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GOM oil and gas leases to swarm market in 2006 Deepwater leases from large 1996-98 sales will soon start to expire; only 6.5 percent of 3,200 leases issued 1996-2000 have been drilled so far Ray Tyson Petroleum News Houston Correspondent
Several thousand oil and gas leases in the deepwater Gulf of Mexico, scooped up by industry during some of the largest sales in the region’s history, will begin expiring over the next few years without being explored, no doubt altering the dynamics of future sales as new leases pour on to the market.
In fact, the U.S. Minerals Management Service said in a report released at the Offshore Technology Conference in Houston, Texas, the first week in May that only 6.5 percent of the roughly 3,200 deepwater leases issued from 1996 through 2000 have been drilled to date.
Generally, only a few hundred of these type leases are available in any given sale. However, they can account for up to 25 percent of all leases receiving bids, according to MMS calculations.
Because deepwater leases carry 10-year terms, those awarded in the latter half of the 1990s will expire beginning as soon as next year. MMS anticipates 741 leases would expire through 2005 and then jump to 2,527 leases in 2006-2007, dropping off to 1,077 leases in 2008-2009, 558 leases in 2010-2011 and 525 leases in 2012-2013. Record-setting sales from 1996-1998 Driven by the lure of mammoth oil prospects and supported financially by the Deepwater Royalty Relief Act, offshore lease sales in the U.S. Gulf from 1996 to 1998 drew total bids approaching $1 billion in some cases while setting records on the number of leases awarded.
For the most part, industry’s investment in financially risky leases ranging in water depths up to 10,000 feet proved successful, resulting in the discovery of billions of barrels of oil equivalent reserves and a surge in offshore production in the Gulf of Mexico.
But there also have been disturbing signs over the past few years, most notably decreases in the average bid amount per block, average number of drilling rigs operating, the number of wells drilled, and the number of deepwater plans submitted to MMS.
Perhaps the most disturbing sign relates to overall drilling activity, particularly on the exploration front. The number of deepwater rigs operating in the Gulf plummeted from an average high of 41 during the 2001 peak to a current average of 25, while the number of exploratory wells dropped from 114 in 2001 to 68 in 2003. Huge inventories, limited rig fleet equal untested leases “The combination of huge deepwater lease inventories and a limited rig fleet dedicated to the Gulf of Mexico means that the vast majority of today’s leases will remain untested when their terms expire,” MMS concluded.
The question is whether industry finds expired leases sufficiently attractive to bid on them in a big way in future lease sales.
“How many will depend a lot on where those locations are vis-à-vis other discoveries that have occurred along the way,” Chris Oynes, MMS regional director for the Gulf, told Petroleum News. “But it’s always driven by the geology. You’ve got to go back to the fundamentals.”
He said the level of interest on specific blocks could depend on whether “it was (a) very reluctant turn back to the government,” meaning the explorer liked the prospect but simply couldn’t fit it into the company’s drilling schedule before the lease expired.
“There’s no possible way they could have drilled all of these, so they probably would (attempt) to re-acquire some of them,” Oynes said. “Whether they will be as frantic as the first time, I suspect they won’t. I think they will be more judicious.” Some explorers will have new ideas Explorers with new ideas also could emerge and go after expired blocks in which others saw little or no value. “That’s going to happen,” Oynes said.
With new technologies and a growing infrastructure in deepwater Gulf, including pipelines and production platforms, expired leases containing marginal prospects also could become economic. For example, analysts speculate that introduction of the cell spar platform this year could lower the minimum economic field size in deepwater Gulf to around 30 million barrels of oil equivalent.
“Presumably, there’s going to be some of these blocks that have that kind of potential,” Oynes said, “and there’s no reason that these blocks are going to be left alone. It’s just a question of how many and which sale, and what the prospect looks like.”
Despite the fact that many of the large prospects were taken in the last leasing round, there’s still “a lot of dynamics” at work in the Gulf, Oynes said.
“Certainly the potential is there,” he added. “The Gulf is still a very big engine. There’s a lot of stuff that’s still out there.”
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