Changes

Sales of producing properties are often well advertised, attracting several potential purchasers, and are commonly carried out by sealed bidding. It is important to recognize that sealed bid sales of oil and gas properties contain several inherent pitfalls:

Sales of producing properties are often well advertised, attracting several potential purchasers, and are commonly carried out by sealed bidding. It is important to recognize that sealed bid sales of oil and gas properties contain several inherent pitfalls:

* Because reserves and producing rates are lognormally distributed, independent present value estimates of the same property will also tend to be lognormally distributed. This phenomenon is well documented for offshore lease sales.<ref name=pt02r2>Capen, E. C., Clapp, R. V., Campbell, W. M., 1971, Competitive bidding in high-risk situations: Journal of Petroleum Technology, v. 23, p. 641–653, 10, 2118/2993-PA</ref><ref name=pt02r11>Megill, R. E., 1984, An introduction to risk analysis, 2nd ed.: Tulsa, OK, PennWell Books, 274 p.</ref> Accordingly, there will tend to be a larger numerical differential between the first and second bids than between the lowest and second-lowest bids. This leads naturally to large overbids or “leaving money on the table” as an inherent byproduct of the mathematics.

* Because reserves and producing rates are lognormally distributed, independent present value estimates of the same property will also tend to be lognormally distributed. This phenomenon is well documented for offshore lease sales.<ref name=pt02r2>Capen, E. C., R. V. Clapp, and W. M. Campbell, 1971, Competitive bidding in high-risk situations: Journal of Petroleum Technology, v. 23, p. 641–653, 10, 2118/2993-PA</ref><ref name=pt02r11>Megill, R. E., 1984, An introduction to risk analysis, 2nd ed.: Tulsa, OK, PennWell Books, 274 p.</ref> Accordingly, there will tend to be a larger numerical differential between the first and second bids than between the lowest and second-lowest bids. This leads naturally to large overbids or “leaving money on the table” as an inherent byproduct of the mathematics.

* Geotechnical forecasts of reserves, producing rates, and so on are estimates made under uncertainty. Hence, both overestimates as well as underestimates are likely to occur in a group of independent estimates of the same property. Final bid levels are most influenced by estimates of reserves and rates. In sealed bidding, the property goes to the highest bidder. Accordingly, there is a marked tendency for winners of sealed bid sales to have overestimated the present value of the property— usually by overestimating reserves or rates. This is called the ''winner's curse''. Moreover, because of lognormality, the amount of money left on the table by the winner is frequently substantial. This pattern is most significant for exploration bidding, but it should still be taken into account in sealed bidding for producing properties.

* Geotechnical forecasts of reserves, producing rates, and so on are estimates made under uncertainty. Hence, both overestimates as well as underestimates are likely to occur in a group of independent estimates of the same property. Final bid levels are most influenced by estimates of reserves and rates. In sealed bidding, the property goes to the highest bidder. Accordingly, there is a marked tendency for winners of sealed bid sales to have overestimated the present value of the property— usually by overestimating reserves or rates. This is called the ''winner's curse''. Moreover, because of lognormality, the amount of money left on the table by the winner is frequently substantial. This pattern is most significant for exploration bidding, but it should still be taken into account in sealed bidding for producing properties.

* The result is commonly that acquisitions are substantially less profitable than the purchaser has anticipated. And when the previously discussed unanticipated geotechnical, process, and economic risks are factored in, the danger is doubled. Technical assessors must never forget that the central goal is to make a sound profit on the purchase. The appropriate mind set to operate from is, ''“If we cannot acquire this property at our price, we do not want it!”''

* The result is commonly that acquisitions are substantially less profitable than the purchaser has anticipated. And when the previously discussed unanticipated geotechnical, process, and economic risks are factored in, the danger is doubled. Technical assessors must never forget that the central goal is to make a sound profit on the purchase. The appropriate mind set to operate from is, ''“If we cannot acquire this property at our price, we do not want it!”''