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Victory at Sea: New Offshore Leasing Program Begins to Adopt Policy Integrity Recommendations

Policy Integrity’s multi-year effort to make the government account for “option value” in its natural resource leasing decisions has begun to pay off. In its new proposal for offshore oil and gas leasing from 2017-2022, the Department of the Interior’s Bureau of Ocean Energy Management (BOEM) devotes 12 pages to option value and related resource valuation concepts, which will now be considered in leasing decisions. Much of this language closely resembles the arguments Policy Integrity has made to the agency repeatedly since 2009.

Policy Integrity has long argued that incomplete and flawed economic analysis leads the government to sell resource leases too quickly and too cheaply, potentially costing the American public hundreds of billions of dollars. We have 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. The language of BOEM’s proposed plan suggests that option value considerations could likely raise the minimum bids for lease sales and delay leasing in sensitive areas. However, BOEM has still failed to quantify option value, so Policy Integrity will continue to push for major improvements in the final plan.

Our work on this issue began in 2009, when Policy Integrity sent comments to the Minerals Management Service (the precursor to BOEM at the Department of the Interior) requesting that the agency incorporate option value into its assessments of offshore drilling lease sales. Those comments later formed the basis for an article by Michael Livermore in the Colorado Law Review, “Patience is an Economic Virtue: Real Options, Natural Resources, and Offshore Oil.” Policy Integrity is also serving as counsel for the Center for Sustainable Economy in a lawsuit against BOEM. The case, Center for Sustainable Economy v. Jewell, focuses on BOEM’s 2012-2017 leasing plan for the Gulf of Mexico and the Alaskan coast. In September 2014, Michael Livermore represented the Center at oral argument before the U.S. Court of Appeals for the D.C. Circuit. A ruling is expected soon, and the case could have significant implications for all government natural resource leasing programs.