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Option Value and Offshore Leasing
March 20, 2015
Jayni Foley Hein
Policy Director
Institute for Policy Integrity
NYU School of Law
Option Value and Natural Resources
• Option value: a financial concept widely used in markets that
analyzes the value of delaying irreversible decisions until more
information is available to inform whether a current decision to
exploit the resource is socially desirable.
• The value associated with the option to delay can be large,
especially when there is a high degree of uncertainty about
price, extraction costs, and/or the environmental and social
costs imposed by drilling.
• In the offshore drilling context, there is uncertainty around the
risks and consequences of an oil spill, oil and natural gas prices,
extraction costs, and other environmental and social costs, such
as onshore and near-shore infrastructure impacts.
One component of option
value: uncertain oil spill
impacts
Unemployed commercial fishermen and
their families wait in line to receive
handouts from New Orleans Catholic
Charities on May 5, 2010 in Hopedale,
Louisiana.
Mississippi River water (left)
meets sea water and an oil slick,
off the coast of Louisiana, on
May 7, 2010. (Photos: Mark
Ralston)
Policy Integrity’s Work on Option Value
and Natural Resources
•
•
Research → scholarship → advocacy → policy change
Beginning in 2009, Policy Integrity submitted comments and correspondence to
the Department of the Interior, advocating for Bureau of Ocean and Energy
Management (BOEM) and its precursor agency to consider environmental and
social uncertainty when deciding upon the time, size, and location of leasing.
– Scholarship
– Comments to BOEM on five-year leasing program
– Petition to BOEM
– Counsel for the Center for Sustainable Economy in a lawsuit filed in the U.S.
Court of Appeals for the D.C. Circuit against BOEM
– Partnerships with advocacy organizations
– Expansion of work to other agencies
BOEM’s 2017-2022 Draft Proposed Program
for Offshore Leasing (Feb. 2015)
• For the first time, BOEM includes a significant section on option value
and notes that environmental and social cost uncertainties can affect the
size, timing, and location of offshore leasing.
• (1) BOEM acknowledges that “[a]s part of the decision on size, timing,
and location, the Secretary can consider the state of available
environmental and social cost uncertainties.”
• (2) BOEM acknowledges that environmental and cost uncertainty can
“greatly affect the Net Social Value” of offshore leasing in each Outer
Continental Shelf (OCS) planning area.
• (3) BOEM’s Draft Program tentatively schedules the Alaskan lease sales
later in the five-year period.
BOEM’s 2017-2022 Draft Proposed Program
for Offshore Leasing
• (4) BOEM explains that option value can be a component of the
fair market value of a lease.
• (5) BOEM discusses the possibility of raising minimum bids in
lease sales to account for option value.
• (6) BOEM uses a hurdle price analysis, which Policy Integrity
previously advocated for.
– But, the agency’s hurdle price analysis is flawed, because it does not
account for environmental and social cost uncertainty—only
economic uncertainty.
BOEM’s 2017-2022 Draft Proposed Program
for Offshore Leasing
(7) BOEM conducts a qualitative assessment of option value, but
does not conduct a quantitative analysis.
•
•
In Policy Integrity’s comments and litigation, we urged the agency to quantify the
option value for each OCS planning area.
BOEM states that “it is surpassingly difficult to specify and estimate a useful,
empirical model of that type.” (DPP at 8-9).
 We are pursuing opportunities to assist the agency in
quantifying the option value by developing an empirical model.
•
This model would further inform the agency’s decisions with respect to the time,
size, and location of offshore leases.
D.C. Circuit Opinion (March 6, 2015)
• Lawsuit challenging BOEM’s 2012-2017 leasing plan for the Gulf of
Mexico and the Alaskan coast.
• Center for Sustainable Economy (CSE) argued that incomplete and
flawed economic analysis leads the government to sell resource
leases too quickly and too cheaply, potentially costing the American
public billions of dollars and leading to high-risk drilling.
• U.S. Court of Appeals for the D.C. Circuit ruled against CSE.
• Decision leaves door open to develop a methodology to quantify
option value.
D.C. Circuit Opinion (March 6, 2015)
• The court’s decision acknowledges that there is “a tangible present
economic benefit to delaying the decision to drill for fossil fuels to
preserve the opportunity to see what new technologies develop and
what new information comes to light.”
• The court found that BOEM’s failure to quantify option value was
reasonable at this time because the option value is not yet “readily
quantifiable.”
• “Our holding is a narrow one…the agency is not permitted to
substitute qualitative assessments for well-established quantitative
methods whenever it deems such substitutions convenient.”
• “Had the path been well worn, it might have been irrational for
Interior not to follow it.”
Next Steps for Option Value Analysis and Advocacy
• Quantify the option value for offshore leasing decisions.
• Submit comments to BOEM on 2017-2022 Program; encourage the
agency to use option value qualitatively and quantitatively.
• Encourage environmental groups to push BOEM and BLM to use and
quantify option value in leasing decisions.
• Analyze option value as applied other natural resources decisions,
such as onshore oil, gas, and coal leasing, forest service timber sales,
and others.
• Encourage other agencies to apply option value when leasing public
resources.