Exploration and production companies, with lots of cash on hand from the unprecedented run up in oil and gas prices, are definitely poised to make a good showing at Central Gulf of Mexico Lease Sale 194 scheduled for March 16 in New Orleans.
“I’m expecting a good sale but not a barnburner,” Chris Oynes, U.S. Minerals Management Service’s regional director for the Gulf of Mexico, told Petroleum News in a pre-sale interview.
However, predicting the outcome of lease sales can be tricky. Just prior to last year’s Central Gulf lease sale, the director was expecting a “subdued” turnout due to a lack of key “drivers” in the sale. As it turned out, Sale 190 attracted the largest number of bids for a Central Gulf offering in six years, netting the federal government an impressive $368.8 million in apparent high bids.
Commodity prices are even higher this time around. On the other hand, the region has become more picked over with each areawide sale dating back to the 1980s.
“I don’t know of any discoveries that would really push bidding in the deep water,” Oynes concluded. “But at the same time, with the price of oil and all, there are certainly a number of tracts out there … where people could still potentially see some prospects and then go after them.”
With oil prices above $50 a barrel and natural gas prices soaring above $6 per thousand cubic feet, prospects that were uneconomic at lower prices have suddenly become economic to pursue, Oynes noted.
“That means investment,” he added. “They are gong to go after prospects that were more marginal at $24 a barrel that are now very economic.”
Incentives offered for shallower waters
As for tracts offered in shallower waters of the U.S. Gulf’s continental shelf, bidding could be spirited largely because of highly attractive government incentives that encourage both deep and “ultra-deep” drilling for natural gas.
“In the last Central Gulf sale we had pretty heavy bidding, and we’re likely to see it again in areas like South Timbalier and West Cameron,” Oynes said.
Also, since last year’s Central Gulf lease sale, MMS has adopted one rule and proposed another specifically governing incentives for drilling “ultra-deep” wells below 25,000 feet on the continental shelf.
Of the 4,043 blocks to be offered in Central Gulf Lease Sale, 1,180 are located in water depths of less than 1,312 feet and carry five-year terms; 125 blocks are in water depths ranging from 1,312 feet to 2,624 feet and carry eight-year terms; and 2,738 blocks are in waters depths from 2,624 to more than 11,000 feet and carry 10-year terms.
Despite the larger number of tracts offered, companies can be expected to bid on just a few hundred of them. For example, last year’s Central Gulf lease sale drew 829 bids on 557 blocks with 83 companies participating.
Roughly 25% newly available tracts
Among the tracts to be offered in Sale 194 are some 280 so-called newly available blocks, or blocks that had been under lease and unavailable until now. They consist of expired leases and leases voluntarily relinquished by companies, as well as leases terminated by MMS for various reasons. Newly available leases generally make up roughly 25 percent of all tracts receiving bids in a sale.
Additionally, 14 tracts from last year’s Central Gulf sale, whose high bids were rejected by MMS for being too low, will be reoffered in the up-coming Central Gulf Sale 194.
MMS, in conjunction with Central Gulf Sale 194, also is offering 124 blocks in the Eastern Gulf of Mexico. However, because of its small area and the fact most of the good prospects were taken in earlier lease sales, Sale 197 is likely to attract light bidding, Oynes said. “We probably will get one or two (bids) but it wouldn’t surprise me if it were zero,” he added.
