Shifting the Bidding Game: Reform of Auction Design for Petroleum Exploration and Production Rights in Argentina

This thesis examines the design of petroleum exploration and production (E&P) rights auctions in Argentina, emphasizing the theoretical and policy implications of President Milei’s 2024 Ley Bases reform to Hydrocarbon Law 17,319, which introduced royalty bidding as an alternative to the prevailing investment-commitment framework. The study develops a Bayesian auction model in which firms, facing incomplete information, compete after receiving noisy private signals regarding the tract’s underlying value. Two mechanisms are examined: (i) work- commitment bidding, where competition is based on the scale of exploration and production expenditures under a flat royalty; and (ii) royalty bidding, where firms bid a royalty rate rather than committing to a fixed investment level. The symmetric Bayesian Nash equilibrium is characterized by numerically solving coupled integro-differential equations, calibrated to the specific conditions of Argentina’s hydrocarbon sector. The analysis reveals a key policy trade-off: royalty bidding enhances government rent capture but exposes the state to greater fiscal volatility, whereas work-commitment schemes provide more stable, though typically smaller, revenue flows, limiting the upside from high-quality tracts.