New Frontiers: New life for once-spurned Gulf of Mexico oil and gas leases

— Starr Spencer attended last week's Gulf of Mexico lease sale in New Orleans. She noticed something about the bidding: old, abandoned leases have gotten renewed interest. She reviews the trend in this week's Oilgram News(opens in a new tab) column, New Frontiers.

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Recycling of leases in the Gulf of Mexico is nothing new. But acreage there has fetched premium prices in recent years, particularly in deep- and ultra-deep waters in emerging areas where oil companies continue to cough up tens of millions of dollars for tracts that may have once fetched a mere few hundred thousand bucks.

Sometimes, operators even chase tracts they themselves had once leased, eager to pay big sums for acreage they may have once viewed with nonchalance, according to records from US Bureau of Ocean Energy Management.

Charlie Miller, chief technology officer with offshore consultants Waring & Associates, said improved seismic data may reveal new targets not seen before.

“Technology has definitely improved over the years, and allows new things to be seen and found that wasn’t available” earlier, he said. “And sometimes a company just doesn’t meet the criteria to hold onto a lease” and must give it back.

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Sources at Central Gulf of Mexico Lease Sale 231 last week said the deepwater tract that captured the highest bid, Atwater Valley block 198 (AT 198), features a large structure—the probable reason it lured half a dozen high-dollar bids. The sale’s highest offer, which apparently won the lease, was nearly $69 million by minerals conglomerate Freeport-McMoRan that far and away boasted the largest sum of total high bids in the auction: $321 million.

But two oil majors had won the block in respective lease sales years before, and each paid far less for it, records show.

Exxon Asset Management Company made an offer of $1.01 million for the tract in the 2001 Central sale, but BOEM deemed the offer insufficient for fair market value and rejected it. The agency typically rejects a handful of leases in most sales for that reason.

A year later, in the 2002 Central sale, Shell won AT 198 for $1.5 million, although ExxonMobil partnered into the block around 2003 and eventually took it over entirely. BOEM records do not show evidence that it was drilled. The lease expired in May 2013.

Last week, ExxonMobil again vied for the lease with a $45.5 million offer in hand, but Freeport McMoRan’s stunning sum, which elicited gasps from the audience, wrestled the major to the ground.

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BOEM said oil companies that lease offshore blocks pay bonuses, rentals, and royalties that reflect the value of the right to explore and potentially develop and produce oil and gas in federal waters. On its website, the agency said it sets minimum bid levels, and also rental and royalty rates, for each auction “based on its assessment of market and resource conditions as the sale approaches.”

Sale 231, held last Wednesday in New Orleans, captured nearly $851 million in total high bids, making it the sixth-largest Central auction in total high bids in the last 10 years. AT 198 was the largest bid, but the sale attracted a healthy number of eight-figure offers, sale records show.

In another example of a company bidding for a tract it had formerly leased, privately held LLOG Bluewater Holdings was a contender for Mississippi Canyon block 475 last week, pledging $2.6 million for a tract it held several years ago. But Chevron came at the block with the second-highest offer in the sale, $62 million. The tract is adjacent to BP’s Na Kika field.

MC 475 was previously won by Conoco (now called ConocoPhillips), which paid $409,250 for it in a 2002 auction. Subsequently, the lease ended up the hands of LLOG and several small partners until its term expired in 2013.

Sale 231’s third-highest offer, the $45 million that Freeport-McMoRan brought to the table for Mississippi Canyon block 82 in 4,300 feet of water, is another example. Occidental Petroleum and BP won the tract in 2002 for $1.1 million, although BP eventually took it over. The lease was part of the major’s Horn Mountain field complex at MC 126-127, BOEM records show.

BP unloaded Horn Mountain, including MC 82, to Plains Exploration in 2012, as part of the major’s multi-billion-dollar post-Macondo sales. Although Plains lists MC 82 as part of Horn Mountain, the lease expired last year—about the time Freeport-McMoRan bought Plains, an independent upstream company.

In a Plains securities filing at the time it bought Horn Mountain, the company said it planned to develop and explore via subsea tiebacks additional...resource opportunities as well as deeper potential on the [field’s] leases.”

Also, ExxonMobil was a contender in Central Sale 231 for Mississippi Canyon block 166, although the major’s $5.2 million offer was whipped many times over by Chevron’s $35.9 million bid—the eighth-highest in the sale. But Exxon held it once along with BP; the pair won it in a 1991 auction for a mere $186,000. The lease expired in 2001, and BOEM records do not show that it was drilled.

— Starr Spencer in Houston