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Vol. 11, No. 12 Week of March 19, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Best Gulf sale in 8 years

Central Gulf Lease Sale 198 draws $588.3 million in high bids on 405 blocks

Ray Tyson

For Petroleum News

Amerada Hess and a slew of other deep-pocket bidders evidently came to Central Gulf of Mexico Lease Sale 198 March 15 armed with three fundamental winning strategies — spend, spend and spend.

And spend they did — to the collective tune of $588.3 million in apparent high bids on 405 offshore exploration blocks, an astounding 66 percent increase over last year’s roughly $354 million Central Gulf performance on 428 blocks.

It also was the first Gulf of Mexico lease sale held in New Orleans since last year’s Hurricane Katrina caused levies to fail, putting 80 percent of the city under water and raising serious doubt whether the “Big Easy” could again host the traditional March sale.

Therefore, no one was happier with the sale results than Chris Oynes, Gulf regional director for the Minerals Management Service, the federal agency that conducts offshore lease sales and collects the proceeds for Uncle Sam.

“Our calculation is that this, from a high bids standpoint, is the highest in the Central Gulf in eight years,” Oynes told Petroleum News in a post-sale interview. “I’m sure the U.S. Treasury will be happy.”

New players bid

Sale 198 also brought several new players to the Gulf, most notably Spain’s Repsol, which knocked out eight bidders and bidding groups with a $20.2 million bid for Green Canyon Block 304.

Though many Gulf producers were badly shaken by back-to-back hurricanes Katrina and Rita, they came to Central Gulf Lease Sale 198 in high spirits and with deep pockets, filled with windfall profits from an exceptionally strong and enduring oil-and-gas price environment.

A sale-high $42.8 million bid submitted by Amerada Hess on Green Canyon Block 287 was the highest single bid in any Gulf of Mexico sale during the past 20 years.

Sale 198 also was one of the more competitive offshore lease sales in memory, with an unusually high number of blocks receiving multiple bids, and an unusually large number of blocks attracting bids greater than $1 million.

In fact, sale results show that about 100 or one-fourth of the 405 winning bids broke the million-dollar mark. Moreover, the sum total of the 707 bids submitted in the sale, including both winning and losing bids, came in at just over $978 million, further evidence of industry’s strong interest in Sale 198.

“I talked to a couple of companies before the sale … and they were anticipating that they were going to have to bid pretty high in order to get blocks,” Oynes noted. “They were anticipating that everybody was going to be looking, to a degree, at some of the same stuff.”

Kerr-McGee, a major deepwater player, and its partners captured four leases in the sale, bringing the E&P independent’s total position in deepwater Gulf to 2.75 million acres.

“These leases provide additional opportunities in our core area,” said Dave Hager, Kerr-McGee’s chief operating officer. “They also add to our growing inventory of sub-salt non-amplitude prospects and enhance our overall portfolio in deepwater, which is spread across multiple trends including the Miocene and (deeper) Eocene.”

Hess the big spender

However, it was Hess that emerged as the big spender with its $42.8 million Green Canyon bid. But there were plenty of other eyebrow raisers, including a nearly $34 million winning bid submitted by partners Newfield Exploration and Anadarko Petroleum on another Green Canyon block (551).

Anadarko noted post-sale that Block 551 contains a prospect called Lyell, which is situated “in close proximity to and targets” the same Miocene pay zones found in Anadarko’s Knotty Head and the nearby Tahiti and Tonga fields.

Anadarko said it also picked up a lower tertiary lead called Fog Hat on Walker Ridge 414, and five wildcat prospects in a newly emerging play on the abyssal plain: the Antares prospect on Atwater Valley 890, 891 and 892; Sirius on Atwater Valley 636, 637 and 681; Cygnus on Atwater Valley 675 and 719; Aldebaran on Green Canyon 1009; and Rigel on Lund 47 and 48.

But it was the prolific Green Canyon region — home to such monster lower and middle Miocene discoveries as Tahiti, Atlantis and Mad Dog — that accounted for six of the highest 10 bids in the entire sale, or a combined $144.3 million, nearly 25 percent of total high bids in the sale.

Hess had to beat seven other bids to capture Green Canyon Block 287, while Newfield-Anadarko topped five bids to take Green Canyon Block 551. Other big winners in the Green Canyon region were: Australia’s Woodside Energy, $26.6 million for Block 452; Repsol, $20.2 million for Block 304; Hess, $12.8 million for Block 204; and Italy’s Eni, $8 million for Block 340.

Mississippi Canyon draws bidders

Another deepwater hot spot in the Central Gulf and home to Thunder Horse, the largest discovery ever in the Gulf, Mississippi Canyon accounted for two of the highest ten bids in the sale. Noble Energy and Samson Offshore teamed up to take Block 948 for $20.2 million, while partners Kerr-McGee and Dominion E&P captured Block 945 with an $8.4 million bid.

Other top-ten bidders were Dominion and Hydro Gulf of Mexico, which beat all comers to take Atwater Valley Block 428 with a $21.4 million bid, and Samson Offshore, which took South Marsh Island Area Block 38 with an $11 million bid.

In terms of the sheer number of tracts won, BP clearly got the most for its investment, capturing 73 blocks with bids totaling $22.2 million. However, many of the tracts won by BP were unchallenged and located in “ultra-deep” waters of Atwater Valley.

Other top-ten winners in this category were Australia’s BHP Billiton, 26 blocks with $7.6 million in high bids; Hunt Oil, 23 blocks with $10.9 million in bids; Dominion, 16 blocks with $41.4 million in bids; Hydro, 14 blocks with $20.1 million in bids; Hess, 13 blocks with $62.6 million in bids; Anadarko, 13 blocks with $20.3 million in bids; Republic Exploration, 12 blocks with $3.3 million in bids; Woodside, 11 blocks with $32.2 million; and LLOG Exploration Offshore, 11 blocks with $26.6 million in total high bids.

Gas of interest in shallower waters

Shallower waters of the Gulf’s continental shelf failed to attract the dollar magnitude of high bids in the oil-prone deepwater Gulf. Nevertheless, the gas-prone shelf, backed by enticing government drilling incentives, ignited intense competition, with 55 of 194 blocks receiving multiple bids, including perhaps the most closely watched block of the entire sale, Ship Shoal 127.

Ship Shoal 127 brought a sale-high 10 bids, with ConocoPhillips emerging as the apparent winner on a lone $3 million bid. Other shelf blocks attracted multiple bids ranging from as few as two to as many as nine.

A number of blocks receiving strong bids in Sale 198, including Ship Shoal 127 and Hess’ Green Canyon 287, were among more than 300 so-called “newly available” leases, or blocks that were relinquished by prior owners and just recently became available. For example, Ship Shoal 127’s most recent owner was big Houston independent Apache, a major player on the shelf.

Energy Partners Ltd, a small but growing E&P independent based in storm-torn New Orleans, partnered up with other companies to win two deepwater blocks and nine shelf blocks, with its share of the investment totaling $7.9 million.

“The competition at the last several Gulf of Mexico lease sales is evidence of the attractive targets and associated economics in the (shelf) area,” said Richard Bachmann, EPL’s chairman and chief executive officer.

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