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Friday, 26 June 2009

Oil Watch (Bids Open)

An important development mid week that appeared to have got little traction in the Press. Godwin Beene, the Mining PS disclosed to Reuters that the bids for oil exploration have opened with a closing date of August 7 for all companies that plan exploration: "The government... invites sealed bids for petroleum exploration licensing round for 23 blocks in the north western, western and eastern provinces of Zambia". More detail via Reuters.


  1. I have this feeling that this is too short a time to attract serious bids. Why not do it over a 9 month or 12 month period? Or is it that they already have some companies lined up and this is merely been done to fulfill legal provisions?

  2. Good questions Frank, and I cannot claim any more knowledge than the next fellow, but I am happy to speculate. Because the notion of oil/gas exploration in the western parts of the country has been discussed for quite some years, and because the number of qualified exploration companies is rather limited, and given the forward-looking nature of the business to begin with, I think that the government may simply be assuming that anyone who is really capable of doing it has long since worked out whether or not it is feasible for them, and indeed perhaps exactly how they would do so down to the details. After all, if you can't predict where the petroleum is before you buy the rights, then you don't last long in such a high pressure industry.

    Apparently the geology is such that (typically not following colonial and now national political boundaries) a decent bet can be placed on the area based on results from the more western parts of the same formations located in Angola. At this stage of course it is impossible to know exactly where or how much, but what is being bid on are the rights to take that bet (@$10,000 non-refundable per bid, per each of 23 lots, if they get an average of 4 bidders per lot, then they will have almost a million with which to fund the process I suppose.)

    I am not certain of the logic behind closed bidding however, which is essentially a "silent" auction with only a single round of bidding. That would not seem to optimize the return to the seller in most cases, but I am not an expert on petroleum exploration, so perhaps there is something there that I am just not aware of which makes such things standard in that industry. I think that in general within the broader academic community, closed bidding is rather closely correlated with both government and business corruption, especially with regard to analysis of the "resource cursed" nations of the Southern Hemisphere.

  3. Yakima, Frank

    Good points here!

    On timing, I think its likely that Government would have been contacted already (Chinese exploration experts?) in anticipation of this legislation. A lot of people had been waiting for the process to begin! So I think you are both right. The period must indicate the confidence that Government has in getting a bidder. Whether that leads to the right bidder that is entirely a different question.

    What I am unclear about is what the bids are for...I assume that is just to find out the extent of the deposits..and VERIFY on behalf of government (or themselves???). How different are these exploration permits from the mineral ones? I had assumed that GRZ was going to pay for exploration, but it sounds like the oil companies will explore and pay for exploration? This needs to be clarified.

    Which brings us to the bidding process...

    Yakima raises an interesting point. Its a while since I thought about "auction theory" . What I remember is that the method they have opted for is the First Price Sealed Bid (FPSB), as opposed to the Open Cry (or English Auction) or Second Price Seal Bid (SPSB) or indeed the Dutch Auction.

    The reason why Governments prefer sealed bids (whether FPSB or SPSB) is obviously to avoid "collusion" among players. I doubt this would be avoided. I am pretty sure all the bidders probably chatted to each other, and much rests on the integrity of those hosting the bidding process.

    In theory, from what I can remember, auction designs can do two things : either make you bid the maximum value (your real value) or bid the price which could either be below or above the actual value. It turns out that all of the mechanisms deliver the same pay-off, although under the GRZ's prefered method (FPSB) and the Dutch Auction they rely more on how risk neutral the bidders are. This is of course important especially in the small country context where potential can easily be discerned. So I have the natural preference for SSPB which avoids the "risk" defects of the FPSB & Dutch Auction and also the "collusion" worries of "Open Cry".

  4. Cho,

    I think that you make good points about risk avoidance in SSPB auctions, however it is my understanding that the improvements typically come at the expense of the seller's return from the sale. The buyers are more likely to bid their "true value" for the item in question using SSPB, however the seller may wind up with a return which is non-monotonic with respect to the particular set of bidders and offers (i.e. just because bids go up or down, doesn't mean the seller makes more or less money on the auction). If the goal is to maximize the selling price of national assets, then I am not convinced that SSPB is optimal.


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