Interior Department’s Auction System Does Not Ensure Taxpayers Receive “Fair Market Value”
Today, the Project On Government Oversight (POGO) released a new report revealing a shocking lack of competition in government leasing of public resources. The government’s auction system for drilling rights on lands owned by the American people creates a false appearance of competition, allowing oil companies to lease potentially lucrative tracts of the seafloor for bargain-basement prices.
POGO’s analysis shows the American people have lost tens of billions of dollars in revenue over the last three decades since a sweeping and then-controversial policy change to the offshore leasing system that was instituted by the Reagan administration and remains in effect to this day.
The seafloor of the Gulf of Mexico is publicly owned. The government leases tracts of this territory to oil and gas companies, ostensibly through a competitive bidding process that is supposed to ensure that taxpayers receive “fair market value” for natural resources extracted from public lands.
However, POGO’s report reveals that the bidding process since the 1983 policy change has been anything but competitive: the vast majority of the seafloor tracts only receive a single bid. That has impacted the prices companies pay the public for drilling rights: adjusted for inflation, the average price paid since 1983 has declined from $9,068 to $391 per acre in each Gulf of Mexico auction—a drop of 95.7 percent.
The government is supposed to independently assess the tracts to determine their fair market value and whether a bid is adequate. Yet the government deems 80 percent of tracts that industry bids on as "non-viable”--lacking the potential to lead to profitable production. In other words, worthless. POGO found that the vast majority of tracts that entered production and produce oil and gas were deemed non-viable. POGO’s report also found that even when the government deems a tract “viable” and assesses its value it consistently underestimates its worth.
“The flaws in the offshore leasing system cost taxpayers billions of dollars in potential revenue that the government could have spent on infrastructure or used to reduce citizens’ tax burdens,” said Danielle Brian, POGO’s executive director. “The Trump administration shouldn’t double down on a system that has already been a bad deal for the American public for over three decades.”
In its report, POGO provides recommendations to President Trump and the Interior Department on how to change this auction system to better ensure that American taxpayers get fair market value for their land. Those recommendations are based in part on interviews with former Interior Department insiders, including Marshall Rose, who, from 1983 to 2016, was chief economist of the Interior Department bureau that manages offshore leasing.