Society of Petroleum Engineers 6200 North Central Expressway Dallas, Texas 75206

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American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.

Abstract

A mathematical model has been derived and solved to compute the bidding strategy that maximizes the expected present worth in a competitive bidding environment. Basically, the model consists of three modules, each of which is processed sequentially. The first module performs a risk analysis on the geological performs a risk analysis on the geological estimate of the reserves under the lease and passes the expected reserves to the second passes the expected reserves to the second module that computes the expected present worth of these reserves. This value is then passed to the competitive bidding module that computes the bid that maximizes its expected present worth.

The competitive bidding model was developed to compute the probability of winning with a given bid. A Pearsonian analysis was performed on the published results of past lease sales to identify the functional forms of the probability density functions used i-n the model, and regression analyses of past lease sales provided estimates of the model's parameters. In addition, a data base management and maintenance system was coded to update the parameters of the model upon the completion of each lease sale.

The model has been tested in several recent federal lease sales and the results of the model compare favorably with the actual bidding outcomes.

Introduction

In order to achieve the objectives established by Project Independence, the Bureau of Land Management has accelerated the leasing of potential oil and gas acreage in the federal offshore areas. Since competitive bid leasing began 22 years ago, a total of approximately 18 million acres have been leased, 30 percent of which have been leased in the past 4 years. This increased activity has posed several interesting problems for management when developing a strategy for bidding. For example, is it more beneficial for a company to bid with a group, thereby spreading the risk by reducing the expected cost, or should a company bid alone and assume the full risk? With few exceptions, recent bidding results imply that corporations are unwilling to assume the full risk. Should a bidding combine spend their leasing budget by bidding very high on a few low-risk tracts, thus enhancing their chances of winning some tracts, or should they distribute the budget over more tracts by bidding less on each tract while reducing the chances of winning any single tract?

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