Market allocation of petroleum

Abstract

Petroleum development rights are currently exchanged by a method known as work programme bidding. This method requires mining companies to submit a programme of exploration work for allotments of land with oil-bearing potential. The firm that gains the right to exploit petroleum is required to carry out the exploration programme they have submitted. This paper evaluates an alternative method for transferring petroleum rights in which firms offer a monetary amount for the value of petroleum reserves, namely cash bonus bidding. Once the right has been awarded the successful firm may explore for and extract petroleum with a minimum number of constraints. The study concludes that auctioning petroleum licences may be an efficient way to allocate resources where their location and quality are well known. To initiate exploration in a new area the present method of work programme bidding should be used in preference to a market auction.