Page 25 - Hydrocarbon

12 Motivations and Form of Bid

The invitation to bid may come in several forms. For example, in the UK,
licensing rounds are announced periodically by the Department of Trade and
Industry (DTI) on behalf of the UK Government. In 2007 the UK was offering
licences in its 24th offshore licensing round.
In any given UK licensing round, specific licence blocks are offered, and an
interested bidder is left to his initiative to make an evaluation of the block. This may
be based on speculative regional studies performed by consultants, made available for
purchase by the author, or on the company’s own understanding of the block, using
regional data, analogue data and any public domain information available.
The invitation to bid may not be for exploration acreage. For example, some
blocks offered by Sonatrach, representing the Algerian Government, were for fields
that had many years of production history. In this case, the equivalent of an
information memorandum (IM) was provided to prospective bidders. This infor-
mation includes both technical data for the fields, such as the production history by
well, and an outline of the commercial agreement that would be expected for any
participation by a foreign investor. Investors were invited to submit a forward
development plan to increase the recovery of the field above the base case. The
commercial terms offer a fraction of the incremental production to the investor as
the profit element of their investment.

2.2. Motivations and Form of Bid

In offering an exploration opportunity in a block, the motivation of the
Government is to encourage investment in form of exploration activities, such as
shooting seismic and exploration drilling, with a view to development if the explo-
ration is successful. A signature bonus may form part of the bid package. The prime
objective of the oil company is to discover commercial hydrocarbons from which it
can create profits by subsequent development, and it therefore considers the
prospectivity of the block along with the costs of both exploration and future
development. This risk-reward calculation is covered in Chapter 3.
The invitation to bid may include an outline of the form of bid required along
with the fiscal terms applicable to any subsequent development. The bid may require
a minimum work programme consisting of seismic data to be acquired and a minimum
number of wells; for example 2000 km of 2-D seismic and four wells. The bidder is
of course at liberty to commit to more than the minimum, and a heavier
commitment will improve the competitiveness of the bid.
In many regions, especially those operating PSAs, it is normal to add a signature
bonus to the work programme offered. This is the promise of a cash sum payable by
the successful bidder to the Government on award of the block. A minimum
signature bonus may be indicated in the invitation to bid, but this element of the bid
package is again a choice to be made by the bidder. In the early phases of exploration
in a basin, when the risks of exploration failure are high, signature bonuses are
usually tens of millions of dollars. However, once the first discoveries have been
made in the area, interest will be heightened and signature bonuses offered for