Results of Recent U.S. Outer Continental Shelf Lease Bidding
Authors: Lohrenz John 
Published: December 2007

The larger number of leases offered in area-wide sales has lowered the average number of bids per lease. Yet, the number of competing bids for leases of the same bidder interest has been stable and almost equal to that for non-area-wide sales.

Data

The SPE Senior Technical Editor recently asked pertinent questions in JPT about competition in Outer pertinent questions in JPT about competition in Outer Continental Shelf (OCS) Sale 72, the first Gulf of Mexico area-wide offering. The use of a mixed Poisson distribution model (3MP) that groups leases into three classes (no, low, and high bidder interest) triggered the questions.

Table 1 shows 3MP results for Sale 72 plus subsequent area-wide sales and other recent sales. The Poisson means of competing bids were stable for leases with the same level of bidder interest, but a much larger fraction of leases were in the no bidder interest class in the area-wide sales. An opposite and wrong conclusion can be drawn comparing only the average number of bids per lease.

A current OCS lease policy issue is whether more leases should be offered with a royalty or profit share stipulation. That stipulation which engenders more competition is more desirable. Two reports from the U.S. General Accounting Office (GAO) use an average number of bids per lease to measure competition. Table 2 shows 3MP results for three sales with both fixed royalty and profit share offerings. Profit share offerings were almost devoid of no-bidder-interest leases. Poisson means were about the same or higher for fixed royalty as compared to profit share leases with the same bidder interest. Opposite conclusions would be drawn using the GAO measure of competition.

The Senior Technical Editor also noted that brevity is a merit in these writings. Without resorting to the sophisticated syntax of the burgeoning discipline of model validation, the validation of 3MP, previously expunged for brevity, will be addressed using a crude analogy. Suppose you have some homing pigeons and want to know how well individual pigeons can get home. Presumably some pigeons may be more sensitive to Presumably some pigeons may be more sensitive to dishevelment than others. The better pigeon would find its way home even when subjected to severe dishevelment. This is, in essence, exactly how 3MP was tested. Known underlying distributions were disheveled by a random multiplier. The Sept. 12, 1972, OCS sale, which was the worst-fitting of the 31 sales in our original data, provided an outlying reference. When distributions provided an outlying reference. When distributions disheveled severely as compared to the outlying reference reproduced the underlying 3MP parameters, 3MP was accepted.

Validation by reproduction of underlying parameters from disheveled data has no intrinsic connection with statistical goodness of fit. This is obvious from the homing pigeon analogy. One also could measure the directness of a pigeon's path from the start to its home. Some pigeons might flit back and forth but still arrive home. Others might take a direct path ending far from home. Any of a multitude of statistical goodness-of-fit tests could measure a pigeon's directness of path; however, all are meaningless or, at best, peripheral to assessing a pigeon's ability to get home. Thus, goodness-of-fit tests pigeon's ability to get home. Thus, goodness-of-fit tests can be ignored.

Questions about the correct use of the right data for 3MP studies cannot be ignored, however. I was the originator of the Lease Production and Revenue data base and obtained the source data for the 31 sales studied originally from that data base. Many investigators received the data and obtained results agreeing with ours. The exception was the work referred to but not presented, no doubt for brevity, by Bruckner and presented, no doubt for brevity, by Bruckner and Nachstheim in the July 1983 JPT. When I saw their detailed work, I concluded there was some calculational error. Neither that work nor their data appear available now. The reason for the difference can only be surmised with no resolution possible.

Fortunately, that indeterminate status need not prevail for 3MP results given here. All raw data are available. Detailed 3MP results along with the computer program (in BASIC) that produced them are available. Brevity precludes their inclusion here. precludes their inclusion here. JPT

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