No one expects Wednesday’s sale of drilling rights in the western Gulf of Mexico to break any records.
After all, relatively few newly available leases are on the auction block, at least compared to the last few sales of tracts in the region. And the last western Gulf lease sale, in December 2011, was a blockbuster, raking in nearly $325 million in total high bids driven by pent-up demand after the Deepwater Horizon disaster prompted regulators to cancel a 2010 sale.
But don’t think less-than-stellar numbers translate to a lack of commitment to Gulf drilling, energy industry leaders cautioned.
“The investments that the industry continues to make in the Gulf of Mexico show they’re confident in the Gulf,” said Erik Milito, upstream director for the American Petroleum Institute. “There’s a high level of confidence in being able to develop the Gulf of Mexico, and it’s demonstrated in these continued lease sales and the amounts of capital being devoted to developing these fields.”
With bids starting at $25 per acre for the shallowest options, companies are vying for the rights to drill over 20.8 million acres in the Gulf. The sale kicks off at 9 a.m. central time at the Mercedes-Benz Superdome in New Orleans.
According to the Bureau of Ocean Energy Management, 116 of the 3,873 blocks offered in the sale have received bids, which are not disclosed until the auction. During the sale, regulators generally read the freshly unsealed bids methodically and systematically, with their voice giving no indication of the big dollars attached to each offer. Amounts can reach the tens of millions, and because bids are sealed, they can vary widely for the same tract.
Although the area up for grabs encompasses some 3,900 blocks, interest may be focused on the 141 blocks that are being made available for the first time in years. That’s less than a quarter of the number of newly available blocks relinquished by previous operators that were offered in the 2010 western Gulf of Mexico sale.
Roughly a third of the newly available blocks are in deep water, according to the ocean energy bureau.
Randall Luthi, president of the National Ocean Industries Association and a former offshore drilling regulator, said the auction could be “a good indicator of industry’s confidence not only in the remaining resources of the Western Gulf of Mexico, but also in the administration’s willingness to allow those resources to be developed in a timely fashion.”
He noted that while “no one expects this sale to match the level of the 2011 western Gulf sale, which was much bigger than usual” because of the canceled 2010 auction, “we could see some surprises if residual pent-up interest has carried over from 2011.”
The lease sale is set to be the first under the administration’s new five-year plan governing offshore lease sales until June 30, 2017, coming just before the more attractive central Gulf auction slated for March 20, 2013.
Companies had the chance to submit bids on some western Gulf areas along the U.S.-Mexico continental shelf boundary that aren’t guaranteed to be available.
A 10-year moratorium on drilling within 1.4 nautical miles of either side of that maritime boundary was initially set to expire in January 2011 but was extended until January 2014. Although companies were allowed to submit bids for blocks in the area subject to U.S.-Mexico talks, they won’t be opened during the November sale, and they may never be opened at all.
According to the government’s sales package, Interior Secretary Ken Salazar “will determine whether it is in the best interest of the United States either to open bids for boundary area blocks or to return the bids unopened” by May 31 or within 30 days after Congress approves a U.S.-Mexico agreement governing the area (whichever happens first).
Milito noted that lack of certainty about those U.S.-Mexico boundary tracts — some of which cover deep territory — could suppress interest in them.
“There’s interest, and there’s going to be more interest over time,” Milito said. “It becomes difficult without having the certainty from Congress in ratifying that agreement.”
Analysts noted that a less-than-stellar auction could actually be evidence that industry is confident that future sales will take place on a predictable schedule — that companies won’t feel pressured into buying up leases on Wednesday for fear it will be years before they get another chance.