More competition from oil and gas companies for blocks available for leasing in the U.S. Gulf of Mexico (GoM) helped bring in more than $178 million in high bids during the latest offshore lease sale, showing offshore interest remains.
Preliminary sale statistics provided by the U.S. Bureau of Ocean Energy Management show 29 companies participated in the Aug. 15 lease sale. Together, they placed 171 bids on 144 blocks. This was less participants than the March lease sale that attracted 33 companies, which placed 159 bids on 148 blocks.
The latest sale, however, brought in both more high bids and total bids—more than $202.6 million—while luring small and large companies alike—some venturing into deeper waters and new areas. However, less than 1% of the 14,575 blocks offered received bids.
National Ocean Industries Association (NOIA) President Randall Luthi said the sale was not a “barn burner” but it topped some previous GoM lease sales in several aspects, including competition for offerings and bid amounts.
“The operating environment in the U.S. Gulf of Mexico shows tangible signs of improvement pointing to an industry that is poised to shift into high gear; oil prices are higher, revisions to overly burdensome regulations are in the works, rig rates and supply chain prices are more competitive, and companies have improved the efficiency of their operations,” Luthi said in a statement. “The results of today’s sale reaffirm the paradoxical state of an offshore energy industry in slow recovery mode; the future is bright, but shifting out of reverse takes time.”
The lease sale was held as market conditions continue to regain strength following a pullback in activity and spending. Oil prices have since rebounded as operators bring down costs and become more efficient.
Deepwater blocks continued to attract the most attention from companies. Bidding statistics show 55 bids were placed on blocks with water depths greater than 1,600 m and 43 bids were placed on blocks with water depths between 800 m and 1,600 m. Combined, the two categories generated more than $160 million in high bids.
Shallow-water blocks also garnered bids, most of which were for blocks less than 200 m. Companies placed 32 bids on these blocks with the sum of high bids at about $4.7 million, which was less than the $8.8 million in high bids received during the March gulf-wide lease sale.
Mike Celata, regional director for BOEM’s GoM region, described the sale as positive.
“There is obviously continued interest in deep water. … The number of tracts bid on is up for the year. I think that’s continued interest. Even though the numbers are low on the shelf, they’ve been up since we lowered the royalty rate,” Celata said on a media call. “I think the positive thing for me was there was increased competition from the last sale. You had some four-bid tracts, three-bid tracts,” which may have resulted in some of the high bids.
“Overall, I still think the Gulf is a very viable place. You had some operators, Shell and Chevron didn’t bid as much in this sale, but you had Exxon bidding a lot more and Hess, definitely, bidding on more tracts as well,” Celata added. “I think there is a lot of interest in the Gulf if you look at the number of different players in this sale vs the last.”
Exxon Mobil Corp. (NYSE: XOM) placed more high bids than any other company—25 for a total of about $40.6 million—while Hess Corp. (NYSE: HES) placed 16 high bids totaling about $36.2 million.
“The Gulf of Mexico is a significant part of our portfolio and an important cash generator for Hess,” Rob Young, senior manager of communications and external affairs for Hess, told Hart Energy in an email. “In today’s U.S. offshore lease sale, Hess was the high bidder in 16 of 19 blocks that are centered over core exploration areas of interest near our existing footprint.”
Hess has several GoM developments, including the Stampede deepwater oil and gas field that started production earlier this year in the Green Canyon area and Tubular Bells, a Mississippi Canyon area field it co-owns with Chevron Corp. (NYSE: CVX).
The highest bid of the sale was also placed by Hess. William Turner, senior research analyst at Wood Mackenzie, called the high bid the biggest surprise of the sale.
“[Hess] bid $25.9 million on a block in the heart of the Mississippi Canyon near BP’s Na Kika offshore platform,” Turner said in a note. “Surprising as it is also near the Silvergate prospect, a dry hole.”
Houston-based Noble Energy Inc. (NYSE: NBL), which agreed to sell its GoM business to Fieldwood Energy LLC earlier this year, conducted deepwater exploratory tests in Mississippi Canyon Block 338 and Block 339 in 2016 at the Silvertip prospect. However, the company plugged and abandoned the well after failing to find commercial hydrocarbons.
Still, the GoM remains alluring for many oil and gas companies as new discoveries are still being made and existing infrastructure is helping to bring costs down.
Looking at results from the March lease sale, Celeta said a lot of companies were bidding near existing infrastructure. The trend was evident in the Aug. 15 sale; though, he pointed out that some companies, such as Exxon Mobil and Equinor ASA (NYSE: EQNR), are stepping out a bit into remote areas in the GoM.
“This reflects the steady increase in oil price and competitive ROI now due to much more efficient practices in the Gulf of Mexico,” Turner said.
Wood Mackenzie also noted that about 40% of blocks offered during the Aug. 15 made a return from 2007 and 2008 lease sales, including several blocks toward the east previously held by Shell that were picked up by Exxon Mobil.
Also notable was deepwater bids from companies that haven’t traditionally bid on such acreage, according to Celeta. He pointed out smaller companies had an opportunity to win some of these blocks with bigger players like Shell bidding on fewer tracts.
“Hopefully, the opportunity of having two gulf-wide sales—one in March and August—have helped give companies that opportunity,” he said.
The GoM Outer Continental Shelf holds about 48 billion barrels of undiscovered technically recoverable oil and 141 trillion cubic feet of undiscovered technically recoverable gas, according to BOEM. Leases in water depths of 200 m or less carry a 12.5% royalty rate, while the royalty rate for other leases remains at 18.75%.
Velda Addison can be reached at email@example.com.
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