ANALYSIS: Cloudy outlook seen for US Gulf lease sale due to low oil prices, budgets

Houston — Uncertainties on both the timing of oil demand recovery from the coronavirus pandemic and the future actions of the incoming Joe Biden administration over permitting on federal lands present a cloudy outlook for upcoming US Gulf of Mexico Lease Sale 256, analysts said Nov. 16.

The extraordinary events this year that resulted in tamped-down oil prices from ravaged demand owing to the pandemic may prompt many E&P operators to sit out the auction, sponsored by the US Bureau of Ocean Energy Management, although it may also be a buying opportunity to grab choice acreage before President-elect Biden can keep his campaign promise of banning new drilling on federal lands.

As a result, it's anyone's guess whether the total high bids in Sale 256, which will be live-streamed on the BOEM website Nov. 18, will match the $93 million seen in Sale 254 in March 2020 or the $159 million captured in Sale 253 in August 2019.

Sale 254 last March collected 84 bids spread across 71 blocks, placed by 22 producers, while Sale 253 reflected 165 bids over 151 blocks where 27 operators participated.

But at a time of fiscal austerity forced by lower oil demand, ample global supply and the next lease sale likely to occur just a few months from now in March 2021, many observers are betting on lower participation in the Nov. 18 auction.

Budgets still 'very limited'

"I don't believe Sale 256 will fare any better than [recent] sales, since budgets are still very limited and many operators already have blocks they need to digest," S&P Global Platts Analytics analyst Sami Yahya said. "Growth just isn't a primary goal for most operators, especially given price volatility and demand uncertainty. Reducing debt ... is the head of the spear for most operators as they seek gains in operational/production efficiencies and improved free cash flow generation."

"Also, I don't think a [permitting] ban is the main issue operators are worried about right now," Yahya said. "They may have bigger and more immediate fish to fry when EPA [Environmental Protection Agency] is under Biden's control, which may roll out stricter regulations such as harsher emissions restrictions that may impact the entire industry."

Justin Rostant, a Gulf of Mexico analyst for energy consultancy Wood Mackenzie, said he would be "surprised" if high bid totals in upcoming Sale 256, which offers thousands of blocks in both deepwater and shallow waters offshore Louisiana, Texas, Mississippi and Alabama, match the $93 million last March.

"I still think the lower budgets and lower oil price would be a bigger driver of companies' decision to bid in the lease sale," Rostant said.

Kate MacGregor, deputy secretary of the US Interior Department, under which umbrella BOEM falls, declined to speculate on sale outcomes including possible bid totals.

"What I'm hoping to see...at the sale is signs of our economy reborn and strengthening in this market," MacGregor said.

"We've been leasing in the Gulf of Mexico since the 1950s and folks keep showing up," she said. "Our lease sales constantly offer the same acreage over and over again, and still people show up and buy that acreage."

What is certain is that producers have less money to spend right now. Their 2020 capital budgets, slashed in early 2020 as the pandemic deepened and drilling activity slowed, are nearly exhausted. In any case, the bigger of the pair of annual federal Gulf sales historically occurs in March, when budgets are replenished for a new year.

Operators may want to preserve cash

Oil prices have been around $40/b for several months, after prices plummeted in early March from around $46/b to the teens and $20s/b over the subsequent couple of months. Prices didn't rise to current levels until late June.

"When we did our forecast in early 2020, we thought it would be another record year for production in the Gulf," Rostant said. "We also believed there would be four projects that were sanctioned; that's now zero."

MacGregor and analysts also say upstream producers will likely bid for acreage near existing infrastructure – a trend ongoing for several years as operators seek projects with shorter-term paybacks. This allows new wells and fields to be tied back, or hooked up, to production hubs as existing output declines naturally.

Tiebacks are much easier and cheaper than building new platforms or floating, production, storage and offloading vessels – which could take multiple years and billions of dollars.

Operators are also likely to bid for acreage in the deepwater rather than shallow waters, and focus on proven, well-drilled areas around the Green Canyon, Mississippi Canyon and Garden Banks offshore Louisiana which are in more moderate water depths of 3,000 feet to about 7,000 feet.

Also, even though the total high bids may be smaller than in years past, that may not necessarily mean bidders individually aren't willing to pay high prices for choice acreage.

In the August 2019 sale, for example, the collective sums bid totaled just over $93 million, but the ten largest bids made up 43% of the total. In contrast, in the larger March 2020 sale of $159 million, the ten largest bids comprised 36% of the total.

Lease Sale 256 will include roughly 14,755 unleased blocks spanning about 78 million acres, located from three to 231 miles offshore in the Gulf's Western, Central and Eastern planning areas.