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Feds collect millions in Gulf oil drilling sale, despite falling prices

By:  Jennifer A. Dlouhy

FuelFix.com

 

WASHINGTON — Slumping crude prices tempered some of the oil industry’s enthusiasm for buying new Gulf of Mexico drilling rights during a government auction on Wednesday.

Still, the federal government is on track to pull in hundreds of millions of dollars in winning bids for the central Gulf tracts, courtesy of sustained industry interest in deep-water territory that could pay off with production long after crude prices are expected to rebound.

All told, 42 companies pledged $583.2 million in total bids for 169 separate central Gulf of Mexico tracts, with the government set to collect $538.8 million in apparently winning bids.

The government’s total haul and the number of participating companies was down from recent central Gulf of Mexico auctions, including a March 2014 sale that netted $850.8 million in winning bids from 50 companies. The reduction in revenue since that sale reflected the downward trajectory of oil prices over the same time frame.

Abigail Hopper, director of the Bureau of Ocean Energy Management that conducted the sale in New Orleans, said the results were “about what we expected given that oil prices obviously are lower than they have been in the last six years.”

“That has an impact,” she said. “As the companies look at their revenue and their plans for the future, they make different decisions than they would have if the market were in a different place.”

Houston Energy and Red Willow Offshore teamed up to offer the highest single bid, $52.2 million for Walker Ridge block 107.

Much of the action was concentrated in less-explored deep Gulf waters; 100 of the 169 targeted tracts that received bids have water depths of at least 2,624 feet.

“The fact that the majority of today’s bids are for deepwater tracts is evidence that industry is still willing to invest in the deep-water Gulf of Mexico for the long term,” said Chris John, president of the Louisiana Mid-Continent Oil & Gas Association.

The hottest territory by far was the Green Canyon area, which drew 52 bids, with oil companies likely encouraged by Chevron Corp.’s Anchor discovery in the region and other recent successes in the Lower Tertiary Wilcox Trend. Appraisal drilling has been planned for later this year at that Anchor prospect in Green Canyon block 807, which Chevron co-owns with Cobalt International Energy, Samson Offshore Anchor and Venari Resources.

“It’s a continuation of those subsalt, deep plays that we’ve seen over the years in that area,” said Andy Radford, offshore senior policy adviser for the American Petroleum Institute. “As companies drill more wells in that area and get a better sense of the geologic framework there, it spurs more interest in those blocks.”

The focused interest in the Green Canyon reflects a trend of oil companies submitting highly targeted bids in the expensive deep water and looking to align offers with promising geological information or near existing production.

“It’s been clear for many sales,” said John Rodi, BOEM’s Gulf of Mexico regional director. “They are really focusing on where there is new information.”

Oil companies may have concentrated more of their bids — and collaborated to make offers — in light of lower crude prices forcing them to pare capital spending.

For instance, BP submitted just four bids — winning all of those targeted tracts for a total bill of $4.42 million. Company spokesman Brett Clanton said the firm’s “more targeted approach reflects the acreage available, the challenging oil price environment and BP’s continued focus on capital discipline.”

Roughly half of the bids in Wednesday’s sale were directed at newly available blocks that have been relinquished by previous leaseholders.

Falling crude prices are only one factor driving down the number of participants in offshore lease sales — which have been dropping steadily for years, from 56 in a 2012 central Gulf sale to 52 a year later and 50 in 2014. Some energy companies once focused on extracting natural gas from the shallow continental shelf have pulled back from the Gulf amid low gas prices.

“A lot of the interest in recent sales is in deep water; that is very, very expensive area,” Rodi said. “It’s not totally unexpected that we would see fewer players who may have the resources to focus on deep water in the Gulf of Mexico.”

Oil companies fiercely guard their bidding plans and strategy — often with only a handful of employees involved in deciding the final bids, after geologists study seismic data and evaluate recent discoveries. Because bids are sealed, with both their sums and their very existence under cover, the offers can vary widely.

For instance, in Wednesday’s sale, Green Canyon block 761 drew a $997,122 offer from Statoil Gulf of Mexico that lost out to a combined bid from Chevron U.S.A. and Venari Offshore totaling $43.1 million.

Shell had the highest number of winning bids — nabbing 17 of the 18 tracts it targeted for $37.9 million in high bids. Other companies with a high number of successful bids included Statoil, with 14; Venari Offshore, with 12; and Chevron and Exxon Mobil Corp., both with 11.

Chevron left the sale with the biggest bill; it is expected to owe $78.6 million in successful bids on 11 tracts. Other big spenders were Red Willow Offshore, with $59 million due for 8 high bids; Exxon Mobil with $53 million due for 11 high bids; and Statoil, with $51.4 million due for 14 high bids.