An Analysis of Methods for Leasing the U.S. Outer Continental Shelf
- G. Rogge Marsh (Exxon Co. U.S.A.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- July 1980
- Document Type
- Journal Paper
- 1,262 - 1,270
- 1980. Society of Petroleum Engineers
- 1.6 Drilling Operations, 4.3.4 Scale, 3 Production and Well Operations
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- 63 since 2007
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New U.S. laws require the use of many different offshore leasing methods. A computer program has been developed to analyze these alternatives. Economic characteristics are reviewed. Criteria are suggested for judging leasing systems. The most effective methods use cash bonus as the bid variable and a small fixed royalty or net profit share.
The recently passed amendments to the Outer Continental Shelf Lands Act of 1953 enable the use of several different methods for leasing the U.S. offshore (Table 1). The U.S. Dept. of Interior, charged with the administration of the OCS, is required to use systems different from the current bonus-bid-plus-fixed-royalty method for at least 20%, but no more than 60%, of future leasing. Questions arise as one looks over this list. How will these alternative methods operate? How will they affect offshore operations? Are some systems better than others? The purpose of this paper is to try to answer these questions by (1) analyzing economic and operational effects of each leasing system, (2) examining the problems of selecting the "best" system, (3) proposing criteria for judging leasing systems, and (4) evaluating these systems.
EXXALT - An OCS Leasing Model
The tool used for this analysis is EXXALT, a Fortran IV program developed specifically to analyze alternative leasing methods. It is an extensively revised version of a program written at Cornell U.
Bidder's Attitude in Model
Any economic model of OCS operations must be concerned primarily with the formulation of the bid to win the tract. Because of this, the attitude of the bidder is a major concern. How will he act? The model assumes the bidder's view of the prospect is that it is either wholly contained oil one tract or unitized, it has some chance of being dry (though the basin is productive), and the range of possible reserve sizes is described by an input lognormal distribution. The bidder will make the largest possible bid to maximize his chance of winning the lease. This maximum bid results in a zero average net present value (ANPV) profit after discounting the expected net cash flow at the bidder's required discounted cash flow rate (DCFR). The bidder will ignore all other variables that may influence his bid, such as amount and nature of competition, "flinching" (a bidder's reluctance to bid above a certain monetary level), or other constraints imposed by a company's unique financial situation.
How Model Works
The flowchart in Fig. 1 shows how the program calculates a bid for a prospect. Offshore cost data and operational data (number of platforms and wells, amount of installed capacity, etc.) can be expressed as functions of field reserve size, water depth, and reservoir depth. These three parameters are the most significant.
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