WASHINGTON — Forty-two oil and gas companies will make plays for new Gulf of Mexico territory on Wednesday, in a closely watched, high-stakes auction of U.S. drilling rights, viewed as a test of the industry’s appetite for offshore projects while a drilling boom unfolds mostly on land.
The lease sale, set to begin Wednesday morning in New Orleans, was designed to be a doubleheader, with federal officials opening sealed multimillion-dollar bids for territory in the central Gulf of Mexico, before unveiling offers for a small patch of available eastern Gulf tracts. But no bids came in for the limited stretch of available eastern Gulf acreage, generally viewed as less attractive to industry.
BP was expected to have placed bids on some of the central Gulf leases, after a 16-month government contract suspension forced the oil giant to sit out the last three auctions. A deal between BP and the Environmental Protection Agency, announced on March 13, paved the way for the company to participate and bulk up its Gulf drilling portfolio. BP declined to comment.
The government also is set to reveal which company will get the first crack at territory along the U.S.-Mexico boundary in the Gulf, following congressional enactment of a treaty that established the framework for oil development along the international border.
All of those factors combine to make for a “significant sale,” acknowledged acting Assistant Interior Secretary of Land and Minerals Tommy Beaudreau.
“I expect to see a continuation of the trend we’ve seen over the last number of sales, where there’s concentrated interest in deep-water tracts,” Beaudreau said in an interview. While “there will still be some leasing on the shelf, the trend has been to focus on these very prospective (deep-water) areas and go in significantly in those areas.”
Beaudreau, who will open the sale Wednesday, noted that there are 519 central Gulf blocks that are available for the first time in years, because the tracts were just relinquished to the federal government, 213 more than a similar auction last March.
“That kind of turnover tends to be a pretty reliable predictor of the level of activity that we would see in a sale,” Beaudreau said. Additionally, he noted, “there have been new discoveries in the Gulf, some of which have been pretty significant over the past year, and prices are remaining pretty high.”
But there are headwinds.
Oil and gas companies that have been facing increasing shareholder scrutiny for climbing capital expenditures and lower rates of return on their investments may be less willing to pledge many millions on speculative Gulf tracts.
That is especially true in the ultra-deep frontier of the Gulf, which may look less attractive in the face of surging onshore oil and gas production.
“Financial performance lately has not been as good as it was in the past, so they may be looking at the capital expenditures on this,” said American Petroleum Institute senior policy adviser Andy Radford.
Mergers among oil and gas companies that focus on the shallow shelf also may have helped pare the number of operators actively bidding in Wednesday’s sale, down to 42, from 56 just two years ago.
During the last central Gulf sale, 52 oil and gas companies submitted 407 bids on 320 blocks, with high bids totaling $1.2 billion.
The government claimed a much bigger haul a year earlier, during its 2012 sale of central Gulf leases, when pent-up, post-spill demand spurred a buying frenzy, as 56 firms pledged $1.7 billion in high bids for 454 tracts.
Radford warned against viewing any single auction as a harbinger of the industry’s commitment to offshore development during the onshore boom. The trend for recent sales shows great interest, he said.
“In the end, the Gulf deep water remains one of the most lucrative plays out there and one of the few (offshore) opportunities we have here in the U.S.,” Radford said. “It will always be attractive to companies that want to play in the deep water.”
Although more than 40 million acres were made available for Wednesday’s sale, bidding focused on a relatively small portion of them. By the time bidding closed on Tuesday, 380 sealed offers had been filed on 326 central Gulf blocks.
One company is responsible for three bids on three separate blocks in the U.S.-Mexico boundary area, part of the Perdido Fold Belt area in the Gulf, near Shell’s existing Perdido platform.
Bids for the boundary area have been kept sealed since they were first filed as part of an August 2013 auction of western Gulf acreage. Companies who bid on the boundary area had the option of withdrawing their offers or revising them before they were opened Wednesday.