Gulf lease sale tanks

By all measures, yesterday’s Western Gulf lease sale was both ill-timed and an abject failure. The Bureau of Ocean Energy Management (BOEM) reported that the oil and gas lease sale for the Western Gulf of Mexico drew only $22.7 million in high bids for tracts on the U.S. Outer Continental Shelf offshore Texas.

Just a year ago, a similar Western Gulf lease sale attracted 14 bidding companies throwing out over $135 million in bids on 81 tracts, or approximately $1.67 million per tract. This year’s sale, at $687,000 per tract, generated an average bid-per-tract that was less than half of last year’s average.

Yesterday’s Lease Sale 246 offered 4,083 unleased blocks, covering about 21.9 million acres, located from nine to 250 nautical miles offshore in water depths ranging from 16 feet to more than 10,975 feet (five to 3,340 meters). Five offshore energy companies submitted 33 bids on 33 tracts, covering about 190,080 acres.

“While this sale reflects today’s market conditions and industry’s current development strategy, it underscores a steady, continued interest in developing deep water federal offshore oil and gas resources,” BOEM Director Abigail Ross Hopper said in a statement. Most of that interest, it appears, is from BHP Billiton, which made 26 bids, totaling more than $16 million, or 71% of the total money bid.

The sale failed for several reasons:

  • Oil prices hovering in the low-$40-bbl. range with little chance of significant recovery before 2017, according to most pundits, with natural gas prices similarly depressed.
  • Growing uncertainty over new and emerging rules and regulations governing offshore, and particularly deepwater, development and operations.
  • A higher percentage of tracts that operators considered less than prime.
  • Increasing organizational disruption as low oil and gas prices drive increasing M&A activities and burgeoning bankruptcies.

There are four more Gulf of Mexico lease sales scheduled under the 2012-2017 Lease Sale Program. A Draft Proposed Program, published in January of this year, schedules 10 addition sales in the three Gulf of Mexico lease planning areas from 2017–2022. By my math, that’s 14 GOM lease sales in the next seven years. The finalized 2017–2022 program won’t be released until next year. Maybe it is time to rethink that program while we still have time.

With more than two million bbls. a day of excess production in the world market, stagnating economies in major countries like China and Brazil, and rising production in the U.S. despite a significant drop in the rig count, do we really need to develop an important natural asset at a time when its value may be lower than at any time in the last four decades?

I’m voting no to that.

About the author

Dr. William J. Pike

Dr. William J. Pike has 45 years experience in the upstream oil and gas industry, including more than 20 years in oil and gas drilling and production operations, both onshore and offshore. He has worked in the U.S., Canada, Britain, Europe and Russia as a technical and economic advisor to the energy industries and various governmental agencies. Pike was editor-in-chief and editorial director for Hart Energy Publishing’s E&P magazine and was also the editor of the Journal of Petroleum Technology, the official publication of the Society of Petroleum Engineers. He holds a doctorate in energy economics from the University of Aberdeen in Scotland.

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