(2) There is a probable lack of industry funds to implement this alternative area among the larger firms. (3) The Government would not participate in profits if the resource were larger than estimated. (4) The bonus must be capitalized and the after-tax effect of pure bonus bidding could be much less attractive to industry than one in which high royalty or net profits (which are excludable from income for tax purposes) are payable. (5) The administrative costs of Government for prebidding evaluation would be much higher in view of the need to know with greater certainty the value of the resource. It should be noted that an amendment to the Outer Continental Shelf Lands Act would be required in order to implement a lump sum bidding system, since the Act requires a minimum 12-1/2% royalty. Finally, it should be noted that there are few mineral properties, particularly oil and gas properties, and particularly any but the most proven type of oil and gas property, as to which sufficient pre-bidding information can practicably be obtained by the Government or potential bidders as to which the use of this alternative could be justified. As to those few properties, this alternative has much to recommend it, however. (b) Deferred Bonus Bidding (with fixed royalty). A system of deferred bonus bidding with a fixed royalty is very similar to what is provided for in the Outer Continental Shelf Lands Act, except the Act does not make provision for a deferred payment of bonus. While such deferment would appear to permit increased competition, the high cost of entry predictably still would preclude the smaller firms from substantially participating in offshore mineral develop ment. This alternative would be superior to the existing only in relieving the immediate capital requirement for resource entrants in acquiring leases and this would, of course, reduce immediate revenue to the Federal Government. The bonus installments could be paid as production payments if the property proved productive, but some other type of security would be needed as this event might not occur. It should be noted that this alternative could inspire short-term speculative interest by smaller firms having the least ability to pay bonus when due. On the other hand, a completely secured bonus committment might result in tying up as many funds or other liquid assets as the present bonus bidding system. (c) Royalty Bidding (With Fixed Bonus). My views on this alternative are fully set forth in the above-cited article at 787-789. (a) Profit Share Bidding (Net Profit Contracts). My views on this alternative are fully set forth in the above-cited article at 789-790. (e) Work-Program (Development Contract) Bidding My views on this alternative are fully set forth in the above-cited article at 790. See also Krueger, "An Evaluation of United States Oceans Policy," 17 McGill L. J. 603 (1971) at 686-687. 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 (b) Competitive leasing of onshore oil and gas? (c) Non-competitive leasing of onshore oil and gas? Comment: (a) My views on this question are set forth fully in the above-cited article at 775-777 and in the Nossaman OCS Study SS 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? 85-197 - 73-24 (c) (a) Whether payment of a high cash bonus selects 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 development of offshore resources. See Nossaman OCS Study $11.18. See also the above-cited article at 785-786. (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 |