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Court Rules on Offshore Leasing Lawsuit

March 6, 2015

Policy Integrity senior advisor Michael Livermore represented the plaintiff in Center for Sustainable Economy v. Jewell, a lawsuit challenging the Bureau of Ocean Energy Management’s (BOEM’s) 2012-2017 leasing plan for the Gulf of Mexico and the Alaskan coast. The Center for Sustainable Economy (CSE) argued that incomplete and flawed economic analysis leads the government to sell resource leases too quickly and too cheaply, potentially costing the American public billions of dollars and leading to high-risk drilling. Today, the U.S. Court of Appeals for the D.C. Circuit ruled against CSE in the case. However, part of the ruling could lead to major changes in how the government values the natural resources it leases.

Livermore argued that government agencies engaged in leasing decisions should account for option value—a concept widely used in financial markets that analyzes the value of delaying irreversible decisions until more information is available. Applied properly, an option value analysis would guide leasing away from areas with the greatest uncertainty, and help BOEM optimally time leases.

The court’s decision acknowledges that there is “a tangible present economic benefit to delaying the decision to drill for fossil fuels to preserve the opportunity to see what new technologies develop and what new information comes to light.”

The court found that BOEM’s failure to quantify option value was reasonable at this time because the methodology is not yet “readily quantifiable.” It stated: “Our holding is a narrow one…the agency is not permitted to substitute qualitative assessments for well-established quantitative methods whenever it deems such substitutions convenient.” The court further noted: “Had the path been well worn, it might have been irrational for Interior not to follow it.”

“The ruling strongly suggests that advancements in option value research could compel the government to alter its leasing practices and better quantify risks,” said Livermore. “This change could pay enormous dividends to the American public.”

The Institute for Policy Integrity is currently exploring new research on the quantification of option value, with the aim of improving natural resource valuation and leasing decisions at BOEM and other federal agencies.

The sections of the court’s opinion that pertain to option value can be found here.

Filed under Climate Change and Energy Policy, Natural Resources, News