US Could Make Hundreds of Millions More from Offshore Leasing, GAO Says

GAO believes BOEM often undervalues its tracts offered to operators in offshore lease sales.

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The US Bureau of Ocean Energy Management “systematically underestimates the value of offshore oil and gas leases, resulting in the government collecting hundreds of millions of dollars less than it otherwise could,” the US Government Accountability Office (GAO) said in a recently published report.

The report concluded that BOEM's valuation process might not result in fair market value for tracts offered during offshore lease sales, which are held by the agency twice yearly. In many cases, BOEM accepts bids for leases that it may have believed deserved more money, underselling its inventory when companies may be willing to pay more.  

US offshore production generated about $90 billion in revenue for the government from 2006 through 2018. In addition to bids during lease sales, revenue is generated from rent on the leases and royalties on production.

Speaking with BOEM officials, GAO found that BOEM’s lower valuations were the result of the agency compensating for uncertainties related to the presence of oil and gas on the leases, and, if oil and gas are discovered, subsequent exploration and development costs.  

BOEM officials told GAO that they prefer to accept bids unless there is high certainty that the bids are inadequate. However, GAO identified bias where BOEM lowered many valuations that were initially higher than industry's bids.

Procedures do enable BOEM to reject certain high bids to assure fair market value. From March 2000 through June 2018, BOEM rejected 27 bids for tracts that it ultimately valued at up to double industry's bid while accepting 359 bids in which industry's bid was up to double BOEM's valuation.

Tracts for rejected bids are, on average, subsequently sold for more than twice the initial rejected amount, GAO said. In last August’s Lease Sale 253, BHP submitted a $22.5-million high bid on Green Canyon 124, much higher than Equinor’s rejected $1.2-million high bid on the block during Lease Sale 252.

GAO also determined that BOEM tends to assume the value of unclaimed tracts depreciates rapidly, leading it to accept bids before further perceived value is lost. Tracts have been offered for bid twice each year since BOEM started conducting regionwide lease sales in 2017. Previously, three yearly regional sales were held, with tracts in the eastern, central, and western planning areas offered once a year.

GAO addressed these valuation issues in recommendations, namely that BOEM:

  • Enlist an independent third party to examine whether the use of delayed valuations assures the receipt of fair market value, and  

  • Take steps to ensure its bid valuation process is not biased toward lowering valuations.

BOEM’s parent agency the US Department of the Interior disagreed with the first and partially agreed with the second, according to the report.
In 2019, Interior disbursed $11.69 billion from energy production on federal and American Indian-owned lands and offshore areas, according to Interior’s Office of Natural Resources Revenue.