Current brisk US Gulf of Mexico activity could slow without regular oil and gas lease sales: experts

The US Gulf of Mexico appears to be flourishing amid $100/b oil prices, with drillers—especially in deepwater—talking about more wells, potential development, longer contract terms, and upturning rig dayrates. But activity may slow in the next couple of years if the Biden Administration limits or cancels lease sales, experts said this week.

Earlier in May, the US Interior Department canceled its next three offshore oil and gas lease sales citing court-related delays that affected two US Gulf auctions and one sale in Alaska 's Cook Inlet, in which there was said to be lack of interest.

While near-term the lease sale cancellations do not appear to be hurting US Gulf activity, many question what will happen to production in the region longer term if no new lease sales occur in the next few years.

"In the short term, there is virtually no impact to the US Gulf ... but certainly the impact is compounded in the mid-long term as operators run through their inventory of projects to develop," said Sami Yahya, senior energy analyst for supply and production at S&P Global Commodity Insights.

"This is indeed a high risk that might push some operators to take their capital somewhere else," Yahya said.

At the very least, US Gulf developments will "slow down some" if there are no new sales until 2025 or beyond, said Justin Rostant, principal analyst-Gulf of Mexico research at energy consultancy Wood Mackenzie.

"We have not had many major discoveries over the last several years," Rostant said, noting some exceptions are Shell's Blacktip/Blacktip North/Leopard finds, although they have not yet been appraised so their size is unknown.

Still, "infrastructure led exploration and brownfield projects will remain a priority," he added.

Consequences

But the consequences for the US Gulf of fewer lease sales, and likely fewer discoveries, are not inconsiderable, since the region accounts for about 1.79 million b/d, or 15% of the US' 11.78 million b/d crude oil output, according to the US Energy Information Administration. For natural gas, the proportion is much smaller: The Gulf supplies about 2.3 Bcf/d, or slightly over 2% of the US' total 103.98 Bcf/d of marketed natural gas output.

Even though most leased tracts are never drilled, E&P companies rely on lease sales to replenish their prospect inventories and plan for the future. But E&P companies, nonetheless, pay, sometimes handsomely, for acreage they want, and if they do not drill on blocks they are awarded, that money is not returned.

Also, US offshore leases, which in the US Gulf are typically 9 square miles, are a fraction of the size other countries offer. This makes US Gulf exploration more difficult and also predicates development on acquiring additional blocks at future auctions.

It takes time

Much of the US Gulf's current activity is around existing production hubs. Operators rely on regular auctions to optimize their drilling schedules and plan for future production. Some discoveries span two or more blocks, and it may take many years to acquire enough tracts to make a discovery economic, explore surrounding leases, and maximize a hub's output capacity over its life.

Earlier this year, one big project, Murphy's King's Quay, came online to produce three discoveries: one of them made in 2007 by the former Anadarko Petroleum, which paid $105.6 million to lease the block. Two other big developments, Shell's Vito and BP's Mad Dog 2, both of which are expected to start up later this year, stem from discoveries made in 2009 and 1998, respectively.

The next big tranche of US Gulf production will be 2024, when Chevron's Anchor field, Shell's Whale, and possibly Kosmos' Winterfell project may come online. In 2025, Chevron's Ballymore, and TotalEnergies' Leon/Castile fields are also pegged to start producing.

Moreover, Shell is expected to greenlight its Rydberg field this year, and BP potentially its Atlantis 4 development as well, analysts said.

Until about half a dozen years ago, E&Ps during US Gulf lease sales often bid on frontier and other speculative acreage, whereas more recently they mainly acquired tracts around existing production hubs – i.e., infrastructure-led exploration, Rostant said.

"Companies have moved away from the shotgun approach to the rifle approach," he said. "Over the past several years, companies focused their lease acquisitions on blocks that supported a strategy, so pick up fewer, but more important leases."

One feature of current developments is that several finds under development were announced a decade ago or more. Economic crises and lack of technology to produce the finds kept them from being greenlighted earlier.

Moreover, there are still some significant unproduced discoveries in the hopper, such as BP's Tiber and Kaskida, which were all announced eight or more years ago, but at the time were too deep and high-pressure/high temperature to develop. The technology has now caught up and is being used at Anchor and other fields.

Analysts say having those discoveries available could help fill output gaps from lack of US Gulf leasing in 2021 and potentially longer if no more auctions in that region occur until Biden's term ends in 2025 or – if he wins a second term – in 2029.

Falling bid amounts

Until the current presidential administration, US leasing was typically twice a year, usually in March and August. Historically, March was the larger auction, but in the last half-dozen years, total bid amounts from both yearly sales have fallen substantially. Many operators exited or pared down Gulf operations, preferring quicker-payback onshore shale oil fields.

For example, Lease Sale 252 in March 2019 captured just $244 million in high bids, compared to Sale 231 in March 2014, where E&P operators offered $851 million in high bids.

In fact, the first sales of years 2012 and 2013, which respectively took place at a time of frenzied US Gulf activity and much frontier drilling in ultradeep high-pressured plays, took in more than $1 billion each in high bids. A number of offers made were in the mid to high eight figures—tens of millions of dollars apiece.

Discoveries were made in that period, which are either being developed today or are already online. For example, Chevron's Ballymore discovery in January 2018 and greenlighted for development May 17, was on a pair of leases won in the pricey June 2012 sale, which took in $1.7 billion in high bids.

Chevron paid $58 million and $29 million, respectively, for the two Ballymore tracts.

But the last lease sale, which awarded acreage to upstream operators, occurred in August 2020. While the Biden administration paused lease sales just after he took office in January 2021, a court in mid-2021 ordered an auction to take place and one was held last November. However, it was subsequently voided by another court decision in January 2022. That decision has been contested, and is now winding through the judicial system.

On May 12, the US Interior Department cancelled three US offshore lease sales, the last three on the 2017-2022 federal offshore leasing plan, which expires June 30. A plan for 2022-2027 has been ordered by June 30 but it is unknown if the Biden Administration can meet that deadline.