Oil companies bid big bucks for Gulf drilling rights

WASHINGTON — Oil and gas companies pledged hundreds of millions of dollars for drilling rights in the Gulf of Mexico on Wednesday, during a high-stakes auction that demonstrated their enthusiasm for offshore development and marked BP’s return to the bidding after a suspension related to the Gulf oil spill.

All told, 50 companies filed bids worth $1.1 billion for central Gulf drilling rights in the lease sale, with $850.8 million in winning amounts.

BP, which had been forced to sit out the last three auctions under a government contract suspension, won 24 of its 31 bids for drilling leases in the central Gulf of Mexico, including territory near its failed Macondo well. Ultimately, the company will pay the U.S. government $41.6 million for its winning bids.

‘Expensive place’

The auction unfolded over two hours in a room at the Mercedes-Benz Superdome in New Orleans, with Interior Department officials taking turns reading off the offers in a typically dry monotone.

The number of participating companies was down slightly from previous years, a reflection both of mergers among the firms active on the shallow continental shelf and the concentration of well-capitalized companies investing in the deep-water frontier.

The government’s haul also was smaller than in previous two years, including the last central Gulf sale in March 2013, which netted $1.2 billion in high bids and an unusual 2012 auction that generated $1.7 billion for federal coffers.

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John Rodi, regional director for the Bureau of Ocean Energy Management, noted that there was “no shortage of dollars and investors who are interested in the Gulf of Mexico.”

“We have a very healthy and large number of participants, both in the shallow and deep water, and we’re continually seeing new entry into the market as well,” Rodi told reporters after the auction. “All indications are . . . the Gulf of Mexico is a very great place to do business, in terms of the economic benefit that might exist. It’s just an expensive place to do business.”

Highest bid

The highest single bid Wednesday came from Freeport-McMoRan Oil & Gas, which pledged $69 million and beat out five other companies for the rights to drill a lone tract in the Atwater Valley leasing area. The region, home to at least five discoveries, was freshly surveyed last year.

Other high-interest tracts, which each received four bids, were West Delta 41 and Mississippi Canyon 475.

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Freeport also is leaving the auction with the biggest bill, having won 16 of its 17 total bids, with a price tag of $321.4 million in the high bids. Freeport’s buy was more than three times as much as the next-biggest spender, Chevron, which scored $103.3 million in high bids. At No. 3 was Murphy Exploration and Production Co., which spent $49.8 million to win 16 bids.

Cobalt International Energy was the most aggressive bidder, with 46 offers worth $26.6 million. The company won all but two of the leases it targeted.

Some companies seemed to pare their involvement from previous auctions, which could reflect the cyclical nature of offshore investments as well as efforts to rein in capital costs in response to shareholder scrutiny.

For instance, after spending $220.3 million in seven high bids last March, Exxon Mobil this year concentrated its efforts on just three central Gulf tracts, with offers totaling just $55.4 million. Ultimately, it won just one of them, at a price of $4.6 million.

Shell Offshore, which last March put $166.3 million on the table — and walked away with $139.8 million in high bids — capped its offers in Wednesday’s sale at $100 million.

And BHP Billiton Petroleum, which offered $198.5 million in winning and losing bids last March, on Wednesday put just $2.4 million in play.

Bidding strategy

Energy companies craft the bids in secret, after scrutinizing data and computer models drawn from seismic surveys that give only a hint of the geological structures — and potential oil and gas — lurking deep underground.

Because the bids are sealed, the amounts can vary widely. For instance, the competition over Mississippi Canyon 475 yielded four offers, ranging from BP’s low bid of $1.2 million to Chevron’s winning pledge of $62 million.

Many companies wait until the last minute to file bids with the federal government — a tactic that may have allowed some firms to quickly adapt their strategies after learning BP’s suspension was lifted last week. There are hints of strategy even in the numbers themselves, with some companies offering relatively odd sums in a bid to edge out competitors. Consider that Shell offered $20,020,002 for one of the 8 blocks the company targeted.

While the central Gulf lease auction was the big event on Wednesday, the Bureau of Ocean Energy Management also was selling off a small sliver of eastern Gulf territory and unveiling three bids first filed as part of a western Gulf sale last August.

By pledging $21.3 million, Exxon Mobil won those three western Gulf tracts, which are near the U.S.-Mexico boundary and subject to the terms of an international treaty that sets the framework for oil development along the international border.

If Exxon Mobil discovers oil at the site, the company will have to abide by the treaty’s terms for determining if the underground reservoir spans the boundary into Mexico’s territory and for divvying up the value of any resulting production.

Deep-water Gulf

No companies submitted offers for the eastern Gulf blocks, which is a relatively unknown and still largely undeveloped region. Because it is believed to be dominated by gas, the area is less attractive to companies eager for more lucrative liquid plays.

Many of the 380 total bids were for deep-water territory, demonstrating the oil industry’s continued interest in the Gulf frontier.

Acting Assistant Interior Secretary Tommy Beaudreau said that reflected an ongoing trend, with smaller operators dominating the shallow continental shelf and especially well-capitalized companies focusing “on extremely prospective areas, some of which also present challenges in exploration and development.”

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The relatively bifurcated approach to Gulf drilling is nothing new. The geology of shallow Gulf acreage tends to be better known and cheaper to explore, making it appealing to smaller players, in contrast to more expensive and challenging deep-water development.

“Deep water continues to lead, but today’s bidding also showed that the shelf is still worth pursuing,” said Randall Luthi, head of the National Ocean Industries Association. “The majors demonstrated once again that they have the revenue to invest in the deep-water frontier areas, and smaller operators also showed they are serious investors on the shelf as well as in deep water.”

Commitment to the Gulf

Luthi called the industry’s commitment to the Gulf “remarkable given the relative ease of producing oil and natural gas onshore, the expansion of competing offshore programs in other countries and some continuing regulatory uncertainty here at home.”

Oil industry representatives in Washington, D.C. said the success of Wednesday’s sale should encourage the Obama administration to put more offshore acreage on the auction block. American Petroleum Institute upstream director Erik Milito urged the Interior Department to sell leases off the East Coast as part of its next five-year strategy for the United States’ outer continental shelf.

“Every lease sale held in the U.S. strengthens our hand as an energy superpower,” Milito said.


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