Offshore Oil and Environmental Risk: Federal Offerings vs. Industry Bids

Abstract

This paper examines the role of environmental risk in the Interior Department's Outer Continental Shelf (OCS) acreage offering decision process and the oil industry's bidding decision. Following a brief discussion of the OCS leasing process, a conceptual model for understanding the decisions proposed. The associated equations are econometrically estimated for both Interior und the oil industry using data from the 1979 North Atlantic Georges Bank Sale. By estimating decision equations as a function of environmental risk, cost of extraction, and expected hydrocarbon potential, the trade off between these parameters is revealed. Two important results are obtained. First is that in the Norht Atlantic study case, the acreage of interest to industry was largely a subset of the acreage Interior was willing to offer. This implies that industry was generally more conservative with respect to environmental risk than Interior. Second, the industry trade off between expected hydrocarbons and risk of a potential oil spill reaching shore was considerable. Over $1 million worth of additional expected hydrocarbons was needed to induce a bid if the risk of a spill hitting shore increased about 7%