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The Trump administration has dubbed Wednesday's Gulf of Mexico oil and natural gas lease sale as the largest in US history and Interior Secretary Ryan Zinke has called it a "bellwether" for America's offshore energy future.

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But on Tuesday, US offshore representatives downplayed the market and policy significance of the Gulf lease sale, known as Lease Sale 250, which will be held in New Orleans Wednesday.

"Industry's views on the tracts available tomorrow do not necessarily say much, if anything, about industry's interest in [the eastern Gulf of Mexico] or Atlantic one to six years from now," said Christopher Guith, a senior vice president for policy at the US Chamber of Commerce's Global Energy Institute.

"Economics will still be a major factor in tomorrow's sale," said Nicolette Nye, a spokeswoman for the National Ocean Industries Association. "While overall commodity prices have shown improvement, companies are still likely to take a conservative approach to locking up exploration capital. They may look first to purchase leases close to current producing fields in order to more efficiently use infrastructure currently in place."



Wednesday's sale will offer 14,776 unleased blocks across about 77.3 million acres, the largest amount of blocks offered in at least 35 years.

In a March 6 speech at CERAWeek by IHS Markit in Houston, Zinke said the sale would be a "bellwether" for the offshore industry as US onshore production continued to climb.

"We'll see what the future of offshore is in comparison to the Permian," he said.

But Guith said Zinke meant that the sale Wednesday would be a "status check" on how the industry views the economics of offshore blocks currently available compared to acreage available onshore.

"Lease sales are essentially scheduled many years in advance," Guith said. "The process is intended to have [Interior] offer acreage and for industry to make a decision at the time of the sale whether to bid and how much. It's not [Interior's] job to predict supply/demand and price."

Rene Santos, senior director, E&P analysis, S&P Global Platts Analytics, said that while the industry likely welcomes the large scale of the sale, its size may not translate to corresponding interest. There has not been a sale which attracted over $500 million in roughly three years and the last Gulf lease sale attracted high bids of only $121 million, after 14,220 tracts were offered, just 556 tracts less than what will be offered Wednesday.

"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 breakevens in the low $40s/b (WTI) which are about $10/b lower than Gulf of Mexico project breakevens," Santos said. "Therefore several operators will likely play it safe and continue to stick to shale development in the near/mid-term."

Santos forecasts Gulf of Mexico oil production to decline in the near-term due to the drop in investment for new projects amid relatively low oil prices, and then increase in the mid-term before flattening out in the longer term.

The US Energy Information Administration forecasts US Gulf of Mexico output to average 1.54 million b/d in December 2017 and climb to 1.89 million b/d in December 2019.

Wednesday's sale will take place as the Trump administration works to expand federal waters for drilling and revise rules some offshore safety rules developed during the Obama administration in an attempt to increase commercial interest in federal waters.

In January, Interior released a proposed offshore leasing plan which calls for 47 sales in federal waters, including 12 sales in the Eastern Gulf of Mexico, three in the South Atlantic and one in the Straits of Florida, over a five-year period.

Santos said she does not expect any significant production from these new areas for the next 15 to 20 years due to likely legal challenges and limited prospects for development. --Brian Scheid, brian.scheid@spglobal.com

--Edited by Richard Rubin, newsdesk@spglobal.com