In some (mostly developing) countries, oil companies compete for new exploration agreements by bidding the key economic parameters. Companies are faced with a trade off between profitability of potential discoveries and probability of winning the bid.
We believe that an increasing number of companies are making generous offers in order to win bids, in the expectation of being able to renegotiate economic terms if they make a discovery. This tactic is hard to recognise and may have a good chance of success, due to the strength of the oil company's bargaining position upon discovery. However, the tactic damages the performance of the E&P industry in developing countries - for governments and companies alike.
The means of combating "tactical underbidding" rest largely with governments and national oil companies in making better contracts and taking a cautious approach to the evaluation of bids. Reputable companies can contribute to the process by emphasising that their bids are formulated in good faith and based on sound commercial considerations.