Are auctions always advisable? Lessons from Brazil's Libra auction

8/12/2019 Are auctions always advisable? Lessons from Brazil's Libra auction

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Rayner TeoProfessor Michael OristaglioG&G 274 Fossil Fuels and Energy TransitionsDec 12, 2013

Are auctions always advisable? Lessons from Brazil's Libra auction

The conventional wisdom holds that auctions are the best way for sovereign owners to get

the most value out of their natural resources. But they are open to criticism: governments are

denounced for selling the ownership of 'national' resources to private corporations, while media and

the public are outraged if the auction fails to bring in revenue as projected. And auctions are

complex allocative mechanisms which give rise to unintended consequences. Arcane rules can

dampen interest from would-be bidders, or create opportunities for corruption. Firms may overbid

based on overly optimistic expectations, and be forced into bankruptcy, leading to underutilization

of the resource as legal and administrative procedures take their course. Auctions are no panacea.

Likewise, auctions of leases on petroleum fields have led to widely differing outcomes for

governments. The US government took 74% of the economic rent on US offshore oil lease auctions

from 1954 to 1969 (Hendricks, Porter, and Boudreau 1987, 519), while the average government

share was estimated at 90% in a 2005 round of auctions held by Libya (Johnston 2005, cited in

Cramton 2009, 12). On the other hand, Brazil was unable to raise more than its reserve price on a

widely-derided recent auction. This paper examines two hypotheses that auction theory throws up.

Based on those hypotheses, I examine possible reasons behind the failure of the recent Brazilian

auction of the Libra field at attracting more bids and raising more than the government's reserve

price. I conclude by examining the idea of resource stewardship in developing countries, and argue

that short-term goals of raising the maximum amount of revenue through auctions must be balanced

against a longer-term view.

Theory



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While a full exposition of auction theory is beyond the scope of this paper, this section

explains two hypotheses relevant to the Libra auction: that the bid price increases with (1) the

number of bidders and (2) the availability of information on the tract. I present results from a simple

econometric model built to test these hypotheses on data from US federal government auctions of

oil and gas tract leases in the Gulf of Mexico Outer Continental Shelf (OCS) from 1954 to 1979.

An auction is defined by the item being sold (attributes such as size and location, contract

terms and so on) and the procedure which sets the bid parameter (often, but not always, the price).

Broadly speaking, auctions are of two types: sealed-bid , in which secret bids are all submitted at the

same time, and open , where bids are announced as the auction proceeds (Cramton 2009, 4). Sealed-

bid auctions may be either first-price or second-price , which differ only in that the highest bidder pays

her price or the next-highest bidder's, respectively. Open auctions can be ascending , where bidders

drop out progressively as the price rises until only one is left, or descending , where the auctioneer goes

down progressively from a high price until the first bidder calls out. Auction theory tells us that if

each bidder is certain of how much they value the item, all these types raise the same amount, and

maximize revenue for the seller. This result lies behind much of the attraction of auctions — but it

rarely holds in practice because bidders are almost never sure of how much an item is 'actually'

worth in an auction.

Auction design is important in two ways, by encouraging more entrants, and making

information available to bidders. The number of entrants is an important determinant of the revenue

generated. More competitive auctions tend to be more profitable for the seller (Klemperer 2004a,

106). At the other extreme, the sole bidder wins at the reserve price. And the type of auction matters

in encouraging auction entry. Ascending auctions with strong bidders see less competition, because

only the strongest bidder — the one most willing to spend — wins. But in sealed-bid auctions,

stronger rivals do not bid the maximum they are actually willing to pay (since they want a bargain



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and are unsure of their opponents' bids; ibid.: 114). This gives weak bidders a slim chance of success,

which makes sealed-bid auctions likely to see more bidders than open auctions. Thus in sealed-bid

auctions, competitive effects push bids up as the number of bidders increases, while strategic effects

moderate the top bids; nonetheless, for the number of bids that oil auctions are likely to attract,

competitive effects probably dominate strategic effects.

Strategic interaction between firms can also discourage bidders from entering the auction, as

is almost certainly the case in the Libra auction. For instance, a strong bidder can signal its intention

to "play to win" by implementing organizational changes, hiring specialists and purchasing

equipment that would be useful only if it won the auction (Klemperer 2004a, 108). Joint bidding

may consolidate multiple players, who come together with the aim of tying up the result of the

auction before it even starts. These may deter weak bidders, especially in a high-commitment, high-

risk environment like oil exploration and development.

