U.S. Interior Secretary Ryan Zinke was looking for March 21's offshore Gulf of Mexico lease sale to give him a clear sign to the oil and gas industry's appetite for offshore drilling in the age of onshore shale, but any signals were mixed.
The number of bids increased 76% but the cash spent for those blocks went up by only 3% compared to the previous sale in August 2017. The total number of bidders increased to 33 from 27, said Interior's Bureau of Ocean Energy Management, or BOEM.
"This sale, I think, is going to be a bellwether in many ways," Zinke told oil and gas executives at IHS Markit's CERAWeek conference in Houston earlier in March. "We'll see what the future of offshore is in comparison to the Permian."
While Gulf of Mexico Lease Sale 250 offered more than 77 million acres, the most acreage of any lease sale in history, offshore drillers offered only $139 million in 159 bids on 815,403 acres, mostly in the central Gulf off Louisiana, the BOEM said March 21. In the previous lease sale, drillers offered $137 million for 99 blocks. Drillers spent $124.8 million for their successful bids, compared to $121.1 million in August.
"It's a bellwether. Probably not the one he wanted," said Kenneth Medlock, senior director of Rice University's Center for Energy Studies. There are more attractive places for drillers to work, including onshore in the U.S. and offshore in such counties as Guyana, Medlock said.
"In the $60 to $65 [per barrel] price environment, with a lot of uncertainty, especially if the Russia-OPEC thing falls apart, why would you go spend on something that's always going to be there?" Medlock said.
"Oil prices are higher now than they were a year ago, but they are still a bit low to attract significant activity in the Gulf of Mexico due to competition from U.S. shale with well break-evens ... about $10/bbl lower than Gulf of Mexico project break evens," said Rene Santos, S&P Platts Analytics' senior director for exploration and production, before the results were announced. "Several operators will likely play it safe and continue to stick to shale development in the near/mid-term."
The offshore industry's trade group found the lease sale encouraging because bidding increased in a time of low commodity prices. "Bonus bids are an indicator of the ability and confidence of producers to invest in the Gulf of Mexico," said the National Ocean Industries Association, or NOIA, but more work needs to be done to make the Gulf globally competitive. "These are not new fields, and producers are attempting to pick the best of what is left," the NOIA said.
Despite Zinke's hopes for a clear signal from the industry, NOIA President Randall Luthi said Lease Sale 250 cannot be used as an indication of the oil and gas industry's interest in the Trump administration's plans to open Atlantic, Pacific and more Alaskan waters to drilling.
"Today’s lease sale has no bearing, either positively or negatively, on potential Atlantic sales," Luthi said. "The Gulf of Mexico is an entirely different region, has been largely explored and offers no new areas. Obviously, the Atlantic would be considered a new area, and thus to compare the two would truly be an apples-to-oranges exercise."
A cut in the royalty rate for shallow water blocks (less than 200 meters in depth) more than quadrupled the bids compared to August, BOEM Gulf of Mexico Region Director Michael Celata said after the results were announced. The agency is considering a similar cut, 18.75% to 12.5%, for deeper blocks, which might spark more interest in those acres, Celata said.
Celata cautioned against drawing any conclusions from Lease Sale 250. It showed an uptick in industry interest, but it is only the second lease sale of its size. Prior to 2017, separate sales were held for the western and central Gulf. "It's difficult to compare year over year," Celata said. "I think we'll need another at least another sale to confirm any trend."
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