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March 2008

Vol. 13, No. 12 Week of March 23, 2008

Two-decade high for Gulf sale

Central Gulf of Mexico oil and gas lease sale draws record $3.67B in high bids

Ray Tyson

For Petroleum News

Bidders went on the mother of all shopping sprees at the Central Gulf of Mexico Lease Sale 206 on March 19, shelling out a record $3.67 billion in apparent high bids on 615 oil and gas exploration tracts. They even managed to outspend, by a huge margin, last year’s $2.8 billion extravaganza, at the time the best performance for a U.S. Gulf lease sale in more than two decades.

Eastern Gulf Lease Sale 224, held immediately following Sale 206 in New Orleans, drew $64.7 million in apparent high bids on 36 tracts. The Eastern Gulf sale area is a fraction the size of the Central Gulf’s. Still, it was the bidding results from Sale 206 that left jaws hanging in The Big Easy.

Clearly, many of the fundamentals that drove last year’s Central Gulf Lease Sale 205 were key drivers in Sale 206: insatiable appetites for the emerging Lower Tertiary oil play in deeper waters of the Gulf and “ultra-deep” natural gas plays beneath shallower waters of the Gulf’s Outer Continental Shelf — and all supported by a particularly strong and lasting commodity price environment, especially on the oil side where prices have surpassed the $100-per-barrel mark.

Price, newly available tracts

“It’s the price of oil and gas right now that’s providing a lot of money and a lot of interest in the Gulf of Mexico,” Lars Herbst, Gulf regional director for the U.S. Minerals Management Service, said in a post-sale interview.

In addition, he added, a large number of so-called “newly available” tracts in this year’s Central Gulf lease sale, as was the case in last year’s sale, also contributed to the sale’s success.

These tracts were initially picked up by companies — and later relinquished —in the big sales of the mid- to late-1990s, in which the federal government suspended royalty payments on oil production stemming from deepwater leases offered in a sale. In effect, nearly all of the recently available leases were off the market for 10 years, the term limit for deepwater leases. About 65 percent of the newly available tracts in Sale 205 received bids, and officials believe the percentage for Sale 206 could run even higher.

“Obviously the technology has improved,” Herbst said of industry’s ability to access ultra-deepwater plays such as the Lower Tertiary.

“And the price of oil and gas has improved these prospects themselves.”

Still, the enormous increase in total high bids compared to last year’s lease sale — approaching $1 billion — caught federal officials by surprise. That’s because there were fewer bids and tracts receiving bids than last year. “That was a shock,” Herbst confessed.

Highly competitive sale

But what really differed from last year’s areawide lease sale in the Central Gulf were the astronomical sums of both winning and losing bids submitted on individual tracts, demonstrating the highly competitive nature of the sale.

A consortium of thee independent producers — Anadarko Petroleum, Murphy E&P and Samson Offshore — turned heads with a sale-high bid of $105.6 million for Green Canyon Block 432, located just north of the K2 and Shenzi discoveries.

In fact, none of the top 10 single bids in the entire sale was less than $68 million, and all 10 were placed on deepwater tracts in Green Canyon and Garden Banks, and on “ultra-deepwater” tracts in Walker Ridge and Keathley Canyon. Second place honors for highest single bid — $93 million for Walker Ridge Block 226 — went to joint bid partners Marathon Oil and Hess Corp. Block 226 is on the same Lower Tertiary trend that spawned the Jack and Kaskida discoveries.

The third place winner for highest single bid went to E&P independent Cobalt International Energy and the company’s $85.4 million winning bid for Green Canyon Block 858. Cobalt, a relatively new player consisting of former BP and Unocal executives, made headlines in last year’s Central Gulf lease sale with top five finishes in nearly every category, including third places for submitting the highest number of high bids (83) and dollar amount ($355 million) of total bids.

In addition to Cobalt’s third place finish in Sale 206 for highest single bid, the company took second for the sum total of all high bids — $389 million on 36 tracts. “They did have quite a bit of experience in the Gulf when they formed this entity,” Herbst noted.

Hess biggest spender

But the biggest overall spender was Hess, with winning bids totaling $437.5 million on 25 blocks. Other top 10 spenders: BP Exploration & Production, $336.6 million for 63 tracts; ConocoPhillips, $323.9 million for 20 tracts; Chevron USA, $240.9 million for 49 tracts; Statoil Gulf of Mexico, $199.3 million for 16 tracts; Petrobras America, $178.9 million for 22 tracts; Noble Energy, $166.6 million for 15 tracts; Anadarko, $130.4 million for 13 tracts; and Marathon Oil, $121.3 million for 15 tracts.

Anadarko, the largest E&P independent owner of oil and gas leases in the U.S. Gulf, actually was the apparent high bidder on 20 deepwater tracts for $143 million when including the Eastern Gulf. Anadarko said its primarily focus was high-impact, drillable targets in the more traditional Miocene play. The blocks, which cover 115,200 gross acres, range in water depths up to 10,085 feet. Anadarko noted that it will be the designated operator of all of its high bid leases with an average working interest of about 78 percent.

“Our lease-sale effort was focused on securing additional acreage around our existing leasehold, while adding a few new drill-ready opportunities aimed at continuing that growth,” said Bob Daniels, Anadarko’s senior vice president of worldwide exploration.

The 15 blocks captured by Marathon and its partners in Sale 206 cover 86,000 gross acres ranging in water depths from around 900 feet to 8,200 feet. “Building upon Marathon’s success at the October 2007 lease sale, these new leases in the deepwater Gulf of Mexico help contribute to our strategy for growing an inventory of prospects for future exploration activity. Marathon will continue to focus on maintaining a diversified and balanced exploration drilling program,” said Phil Behrman, Marathon’s senior vice president of worldwide exploration.”

Louisiana-based Stone Energy Corp. submitted high bids totaling $43 million on 25 tracts, adding about 79,338 net acres to its leasehold inventory. “We are now well positioned to execute our strategy of participating in a portfolio of deepwater projects,” Richard Smith, Stone’s vice president of exploration, said, adding that the company also was pleased with shallower water additions on the continental shelf, “as these prospects will provide us with lower risk projects with a shorter term impact.”






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