United States Senate
WASHINGTON, DC 20510
February 3, 2005
Mr. Douglas Holtz-Eakin, Director
Congressional Budget Office
Second and D Streets, SW
Washington, DC 20515-6925
Dear Director Holtz-Eakin:
We write to gather more information about how the Congressional Budget Office (CBO) calculates revenue estimates from oil drilling and production in Alaska’s Arctic National Wildlife Refuge. In March 2003's Budget Options document, the CBO estimated that revenues from drilling in this pristine area would result in $4.2 billion in revenues total and $2.1 billion in revenues for the federal treasury. Since this 2003 estimate, oil prices have increased, but more information about problems that may affect bidding for drilling rights in the Arctic Refuge has surfaced. To assist us in understanding the CBO estimate of revenues from drilling in this wildlife refuge, please address the following issues:
1) The attached report, “Projected Bonus Payments from Proposed Leasing on the Arctic National Wildlife Refuge Coastal Plain Greatly Exceed North Slope Historical Trends,” by noted Alaskan economist Richard A. Fineberg, concludes that during the last 15 years, oil companies have been willing to bid, on average, little more than $50 per acre for petroleum leasing rights on Alaska’s North Slope. Even with the recent surge in oil prices, over the last four years in 15 state and federal northern Alaska lease sales, oil companies have spent less than $40 per leased acre on new northern Alaskan prospects.
According to this study, to generate $4 billion in lease revenues (with half going to the federal government) oil companies would have to bid an average of $2,667.00 per acre for each acre of the 1.5 million acre Arctic National Wildlife Refuge Coastal Plain. The Department of Interior, however, has indicated that 400,000 to 600,000 acres within the refuge would be leased in a first lease sale. Thus, to generate $4 billion, companies would have to lease the area at $6,667 to $10,000 an acre – even though recent lease bonus payments in northern Alaska average $50 an acre and drilling advocates insist the industry will only develop a 2000 acre “footprint” within the refuge.
Please explain what CBO assumes the lease bonus payment per acre will be for rights to drill in the Refuge and how it arrived at that assumption.
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February 4, 2005
2) The costs of operations for oil development in Alaska are the highest in the world. How has CBO factored the higher costs associated with the construction of air strips, housing, food, waste disposal facilities, drilling facilities, pipelines, and pump stations in its estimates of how attractive oil drilling and production in this remote area will be to oil companies?
3) Lease bonus payments are not included in the U.S. Geological Survey and EIA economic analyses of drilling in the Arctic National Wildlife Refuge’s Coastal Plain. How has CBO incorporated the effects of these up-front payments into its financial analysis?
4) The recent Arctic Climate Impact Assessment, which was commissioned by the Arctic Council, reports that global warming will result in a shorter oil drilling season in Alaska. A shorter drilling season would affect the amount and costs of oil recovery in the Arctic Refuge’s coastal plain. How has CBO accounted for the likelihood of a shorter drilling season in its budget revenue estimate?