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Vol. 11, No. 20 Week of May 14, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

MMS predicts robust sales

Strong interest in expiring GOM deepwater leases; sales likely top $588M

Ray Tyson

For Petroleum News

The U.S. Minerals Management Service believes Gulf of Mexico oil and gas lease sales over the next few years likely will top the $588 million it collected in last March’s highly successful Central Gulf Lease Sale 198.

The MMS projection is based on more than 2,200 deepwater leases set to expire in 2006 and 2007 alone and then re-offered to industry in 2007 and 2008 as so-called “newly available leases.” These leases carry 10-year term limits and were issued during the deepwater boom of the middle-to-late 1990s.

MMS gulf director Chris Oynes is convinced that at least 90 percent of the leases scheduled to expire will be returned to the federal government without ever seeing a drillbit. In fact, agency records show that of the roughly 3,330 deepwater leases issued from 1996 through 2000, less than 8 percent have been drilled and even fewer produced.

No discovery, no extension

“Leases issued … are now starting to come due,” Oynes said May 3 during a media briefing at the Offshore Technology Conference in Houston, Texas. “If they (leaseholders) have not brought them into production nor had a commercial discovery, they will be turned back to the government’s inventory.”

Because they have been off the market for years and in many cases not fully evaluated, newly available blocks are typically attractive to explorers, making up about 25 percent of total blocks receiving bids in any given sale. Coupled with today’s high oil and gas price environment, the next few sales should be barnburners.

MMS anticipates that 2,270 leases could expire in 2006-2007, 1,680 leases in 2008-2009, 874 leases in 2010-2011, 693 leases in 2012-2013 and 647 leases during the period 2014-2015.

“Presumably, the level of activity would be very, very robust, just like the last lease sale,” Oynes said of future sales, noting that a block in Green Canyon offered in last March’s sale received a $42 million bid, the highest for a single block in some 20 years.

Lease hording, lack of rigs

Oynes said many expiring leases are not being evaluated partly due to a lack of deepwater drilling rigs and partly due to company hording. “I think it is fair to say they acquired a lease inventory (knowing) there was no way they were going to have time to evaluate all of this,” he added.

Leases expiring this year and next should contain at least some worthy prospects, although Oynes agreed during an interview with Petroleum News that the really good or “A” targets likely were drilled following the first leasing round. However, many “B” and “C” prospects likely will be turned back to the government for re-offering.

“Do I expect a record sale? No, in terms of the number of tracts bid on — the dollars we’ll have to wait and see,” he said. “Do I expect a very robust sale? Yes, probably larger than this last Central Gulf sale.”

Meanwhile, explorers lucky enough to have a deepwater rig under contract appear eager to drill as many prospects as they can before their leases begin to expire. Forty-six drillships and semi-submersible rigs were actively drilling in early May, just one rig away from the record of 47.

Going all out in the 11th hour

“They are going all out … trying to get at some of these ‘A’ prospects before they expire,” Oynes said, but still holding to his expectation that despite this 11th maneuver at least 90 percent of the leases will be turned back to the government.

However, he said the actual pace of discoveries in the deepwater Gulf of Mexico has picked up, noting that from 1975 through 1999 there were 143 discoveries, compared to 44 from 2000 through 2003 and 32 discoveries in 2004 and 2005. “The progression is farther and farther offshore and deeper and deeper waters,” Oynes added.

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