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The Bureau of Ocean Energy Management (BOEM) released final revisions to its bid adequacy procedures in the Federal Register in an effort to ensure fair market value on oil and gas lease sales.
In a key revision, the BOEM updated its methodology for measuring adequacy of bids for Outer Continental Shelf (OCS) oil and gas lease sales by eliminating the use of delayed valuation methodology and adopting a statistical lower bound confidence interval (LBCI). The adopted LBCI will be at a 90% confidence level, which the BOEM says will enhance clarity and transparency.
In the announcement’s accompanying press release, BOEM said that the revisions, which were finalized Jan. 19, “ensure the American taxpayer receives fair market value from OCS oil and gas lease sales.”
The LBCI is a threshold that incorporates the geological risks and uncertainties associated with a development and economic parameters unique to the valuation. LBCI represents the minimum expected value associated with a tract at the time of the lease sale and is widely accepted as a standard approach. If the highest qualified bid is equal to or greater than the LBCI, the regional director may accept that bid as representative of fair market value.
The next key revision is to discontinue the use of tract classification. Tract classifications included confirmed, wildcat, drainage and development. Under previous bid guidelines, if a tract was classified as confirmed or wildcat, it was tested for geologic and economic viability and passed to the second phase of the bid evaluation process if deemed viable. If a tract was classified as drainage or development, it was immediately passed to phase two of the evaluation process. BOEM said these classifications had a minimal impact on the procedural analysis of fair market value and chose to no longer use these classifications.
BOEM proposed these revisions in January 2023 and faced a slew of initial pushback, receiving over 15,000 comments. The biggest area of pushback was replacing the delated mean range of value (DMROV) methodology of bid adequacy with the LBCI approach.
“API does not support BOEM’s proposed elimination of the use of delayed valuation methodology,” Andy Radford, senior policy advisor for API, said in a March 6 comment to BOEM. Inherent in BOEM’s prior reasoning, delayed valuation is especially relevant when there are large gaps between lease sales … instead of eliminating delayed valuation outright, API suggests BOEM consider modifying its depreciation rate.”
Marshall Rose, an industry veteran who has worked in the economics division of the DOI for 40 years, also felt the same way, saying in his comments that the elimination of the delayed MROV is not strongly justified.
“The potential weaknesses of the proposed approach are not discussed, such as the possibility that a disproportionate number of cases might result in having a large difference between the mean of the range of values and the lower bound measure, perhaps much more so than would be the case replacing the MROV with the delayed MROV, as has been done for many years,” Rose said.
After reviewing each suggestion, BOEM released a response addressing each concern that was brought up in their initial proposal, saying the LBCI methodology is a defined formula for transparent tract valuation. Addressing concerns with removing DMROV, BOEM said that “given the uncertainties in estimating the delayed values, the LBCI approach would be preferable as it better captures the range in values surrounding the unknown mean value.”
The revised procedures will be used to evaluate lease sale bids received as part of the 2024-2029 National OCS Oil and Gas Leasing Program. The procedures will officially be published to the Federal Register on Jan. 22.
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