Auctions for coastal energy resources

Robert M Griffin, University of Rhode Island

Abstract

It is becoming increasingly common to allocate public resources to the private sector for the purpose of developing these resources. One of the earliest uses of auctions in the U.S. for allocating rights to public resources was in the offshore oil and gas industry. The U.S. Federal government, through the Department of Interior (DOI), has used auctions to allocate development rights to offshore oil and gas resources to the private sector since the 1950's. Since then many things have changed. Oil and gas markets have gone through boom and bust cycles, giant technological advances in extraction and assessment have taken place, and alternative energy based in the coastal zone is now in demand in markets as well. There has been an enormous amount of research into the drivers of bidder behavior in auctions and optimal auction design in the last 60 years as well. Throughout all of this, the DOI has continued to use basically the same exact auction design to allocate oil and gas leases. ^ The U.S. offshore oil and gas resources sold by the Department of Interior have accounted for more than $65 billion in revenue since the program started. These offshore resources are an important source of government revenue and national wealth. Additionally, the expansion of the energy sector offshore has enormous potential for electricity generation in the U.S., estimated by the National Renewable Energy Laboratory as approaching 54 gigawatts by 2030 (U.S. Department of Energy, 2008). Taken together, the DOI controls access to a large part of the future of energy in the U.S. ^ The research herein assesses the auction formats used to allocate both fossil fuels and renewable resources on the Outer Continental Shelf (OCS). The first manuscript looks at the current method used by the DOI to allocate oil and gas leases on the OCS, and is primarily interested in how bidders behave in this environment. Using latent class estimation techniques to separate distinct bidding behavior in a laboratory simulation of current U.S. policy, it compares lab results to field data and identifies efficiency and revenue losses stemming from the endogenous entry aspect of current policy. The second manuscript identifies an alternative auction method for allocating these development rights and develops a bidding model based on that of Milgrom (2000) for private value auctions. When tested against laboratory data, the model is favorably predictive of outcomes, but the path of bidding significantly deviates from predictions due to jump bidding and bidder impatience. The final manuscript provides a qualitative assessment of alternative auction arrangements for allocating access to wind energy on the OCS. In consideration of the relative state of the wind energy and oil and gas industries, the DOI may want to employ an allocation policy that better fits the current status of the wind energy industry. Considering the federal mandates regarding allocation that the DOI is required to follow, several allocation methods are identified for the short and medium term that meet federal mandates and promote the growth of the industry.^

Subject Area

Alternative Energy|Economics, General|Energy

Recommended Citation

Robert M Griffin, "Auctions for coastal energy resources" (2012). Dissertations and Master's Theses (Campus Access). Paper AAI3502987.
http://digitalcommons.uri.edu/dissertations/AAI3502987

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