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MMS expects ‘subdued’ bidding at Gulf lease sale March 17 Sale 190 to offer 4,324 unleased blocks, new incentives for gas drilling on GOM Continental Shelf Ray Tyson Petroleum News Houston Correspondent
Commodity prices are strong. Explorers are flush with cash. And the federal government is offering attractive incentives to encourage drilling. These are key ingredients for a blockbuster Gulf of Mexico oil and gas lease sale. But don’t expect one when bidders gather March 17 in New Orleans, La.
“There could be hot spots, but I think it’s going to be a little subdued,” said Chris Oynes, Gulf regional director for the U.S. Minerals Management Service.
Oynes told Petroleum News that in spite of new royalty relief incentives for gas drilling in shallower waters of the Continental Shelf, Central Gulf Lease Sale 190 appears to lack the necessary drivers among available blocks that typically attract large bids for oil prospects in the deeper waters.
“Look at the deepwater stuff,” Oynes said. “The deepwater doesn’t seem to have too much going on to have a real strong interest. There are no new wells that could drive this one way or the other. There’s going to be some bidding out there, but probably not in terms of a strong level of activity.” 2003 sale netted $297.6 million MMS netted $297.6 million in high bids from last year’s Central Gulf Lease Sale 185, with 561 tracts receiving bids and 545 accepted. Sixteen bids totaling $17.9 million were rejected because they did not meet the agency’s standard of fair market value. They will be reoffered in next week’s sale.
Exploration and production independents dominated last year’s Central Gulf lease sale, taking four of the top five top slots in terms of tracts won and all five positions in terms of accepted high bids. Oklahoma’s Kerr-McGee led the pack with 63 blocks and $28.1 million in bonuses, followed by Newfield Exploration with 49 blocks and $11.8 million in bonuses, BHP Billiton with 49 blocks and $9.6 million in bonuses, ChevronTexaco with 38 blocks and $9.3 million in bonuses, and Magnum Hunter with 38 blocks and $7.7 million in bonuses.
Of the 16 rejected high bids in last year’s lease sale, two of them were offered by ChevronTexaco on adjacent deepwater blocks, Green Canyon 468 and 512, and could draw spirited bidding in this year’s sale, based on combined bids of $11.5 million, or nearly 65 percent of the $17.9 million in previously rejected bids.
“One question is whether Chevron will come back on those blocks,” Oynes said. “Or because of the high dollars involved, is anyone else interested in them.” Some blocks could draw because of deep gas plays Because of robust natural gas prices, new government incentives and industry’s general interest in geologically deep gas plays in shallower waters of the Gulf, available blocks in the areas of East and West Cameron and Eugene Island also could draw interest. They also were hot spots in last year’s Central Gulf lease sale.
A total of 4,324 blocks covering 22.7-million acres will be offered at the March 17 areawide sale. Of these, 1,390 blocks are at water depths less than 400 meters, 128 blocks at water depths between 400 and 799 meters, and 2,806 blocks at water depths greater than 800 meters.
However, there are only 218 so-called “newly available leases” offered in this year’s sale, compared to 393 last year. These represent both deepwater and shallower water leases that expired or were relinquished by their owners during the past year, as well as leases terminated by MMS for failure to meet work commitments. They generally draw interest simply because they have been off the market for years and can account for roughly a quarter of all leases receiving bids in any given Gulf sale. Deep-gas drilling incentives expanded Incentives for deep-gas drilling in water depths below 200 meters on the continental shelf were greatly expanded in January, essentially replacing the former rule providing for royalty suspension on just the first 20 billion cubic feet of production on newly issued leases below a geological depth of 15,000 feet.
The new package increases both the size and scope of the program to include not only future leases in the upcoming sale, but 2,400 existing leases offshore Texas, Louisiana, Mississippi and Alabama.
Under the new program, the government specifically is offering a royalty suspension on the first 15 billion cubic feet of gas produced from depths greater than 15,000 and less than 18,000 feet, or on the first 25 bcf produced from 18,000 feet or deeper. A royalty suspension volume of 15 bcf can be increased to 25 bcf from a second successful well to 18,000 feet or deeper. The rule applies to all qualified wells on a specific lease. Deep dry holes also qualify for relief In the event of a dry hole below 18,000 feet, a producer would qualify for a royalty suspension supplement of 5 bcf of gas equivalent that could be applied to future oil or gas production from any depth. Two of these supplements are available per lease prior to production from a deep well. The maximum relief a lease can earn from either successful or unsuccessful deep wells is 35 bcf.
Additionally, sidetrack wells could earn royalty suspensions in amounts based on drilling depth and sidetrack length. Royalty relief would be discontinued if natural gas prices exceed $9.34 per thousand cubic feet. And deep gas must be drilled and production started by March 1, 2009.
Recent royalty suspension measures for deepwater oil and gas production will continue with Central Gulf Lease Sale 190. Leaseholders can claim exemption on the first 5 million barrels of oil equivalent from water depths ranging from 400 to 799 meters, 9 million barrels of equivalent from water depths between 800 and 1,500 meters, and 12 million barrels of equivalent from water depths greater than 1,600 meters.
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