Introduction
Today’s column begins with a summary overview of the current state of affairs in regard to the proposed public oil block options in Guyana postponed from an initial mid-April due date to a new one, mid- July and them to September 12. This is followed with brief indications of the presumed advantages, which public auctions as a market instrument in general and specifically for oil rights can offer to Guyana. Subsequent to this I draw to the public’s notice studies that evaluate the worth of oil rights options
State of Play of Auctions
The Ministry of Natural Resources, MONR, had stated the oil blocks auctions are being extended until September 12, 2023, after the auctions, which were set to end on April 14, 2023 had been postponed [with evaluations and negotiations leading to awards in May 2023]. As indicated last week the delay was blamed on having to seek “Industry feedback and complete the modernization of the oil and gas regulatory framework”
Of special note the Authorities have also recently concluded agreements with two specialist firms; namely PGS Exploration, and CGG Data Services, to provide bidders with additional 2D seismic data for the blocks in order to better inform their bidding decisions.
Crucially, the MONR has claimed more than a score of companies have indicated their interest in buying Guyana oil blocks, and have already submitted bids. These companies, he had noted, are renowned in the oil and gas industry To quote “A lot of companies have been making requests to us to have an extension, because they have to prepare their proposal to send to us so that we may consider. They have already paid their fees to enter the Government Data Room”. Bidders are required to pay a US$20,000 fee that gives them access to the Government’s Data Room.
It has been reported that, when the proposed new PSA was released, Exxon had already registered for the bidding round. ExxonMobil Guyana President Alistair Routledge told Guyana Times that his company’s interest in the auction is fueled by its successful oil finds offshore Guyana.
Auctions in Competitive Markets
Investopedia refers to auctions as ‘sales events wherein potential buyers place competitive bids on assets in an open or closed format’. Key takeaways are;
• Buyers compete by placing bids.
• Auctions can be both live and online.
• Closed auction bidders are not aware of competing bids.
• Open auctions are aware of other bids.
• Auctions are widely used.
There are both advantages and disadvantages of auctions.
• Pros of Auctions
• Seller controls process
• Find rare items
• Buy at a discount
• Seller can maximize bargaining power
Cons of Auctions
• Competitive process can deter some buyers
• Cost of running an auction is significant
• Competitive bidding process can drive up price
There are certain activities at an auction that are considered illegal. In some countries, ring bidding, which is the practice of bidding on one’s own object in an effort to increase competition. Some countries also forbid chandelier bidding, which is the process of raising false bids at crucial times in the bidding in order to create the appearance of greater demand or to extend bidding momentum.
Collusion may also occur in the bidding process, which is when a small group of bidders come together and form a pool, and, thus, manipulate the auction result. At the end of the official auction, the pool of bidders may come together for an unofficial auction. This practice is also illegal in some countries.
Oil Rights Auctions Merits and De-merits
There is a widespread presumption that the available evidence, based on global practice, reveals auctions are by no means uniformly fool-proof, thereby indicating a fair exchange. Always the design of the auction matters. And, a poorly designed one often leads to bad and even perverse outcomes. This is the reason why 1] bidders have to satisfy technical standards to qualify; and 2] the discretionary power of the assessing authority or procurement committee is a sine qua non. This power can be used to exclude certain players or promote some at the expense of others, even unintentionally.
Furthermore, analysts acknowledge there is “always the possibility of rigging through collusion, unless rules have been very carefully devised”.
One of the most infamous examples cited in the literature is the 1994 telecom spectrum licence auction in New Zealand, where the government made the mistake of not fixing a reserve price. While the winning bid was for NZ$ 7 million ($4.9 million at current rates), the second highest was a mere NZ$ 5,000. Since this was a second-price sealed bid auction, the winner got the spectrum at the drastically lower price offered by the second highest bidder, suggesting collusion between the two.
Winners Curse
The literature identifies the phenomenon of the ‘winner’s curse’ as a situation in which a participant bids so aggressively that, the asset is no longer worth the amount paid for it. This can happen when the value of the asset is relatively unknown before the auction. Another danger is the possibility of an unexpected, post-auction deterioration in the quality of the asset, which could leave the winner facing losses. A global commodity prices crash and a fall in the price of crude, is a prime example, and has indeed affected the use of exploration licenses.
Conclusion
I continue to analyze public auctions of oil block rights next week.
