapter 8, particularly Table 8-15 of the Study of the Outer Continental Shelf Lands of the United States for the Public Land Law Review Commission by the Nossaman firm (1968) (hereinafter referred to as "Nossaman OCS Study"). Question 5 (Question 12 of Attachment A): What are the advantages and disadvantages, in terms of the criteria set forth below, as applied to OCS oil and gas of the bonus bid successively upon award of lease, discovery, |