A Study Of Factors Affecting Profit For Different Federal Offshore Oil And Gas Lease Bidders
Authors: Lohrenz John , Dunham Deborah A. , Tomlinson Holly 
Published: December 2007

Abstract
Six factors affecting profit on federal offshore oil and gas leases were calculated for individual bidders and leases, categorized by whether larger or smaller companies were involved. The six factors treated were (1) the bonuses paid per acre, (2) the frequency of getting any production, (3) the recoverable reserves, (4) the number of wells drilled to develop the reserves, (5) the selling prices of the production, and (6) the time delay between sale of the lease and any production. The results show how higher bonuses, a factor which affects profit adversely, have tended to compensate the individual bidder who paid them with other factors advantageous to profit compared with an individual bidder who paid lower bonuses.

Introduction
What has been the profit on federal offshore oil and gas leases? What is it? What will it be? What ought to be the profit? Anyone who proffers any answers to those questions will be enmeshed in arguments. The arguments will be over both technical and political matters. The technical issues ultimately might be resolved; i.e., the protagonists might agree on how profit should be computed. The political issues, however, would make the arguments unresolvable in any wholly technical arena.
Without argument, however, one can define some outcomes that presumably profit-seeking bidders on federal offshore oil and gas bonus leases would have preferred to have, ceteris paribus. Each individual bidder would prefer to have (1) paid less bonus for the leases issued, (2) obtained a higher frequency of production from the leases issued, (3) obtained more recoverable reserves from the productive leases, (4) found and developed more recoverable reserves for the exploration/development effort, (5) marketed the production at a higher selling price, and (6) produced a barrel of oil or Mcf of gas earlier rather than later.*
In this study, we formulated six specific profit-affecting factors based on the above six outcomes. Then we calculated the six factors for the 1,223 leases comprising all federal oil and gas leases issued in the Gulf of Mexico in the years 1954 through 1969 and for individual bidders to whom these leases were issued. Therefore, while we do not join any argument over profit in this study, we did treat the factors that affect profit in an unarguable direction.
Section I gives precise definitions of the six factors affecting profit defined and used in this study. Values of the six and some related factors are given for the aggregate of all leases and for individual bidders making up the aggregate. The relationships between the six factors are examined in Section II. Specifically, we used scattergrams to examine the correlations between higher bonuses and the other five factors affecting profit. The behavior and patterns of larger and smaller companies is the subject of Section III, which studies the six factors affecting profit for the aggregated leases of 'Big 8', 'Big 9-20', and non-'Big 20' leases.
Basically, we will show that individual bidders who have paid higher bonuses, which must affect profit adversely, have tended to be paid for those higher bonuses with some other factors that affected profit favorably.