Though the data available do not support a comparison between sealed-bid and open

auctions for petroleum leases (all OCS auctions are sealed-bid first-price, like the Libra auction), they

do confirm that having more bidders is associated with higher top bids. On average, an auction with

two bidders has a top bid of $2.28 million more than an auction of an equivalent tract with a single

bidder (Table 3). For five bidders, the same tract would raise $14 million more than the single-bidder

case on average; ten bidders, $32.5 million more. And though these amounts might seem relatively

small, the OCS blocks are only about 20 sq km on average, which pales in comparison to Libra's

1,500 sq km (Davies 2013). Full results for the number of bidders are shown in Chart 1 and listed in

Table 1. We should be cautious about drawing inferences from the results for auctions above ten



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bidders, since the sample size is small. Nevertheless, the pattern is clear: more bidders means more

revenue.1

Information is another crucial aspect of auctions, and can influence participants' behavior

both before and during the auction. In all auctions, more information means less uncertainty and

therefore less risk, which in turn raises the price each bidder is willing to pay. Oil and gas leases may

be categorized as wildcat, drainage, or developmental (Porter 1995, 4). Wildcat leases are on

unexplored tracts; prior to auctions, firms may conduct their own seismic surveys but not drilling.

They thus have the least information available. Drainage and developmental leases are those on

which a known deposit exists. Developmental leases are usually re-offers of previously sold tracts

which have reverted to the government, either because exploratory drilling not conducted in the

time specified, or because previous bids were rejected. Porter asserts, and I confirm, that drainage

leases are the most valuable (ibid.).

Because auction designers often work with many different considerations, it is worth

mentioning the obvious: bidders seek to pay as little as possible. Auction designs can facilitate

collusion and even overt signaling coded through bid prices. Compared to ascending auctions,

sealed-bid auctions are more robust to information exchange, since the auction is instantaneous.

Similarly, auctions with many players tend to be dominated by competitive effects rather than

collusive effects; likewise where the government retains the right to cancel the auction if it suspects

collusion (Klemperer 2004b, 136, 138). Thus, we expect sealed-bid auctions to suffer from fewer

unintended informational consequences at the auction stage — though this simply means that the

pre-auction stage becomes more important.

1 One might argue that the number of bidders and the price of the top bid are both functions of the attractiveness of thetract. Better lots attract more bids and larger bids. Therefore, a larger number of bidders is already a sign that we shouldexpect the bid price to be higher. While this is true, the statistical analysis undertaken for this paper controls for variousattributes of the attractiveness of the lot (the size, degree of exploration, whether the block had previously beenauctioned, the auction year and current oil price). Therefore, we are notionally comparing like with like, and themeasured effect of the number of bids (Table 1) is over and above characteristics of each tract which make for a higherbid independent of the number of bids.



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Since petroleum tract leases are usually sealed-bid, informational effects during the auction

are less important — but information availability prior to the auction is still a major factor in bid

prices. Table 2 shows that top bids on drainage leases are on average $9.79 million more than the

equivalent wildcat lease; development leases show a smaller positive but statistically insignificant

effect. Re-offered blocks are generally cheaper, but identical re-offers are more expensive than tracts

which are not re-offered the same as before — suggestive of an information effect, since in an

identical re-offer all bidders have the earlier auction round's bids to guide them. But these effects are

not statistically significant, probably because of wide variation in the characteristics of re-offered

tracts. Additionally, Porter finds that bids from firms which own adjacent tracts are generally higher

(1995, 20). All this is consistent with the hypothesis that the availability of information increases bid

prices, and thus revenue for the seller.

We have seen that the top bid and thus revenue for the seller tend to increase with the

number of bidders and the amount of information they have. Armed with these two insights from

auction theory, I next examine technical aspects of the Brazilian Libra presalt field and their

implications for the auction process.

The Libra oil field

Large presalt reservoirs — petroleum reserves under a thick layer of salt — were first

discovered in Brazil in 2006, in the Santos basin south of Rio de Janeiro, about 300 km off the coast

(Beasley et al. 2010, 35). Through repeated cycles of saltwater flooding and evaporation following

the breakup of Gondwanaland in the Early Cretaceous, a salt layer was laid down over a layer of

source rock from lake-bed organic deposits (Beasley et al. 2010, 33 – 34). Libra lies at an average of

5.5 km below sea level, under about 2 km of water. It is not the deepest deposit ever explored (for

instance, the Gulf of Mexico Tiber field was discovered at a depth of around 10 km), but the thick

salt layer and sheer distance from shore make it logistically challenging.



