Record-setting Gulf drilling auction nets $1.7 billion

The Interior Department on Wednesday held a record-setting sale of oil and gas drilling rights in the central Gulf of Mexico, with companies submitting $1.7 billion in winning bids for 454 offshore tracts and Statoil establishing a new high-water mark with its $157 million offering for a single lease.

Industry watchers and Obama administration officials heralded the strong auction as a sign of a Gulf of Mexico renaissance more than two years after the oil spill that halted most deep-water drilling and slowed exploration in shallower depths.

“This is a record-breaking oil and gas lease sale in the Gulf of Mexico,” said Interior Secretary Ken Salazar. “The Gulf is back. There is great robustness in oil and gas activity currently under way in the Gulf, as well as interest in additional exploration.”

The robust sale was driven by pent-up demand for the acreage, recent big discoveries in the Gulf and strong oil prices earlier this year.

“A sale of this size signals a strong industry commitment to the Gulf of Mexico and to our nation’s energy future and to more domestic jobs,” said Randall Luthi, president of the National Ocean Industries Association and a former offshore drilling regulator.

All told, 56 offshore energy companies submitted 593 bids for tracts spanning more than 2.4 million acres. The leases that were snapped up included tracts as far as 230 miles offshore, with some in water depths over 11,000 feet.

Statoil submitted the biggest single bid in the auction, with the Norwegian company offering $157 million for the rights to drill a tract in the Mississippi Canyon area, not far from BP’s failed Macondo well. Although there was at least one larger bid in the 1970s (when lease sales included only nominated tracts), Statoil’s offering on Wednesday is the largest high bid since the federal government began area-wide leasing in 1983.

For context, Statoil’s $157 million bid also was roughly three times higher than the top bid of $52.5 million during the last central Gulf lease sale in March 2010, just one month before the Macondo well’s lethal blowout. The 2010 sale brought in $949 million in high bids.

Statoil spokesman Ola Morten Aanestad said the company was “very pleased” with the outcome of Wednesday’s sale. Overall, Statoil pledged $493.9 million in high bids.

“We won 26 of 32 leases we were bidding on and we won two of our top three targets,” Aanestad said. “This addition of leases allows us to further build upon our broad-based strategy for exploration in the Gulf of Mexico and further upgrades our core position in this prolific and proven basin.”

Shell Oil submitted the biggest total amount in high bonus bids, apparently winning 24 tracts by pledging $763.8 million for those areas. The company’s share, including bids on which it collaborated with other firms, was $500 million.

BP was poised to win the rights to drill in 43 separate blocks by pledging $428.6 million in high bids. The company’s share of those winning bids totaled $249.9 million.

Here’s how other companies stacked up:

  • Apache Corp. had 61 high bids — including some joined by other companies — totaling $32 million.
  • Apache Deepwater had 29 high bids totaling $478 million, though the company’s share was $169 million.
  • ConocoPhillips had 24 high bids totaling $100 million, with the company’s share of that being $60 million.
  • Chevron pledged $321 million in 29 high bids, with the company’s share of that totaling $221 million.
  • ExxonMobil pledged $382 million in 22 high bids.
  • Houston Energy had seven high bids totaling $68 million, though the company’s share of that is $32 million (because many of those offers were done collaboratively with other companies).
  • LLOG Exploration pledged $417 million in eight separate high bids, with the company’s exposure being $139 million.
  • Anadarko Petroleum Corp. had 11 high bids totaling $80 million.
  • Noble Energy had $209 million in six high bids, though the company’s share of that is $113 million.
  • BHP Billiton Petroleum offered $264 million in 20 high bids.
  • Samson Offshore is responsible for $47 million worth of three high bids with other companies that totaled $270 million.
  • Murphy Exploration and Production Co., had 14 high bids totaling $190 million, with the company’s share resting at $93.8 million.
  • The Spanish company Repsol had five high bids totaling $255.9 million, though the company’s share of that is $78 million.
  • Cobalt’s 10 high bids totaled $28.3 million, with the company’s share of the high bids being approximately $17 million.
  • Ecopetrol America had six high bids totaling $256 million, with the company’s share being $80 million.
  • Stone Energy had 26 high bids totaling $251 million, with the company’s share being $144 million.

