Policy Integrity recently filed public comments on the Bureau of Ocean Energy Management’s (BOEM’s) new offshore leasing proposal, suggesting that the agency update its use of “option value” to improve its valuation of offshore resources. We have long suggested that government agencies engaged in leasing decisions should consider option value—a financial concept widely used in markets that places value on delaying irreversible decisions until more information is available. Largely as the result of our efforts, BOEM’s Proposed 2017-2022 Outer Continental Shelf Oil and Gas Leasing Program incorporates option value concepts for the first time.
Our comments urge BOEM to take additional steps to strengthen its analysis in line with best practices and the mandate to balance economic, social, and environmental values. Specifically, we suggest that BOEM should:
- Use option value to better inform its five-year offshore leasing program and to help determine the optimal size, timing, and location of lease sales;
- Take meaningful steps to quantify the option value associated with leasing in each Outer Continental Shelf region;
- Transparently weigh option value when deciding where and when to issue leases, and only issue leases if the economic, social, and environmental benefits outweigh the costs; and
- Clarify in the program how option value will be incorporated into later development stages, for example, by adjusting minimum bids, rents, and royalties to compensate the public for the full value of the rights conveyed.
In the appendix to our comments, we provide economic methodologies that can help BOEM move forward with option value calculation. We will continue our dialogue with the agency to help spur progress on these important issues.