Ruminations on latest US Gulf of Mexico lease sale... not too shabby

— The US Central Gulf of Mexico Lease Sale 231, held this week in New Orleans, wasn't a barn-burner -- but its results held up relatively well, pulling into sixth place among the last 10 Central sales. With nearly $851 million in total high bids, it didn't carry the cachet of the billion-dollar high-bid sale club that has prevailed in recent years, but it was nothing to sneeze at.

With the highest single bid of the sale coming in at nearly $69 million (by Freeport-McMoRan, which re-entered the upstream space after buying two E&P companies last year) and the 10th-highest bid at $30.1 million (jointly by Murphy Oil and Colombia's Ecopetrol), offers in the eight figures weren't scarce.  Despite industry's concerns over high costs, voiced repeatedly at the recent IHS CERAWeek conference in Houston, oil companies continue to open their wallets for the best acreage -- and these days, that tends to be in deepwater around proven plays or where seismic data has revealed a showy structure, as was apparently the case with the $69 million bid placed on Atwater Valley block 198.

During Central Sale 231, an Eastern Gulf sale was concurrently scheduled. Eastern sales are relatively rare as much of that area borders the Florida coast is is off-limits to drilling. The last Eastern sale was in 2008 and another will take place in 2016. But no one bid for any of the 134 blocks in what was supposed to be the 2014 Eastern sale, most likely because the geology remains unproven, analysts and sale sponsor US Bureau of Ocean Energy Management said. BOEM said it hopes industry's 2016 shot at it will be better, since new seismic and data from nearby recent finds may provide more impetus for leasing.

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Central Gulf sales feature acreage offshore Louisiana, Mississippi and Alabama, and are the larger of two annual sales in the region. The Western Gulf sale, usually held in August and featuring tracts offshore Texas, tends to elicit smaller sums. Much of the Western area is said to be gas-prone and thus is out of favor as gas prices remain relatively tamped down.

In addition:

-- Small independent ultra-deepwater explorer Cobalt International, which in previous sales distinguished itself with monster bids of $30-$40 million and even more, teamed up with France's Total to bid in some of the same areas. But their joint offers were far more subdued at $1.3 million or less per block. The pair especially seemed to favor acreage in Atwater Valley, where they were apparent winners of at least three dozen tracts.

-- Despite the eight-figure sums for many deepwater tracts, on the whole companies paid less for deepwater acreage than last year. Offers were made for 108 blocks in more than 1,600 meters of water at an average bonus of $735/acre; last year, bidders made offers on 131 blocks, paying $932/acre, while in the 2012 Central Sale, offers averaged $1,084/acre.

Moreover, the average winning bid for an individual block was $502/acre, which was below the $705/acre received last year and the $585/acre average from the last three Central Gulf of Mexico sales, Bill Herbert, a Simmons & Company analyst, said in a post-sale investor note.

However, Herbert noted that Sale 231 was the second consecutive auction where "deepwater blocks comprised 91% of total dollars exposed by high bids, tying the high mark set for the decade last March."

-- On the other hand, shallow waters of less than 200 meters, the site of fewer bids in recent years, less competition and fewer dollars, didn't do too shabbily, all things considered. Companies paid an average of $96/acre in Sale 231, compared to $69/acre in the 2013 Central sale and $102/acre in 2012.

One of the most-contested leases of Sale 231 was in shallow waters -- West Delta block 41. Energy XXI, a small public company that specializes in Continental Shelf exploitation and recently said it would acquire fellow shallow water EPL Oil & Gas, apparently won the lease with a $1.2 million bid. Ironically, EPL bid against Energy XXI for the tract, offering just $407,000.

Even so, high bids were received for 131 shallow-water tracts "which represents 40% of total blocks purchased, but only 7% of total dollars exposed by high bids," observed Herbert.

-- Despite a much-watched well, Phobos, that operator Anadarko Petroleum announced as a 2013 discovery in the remote Sigsbee Escarpment area of the Gulf that borders Mexican waters, no bids were received in Sale 231 in either that area of the Gulf or the equally remote and adjacent Amery Terrace area to the east.

However, Noble Energy made uncontested offers for three blocks at $627,580 apiece in the very remote northern Henderson area of the Gulf that borders waters technically offshore Florida. Southeast Henderson is unavailable for leasing, although the current BOEM map shows that five blocks were available for bidding in the Florida Plain area to the south, which is mostly off-limits to leasing.