Introduction
In today’s and the next column I shall draw attention to selected policy research that has focused on evaluating the performance of oil rights public auctions over substantial periods of time. However, before embarking on the pre-set task I shall provide, as I promised in last week’s column a few summary observations on the methodology of auctions in order to wrap-up last week’s contribution.
Summary Observations on Auctions
The literature identifies four broad types of auctions, where these are utilized as a means for maximizing revenues. First, there is the English or ascending auction. Here buyers make progressively higher bids, and drop out when the bid rises past the value they attach to the object on sale. This continues until only one bidder remains. That bidder then pays the price at which the second highest bidder dropped out.
Second, there is the Dutch or descending auction. Here the auctioneer calls out a very high price, which is then progressively lowered. The first bidder to accept a particular price wins the auction at that price.
Third, there is the first-price sealed bid auction. This is similar to the Dutch auction where buyers submit sealed bids. On opening the bids, the highest wins at the price suggested.
Fourth, the second-price sealed bid similar to the English auction, where sealed bids are submitted, but the highest bidder pays the price proposed by the second-highest bidder.
In practice, combinations and variations of the different auction types prevail. These include online auctions, the use of rounds, and the setting of reserve prices, time limits per round or bid which are progressively raised.
Research Lessons
Turning to lessons learnt from research on this topic I have used in today’s column, A. Sen and T. Chakravarty research study entitled, Auctions for Oil and Gas Exploration Leases in India, An Empirical Analysis, 2013, Oxford Institute of Energy Studies in order to illustrate that while auctions have considerable potential for yielding benefits to Guyana when compared to typical bilateral negotiations these benefits should be demonstrated empirically, and not casually presumed to apply.
The above-named study focuses on the “resource allocation effect” of India’s auctions which take place under the ‘New Exploration Licensing Policy,’ NELP. To Guyana’s benefit, the study notes resource allocation is a needed initial step in developing a country’s natural resources sector. The design and implementation of allocation systems have long-term impacts on energy supply. It can also have subsequent impacts on the timing of receipts of fiscal revenue by governments.
The policy question addressed in the study is: “why, despite nearly 15 years of operation, has India’s NELP regime produced unclear results, both in terms of resource potential, and of increased domestic production? Can the reason be … prospectivity [that is, the likelihood of whether a well does contain its predicted recoverable hydrocarbons] or is it a combination of factors”
The study argues that a substantial part lies in auctions and market design and sets this argument out in terms of three theses; namely 1] the auctions design 2] a hold-up problem and 3] conflicting aims
Re 1] NELP auctions have led to the unintended consequence of a highly concentrated, and arguably duopolistic market in which a small number of firms dominate. Re 2] the NELP auctions market designs have led to a ‘holdup’ problem attributable to an “asymmetry of information and incentives between the government and bidders –with the results that firms may not fulfil their work programme commitments within the stipulated timeframe”. Re 3] the lack of a clear understanding and definition of the auction’s objectives and their rankings. For example, revenue maximization versus efficiency.
The study used a dataset for the period 1999–2010; representing nine auction rounds under the NELP.
Conclusion
To sum up, for readers’ benefit I reproduce below, in its entirety, the Abstract for the study:
Abstract
This paper addresses the following policy question: why, despite nearly 15 years of operation of India’s New Exploration Licensing Policy (NELP), representing two full exploration cycles has this regime yielded inconclusive results, both in terms of a firm indication of India’s resource potential, and increased domestic production?
This paper argues that a substantial part of the reason for this lack of performance may lie in auctions and market design, and uses data for the period 1999–2010, covering nine rounds of auctions, to explore three lines of argument relating to some unintended consequences of the NELP.
First, the regime has led to a highly concentrated market in upstream acreages where a small number of firms hold the largest amounts of acreage. Second, the regime has led to a ‘holdup’ problem that can be attributed to information asymmetries between the government and bidders, where winning bidders may later not fulfil their work programme commitments within the stipulated timeframe. Third, the lack of a clearer definition of the objectives of the auction and their relative importance, specifically, optimality versus efficiency, may have acted as a constraint on the effectiveness of the regime. We use a combination of theory and empirics to explore these three hypotheses.
At the end of the paper we draw the results together, showing that problems relating to auctions and market design may have led to a cycle of information asymmetry and inefficiency, the net effect of which has been a slowdown in India’s domestic production, shortages in meeting supply targets, and the need for expensive imports. We suggest some policy options and areas for further research.
Next week’s column similarly considers lessons to be learnt from P Cramton’s How Best to Auction Oil Blocks.
