Bidding Schemes and Their Impacts on Risk Assessments by Oil Companies

Abstract

Abstract Petroleum auctions in US-GOM and Brazil are a common value first-price sealed bid, with fundamental differences on bidding systems defined by the regulators regarding the winner proposal. The US-GOM bidding model for offshore exploration areas considers the higher bonuses values as the winner offer. In Brazil, two main variables define the winner: the signature bonus and the minimum exploration program (PEM). The PEM aggregates value to the government, as it is a firm commitment to acquire geological data on the first exploration years. The amount of PEM committed reflects the importance of the exploration area for the bidders. This information not necessarily could be addressed by the simple high bids' analyses as in the US-GOM system. The Brazilian bidding model allows the bidders to a "full risk assessment" on their competitor's bidding behavior. This paper compares the risk perceptions of oil companies using the US-GOM and Brazilian bidding results for years 2005 and 2006, assuming the same oil price scenario and areas of similar geological settings. Another contribution of this paper is to present a competition model for evaluate different risk perceptions by using measures such as cash bonus (upfront money) and PEM (a long-term disbursement) generated by diverse bidding schemes. Preliminary results show that Brazilian high bids are in the same range of US-GOM bonuses (20,000.00 to 30,000.00 US$/km2). Nevertheless, considering bonus and PEM as the winner offer, Brazilian high bids double the American ones. The competition model used for evaluate the firm performance in both bidding systems indicates that the utilization of bonus and PEM allow companies' decision makers to perform a better portfolio management, but demands the inclusion of a solid risk perception to select the best areas for bidding.