Results of the largest U.S. offshore lease sale to date in terms of acreage offered show oil and gas companies are still investing in the U.S. Gulf of Mexico with the number of bids up compared to last year as market conditions improve.
But there was no bidding frenzy to amass vast amounts of offshore acreage.
Preliminary statistics released by the U.S. Bureau of Ocean Energy Management (BOEM) showed Lease Sale 250, which offered drilling rights to nearly 77 million acres in the Gulf of Mexico (GoM), attracted about $124.8 million in high bids from 33 companies.
In all, companies placed 159 bids on 148 blocks. That equates to only 1% of the 14,431 blocks made available. By comparison, the Gulf-wide lease sale in August 2017 attracted 99 bids for 90 blocks from 27 companies, bringing in more than $121.1 million in high bids.
“With about a 60% increase in acreage from August but relatively the same dollar amount and low competition, bidders got a bargain at today’s lease sale,” William Turner, a senior research analyst for Wood Mackenzie, said in a note. “Bidding activity focused on Mississippi Canyon where operators were likely drawn to its established infrastructure and lowest cost developments in the Gulf of Mexico.”
However, the biggest surprise was from BP, Turner added, noting the company bid on 20 blocks in DeSoto Canyon. The area is near Mississippi Canyon.
“Given lack of hardly any exploration activity in the area, they could be chasing a new play opener,” Turner said.
During a media call March 21, BOEM Regional Director Mike Celata said “I think what you see is a continued consistent investment in the Gulf of Mexico. If you look at the production in the Gulf of Mexico we are at record highs. … We expect continued growth in production for about the next six years.”
The U.S. produces about 1.5 MMbbl/d of oil from the GoM, accounting for about 15% of the nation’s total oil production, according to the U.S. Energy Information Administration.
The lease sale was held as market conditions regain strength following a downturn that crippled offshore operations as companies spent less, particularly on expensive offshore deepwater projects and exploration. The sale also came as oil prices rise—U.S. West Texas Intermediate crude futures were up 2.4% about midday March 21 to $65.05 per barrel—and U.S. shale plays thrive, leading production growth in the U.S.
But the GoM is still a force with operators bringing down costs, including through less costly tiebacks. Plus, the basin continues to churn out discoveries. Shell Offshore Inc. hit more than 427 m (1,400 net ft) of oil-bearing pay in the Alaminos Canyon Perdido area with its Whale discovery.
Chevron and partner Total also recently hit oil in the emerging Norphlet play at its Ballymore prospect in the Mississippi Canyon area.
Total E&P USA was the highest bidder in the sale, pledging more than $7 million for Mississippi Canyon Block NH16-10. The block, located in the central GoM, received the most bids of the sale—three.
But Chevron’s bidding tally surpassed others, totaling about $29.4 million for 24 bids, while BP Exploration & Production Inc. placed the most number of high bids—27 for a total of about $20 million. Shell Offshore placed 16 high bids for a total of about $22.9 million.
Deepwater acreage still appears to be a favorite for operators.
Of the 148 blocks receiving bids, 59 were in water depths of greater than 1,600 m, and 35 were in water depths between 800 m and 1,600 m.
However, participating companies showed a renewed interest in the shelf. Blocks in water depths of less than 200 m attracted 43 bids. Celata said most of these blocks were offshore Louisiana.
National Ocean Industries Association President Randall Luthi was encouraged by the sale’s results, saying it indicates a promising future and the bids show producers’ confidence in GoM.
“These are not new fields, and producers are attempting to pick the best of what is left,” Luthi said in a statement. “From that view, the bids demonstrate a solid commitment by the oil and natural gas industry to continue to invest in U.S. offshore energy and U.S. jobs.”
But he cautioned that despite the promising outlook, the U.S. faces competition from other parts of the world looking to attract oil explores.
“The United States must continue to evaluate how to keep the Gulf of Mexico and other parts of the U.S. outer continental shelf attractive in light of competition from Brazil and Mexico,” Luthi said.
In late January, Mexico received 19 bids on 29 deepwater blocks offered in its GoM territory. Eleven companies from 10 countries participated with Royal Dutch Shell emerging as the high bidder for nine areas.
Celata addressed Mexico on the call, saying “it’s really one geologic basin and so some of the trends on the U.S. side, the Perdido Fold Belt, extend over to the Mexican side.” He added that some companies such as Shell use their expertise gained on the U.S. side to inform moves when considering whether to bid on blocks offshore Mexico.
“With their [Shell’s] Whale discovery you can see that there are still some valuable prospects on the U.S. side that the companies are still interested,” Celata said.
Meanwhile, the U.S. is still working to further incentivize companies to develop U.S. hydrocarbon resources offshore. Among the efforts was a move by the Interior Department to cut the royalty rate for companies drilling in shallow water to 12.5%, down by a third. A similar move could also be on the horizon for deep water.
The higher shallow-water bids seen March 21 could be the result of the lower royalty rate, Turner said. If royalty rates for deep water are lowered, there could be more bidding in the next lease round, he added.
The date for the next lease sale has not been announced, but Celata said it will take place in August.
The latest lease sale itself was also a move to shore up more interest. The U.S. typically has lease sales based on region in the GoM. But its last sales have offered blocks across the entire GoM.
Nonetheless, operators appear to remain in a “wait-and-see” mode, according to Turner.
“Meanwhile some patient but dedicated operators are on the brink of cracking the code on ultrahigh-pressure developments,” he said. “Once the industry sees some proven developments in fields like Anchor, others will follow suit and we will begin to see the return of significant volumes being discovered and developed in the region.”
Velda Addison can be reached at email@example.com.