COUNTRIES' EXPERIENCE WITH THE ALLOCATION OF PETROLEUM EXPLORATION AND PRODUCTION RIGHTS: STRATEGIES AND DESIGN ISSUES World Bank Working Paper- Draft

Governments often pursue a variety of economic, social and political objectives through their allocation policies that go beyond the maximization of the net present value of the economic rent. There is little empirical documentation on the design and relative effectiveness of alternative systems for the allocation of petroleum exploration, development, and production (E&P) rights and their policy implications. This paper analyzes the available evidence on the advantages and disadvantages of various practices used by petroleum producing countries to allocate petroleum E&P rights, and draws conclusions about the design of E&P allocation systems. We find that the optimal allocation policy depends on a range of country specific and exogenous factors. Bur despite the variety of factors influencing optimal design, most countries use similar solutions. In particular, when auctions or administrative procedures are used, most governments opt for simple simultaneous multi-object sealed-bid rounds. While this may appear to be paradoxical, there is a practical explanation. It is true that more complex bidding forms might increase rent capture at bidding. However, the potential marginal gain is often limited, owing to most E&P projects’ high level of uncertainty and risk. In addition market mechanisms, such as joint bidding and secondary markets, and the fiscal regime are widely used in the petroleum sector to correct inefficiency at the time of allocation. This paper aims to provide a framework for policy discussion while leaving implementation issues for subsequent papers. Copyright © 2009 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved. This paper is an informal document intended to improve the understanding of the factors that affect the efficient and transparent allocation of petroleum exploration, development, and production rights and their relative importance for policy makers. The manuscript of this paper has not been prepared in accordance with the procedures appropriate to formally edited texts. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the International Bank for Reconstruction and Development or the World Bank and its affiliated organizations, or those of the executive directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. This paper may not be resold, reprinted, or redistributed for compensation of any kind without prior written permission from the World Bank. For free downloads of this paper or to make inquiries, please contact: Oil, Gas, and Mining Policy Division The World Bank 2121 Pennsylvania Avenue, NW Washington, DC, 20433 Telephone: +1-202-473-6990 Fax: +1-202-522 0395 E-mail: ogmc@worldbank.org Web: http://www.worldbank.org/noc.