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Vol. 10, No. 34 Week of August 21, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Blockbuster sale

Western GOM sale 196 a total surprise, generating $285.2M in high bids

Ray Tyson

Petroleum News Houston Correspondent

Big and small players alike came to Western Gulf of Mexico Lease Sale 196 with open wallets, doling out a surprising $285.2 million in apparent high bids for 346 exploration blocks, topping last year’s successful $171.4 million Western Gulf offering by $110.5 million, or a whopping 60 percent.

The results came as a huge surprise to the Minerals Management Service, the agency that conducts offshore lease sales for the federal government. With 80 percent of the bids opened and announced, an MMS staff member slipped Gulf Director Chris Oynes a note pointing out that the high bid count had passed the $200 million mark.

“I just about fell out of my chair (and) we still had 20 percent to go,” Oynes told Petroleum News following the Aug. 17 lease sale. “We crushed last year’s sale.”

Oynes said that more so than last year’s Western Gulf sale companies now seem to be more comfortable that high oil and gas prices are here to stay, resulting in increased project investment that would have been uneconomic to pursue just a few years ago.

“This setting is probably the most fundamental thing that drove some of the bidding,” he said, adding that government royalty incentives also contributed to sale results.

Preliminary sale results were partly skewed by the large dollar amounts of the top four winning bids that totaled $82.6 million, or roughly 30 percent of the $285.2 million in total high bids. In fact, the highest 10 of 346 blocks receiving bids drew $114.5 million in bonuses for the government, or 40 percent of the entire sale.

Independent LLOG Exploration has two highest bids

Large domestic and foreign oil companies accounted for much of the bidding action. But it was a U.S.-based exploration and production independent, LLOG Exploration Offshore, which stole the show.

LLOG submitted the sale’s two highest bids: $26.5 million and $21.6 million for a pair of blocks at High Island in the relatively shallow waters of the Gulf’s gas-rich continental shelf. In the 2003 Western Gulf lease sale, LLOG also won that ball game with a sale-high $22.6 million, also for a block in the High Island area.

“They know what they want and go after it,” MMS spokeswoman Caryl Fagot said.

Nonetheless, big oil companies turned out in force for Western Gulf Lease Sale 196, just as they did last year. Petrobras America, BP Exploration & Production, Shell Offshore, Chevron USA and ConocoPhillips were among the top 10 companies in terms of the number of blocks acquired. Also among the leaders were independents Anadarko Petroleum, Spinnaker Exploration, Kerr-McGee, Canada’s Nexen Petroleum Offshore, and Focus Exploration.

Petrobras wins most blocks

However, Brazil state-owned company Petrobras led the pack, capturing a sale-high 53 blocks on $30.1 million in high bids. Petrobras also was a big player in last year’s lease sale.

Other top-10 winners in this year’s sale: BP with 40 blocks on $13.9 million in high bids; Shell with 30 blocks on $12.8 million in winning bids; Anadarko with 20 blocks on $28 million in high bids; Chevron with 17 blocks on $6.6 million in winning bids; Spinnaker with 16 blocks on $10.4 million in high bids; Kerr-McGee with 16 blocks on $4.5 million in winning bids; ConocoPhillips with 14 blocks on $4.9 million in high bids; Nexen with 14 blocks on $2.1 million in high bids; and Focus with 12 blocks on $3.4 million in high bids.

But when it came to spending, Louisiana-based LLOG surpassed all sale participants, shelling out $49 million for just four blocks, including $48.1 for the two High Island parcels, blocks 156 and 139. Moreover, LLOG is no doubt kicking itself because it was the only company to submit bids for both blocks.

“This is not jumping into something new,” Oynes said. “LLOG has been one of the primary drillers for deep gas for several years. And they have had some discoveries.”

While LLOG was the big spender in shallower waters of the U.S. Gulf, Italy’s Eni Petroleum Exploration took the honor for deepwater Gulf. The big integrated oil company coughed up $19.3 million, the third highest bid in the sale, for an uncontested exploration block (1008) in the remote southern area of Keathley Canyon, where there are no pipelines and production facilities and water depths exceed 10,000 feet.

Fifty-one companies participate

Fifty-one companies participated in sale 196 compared to 45 companies in last year’s sale 192. Some 346 blocks received bids vs. 351 blocks last year. And the 422 bids submitted this year compared to 421 bids last year.

MMS had expected a more subdued lease sale this year, partly because of the large amount of wildcat acreage offered and the fact there were 17 percent fewer “newly available” blocks that had been under lease and off the open market for years. “I was wondering how close we could get to the high bids of last year,” Oynes said.

Sale 196 also looked as if it were going to be a non-competitive sale. That’s because nearly 70 percent, or 289 of the total 422 bids submitted, were single bids. Only 9.5 percent or 40 blocks received two bids, while 3.5 percent or 15 blocks received three bids and less than 1 percent or two blocks received four bids.

82% of bids in waters exceeding 5,250 feet

Despite all the single bids and enormous challenges associated with “ultra-deepwater” exploration, bidders grabbed a pot load of them in sale 196. Eighty-two percent or 284 of the 346 blocks receiving bids are in water depths exceeding 5,250 feet (1,600 meters). Sixty-five percent or 224 of the blocks receiving bids are in water depths exceeding 6,562 feet (2,000 meters).

One reason for the strong deepwater bidding could have been a new government royalty designed especially to encourage more Gulf exploration in frontier waters more than 6,562 feet in depth. MMS noted that most bids for deepwater acreage, despite many of them being single bids, far exceeded MMS’ $144,000 per block minimum.

“And that goes back to the higher energy prices” and the “assumption” commodity prices will remain strong, Oynes said. “I mean a lot of that (acreage) is rank wildcat.”

He also noted that three recent deepwater discoveries in Alaminos Canyon — Tobago, Silvertip and Tiger — helped confirm the hot lower tertiary play believed to extend some 350 miles east from Alaminos Canyon through Keathley Canyon and Walker Ridge.

“The trend has been showing more and more promise,” Oynes said. “I don’t know if that was what Eni was bidding on but presumably that would be the most likely target.”

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