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The ever-present overbid on tracts in sales in the outer continental shelf and Alaska is an indigenous part of the process of the sealed bid. Although it has a universal definition within the petroleum industry, it has been frequently misused and misunderstood outside the petroleum industry.
Overbidding results from the process by which bids are compiled as well as the absence of knowledge of competitive bids. It results in the maximum amount of cash going to the seller, although on the average it tends to depress the rate of return to the buyer.
The final dollar amount for a given bid represents the results of a series of multiplications. For example, the ingredients in the multiplication can be formation thickness times recovery/acre-foot times area times (revenue minus cost) times risk. The distribution of any series of multiplications from randomly selected variables is always log-normal. Therefore, sealed bids on a given tract produce a log-normal distribution. One of the physical characteristics of a log-normal distribution involving about 10 points is a large percentage difference between the first and second point. This difference is the overbid.
Since the beginning of sealed bid sales in the OCS, the overbid has averaged between 40 and 50% of the winning bid. This consistency demonstrates the inevitability of the overbid.
The overbid provides the seller with the maximum values possible. Overbids could be reduced almost to zero by auction bids. In sales with limited acreage offered, the seller would receive substantially less money than from the sealed bid sale. However, in area-wide sales this may not be the case. The public and congressional cry for fair market value for the consumer might preclude auction sales.
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