“Companies continue to bet on the vast potential of the Gulf,” said Lori LeBlanc, executive director of the Gulf Economic Survival Team that lobbies for swifter permitting of offshore drilling projects. “The strong demand for the offshore tracts offered (Wednesday) should remind all Americans, including members of the current administration, of the Gulf’s vast potential to serve our country’s energy needs well into the future.”

“This is truly a record-setting day in terms of investment in offshore oil and gas,” said Tommy Beaudreau, director of the Interior Department’s Bureau of Ocean Energy Management. Beaudreau noted that the auction was the fourth-largest central Gulf sale since area-wide sales began in 1983.

According to the Interior Department, the top money-making central Gulf sale was in 2008, when companies pledged $3.7 billion in bonus high bids. Including sales of other areas of the Gulf and waters surrounding Alaska, there have been two dozen sales that scored more than $1 billion in high bids going back to the 1970s and ’80s.

Some congressional Republicans said the Obama administration was unfairly taking credit for Wednesday’s successful sale, which combined a planned 2012 auction with one originally scheduled for 2011. The Interior Department postponed the 2011 central Gulf sale to allow time to update required environmental reviews of the region that took the Deepwater Horizon disaster into account.

“While the Obama administration has now canceled and delayed more offshore lease sales than they have held, that is not stopping them from patting themselves on the back for holding a lease sale that was originally scheduled by the previous administration,” said Rep. Doc Hastings, R-Wash.

Sen. David Vitter, R-La., said “holding a lease sale is a good, common-sense act,” but it isn’t enough. “Until we see a positive trend with lease sales and issuing drilling permits, no one should be remotely convinced that Washington’s off-course energy policy is on the right track,” Vitter said.

Analysts said Wednesday’s sale results signal that oil and gas companies believe they can satisfy new safety mandates imposed since the Deepwater Horizon disaster and win permits to drill in the Gulf.

“The strong interest in the lease sale shows the confluence of pent-up demand, recent central Gulf of Mexico discoveries and the emerging confidence among the oil and gas industry that they will be able to acquire the plans and permits needed to develop the resources,” said Benjamin Salisbury, an analyst with FBR Capital Markets.

Salisbury said there was more excitement heading into the sale.

“The enthusiasm level was higher going into this because the operators feel like they’re getting a straight deal from the Department of Interior,” Salisbury said. “They think they have strong communication and are being evaluated on the merits. And they understand what is required of them to a greater extent than they did before.”

That represents a turnaround from the industry’s tangling with federal regulators over new drilling safety rules and a deep-water drilling moratorium two years ago.

Salazar called the auction results “proof positive that the oil and gas industry is confident they can meet the heightened requirements.”

But some environmentalists had a different interpretation; they said the big bids are evidence the bar is still too low.

“Safety requirements have not been improved enough to prevent another spill,” said Jacqueline Savitz, with the conservation group Oceana. “This greedy rush to expand offshore drilling sets us up for another disastrous oil spill.”

Aaron Viles, deputy director of the Gulf Restoration Network, accused the Obama administration of “bowing to pressure from the oil industry and their champions in Congress” by going ahead with the sale.

“It is a bad idea to lease areas in the Gulf which outstrip the industry’s ability to respond to their inevitable accidents,” Viles said.

To compete in Wednesday’s auction, companies had to put higher minimum bids down for the tracts. The ocean energy bureau previously hiked the minimum bid in deep water to $100 per acre, up from $37.50, after an analysis of previous lease sales showed tracts that netted less than $100 per acre generally were undeveloped.

Leases sold on Wednesday carry terms of five, seven and 10 years. Under the terms of those contracts, companies will pay escalating rental rates for each year the tracts are undeveloped.

Although big dollars are attached to the auction, it wasn’t apparent from the dry reading of freshly unsealed bids over three hours Wednesday morning. Ocean energy bureau officials stolidly read off the dollar amounts and company names, even when amounts reached into the tens of millions.

Because bids are sealed, they can vary widely for the same tract. For instance, five companies bid on Keathley Canyon block 745, with amounts ranging from $11 million (from Apache, Repsol and other partners) to $110 million (from BP), which was the second-highest winning bid on Wednesday.