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Rayner Teo
Professor Michael Oristaglio
G&G 274 Fossil Fuels and Energy Transitions
Dec 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 auctionsbut 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 bidderthe one most willing to spendwins. 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 stagethough 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 the
tract. Better lots attract more bids and larger bids. Therefore, a larger number of bidders is already a sign that we should
expect the bid price to be higher. While this is true, the statistical analysis undertaken for this paper controls for various
attributes of the attractiveness of the lot (the size, degree of exploration, whether the block had previously been
auctioned, the auction year and current oil price). Therefore, we are notionally comparing like with like, and the
measured effect of the number of bids (Table 1) is over and above characteristics of each tract which make for a higher
bid 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 importantbut 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 beforesuggestive 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 reservoirspetroleum reserves under a thick layer of saltwere 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, 3334). 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, Petrobrasthe Brazilian national oil company and operator of Lulais 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 auctionwhich 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 Lvque 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 royaltieswhich 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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Libra auction was that it did not attract more than one bidder, with the result that the consortium of
Petrobras (40%), Shell (20%), Total (20%), PetroChina (10%) and CNOOC (10%) was able to land
the lease at the reserve price. As discussed earlier, the number of bidders is related to the revenue
earned. And the clearest problem with the Libra auction design is that it commits Petrobras both to
operating the field and to a minimum 30% stakeit makes Petrobras a joint bidder in any possible
consortium, with the result that the behavior of the entire field of possible entrants is dominated by
Petrobras' cost-minimizing motive.
This requirement could not have been more disastrous, as it eliminated the competitive
effects of the design (which drive bids up) while fostering strategic interactions (driving bids down).
In competitive auctions, the price is driven up as each bidder is willing to pay just a little higher than
the rest to get it. In contrast, the Brazilian government solved the bidders' collective-action problem
by effectively creating an information-sharing cartel for themcooperation with Petrobras meant
that they all indirectly had access to the same information. Besides, no firm would have a reason to
enter the auction without consulting Petrobras and risk a bidding war, rather than seeking to
participate in Petrobras' preferred consortium. Thus Petrobras almost certainly became the price-
setter, and consortium-building almost certainly explains the failure of the Libra auction.
Even assuming that Petrobras had no say in any consortium-forming at all, we would still
have expected this result. The pre-auction consortium-forming process encourages consolidation of
the bidders, and if there is more than one viable consortium, firms would bargain between both to
see which offers them a stake consistent with their assessment of possible profits and risk. Consortia
would bring together different combinations of technical expertise, financing, and relationships with
suppliers of equipment like deepwater drill rigs. If one consortium is weaker than the other(s), each
firm in the weaker consortium has an incentive to defect to the stronger, or drop out of the race if it
becomes clear that the other have greater staying power in the auction. One might argue that
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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 bidsand over
40% as the sole bidder. Hallack and Lvque 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 possibleas 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 bagit 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 Lvque 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 investmentsbut 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 auctionsthat the winner is the one who has an
unrealistically-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 Lvque concerns the interaction of expected risks
and rewards in a dynamic world marketshould 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 disadvantageso 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 endowmentfrom 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 bidthe 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 phasethe 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 yearspresalt deposits in Brazil have only
been in production for the last four yearsproper 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 tables
Chart 1: Premium over single-bidder auction when more than one bidder participates, OCS auctions
195479


Table 1: Number of bids
Frequency All bids
rejected?
Effect on
top 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 category
Robust standard error in parentheses
All results significant to the 0.1% level
n = 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 lease
Frequency Effect on top bid
Wildcat 2510
Drainage 339 9.79 (2.21)***
Development
or exploratory
187 1.31 (1.26)
indicates omitted category
Robust standard error in parentheses
***, **, * significant at the 0.1%, 1% and 5% level
n = 3036

Table 3: Regression results
Ordinary least squares
estimate: effect of each factor
Acreage 0.00148 (0.000473)**
Current oil price 0.191 (0.0320)***
In Louisiana? 2.26 (0.982)*
Block portion
Whole block
Portion of block
Zone of block


4.34 (1.94)*
7.65 (2.49)**
Number of bids (Table 2)
Type of sale
Wildcat
Drainage
Development or exploration


9.79 (2.21)***
1.31 (1.26)
All bids rejected 6.10 (0.612)***
Reoffer
Initial offer
Reoffered after rejection
Reoffered after relinquishment


