Is the Bureau of Ocean Energy Management acting illegally on the approval of new offshore lease sales? During today's OnPoint, Michael Livermore, a professor at the University of Virginia School of Law and a senior adviser at the Institute for Policy Integrity, discusses his recent argument before the U.S. Circuit Court for the District of Columbia on a case pertaining to the economic analysis used by the Interior Department in its sales of new leases.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. With me today is Michael Livermore, a professor at the University of Virginia School of Law and a senior adviser at the Institute for Policy Integrity. Mike, it's great to have you back on the show.
Michael Livermore: It's my pleasure. Thanks for having me.
Monica Trauzzi: So, Mike, you've just argued before the D.C. Circuit Court in an offshore drilling case that dealt with the economic analysis used by the Bureau of Ocean Energy Management to sell new offshore leases. Sort of take us behind the background of this. You're contending that the government is acting illegally and moving too quickly on lease sales. Walk us through it.
Michael Livermore: Sure. So basically there's a highly structured process that the government goes through to determine the areas to do leasing and then how much leasing to do, right. And that's the five-year program process, which they're in the midst of doing another round. We're actually challenging the 2012-2017 leasing plan, and they're currently in the process of doing the next round. So this challenge is to the economic analysis that underlies the current leasing program, and basically the argument is that the government had failed to do an adequate economic analysis in several important respects. One that was an important part of the claim is that the government failed to recognize and analyze the value of waiting to drill in certain areas, especially where environmental and social uncertainties are particularly high. And basically the analogy is to financial markets where there's financial options and basically these options are owned, instead of by a private company, they're owned by the U.S. government and the American people. And the question is when to exercise your option. And the government didn't analyze that question sufficiently.
Monica Trauzzi: So how do you think the options value would change the pacing of approvals, and what is the direct impact that industry could see?
Michael Livermore: Right. So basically the -- if option value -- if you go from a situation where it's not recognized to a situation where it's appropriately recognized, you're going to talk about slowing down the pace of leasing. Because uncertainty creates some information value of delay, and so if you just treat that as zero, you're going to lease too fast. You're going to lease inefficiently fast. You're going to move forward too quickly from the perspective of the government owner of the lease, so if the government ends up adequately considering for this factor, that means it will -- all things being equal, will slow down the pace of leasing.
Monica Trauzzi: This administration is often charged with being too slow on approvals for oil and gas projects. Are there specific examples and cases that you can directly point to where you believe this has been done, where it's been mismanaged?
Michael Livermore: Right. So really this isn't necessarily about a specific approval of a specific lease, and that's a different set of issues, and it may be that industry has many legitimate concerns, you know, they put in the process and the process kind of goes slowly. They put in their development plan, it takes the government a long time to get back, there's litigation. And those may be completely legitimate concerns. So the concern isn't necessarily that the government's going too slow with respect to its process on any particular lease. This is about the big planning process and figuring out which areas and the timing, the location and where we're going to drill. So for example, where does this matter is in areas where environmental risks are grave and particularly uncertain. So in the Arctic, in really deepwater areas like, obviously, the BP Gulf Coast oil spill, is it shows the exposure, the uncertainty around drilling in certain areas. So in areas where environmental uncertainty is most profound, that's where this analysis has the most impact. A lot of areas actually it won't end up mattering. It only matters in specific areas.
Monica Trauzzi: So, like you said, this case relates back to the 2012-2017 five-year plan. What about that 2017-2022 plan that's being worked on now?
Michael Livermore: Right, so the hope is that regardless, frankly, of the outcome of the case, that the government will recognize that this is an important class of value and will start to analyze it properly. And what it would mean ultimately, if they do it correctly, is again, in the parts of the Gulf and parts of the Arctic that are particularly uncertain, where the environmental costs are particularly uncertain or where cleanup technologies are very unknown, that the government will move more slowly, and either that means less total leasing or it means a shift in leasing to areas that present less uncertainty.
Monica Trauzzi: So how do things look before the court? What are your expectations for the case?
Michael Livermore: Well, it's always hard to know, and it's always bad business to prognosticate on courts but, you know, the court is always going to ask very probing questions, and that's known for doing that. It did that in this case on both sides. It's not easy to know which way it's going to go, but I think that we certainly got a hearing before the court on our issues.
Monica Trauzzi: All right, we'll end it there. Very interesting time for the agency, for sure. Thank you for coming on the show.
Michael Livermore: Thanks a lot.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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