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Letter to the Honorable Russell D. Feingold 1 (March 2005)

handle is hein.congrec/cbo8917 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Douglas Holtz-Eakin, Director US. Congress Washington, DC 20515 March 14, 2005 Honorable Russell D. Feingold United States Senate Washington, DC 20510 Dear Senator, In your letter of February 4, 2005, you asked for information about CBO's estimate of potential bonus bids for leases to develop the coastal plain of the National Arctic Wildlife Refuge (ANWR). In addition, you provided a copy of an analysis prepared by Richard A. Fineberg regarding historical trends in bonus bids for oil and gas leases in Alaska and the Gulf of Mexico, and you asked us to compare our results with those suggested in that report. Estimates of bonus bids attempt to reflect the economic value of the leases to the winning bidders. Such estimates are particularly uncertain because firms can vary significantly in their assessment of the geologic prospects, future market conditions, and the strategic value of the project to their company. CBO estimates that bonus bids for ANWR leases would total about $5 billion. Under previous legislative proposals to lease ANWR, half of the bonus bids would be given to Alaska. Thus, we estimate that net federal proceeds over a 10-year period would be $2.6 billion, including the initial royalties from production near the end of the decade. (Royalties on any production would continue well after this first 10-year period.) CBO's Estimate of Bonus Bids Federal oil and gas leases are awarded through a competitive bidding process administered by the Department of the Interior. Firms compete on the basis of their bonus bid, which is an amount paid up front for the lease, regardless of whether the property ever produces any oil or gas. Bonus bids are based on the estimated value of the asset, which, in this case, is the opportunity to earn a return on capital invested in an oil and gas property over a 30- to 40-year period. The amount offered as a bonus will depend on the expected profitability of the project. Investors require a rate of return sufficient to compensate for costs and risks but www.cbo.gov

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