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According to the ANP, Brazil's national oil and gas regulator, the Libra field potentially

contains 8 – 12 billion barrels in recoverable reserves. Exploratory wells have been drilled, the most

productive yielding 3667 barrels per day of 27° API oil at 5548 – 5560m depth (Chambriard 2013,

22). Data from several wells, geochemistry and geology reports, 2D seismic slices and 3D seismic

imaging reports were made available to bidders who had registered their interest, reversing the

practice in US OCS auctions in which the oil companies make their own seismic surveys available to

the government.

While the Libra field is proven and thus constitutes a drainage lease, the sheer size of the

field and the difficulty of producing from it are factors that reduce information and increase risk,

perhaps making it closer in practice to a wildcat lease. Only five exploratory wells have been drilled

on it, which provides very little information on such a large field. Extraction could prove

complicated for any number of undiscovered complications, for instance if the reservoir is broken

up into multiple small pockets, or contaminated with unwanted gas deposits.

The Libra field presents severe challenges. Though it has been mapped by 3D seismic

imaging, salt and rock layers have very different seismic velocities, compromising the accuracy of the

imaging, and techniques have only recently been developed to match up seismic imaging with

electromagnetic data to locate deposits with greater accuracy (Beasley et al. 2010, 36). Given the

novelty of these imaging techniques applied to the presalt layer, virtual reservoir simulation and

modeling will prove difficult.

Development of the Libra field will also be a challenge. Salt deforms under stress in a hard-

to-model phenomenon known as 'creep.' Salt may creep into a wellbore even as the drill bit removes

material, potentially causing the drill to jam (Aburto Perez et al. 2008, 34). This must be mitigated by

using drilling muds to supply the appropriate hydrostatic pressure to prevent salt creep or

deformation of the wellbore, but the task is complicated by the need to find drilling fluids which can



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flow in both near-freezing temperatures in the sea and high temperatures near the deposits (ibid., 33,

41). Although such synthetic oil-based muds are more expensive than traditional drilling fluids, the

trade-off between cutting costs on drilling mud and saving time on drilling can make the investment

in pricier drilling mud cost-effective (ibid., 41).

Other challenges include possible inclusions and other formations in the salt layer, and

highly viscous and undetectable tar deposits under the salt layer that are mobile enough to flow into

the borehole, yet thick enough to plug it up (ibid., 42, 44). Failure to detect changes in the rock

composition and permeability while drilling can cause complications such as "lost circulation," in

which the drilling mud (maintained at higher pressure relative to the surrounding rock) flows rapidly

into a zone of high permeability, causing pressure to decrease elsewhere in the borehole.

Complications may result in costly delays, well abandonments, and even blowouts. Indeed, the first

exploration well at Libra back in 2010 collapsed when it reached the salt layer. And even after the

well is drilled, salt creep may warp the borehole. This necessitates stronger, corrosion-resistant well

casing (Estrella 2011, 97). All these are factors which any presalt bidder must account for.

Nevertheless, two facts would reduce uncertainty and increase confidence that the Libra field

is indeed viable given the expertise and resources available. First, wells from the Lula field (Brazil's

first presalt discovery) have already entered production and are among the most productive in Brazil,

which indicates that the Santos basin presalt play is economically viable with current technology.

Second, Petrobras — the Brazilian national oil company and operator of Lula — is required by

Brazilian law to operate all presalt sites in the country. This effectively ensures that technology and

expertise developed on one site is transferrable to another, mitigating potential risk. On the other

hand, this would also seem to militate against competition in the auction — which will be explored in

the next section.

