Government rakes in $133.8 million in Gulf of Mexico lease sale

More than a dozen companies on Wednesday pledged $157.8 million in high bids for the rights to drill on 116 tracts in the western Gulf of Mexico during a lease sale that affirmed the oil and gas industry’s interest in moving into ever deeper waters.

Just 11 of the 116 blocks that were snapped up are located in less than 200 meters of water and some 40 of the sold tracts are in water depths of more than 1,600 meters.

“This is all truly deep water, and a lot of ultra deep water,” noted Erik Milito, upstream director for the American Petroleum Institute.

Tommy Beaudreau, director of the Bureau of Ocean Energy Management that held the auction, said the bidding reinforced the “significant interest in the deep water, in particular, in the Western Gulf, and in these sub-salt plays.”

All told, the government expects to take in $133.8 million in total high bids — an amount comparable to the $115.5 million pledged in high bids during an August 2009 auction of western Gulf of Mexico leases. The most recent previous auction, in December 2011, was a $325 million outlier driven by pent-up demand after the Deepwater Horizon disaster prompted regulators to cancel a 2010 sale.

Analysts widely said Wednesday’s sale would not compare to the December 2011 auction.

The western Gulf of Mexico is generally considered less attractive than the central Gulf region. Interest in Wednesday’s sale also may have been suppressed by the relatively few newly available blocks recently relinquished by oil and gas companies.

Milito noted that “there’s not a lot to choose from in the western gulf. So a lease sale that only results in 116 tracts being bid on is relatively reflective of the limited number of leases available and the areas where leases are located.”

Randall Luthi, the president of the National Ocean Industries Association, said Wednesday’s auction was “on par with expectations and shows that the offshore oil and natural gas industry is still committed to domestic exploration and production.”

ConocoPhillips and Chevron dominated the sale, with the two companies together netting 90 high bids. Other companies active in the auction included BHP Billiton Petroleum with 10 high bids and Exxon Mobil with 4.

Most of the interest was concentrated in the Alaminos Canyon, where Shell’s Perdido platform is located, and the East Breaks area home to discoveries dating back to the 1990s. Chevron won the rights to drill in four East Breaks blocks by pledging roughly $38 million for the tracts, including the auction’s highest offer of $17.2 million for a single block. ConocoPhillips also was the high bidder for four other East Breaks blocks.

Although the ocean energy bureau received at least one bid near the U.S.-Mexico continental shelf boundary, those bids were not opened Wednesday and may never be unsealed.

Interior Secretary Ken Salazar is set to determine whether to open those bids by May 31 or within 30 days after Congress approves a U.S.-Mexico agreement governing the area, whichever happens first.

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.

To participate in the auction, companies had to pay minimum bonus bids of $25 per acre for water depths less than 400 meters and $100 or more per acre for greater water depths. Energy produced from the leases would be subject to an 18.75 percent royalty rate.

Oil and gas industry leaders highlighted the financial windfall for federal coffers, in light of fiscal cliff negotiations over automatic spending cuts in Washington, D.C. Revenue from mineral leases on federal lands and waters is one of the biggest sources of dollars to the federal treasury, next to income tax revenue. That includes the original bonus bids pledged at lease sales, as well as annual rental payments and royalties from any oil and gas produced at the sites.

Milito said he expected the offshore leases sold Wednesday would generate roughly $5 million in rental payments over their first year, with the number increasing as those payments climb over time.

“This is a great way to provide that revenue generation to the government,” Milito stressed. “Every one of these leases is going to bring in money today and it’s going to bring in money in rentals for 7 or 10 years,” in addition to royalty payments.

Oil and gas industry representatives are trying to ward off changes to some tax credits and incentives they have long enjoyed as part of the spending negotiations in Washington.