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USG Lease Sale 252 reflects some exploration interest, widespread wildcatting unlikely for now

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Houston — US Gulf of Mexico Lease Sale 252 last week saw a slew of bidding aimed up shoring up production at existing fields, but also reflected some exploratory interest in areas that may be targets for future drilling and production given lower costs and seismic technology that better pinpoints prospects.

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Sale sponsor US Bureau of Ocean Energy Management noted some new areas targeted by larger companies - particularly Shell, which was far and away the busiest player in the auction, with 87 high bids captured for offers totaling nearly $85 million.

The auction brought in $244 million in high bids, up 37% from the last US Gulf sale in August 2018. It was the largest such sum in two years and four sales, made for 227 blocks.

Even though the line from prospect capture to drilling and production is not necessarily a direct one, most agree the US Gulf needs more exploration to replenish oil production in that arena, which is currently 1.85 million b/d, according to government estimates, and on track to reach 2.38 million b/d by the end of 2020.

"Right, now, our estimate is peak production in 2020," William Turner, a Gulf of Mexico analyst for energy consultants Wood Mackenzie, said. "But our forecast doesn't include [fields] yet to find, and it's those barrels that would pick up production" from there.

"I'm not convinced there are enough [exploration prospects today] to stop Gulf of Mexico production from peaking in 2020 and falling off in the first half of the [next] decade," Turner said.

At the recent CERAWeek by IHS Markit conference, Hess Corp. CEO John Hess noted that in 2004, the number of blocks licensed to oil companies totaled 8,800, whereas today the number is 2,500.

"The pipeline of long-cycle projects is running on empty," Hess told the annual gathering.

Shell is already an aggressive explorer in the eastern Mississippi/western DeSoto Canyon area off the coast of Louisiana, where it has turned up a number of discoveries that include the Appomattox and Vicksburg fields that are currently being readied for first production this year.

But BOEM Gulf of Mexico regional director Mike Celata said at a post-sale press briefing March 20 that Shell's bidding spree in the two deep- and ultra-deepwater areas where it won 24 blocks in DeSoto Canyon and seven blocks in the Lloyd Ridge area south of DeSoto, were chasing a relatively new, deeper play.

DESOTO DEEP TREND MAY BE NEW FOCUS AREA

"We think the DeSoto Canyon trend is maybe new and has a combination" of undrilled potential and acreage near production hubs, where discoveries can be tied back, Celata said at the briefing.

In the previous US Gulf auction in August 2018, ExxonMobil also bid in the same area. The major won a string of 10 largely contiguous clustered blocks in DeSoto Canyon and 15 additional blocks in Lloyd Ridge, laying out bids of over $1 million apiece for many of them. But ExxonMobil did not participate at all in Sale 252.

The formerly high breakeven cost of oil in the US Gulf had turned even majors such as Chevron, a stalwart in the area and operator of several big fields, in favor of shorter-term connections to existing fields instead of traditional massive stand-alone hubs - massive projects costing billions of dollars.

But Chevron is pondering a stand-alone development for its Anchor discovery and is expected to decide whether to go ahead with the project this year. Anchor is a significant development because the pressure is higher than has been produced before. Observers say if it gets the green light, other such fields could follow.

A few years after the industry downturn, operators have pushed the cost of Gulf deepwater development down substantially from its former $55/b-$60/b area to far less. Shell's Vito project, slated to come on stream in 2021, has an oil price breakeven of $35/b. BP likewise has recently focused on streamlining all stages of deepwater development worldwide.

However, with many deepwater and ultra-deep blocks carrying 10-year terms, drilling may be a long way off for Sale 252's prospects. Even though the sale was concluded nearly a week ago, BOEM must conduct a 90-day evaluation period to ensure oil companies are paying a fair market price for them. The blocks should be awarded around the middle of the year.

After that, operators need to study their prospects, select the best, decide on drilling programs and have BOEM approve them - all of which takes time. In the end, a handful of deepwater blocks may be drilled, and some not at all.

In the end, Sale 252's message remains one of exploration and production companies still "refilling their exploration prospect inventory so they can replenish declining production," Turner said, rather than an overall longer term view.

-- Starr Spencer, starr.spencer@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com