The Libra auction: what worked, what did not



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The Libra auction was the first under a new regulatory regime drafted from 2010 to early

2013, in the hope of raising government revenues following the discovery of presalt petroleum

deposits (Hallack and Lévêque 2013, 1). While leases on petroleum tracts were formerly run on the

concession model, which grants the winning oil company the right to develop the field and sell the

oil it produces for a defined period of time, the Brazilian government changed the contract terms for

presalt deposits to a production sharing agreement (PSA) system, in which the state notionally

continues to own the oil, and takes a cut of the profits. Under the old concession system, bidders

would compete to offer the government a sum upfront, the "signature bonus"; the PSA regime

instead requires bidders to offer a share of the profits, with implications for the incidence of

production risk. Under a PSA, the operator first pays a cut of revenues to the government

("royalties"); it then covers its costs ("cost oil"), and the remainder ("profit oil") is split between the

government and the operator (Sunley, Baunsgaard, and Simard 2002, 9). The exact proportion of the

split was the auction parameter, though this was subject to a minimum of 41.65% — a reserve price.

Importantly, Petrobras was legally required to take a minimum 30% share in each bid.

For the Libra auction, royalties were a fixed 15%, and there was a fixed signature bonus of

R$15b (about US$6.8b) to be paid by the winning firm on signing the contract. Brazil also

implemented a "local content requirement" which stipulated minimum amounts of equipment to be

sourced from Brazilian suppliers at each phase of exploration, development and production. The

Financial Times Lex column estimated that the Brazilian government profit share, or "take," will be

around 80% including taxes and royalties — which it considered excessive (though as noted earlier,

government take in the US averaged 74%, and has hit 90% in other countries; "Petrobras: First

among Equals" 2013).

The fact that only one consortium entered the bidding seems surprising, as forty firms were

expected to bid, and eleven officially registered their interest (Leahy 2013). The clearest failing in the





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consortia are common in petroleum lease auctions, and there was no reason for Brazil to restrict

joint bidding in this case. While this is true, 'stable' consortia exist or can be formed more easily in

most other auctions, and the levels of uncertainty and risk are lower so entry is encouraged if there is

a chance that existing participants will collude to tie up the result of the auction. On the other hand,

the unique nature of this presalt auction, and the prescreening of participants, made it far harder for

stable consortia to form. Therefore, and independent of the fact that Petrobras had its fingers in

every possible pie, the Libra auction was likely to see pre-auction consolidation among bidders.

In auctions under the old concession regime, Petrobras won over 90% of bids — and over

40% as the sole bidder. Hallack and Lévêque argued prior to the auction that the requirement for

Petrobras to take a minimum 30% share in every bid and be the sole operator of all presalt fields

would reduce the barriers to entry for new entrants, encouraging more bidders to participate. But

this addresses only the competitive effects of auction design without considering the strategic

interactions. In such a large auction with such a small field of bidders (which are allowed to

consolidate), the strategic interactions probably dominate. And firms have an incentive to team up

with Petrobras or get out. Though it was probably impossible to disallow joint bidding given the size

of the project, making Petrobras a joint bidder in every consortium was a mistake.

The government made a number of other missteps. Announcing the reserve price increases

the chance that bidders will put in the lowest bid possible — as was indeed the case in the Libra

auction. Keeping the reserve price secret increases competitiveness because bidders will attempt to

ensure they are 'safely' above what they expect the reserve price to be. Also, the local content

requirement could not have made the auction more attractive, given existing labor and equipment

shortages in Brazilian shipyards and rig-building facilities.

There were some positives. First, the government was judicious not to offer more than one

block up for auction, as increasing the number of tracts available would have stretched the market's



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capacity to make offers for them. Also, the PSA framework sets the bid parameter as a fraction of

profit oil rather than a lump-sum payment. A lump-sum payment would have been too low based on

the sheer size of the field and the associated uncertainty.

Bidding based on fraction of output is a mixed bag — it encourages entry because it carries

less risk to the bidders compared to bidding based on a lump-sum upfront payment.2 In other words,

the government assumes some of the risk that the field will yield under expectation, and the lower

the bid, the greater the risk to the government. In the Libra auction, the fact that the government

was willing to assume some risk probably mitigated unattractive aspects of the auction design, and

might have raised the bid over what would notionally have been paid under the concession system.

And it must be said that an 80% government take is quite remarkable for a "failed" auction.

Hallack and Lévêque make the point that the new PSA framework, by shifting some risk

from firms to government, encourages the development of riskier, higher-yielding fields (7). Thus

the PSA regime might help to unlock value for Brazil, because it increases risk-taking to the optimal

level (to fields where yields are high, but where risk has so far deterred firms). But this relies on the

premise that which field gets developed is a product of choice by the market participants, as is the

case in most investments — but not in auctions, where the auctioneer entirely controls what goes on

sale (i.e., which fields get developed).

