THE results are finally out for Suriname’s months-long offshore oil lease auction. In mid-November 2020, Suriname invited bids from oil companies for the rights to explore and develop eight shallow water offshore blocks in the emerging Guyana-Suriname Basin. But despite high expectations, bidding closed on April 30 with only three of the blocks near the Guyana-Suriname maritime border receiving bids.

While these bidding rounds were not as successful as Suriname had hoped, the competitive, open bidding process is an important one for new and developed oil countries to consider as they sell development rights.

Competitive auctions are seen as a key indicator on several fronts. They show how much interest companies have in an area of a particular basin, like the shallow areas of the Guyana-Suriname Basin, how well a country’s contract terms and financial attractiveness measure up, and they indicate the general level of risk tolerance for major investments in exploration globally.

When a country decides to open up its oil blocks to international markets, it is essentially holding a public auction for the leases to develop onshore or offshore areas. It can also decide to not have an auction. Once it opens the auction, companies can bid for the right to explore and develop those acres, similar to what has been occurring throughout the Guyana-Suriname Basin. While the leases determine who will own the licence for a block, companies are still bound by contract structures with the home government if reserves are found.

Once regions are more established, some countries turn to public auctions in the hope of creating a bidding war and generating additional revenues. Transparency is especially critical throughout this process. Once selected blocks are announced, international oil companies, both large and small, and state-owned oil companies can “bid” for a certain block or blocks, offering both cash and sometimes specific commitments to exploration or development timelines. These rounds become more competitive when many companies believe the block for sale will be lucrative. Once all bids are in, the auction closes and the government has the opportunity to evaluate which is the most beneficial to the country.

Ultimately the auction process represents bets from all sides. It is inherently risky. Companies are betting that blocks will have enough resources to make back the money spent on the lease and on exploration. Meanwhile, governments are betting that their blocks are desirable enough that the bids will come in. Suriname, which saw ten total bids but only for three of its blocks, shows exactly how this bet can lead to mixed results.

The type of companies bidding on oil blocks is an indicator itself, often indicating the perceived risk and maturity level of a basin. Smaller oil companies are sometimes more likely to take on higher risk frontier prospects in the hope that an early stake in an area that later becomes desirable might pay off, similar to speculation in a real estate market. In many cases these companies are counting on farming out or selling the block later to a larger company that has the resources to develop a find. Conversely, many larger companies are reluctant to bid on high-risk speculative blocks.

That calculation of risk versus potential payoff is a complicated one. Location is a major factor. But government contract terms can play just as much of a role in attracting investment. This dynamic has been on display even in Brazil, a prolific oil producer which boasts extremely desirable offshore leases. Nevertheless, the oil lease auctions over the last two years failed to net nearly the amount of bids and interest that the government had hoped—an issue many analysts attribute to contract terms that make companies wary, ongoing corruption issues and local content policy requirements that would be difficult and costly to meet. Together, these factors were enough to make the “above ground” costs of Brazilian oil too high for many investors.

Comparatively, Guyana’s competitive contract terms prior to discovering oil helped attract companies and ultimately drove it to the top of investor priorities for the coming years. According to a recent report by Westwood Global Energy, Latin America and the Caribbean will boast the most exploration in the coming years, driven by growth in Guyana and Suriname.

Now boasting its own proven oil reserves, Guyana is considering its own path forward. Large areas of offshore acreage that could hold oil remain unsold and largely unexplored. In late December, the government announced that it was considering putting some of these blocks up for auction as early as this year. As the administration prepares to do so, it’s worth carefully watching the experiences of other countries and what lessons they hold.