Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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.