Moreover, under the old concession regime, riskier leases simply receive lower bids, or

remain unsold. But they remain unsold for a reason: if such marginal fields are being brought into

development, Brazil's government is, on average, shouldering a share of expected losses. In part-

nationalizing the operation using the PSA framework, Brazil also took over some of the cost of

developing technology and techniques to develop the presalt fields. The challenges of drilling

through and under salt are immense, particularly given the plasticity of salt and its unpredictable

2 It avoids the "winner's curse" — particularly dangerous in sealed-bid auctions — that the winner is the one who has anunrealistically-inflated valuation of the resource.



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behavior, and the high cost and possible complications of meeting inclusions in the salt layer and

viscous tar deposits under it. Given that few firms have experience operating in the presalt, it is

unsurprising that so few bidders entered the auction.

A further argument against Hallack and Lévêque concerns the interaction of expected risks

and rewards in a dynamic world market — should such fields be developed, at present? Brazil is taking

on the risk and costs of being ahead of the technological curve; yet the payoff of harnessing the

presalt deposits may significantly decrease, if the effort is successful. Generally, as a new technology

is developed, average cost goes down as expertise is accumulated. This is particularly true of well

engineering in presalt: well costs and time taken to drill a well have been reduced significantly as new

wells have been built, and knowledge of the structural attributes of the salt and carbonate layers has

increased (Estrella 2011, 97). The first presalt exploration well cost US$200m and took nearly two

years to drill (Chetwynd 2011, 100). And given that technology and expertise is easily transferrable

within the large multinational oil companies, there is a significant first-mover disadvantage — so future

players like Angola (whose offshore geology exactly mirrors Brazil's because of the breakup of the

Gondwana supercontinent) face lower costs in developing their presalt deposits. And given that well

costs contribute half of the average presalt development project (Estrella 2011, 97), this research and

development is a significant extra burden for Brazilian oil firms. Meanwhile, Brazil's presalt deposits

could place its reserves among the top ten in the world (Haynes and Boone LLP 2013, 10). If it does

become a major player in the oil markets, the size of its presalt play, combined with its relative

political stability and proximity to major markets in the US and Europe is likely to be a stabilizing,

downward influence on oil prices (Pearson 2012). Brazil is thus taking on risk today and

transforming it into future certainty for producers and downstream consumers. Moreover, the high-

volume production in the near future that Petrobras and the Brazilian government are pushing for

may compromise Brazil's energy security in the long run by drawing down its reserves. Brazil's



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success would be its curse. This calls for a long-term view of sustainability in developing natural

resources.

Sustainability

The government's role in oil development and production should, like any other economic

activity, be driven by efficiency ; but as the administrator of a country's resources, the government also

faces the imperative of sustainability . Government is efficient "if it maximizes the present value of net

benefits that could be received from all the possible ways of allocating [its] resources" over time

(Ascher 1999, 33). Efficiency implies two related principles: a country should exploit the resources

which yield greatest returns first before those which are relatively less lucrative; and a country should

not exploit its resources beyond the point at which the benefit of the last resource exploited is less

than the cost to the country. And in any case, sustainable development demands that no action be

undertaken that would worsen the well-being of future generations (ibid., 32).

Oilfield allocation through auctions is a process driven by the government: it decides what to

sell, on what terms. Though each individual auction might be good at maximizing revenue (subject

to caveats as shown in the discussion above), this hinges on the government offering the right tracts

up for auction. The fear is that this is not necessarily efficient. By selling certain tracts before others,

the government might be channeling oil companies' resources and energies into developing less

profitable or more challenging deposits before the easier and richer ones.

Of course, this danger should be mitigated in a relatively active oil industry, where auctions

are in practice driven by market demand and administered by independent bureaucrats. But in

Brazil's case, it is plausible that national pride has influenced the decision to develop the presalt

deposits earlier rather than later. Besides, the lack of interest from bidders hints that they do not find

it to be the most profitable use of their resources. This suggests that the presalt auction was a poor

move on efficiency grounds, and illustrates a more fundamental difficulty with auctions: besides



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designing each individual auction to maximize the sale price, governments sometimes fail to sell the

right resource at the right time.

Moreover, oil revenues are not windfalls; properly accounted, they are outflows from a

country's natural endowment — from the wealth of future generations. Stiglitz argues that only

reinvestment into capital can offset this loss of wealth, by turning one asset into another (14).

