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vol. 14, No. 34 Week of August 23, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Worst in years

Western Gulf lease sale falls victim to low prices, litigation uncertainty

By Ray Tyson

For Petroleum News

The $115.46 million in apparent high bids submitted in Aug. 19’s Western Gulf of Mexico Lease Sale 210 was the poorest showing for a Western Gulf sale in a decade, and ranks among the worst performances for the region since the advent of areawide leasing in the U.S. Gulf in the early 1980s.

BP clearly emerged as the top player in Sale 210. The company’s high-bid total of $50.6 million (37 tracts) accounted for 43 percent of total sale proceeds. Moreover, BP’s sale-high bid of $28.1 million for an obviously promising Lower Tertiary tract in ultradeepwater Keathley Canyon alone accounted for just over 24 percent of the sale.

While low commodity prices and a general lack of good exploration prospects were said to have contributed to Sale 210’s overall poor results, industry uncertainty over the outcome of major litigation that could have stopped the sale dead in its tracks just weeks before the scheduled Aug. 19 sale in New Orleans, Louisiana, evidently had a significant negative impact on the bidding, the U.S. Minerals Management Service indicated.

Last April the U.S. Court of Appeals for the District of Columbia vacated the entire 2007-2012 federal offshore oil and gas leasing program, ruling that the former Bush administration had failed to conduct sufficient scientific and environmental analysis before scheduling sales off Alaska. The ruling came two years after lease sales had begun under the 2007-2012 program, raising questions about the validity of sales scheduled for the U.S. Gulf, including Sale 210.

In May the U.S. Department of the Interior asked the U.S. Department of Justice to seek clarification from the federal court on the scope of its decision.

Court ruling came late in game

Then in late July, just three weeks before Sale 210, the court said its ruling only applied to the Chukchi, Beaufort, and Bering Seas. As a result, the Interior Department is to provide the court with periodic reports on the progress of its review of the existing five-year plan “to ensure that it properly balances environmental concerns with the nation’s energy needs.”

Legal uncertainty over Sale 210 was reflected by the handful of joint company bids submitted in the sale, indicating that many companies simply did not have sufficient time to negotiate contract details required when two or more companies team up to bid on tracts, a process that can take from two to three months, MMS said. Consequently, just 27 companies participated in Sale 210, compared with 53 in last year’s Western Gulf of Mexico Lease Sale 207, for example.

Chris Oynes, MMS’ associate director for offshore energy, indicated that “undercurrent” stemming from uncertainty over the litigation likely was a major factor in the sale.

“It’s very, very hard to make the agreements between companies formulating a joint bid with that kind of uncertainty,” he said during a teleconference immediately following Sale 210. “So your tendency is, ‘I can only go to the lease sale by going alone.’ You probably saw some increase in the amount of (single company) bids, or even the strength of the bids, because of that undercurrent.”

The $115.46 million in apparent high bids submitted in Western Gulf Sale 210 compares with $487.3 million in last year’s Western Gulf Sale 207.

Companies submitted a total of 189 bids on 162 tracts versus 423 bids on 319 tracts in the 2008 lease sale.

Top bidders: BP, Conoco, Petrobas, Chevron, Exxon

In addition to BP, other top finishers based on total high bids submitted were: ConocoPhillips $15.17 million for 22 tracts; Petrobras America $10 million for four tracts; Chevron USA $9.07 million for 26 tracts; ExxonMobil $8.59 million for 17 tracts; Focus Exploration $4.73 million for 15 tracts; Anadarko E&P $4.37 million for five tracts; Castex Offshore $1.91 million for three tracts; Contango Operators $1.65 million for three tracts; and SWEPI LP with $1.49 million for three tracts.

“I think the sale can be characterized by several majors … bidding on deepwater tracts,” Lars Herbst, MMS director for the U.S. Gulf, said during the teleconference, noting that about 80 percent of total bids submitted in Sale 207 were in deeper waters of the Gulf, ranging from around 1,000 feet to over 6,560 feet.

The three highest single bids in the sale, including BP’s sale-high bid of $28.1 million, were placed on ultradeepwater Keathley Canyon tracts along the Lower Tertiary, the hottest deepwater trend in the U.S. Gulf. The three tracts — blocks 96, 223 and 180 — totaled just over $42 million, or 37 percent of all sale proceeds.

“The deepwater is the story today — continued bidding in the Lower Tertiary trend … just as we have seen in past Western and Central (Gulf) sales,” Herbst said.

Bidding light in gas-prone shelf

Bidding action in the relatively shallow waters of the gas-prone continental shelf was unusually soft, probably because of low natural gas prices and stiff competition from U.S. onshore gas provinces, especially from emerging shale plays, where well costs can be far less than in the offshore.

“That doesn’t mean we believe the shelf is dead,” Herbst emphasized, noting that much of the bidding was related to extensions of known fields. “With an economic turnaround, then again we would see increased leasing on the shelf.”

Aside from a few of the major companies, smaller, less known exploration and production independents were active bidders on the shelf, including Stephens Production, Entek USA General, Byron Energy, Peregrine Oil & Gas, Castex Offshore, and Royal Offshore.

MMS also blamed a general lack of good prospects for Sale 210’s overall poor performance. Over the years, as the government’s prospect inventory is tapped with each lease sale, bidders have come to depend on so called “newly available blocks,” or tracts turned back to MMS by their owners. For example, the three high-bid Keathley Canyon tracts in Sale 210 had been off the market for a decade.

“After you have so many sales there are fewer and fewer blocks … that would draw that interest,” Herbst explained. “I don’t know if they are really poor prospects, but there are fewer prospects certainly than what we would have seen in the last couple of sales.”

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