Outer Continental Shelf Sale 147 of late March must not slide by as some fluky blockbuster. In a period of flux in energy policy, the sale offers important lessons.
Sale 147, for example, should put an end to worries that the Minerals Management Service (MMS) doesn't receive fair market value for OCS leases. Late last year, MMS cited that concern as a possible reason to change the leasing system. Any such change can, of course, be expected to reduce the amount of acreage offered and leased. MMS thus seemed headed toward leasing less in an effort to make more money.
Sale 147 should help set MMS straight. The sale's top bids for 357 tracts in the Central Gulf of Mexico totaled $277 million. It was the biggest gulf leasing spree since Sale 123 of March 1990, which drew high bids on 538 tracts totaling $427 million. In last month's sale, Anadarko Petroleum Corp. offered $40 million for a single block, setting an OCS leasing record at $8,008.90/acre. Even without that cannonball bid for Ship Shoal South Addition Block 337, Sale 147 would have been three times as big as the 1993 sale of Central Gulf of Mexico leases. If that's not "fair market value," what is?
WHY THE CHANGE?
It didn't take a change in the leasing system to raise the government's take from Central Gulf leases that much in just I year. Increasing gas prices and a major oil discovery on a prospect imaged beneath thick, horizontal salt raised values to industry of Central Gulf leases with gas and subsalt potential. That last month's bids reflected those values means the system works. In fact, the scheme's only serious problem is that MMS employs it only in the Central and Western Gulf and a few areas off Alaska.
This is not to say the government shouldn't concern itself with revenues; indeed it should. The public has interests in exploration and development of federal land and in consequent revenues. Leasing of and production from federal land generate revenues for the government: bonuses, rentals, royalties, and taxes. No such benefit derives from OCS tracts not leased. From a government that has foreclosed oil and gas activity off two entire coasts, therefore, quibbles about the fair market value of Gulf of Mexico bids would be inconsistent even if they were not--as Sale 147 showed them to be--totally unwarranted.
BROADER MESSAGE
There's a broader message here. It has to do with the connection between government revenues and economic activity. In short, where there is no economic activity the government can make no money.
This proposition should guide current proposals to relax taxes on work threatened by depressed crude oil prices. Key officials worry that revenues would be "lost" to measures such as reduced royalties on deepwater OCS tracts, tax credits for marginal production, or current-expense accounting of geological and geophysical costs. This sounds more like an excuse for inaction than true fiscal concern. Shut-in wells, unleased tracts, undrilled leases, and jobless people--the certain results of government inaction--hurt government revenues more than would tax adjustments in a price slump.
As Sale 147 showed, industry responds to incentives. The resulting work raises government revenues. The public, in other words, has an interest in economic activity that takes the form of oil and gas leasing, drilling, and production. Whenever government revenue worries--whether they focus on "fair market value" of lease bids, tax rate adjustments for economically distressed businesses, or something else--incline policy toward constraints on economic activity, something in the analysis is wrong, terribly wrong.
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