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Recent U.S. Offshore Oil and Gas Lease Bidding: A Progress Report

The U.S. Mineral Management Service (MMS) uses auctions to allocate exploration and drilling rights for oil and gas on federal lands on the Outer Continental Shelf (OCS). The federal offshore leasing program began in 1954, and there have been few alterations in the auction mechanism. However, the environment in which firms bid in these auctions has experienced a number of substantial changes. Offshore oil and gas today accounts for about a third of U.S. production. The stakes are high, and the leasing program has generated considerable revenue for the government. Moreover, excellent data are available. This paper describes an ongoing research project, in which we examine recent trends in bidding behavior and exploration and development of leases after they are sold. A striking feature of the data is that bidding has been much less aggressive recently in comparison with the first thirty years of the leasing program, in terms of both the number of bids submitted and the level of the submitted bids. Our research asks positive questions concerning participation, bidding, and exploration behavior. For example, what accounts for the changes in bidding behavior? Is observed behavior consistent with equilibrium models of competitive bidding? Is there evidence of collusion in exploration or bidding? We are also interested in examining the impact of