3.24 (4.03)
3.45 (3.95)
Identical reoffer 1.69 (4.00)
indicates omitted category
Controls for auction year are not reported
Robust standard error in parentheses
***, **, * significant at the 0.1%, 1% and 5% level
n = 3036, R-squared = 0.445

References
Aburto Perez, Marco, Robert Clyde, Piero DAmbrosio, Riaz Israel, Tony Leavitt, Les Nutt, Carl
Johnson, and Don Williamson. 2008. Meeting the Subsalt Challenge. Oilfield Review 20 (3):
3245.
Ascher, William. 1999. Why Governments Waste Natural Resources: Policy Failures in Developing Countries.
Baltimore: Johns Hopkins University Press.
Teo 18
Beasley, Craig J., Joseph Carl Fiduk, Emmanuel Bize, Austin Boyd, Marcelo Frydman, Andrea
Zerilli, John R. Dribus, Jobel L.P. Moreira, and Antonio C. Capeleiro Pinto. 2010. Brazils
Presalt Play. Oilfield Review 22 (3): 2837.
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 Energy
Solutions for All: Promoting Cooperation, Innovation and Investment. London: FIRST/World
Petroleum, ed. David Buchan, 100101. http://www.world-
petroleum.org/docs/docs/20th/WPCconfull.pdf
Cramton, Peter. 2009. How Best to Auction Natural Resources. Papers of Peter Cramton 09anr.
University of Maryland, Department of Economics - Peter Cramton.
http://ideas.repec.org/p/pcc/pccumd/09anr.html.
Davies, Wyre. 2013. "Brazil confident of Libra oil field success." BBC, October 18. Accessed
November 29, 2013. http://www.bbc.co.uk/news/world-latin-america-24583432.
Estrella, Guilherme. 2011. "Presalt production development in Brazil." In Energy Solutions for All:
Promoting Cooperation, Innovation and Investment. London: FIRST/World Petroleum, ed. David
Buchan, 9699. http://www.world-petroleum.org/docs/docs/20th/WPCconfull.pdf
Hallack, Michelle, and Franois Lvque. 2013. The New Brazilian Oil Regulation: An Ex Ante
Economic Assessment. Working Paper. http://cadmus.eui.eu/handle/1814/27499.
Haynes and Boone, LLP. 2013. "The First Pre-Salt Bid Round for Brazil (and a Sneak Peek at the
12
th
Bid Round." August 15. www.haynesboone.com/files/Uploads/Documents/Pre-Salt-
Bid-Round-Webinar-Slides.pdf.
Hendricks, Kenneth, Robert H. Porter, and Bryan Boudreau. 1987. Information, Returns, and
Bidding Behavior in OCS Auctions: 1954-1969. The Journal of Industrial Economics 35 (4) (June
1): 517542. doi:10.2307/2098586.
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103122. Princeton, NJ: Princeton University Press.
. 2004b. Using and Abusing Auction Theory. In Auctions: Theory and Practice, 123148.
Princeton, NJ: Princeton University Press.
Leahy, Joe. 2013. Brazil Congratulates Itself for Auction with One Bidder. Financial Times.
Accessed December 3. http://www.ft.com/intl/cms/s/0/35371a82-3c9e-11e3-a8c4-
00144feab7de.html#axzz2mCUrNPmt.
Pearson, Samantha. 2012. Pre-Salt Deposits: Development Slowed by Brazils Resolve to Take
Profits. Financial Times, September 12. http://www.ft.com/intl/cms/s/0/99b80838-f5bc-
11e1-bf76-00144feabdc0.html#axzz2mCUrNPmt.
Teo 19
"Petrobras faces setback at Libra exploration well." 2010. Reuters, Jul 14.
http://www.reuters.com/article/2010/07/14/petrobras-brazil-idUSN1412531820100714.
Petrobras: First among Equals. 2013. Financial Times, October 22.
http://www.ft.com/intl/cms/s/3/3bf06538-3b0c-11e3-87fa-
00144feab7de.html#axzz2mCUrNPmt.
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Econometrica 63 (1) (January 1): 127. doi:10.2307/2951695.
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Oil: A Reporters Guide to Energy and Development, edited by Svetlana Tsalik and Anya
Schiffrin, 1320. New York: Open Society Institute.
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Sector: 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 = 3036
F( 44, 701) = .
Prob > F = .
R-squared = 0.4448
Root MSE = 16.75

(Std. Err. adjusted for 702 clusters in BlockCode)
--------------------------------------------------------------------------------
| Robust
HighBidM | 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 .2541221
LAdummy | 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
--------------------------------------------------------------------------------