In deciding whether to accept or to reject high bids for offshore oil and gas leases, the Secretary of the Interior relies in large part on the U.S. Geological Survey (USGS) presale estimate of the resource potential and monetary value of each tract. The information on which the USGS evaluation is based is essentially the same as that used by industry--geologic and geophysical data collected by industry under permit and well data from stratigraphic tests and from any wells drilled on leases in the sale area. Engineering and economic analyses are made for each tract, and probabilistic methods are used to treat uncertainties in the data. Monte Carlo simulation of discounted cash flows is used to derive an expected net present monetary value.

Probabilistic discounted cash-flow methods are commonly used by industry in evaluating projects. Any major differences between USGS methods and those used by most bidders in tract evaluations lie in the level of detail at which the geology, engineering, and economics are modeled and in the scope of factors considered. The USGS model can accept over 100 parameters for a relatively simple tract and many more for a tract in a complex setting. However, the USGS model is strictly an "expected value" model, based on the net worth of the tract to a taxpaying corporation as an independent business venture or as a partner in a logical production unit. None of the elements of evaluation relate to corporate financial positions or corporate bidding strategies.

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