Therefore, the first question a government must ask in allocating any petroleum lease is whether it

can invest that income stream effectively. Otherwise, it is impoverishing the country, and should

leave the petroleum in place rather than rushing to develop it. The Brazilian government is alive to

these concerns: it has set up the Social Fund ( Fundo Social do Pre Sal ) to allocate funds towards federal,

state and municipal levels for social and infrastructure development, and use its oil wealth most

effectively. But concerns about local municipal governance and oversight remain. This might be

mitigated by careful management of oil wealth on the lines of Norway's oil stabilization fund.

Considering the risk Brazil is taking on in being a pioneer in presalt development, only time will tell

if this was the right time to tap into the Libra field.

Conclusion

One might assess the Libra auction by comparing it to other auctions. By this measure, it

seems a failure. Expected to attract forty bidders, only eleven registered, and only one consortium of

five put in a bid — the minimum bid. Though information on the tract was made available by the

government, and there was some interest, the worst feature of the auction design was that it

encouraged collusion and eliminated competition by requiring Petrobras to participate in every bid.

Then again, if the Financial Times' estimate of 80% government take is accurate, the Brazilian

government should probably be rather pleased at the result. What Brazil could have done, given its

current legal framework, was to require consortia, rather than individual bidders, to register for

prescreening. This would have given it a better sense of the chances of the auction succeeding; at



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least, it would have drawn less attention if the process had been canceled at the registration stage.

And what Brazil should do now is to amend the rules so that Petrobras need not operate or take a

stake in every presalt lease. The reason for this is the conflicting objectives it presents: Petrobras has

a huge debt burden, and it would defeat the Brazilian government's purpose of running auctions to

maximize revenue, only to worry about jeopardizing the national oil company's balance sheet.

Though it serves nationalist interests to have Brazil involved, the PSA already ensures that the

government and operator splits the oil produced.

But one might also assess it by comparing it to the alternatives: perhaps, to an auction on the

old concession basis, or simply leaving it for later. As noted earlier, a concession-style auction leaves

operators to carry the risk; the PSA framework part-nationalizes this risk. Even though seismic

imaging of the reservoir was made available, this is only the initial phase — the risks of exploring,

developing, and operating in the presalt environment are complex and poorly known. This adds to

the already-high costs of deepwater drilling. Given the small number of presalt fields and the little

that is known about operating them beyond the first few years — presalt deposits in Brazil have only

been in production for the last four years — proper accounting of risk is vital. While the PSA

framework encourages the development of marginal fields by reducing operator risk, it also increases

the government's share of risk relative to the original concession framework. Governments may

auction more marginal resources prematurely for political or nationalistic reasons, while leaving safer

ones untapped. And sustainability considerations suggest that sometimes, it pays to simply leave the

oil in the ground for future generations to tap. If one takes a broader view, well-designed auctions

may maximize the amount of revenue raised now, but leave the country worse off.



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Charts and tablesChart 1: Premium over single-bidder auction when more than one bidder participates, OCS auctions1954 – 79

Table 1: Number of bidsFrequency All bids

rejected?Effect ontop bid ($m)

1 1120 271 – 2 584 51 2.28 (0.480)3 330 19 6.84 (0.961)4 258 6 9.88 (1.31)5 178 1 14.0 (1.39)

6 128 0 16.4 (1.82)7 114 0 17.7 (1.85)8 81 1 27.6 (3.27)9 54 0 40.5 (6.83)10 54 0 32.5 (2.80)11 42 0 32.6 (2.65)12 34 0 47.1 (7.25)13 26 0 63.5 (6.65)14 16 0 60.9 (7.25)15 9 0 69.8 (13.6)16 6 0 74.3 (12.6)

17 1 0 59.6 (1.78)18 1 0 89.0 (2.20)

– indicates omitted categoryRobust standard error in parentheses All results significant to the 0.1% leveln = 3036

0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Premium over single bidder ($ million)

Effect on top bid



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Table 2: Type of leaseFrequency Effect on top bid

Wildcat 2510 – Drainage 339 9.79 (2.21)***Development

or exploratory

187 1.31 (1.26)

– indicates omitted categoryRobust standard error in parentheses***, **, * significant at the 0.1%, 1% and 5% leveln = 3036

