Feature: US Gulf Lease Sale 257 may spur more bids amid uncertainty of further auctions

The upcoming US Gulf of Mexico Lease Sale 257 could encourage more bids than in recent auctions owing to the uncertainty of further auctions the Joe Biden Administration is resisting, even while allowing next week's auction to go through, analysts said Nov. 12.

Sale 257, which will be the first such event in the US Gulf after the Administration paused federal land/offshore leasing, may also see a bit more participation from smaller entrants that increased in the deepwater arena, given current oil prices over $80/b, experts said.

"The previous halt by the Biden Administration may incentivize some operators to snag more blocks while they can, in case another regulatory hurdle is thrown at them," said Sami Yahya, senior energy analyst-supply and production for S&P Global Platts Analytics.

In June, a US district court judge ordered an end to the Administration's moratorium on leasing and auctions of federal acreage, including Lease Sale 257, saying the ban may hurt economies and revenues in producing states. That cleared the way for US Gulf lease sale sponsor US Bureau of Ocean Energy Management to hold the auction Nov. 17, live-streamed from its New Orleans office.

The Biden Administration, which holds climate change as a top priority and wants to phase down fossil fuel production in the domestic energy mix, continues to pursue a reversal of the June order and restore the leasing moratorium.

The result is cloudiness over future near-term US Gulf sales that could paradoxically also result in a larger high-bid total than the $121 million captured in November 2020's Sale 256 and the $93 million in March 2020's Sale 254, said Justin Rostant, principal analyst-Gulf of Mexico research for consultancy Wood Mackenzie.

"Smaller players may take this opportunity to add some leases because they see indications that [leasing may be] more difficult" if they wait, Rostant added.

'More budget' for bids

"Some folks sat on the sidelines in 2020 since their company budgets got slashed" up to 50% from plunging oil prices during the coronavirus, he said. "This year, operators will have a little more budget to play with, and while it won't be a blowout number, I think high bids exceeding the $120 million mark should easily be achieved."

Sale 257 include more than 15,000 blocks located from 3 miles to more than 200 miles offshore, with water depths ranging from 9 feet to more than 11,000 feet.

While the auction probably would not break any records, it represents an opportunity for large integrated US Gulf participants, such as Shell, BP, Chevron, as well as independents such as Hess, Murphy Oil and Occidental Petroleum, to shore up their portfolios with fresh acreage.

It likely also helps smaller participants, such as relative newcomer Beacon Offshore that recently greenlighted the ultradeep Shenandoah project and US Gulf sale veterans W&T Offshore and LLOG Exploration, to grow in an upturning US Gulf market amid robust oil prices.

"I think we'll see the usual suspects coming back to the game," Yahya said.

Deepwater driller Transocean, in its most recent quarterly call, painted a healthy picture for the US Gulf and said that is slated to further improve in 2022.

Third-party researchers also see tightening US Gulf utilization and increasing demand, Transocean CEO Jeremy Thigpen said.

Mars spot crude prices so far in November have averaged $78.42/b, with an average differential to WTI crude oil of minus $3.09.

US Gulf breakeven prices lower

While today's prices may change before much of the current and future deepwater discoveries come online within months to years, oil breakeven prices in the US Gulf have dropped to the high $40s/b from around $68/b in 2014, Platts Analytics said.

Also, advanced technology and rigs in the US Gulf have been developed to produce complex discoveries subject to high subsea pressures and temperatures. The first such finds bearing 20,000 pounds of pressure/square inch, such as Shenandoah and Chevron-operated Anchor, are slated to come online in the next few years.

Moreover, not only does the US Gulf offer relatively low emissions intensities, but the chance to build a profitable low-carbon business. Small US Gulf operator Talos Energy, for example, has created several joint venture arrangements with technology/engineering companies to develop carbon capture and storage projects.

"I don't think those will be a transition out of E&P, but complementary businesses," Rostant said. "[E&Ps] have access to the seismic and rock data and have wells drilled in the area. They understand the geology, the aquifers ... whereas before they were extracting, now they're injecting. Their knowledge is in place, the infrastructure is in place; the gap was technology."

The US Gulf has about half the carbon intensity in kg/boe found in onshore areas, particularly the Permian Basin, said Yahya.

Offshore US Gulf of Mexico production ranges from about 11 kgCO2e/boe for Shell's Stones project to about 26 kgCO2e/boe for the Auger field, also operated by Shell, according to Platts Analytics figures.

By contrast, US onshore operations range from about 17 kgCO2e/boe in the Permian and Delaware basin to 46 kgCO2e/boe near the Louisiana Gulf Coast.

"The deepwater Gulf of Mexico on a global stage is considered to offer some of the lowest carbon intensity metrics, making it pretty attractive," Yahya said.