Next US Gulf lease sale may be its 'largest': Fuel for Thought

US Gulf of Mexico Lease Sale 250, scheduled for next year, was touted last month as the largest such auction to be offered in the nation’s history—but Trump Administration touters may have confused an offering with an outcome.

True, the event—tentatively slated for March 2018—will feature 77 million acres in federal waters offshore Texas, Louisiana, Mississippi, Alabama and Florida in the second region-wide US Gulf sale since 1983. That’s a lot of acreage, although it was only about 1.5% more than in the most recent auction—Sale 249—in August.

But simply serving up a lot of acreage does not necessarily mean a significant amount of money will be offered for it. And at a time of relatively low crude oil prices when US Gulf offshore exploration is scanty, operators have largely chosen to focus onshore —specifically quick-return shale plays rather than long-lead major projects that can take many years to develop.

“Offering more acreage will not do the trick” of attracting money back into exploration in the Gulf of Mexico, where operators are looking for faster payouts,” said S&P Global PIRA Energy analyst Rene Santos. “You also really need higher oil prices.”

Nor will more acreage bring bigger bids.

“We saw in Lease Sales 247 and 249, the former was smaller in territory coverage and brought in twice the amount of bids of the latter, which covered bigger territory,” Platts Analytics’ Bentek Energy analyst Sami Yahya said.

Sale 247, the last area-wide auction in the Gulf last March, offered 48.5 million acres mostly sited offshore Louisiana and pulled in $275 million in total high bids. Area-wide sales cover smaller areas of the US Gulf, as opposed to region-wide sales that cover the entire gulf.

Sale 249, which offered about 76 million acres, received $121 million in total high bids—a relatively low sum compared not only to most area-wide US Gulf sales in recent years but even compared with region-wide sales that were routine for several years before 1983.

For example, eight region-wide sales in both 1977 and also 1979 to 1982 all raked in more than $1 billion each, including two auctions which took in well over $2 billion apiece.

By contrast, Sale 250 offers only about a million acres less than Sale 249, and there is no real opening of “substantial” areas that have been off the market, Jamie Collard, an analyst at Westwood Global Energy Group, said.

As a result, “[we think it is] highly unlikely that the 2018 license round will reach anywhere near 2007 levels, even with relinquished areas back on offer,” Collard added.

Also, operators look for quality acreage but offshore Texas tracts usually do not attract a great numbers of bids unless new finds are made nearby. Offshore Louisiana is typically a bigger draw in the US Gulf, which currently produces around 1.7 million b/d of crude oil.

But one lure in the 2018 sale may be a swath of deepwater tracts grabbed by operators in high-dollar sale years that began in 2007 but are starting to expire under the federal government’s 10-year terms. Many of those blocks attracted eight-figure bids by majors, and competitors may be curious for a fresh look at the geology that attracted such mammoth sums.

For example, two sales in 2007 attracted bids on 658 deepwater blocks, including 220 in water depths of more than more than 2000 meters.

Also, analysts say oil companies need WTI oil prices near $60/b, about 10% higher than currently, to get offshore exploration moving again. As a result, companies bidding in Sale 250 may largely stick to their recent pattern of securing acreage near existing production hubs in the March 2018 auction.

“If they really want to increase [exploration] activity, they need to think about the royalties and fiscal terms attached to this acreage,” Imran Khan, senior manager-Gulf of Mexico for energy consultants Wood Mackenzie, said. “That’s what will get operators’ attention.”

“If they lower the royalty rate or bring back royalty suspension volumes in deepwater, that’s what could drive greater bidding activity,” Khan said.

Sale 249 was the first region-wide US Gulf sale since 1983, when lease sales became areawide.

That meant blocks offered were confined to respective sales in the Western Gulf offshore Texas, or Central Gulf offshore Louisiana and Mississippi, or Eastern Gulf essentially off the other states’ coasts.

When area-wide sales began in 1983, billion-dollar auctions continued, although those totals fell in mid-decade as oil prices plummeted. Even so, high bid totals from Gulf sales largely remained in the nine figures well into the mid-2000s as oil prices rose to what was then new territory beyond $50/b.

And as oil continued its trek upward after that, the money operators were willing to wager just to grab onto frontier deepwater acreage also increased.

As 2007 progressed, oil prices rose into the $60s/b and $70s/b, and by October that year prices were in the $80s/b and producers were ready to pay big bucks for choice tracts. The Central Gulf sale that month captured $2.9 billion in high bids. The following year, with oil prices in the $90s/b and $100s/b, high bids totaled an all-time record $3.7 billion.

Round 249 in August, in which many of the same blocks were on offer, saw only 76 blocks receive bids in more than 800 meter water depths, and the $121 million in total high bids was “overall quite disappointing,” Collard said.

“The 2018 license round will likely, on the whole, see a similarly low level of competition and interest, probably around recently relinquished deepwater areas and near either existing infrastructure or discoveries under appraisal,” he said.