Table 3: Regression resultsOrdinary least squaresestimate: effect of each factor

Acreage 0.00148 (0.000473)**Current oil price 0.191 (0.0320)***In Louisiana? 2.26 (0.982)*

Block portionWhole block Portion of blockZone of block

– 4.34 (1.94)*7.65 (2.49)**

Number of bids (Table 2) Type of sale

WildcatDrainageDevelopment or exploration

– 9.79 (2.21)***1.31 (1.26)

All bids rejected – 6.10 (0.612)***Reoffer

Initial offerReoffered after rejectionReoffered after relinquishment

– – 3.24 (4.03) – 3.45 (3.95)

Identical reoffer 1.69 (4.00) – indicates omitted categoryControls for auction year are not reportedRobust standard error in parentheses***, **, * significant at the 0.1%, 1% and 5% leveln = 3036, R-squared = 0.445

References

Aburto Perez, Marco, Robert Clyde, Piero D’Ambrosio, Riaz Israel, Tony Leavitt, Les Nutt, Carl Johnson, and Don Williamson. 2008. ―Meeting the Subsalt Challenge.‖ Oilfield Review 20 (3):32 – 45.

Ascher, William. 1999. Why Governments Waste Natural Resources: Policy Failures in Developing Countries .Baltimore: Johns Hopkins University Press.



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Beasley, Craig J., Joseph Carl Fiduk, Emmanuel Bize, Austin Boyd, Marcelo Frydman, AndreaZerilli, John R. Dribus, Jobel L.P. Moreira, and Antonio C. Capeleiro Pinto. 2010. ―Brazil’sPresalt Play.‖ Oilfield Review 22 (3): 28 – 37.

Chambriard, Magda. 2013. ―Brasil Pre-Salt: Opportunities for Investments in the Brazilian Oil &Gas Industry & First Pre-Salt Round‖ July. www.brazil.org.uk/commercial/anproadshow_files/anproadshow2013.pdf.

Chetwynd, Gareth. 2011. "Brazil's deepwater: a financial as well as a technical challenge." In EnergySolutions for All: Promoting Cooperation, Innovation and Investment. London: FIRST/WorldPetroleum, ed. David Buchan, 100 – 101. http://www.world-petroleum.org/docs/docs/20th/WPCconfull.pdf

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———. 2004b. ―Using and Abusing Auction Theory.‖ In Auctions: Theory and Practice , 123 – 148.Princeton, NJ: Princeton University Press.

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Teo 19

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00144feab7de.html#axzz2mCUrNPmt.

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Sunley, Emil M., Thomas Baunsgaard, and Dominique Simard. 2002. Revenue from the Oil and GasSector: Issues and Country Experience .

STATA Regression output (results presented in Table 3)xi : reg HighBidM Acreage YearOilPrice LAdummy i.NumberOfBid i.BlockPortion

i.Type i.RejectCode i.Reoffer i.SameAs i.SaleYear, cluster(BlockCode)i.NumberOfBid _INumberOfB_1-18 (naturally coded; _INumberOfB_1 omitted)i.BlockPortion _IBlockPort_1-3 (_IBlockPort_1 for BlockPor~n==A omitted)i.Type _IType_1-4 (naturally coded; _IType_1 omitted)i.RejectCode _IRejectCod_0-1 (naturally coded; _IRejectCod_0 omitted)

i.Reoffer _IReoffer_0-2 (naturally coded; _IReoffer_0 omitted)i.SameAs _ISameAs_0-1 (naturally coded; _ISameAs_0 omitted)i.SaleYear _ISaleYear_54-79 (naturally coded; _ISaleYear_54 omitted)note: _ISaleYear_79 omitted because of collinearity

Linear regression Number of obs = 3036F( 44, 701) = .Prob > F = .

