Introduction
Today’s column completes the task I had set on August 20 of re-visiting four topics in the series that dealt with the now twice-delayed holding of public auctions for Guyana’s oil block rights. To recall, that series commenced on June 11, and in the course of my presentation, several readers had been urging my revisit of some of the themes addressed in that series. Three of the four topics have been re-visited in the previous three columns. These are 1] general auction theory 2] taking stock of three variables; the GoG Take ratio; Guyana’s estimated petroleum resources; and, the window of opportunity remaining for its crude oil exports and 3] the Fiscal Metrics of the PSA
For today’s column I revisit the lessons to be learnt from both theoretical analysis of mining auction rights and empirical evaluation of country experience with public auctions of oil block rights.
Oil rights auctions: Merits and de-merits
In my earlier presentation I observed there is a general belief derived from available analysis; and based on worldwide practice with public auctions also that these are by no means uniformly fool-proof. In other words, a fair exchange or just outcome is not guaranteed. Always the design of the auction matters. Indeed, a poorly designed auction, more often than not 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 an auction through collusion, and this will happen unless rules have been very carefully devised”.
Then there is the winner’s curse, or 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.
Yet 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 leading to a fall in the price of crude, is a prime example, and has indeed affected the use of exploration licenses.
Research lessons
There are also other lessons to be learnt from research on this topic I had cited A. Sen and T. Chakravarty 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] the study shows 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] further, 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”. And, 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.
General propositions
I posited that, four general propositions emerged from the study
First, good auction design promotes efficient assignment of rights and competitive revenues for the seller.
Second, the factors determining this outcome are 1] the structure of bidder preferences and 2] the degree of competition.
Third, with weak competition and “additive values,” a simultaneous first-price sealed-bid auction may suffice
Fourth, with more complex value structures, a dynamic auction with package bids, such as the clock-proxy auction, is likely needed to increase efficiency and maximize revenues. Bidding on production shares, rather than bonuses, typically increases Government Take by reducing oil company risks
Conclusion
This wraps up my revisit of the column series dedicated to deal with the proposed move to the public auction of oil blocks, going forward. While the aims and their weights behind this move remain somewhat opaque a leading expectation is improved revenues. This follows as the logical outcome of the severe criticisms hurled daily at the ruling PSA.
Time will tell.
