ROSE, PETER R.
Telegraph Exploration, Inc., Austin, Texas

Abstract: Advantages and Disadvantages of Common Methods for Acquiring Petroleum Rights: A Perspective

Theoretically, the most efficient economic process for petroleum exploration and development is "staged", where capital is invested in a series of systematic risk-decisions, each weighing investment-level against the risk and reward presently attending that stage of the evolving venture. Pure "staged" exploration is rare because large front-end payments reduce economic efficiency, and lack of competition in large contract-areas impedes prudent and timely risk-taking. There are at least five common alternative methods by which private companies acquire petroleum E&P rights:

1. Sealed bonus-bidding inherently penalizes the explorer because of two attributes: a) the "Winners Curse" and b) the "Ubiquitous Overbid". Companies can minimize some of these disadvantages through systematic and disciplined bidding strategies. Greatly expanded tract offerings by the State can reduce competition which benefits explorers.
2. Time-constrained serial confidential auctions, where a deal is shown intensively for a brief time (with an understood deadline), function like a sealed-bid sale.
3. Oral auctions do not eliminate the effects of the "Winner's Curse". Theoretically they should eliminate most of the "Ubiquitous Overbid", but anecdotal information suggests that competitive egos may nullify much of this.
4. Performance contracts theoretically should be superior, if explorationists would commit only the capital legitimately required to prudently explore and evaluate the block. However, bidding "extra wells" often introduces both negative effects of sealed bonus-bidding.
5. Serial negotiations, exemplified by conventional onshore competitive leasing and deal making, has some "staged" attributes, but intense competition, fleeting secrecy, and the profit motive reduce economic efficiency.

AAPG Search and Discovery Article #90928©1999 AAPG Annual Convention, San Antonio, Texas