R-squared = 0.4448Root MSE = 16.75

(Std. Err. adjusted for 702 clusters in BlockCode)--------------------------------------------------------------------------------

| RobustHighBidM | Coef. Std. Err. t P>|t| [95% Conf. Interval]

---------------+----------------------------------------------------------------Acreage | .0014832 .0004728 3.14 0.002 .0005548 .0024115

YearOilPrice | .1913491 .0319723 5.98 0.000 .1285761 .2541221LAdummy | 2.262021 .9820631 2.30 0.022 .333884 4.190159

_INumberOfB_2 | 2.276569 .4803484 4.74 0.000 1.333475 3.219663_INumberOfB_3 | 6.839253 .9609502 7.12 0.000 4.952567 8.725938_INumberOfB_4 | 9.884537 1.305479 7.57 0.000 7.321419 12.44765_INumberOfB_5 | 14.00796 1.391512 10.07 0.000 11.27593 16.73999_INumberOfB_6 | 16.40394 1.81726 9.03 0.000 12.83601 19.97186_INumberOfB_7 | 17.66921 1.852685 9.54 0.000 14.03174 21.30669

_INumberOfB_8 | 27.62989 3.274495 8.44 0.000 21.2009 34.05888_INumberOfB_9 | 40.50961 6.82876 5.93 0.000 27.10233 53.91688

_INumberOfB_10 | 32.54077 2.804653 11.60 0.000 27.03424 38.0473_INumberOfB_11 | 32.58953 2.645094 12.32 0.000 27.39627 37.78278

_INumberOfB_12 | 47.14264 7.253862 6.50 0.000 32.90074 61.38454_INumberOfB_13 | 63.49023 6.649396 9.55 0.000 50.43511 76.54535_INumberOfB_14 | 60.94773 7.247058 8.41 0.000 46.71919 75.17626_INumberOfB_15 | 69.77633 13.61743 5.12 0.000 43.04049 96.51217_INumberOfB_16 | 74.34585 12.58755 5.91 0.000 49.63204 99.05966_INumberOfB_17 | 59.56814 1.781377 33.44 0.000 56.07067 63.06562_INumberOfB_18 | 88.97664 2.203689 40.38 0.000 84.65002 93.30326_IBlockPort_2 | 4.343696 1.943621 2.23 0.026 .5276809 8.159712



Teo 20

_IBlockPort_3 | 7.649241 2.494095 3.07 0.002 2.75245 12.54603_IType_3 | 9.794349 2.209253 4.43 0.000 5.456803 14.13189_IType_4 | 1.305887 1.255061 1.04 0.298 -1.158241 3.770016

_IRejectCod_1 | -6.104521 .6117209 -9.98 0.000 -7.305546 -4.903496_IReoffer_1 | -3.238572 4.033224 -0.80 0.422 -11.15722 4.680073_IReoffer_2 | -3.451635 3.948427 -0.87 0.382 -11.20379 4.300524_ISameAs_1 | 1.685913 3.996085 0.42 0.673 -6.159817 9.531642

_ISaleYear_55 | .7278496 1.175592 0.62 0.536 -1.580254 3.035953

_ISaleYear_59 | 7.588162 4.850774 1.56 0.118 -1.935624 17.11195_ISaleYear_60 | 6.330294 1.014378 6.24 0.000 4.338712 8.321876_ISaleYear_62 | 2.878736 .9329537 3.09 0.002 1.047018 4.710455_ISaleYear_64 | -1.903694 3.087199 -0.62 0.538 -7.964958 4.157571_ISaleYear_66 | 7.260226 2.202827 3.30 0.001 2.935297 11.58515

_ISaleYear_67 | 2.153799 1.247487 1.73 0.085 -.2954587 4.603056_ISaleYear_68 | 9.581146 2.051184 4.67 0.000 5.553946 13.60835_ISaleYear_69 | -.6990984 2.49147 -0.28 0.779 -5.590737 4.19254_ISaleYear_70 | -6.101573 1.780111 -3.43 0.001 -9.596561 -2.606586

_ISaleYear_71 | 8.118146 5.478403 1.48 0.139 -2.637898 18.87419_ISaleYear_72 | 13.9438 1.693189 8.24 0.000 10.61947 17.26813_ISaleYear_73 | 18.81875 2.240981 8.40 0.000 14.41891 23.21858_ISaleYear_74 | 14.76855 1.940995 7.61 0.000 10.95769 18.57941_ISaleYear_75 | .6725161 1.174739 0.57 0.567 -1.633913 2.978945_ISaleYear_76 | 2.722743 2.335862 1.17 0.244 -1.863381 7.308867_ISaleYear_77 | 4.083984 1.63318 2.50 0.013 .8774737 7.290495

_ISaleYear_78 | 3.546686 1.613171 2.20 0.028 .3794609 6.713912

_ISaleYear_79 | 0 (omitted)_cons | -18.01088 3.343162 -5.39 0.000 -24.57469 -11.44707

--------------------------------------------------------------------------------