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Two weeks ago the Department of the Interior reported the results of the Central Gulf of Mexico lease sale 227, which, based on the total amount of money oil and gas companies bid, suggested the industry is bullish on prospects in this region. As usual, the media focused on the total dollar figures and the bidding intensity among companies over a few tracts, but it may have missed some of the underlying trends that are shifting and will shape the Gulf's future.
The media focused on the total dollar figures and the bidding intensity among companies over a few tracts
Some 52 oil and gas companies submitted 407 bids on 320 tracts offered by the government. BP plc did not submit a bid, although they were told by the Interior Department that they could. BP is currently prohibited from securing government contracts due to the settlement terms of the Macondo oil spill. The Interior Department told BP they could submit a bid and after a review would be informed whether they were able to be awarded the tract. We assume BP declined to invest the time and effort in what was likely to be nothing more than an exercise. What we don't know is whether BP bid as a partner with others, although their legal status could impact the award status. The 320 tracts bid on represented only 4.5% of all the tracts offered, which was the smallest percentage since 2001, as shown in Exhibit 6 on the next page.
The 320 tracts bid on represented only 4.5% of all the tracts offered, which was the smallest percentage since 2001
When the results of the sale are examined from the perspective of the total number of tracts bid on, the post-2000 period has generally demonstrated a downward trend, although there have been some very successful lease sales such as in 2007 and 2008. Those years appear to have been an aberration from the general trend of bidding in a mature oil and gas province. The high sale results were consistent with the speculative fever that gripped the U.S. and global economy immediately prior to the 2008 financial crisis.
BOEM altered some of the terms of the lease bids from prior sales
Federal officials, such as Interior Secretary Ken Salazar and Bureau of Ocean Energy Management (BOEM) Director Tommy Beaudreau, cheered the results of the sale, and pointed out that comparisons of this Central Gulf of Mexico sale to the prior one in 2012 should be made with caution since the prior sale reflected pent-up industry demand due to the absence of a sale in 2011 following the Macondo oil spill. Additionally, BOEM altered some of the terms of the lease bids from prior sales. Deepwater acreage minimum bids were boosted to $100 per acre compared to prior sale amounts of only $37.50 an acre. The minimum bid hike came following extensive analysis by BOEM showing that deepwater leases with high bids of less than $100 per acre experienced virtually no exploration and development. The deepwater tracts leased in this sale also carried escalating rental rates and tiered durational terms with relatively short base periods followed by additional time under the same lease if the operator drills a well during the initial period. This is the federal government's attempt to make sure that acreage leased offshore is drilled rather than becomes a Congressional talking point whenever gasoline prices soar about how many idle offshore leases the oil industry holds.
Extensive analysis conducted in the mid-1980s showed that between 1974 and 1984, the industry always acquired lease acreage that was never drilled
While we have not seen the BOEM analysis, we would be cautious about interpreting the data. Since the federal government shifted its offshore leasing program to area-wide lease sales in 1983, oil and gas companies have often purchased acreage with minimum bids as they attempt to lock up sufficient acreage spreads to cover geological/exploration theories they planned to test. Extensive analysis conducted in the mid-1980s showed that between 1974 and 1984, the industry always acquired lease acreage that was never drilled. That analysis shocked many in the industry who had always assumed that, prior to the introduction of area-wide leasing, all the acreage ever leased offshore was drilled. The practice of not drilling all leased tracts mushroomed once the industry was freed from the "nomination process for identifying acreage to be leased" in order to test unconventional geologic theories. If the theory proved wrong with a test well, then multiple tracts were often condemned and never drilled. We tend to believe that the shift to area-wide leasing in the Gulf and away from the acreage nomination system previously in effect contributed to the successful development of sub-salt plays, Lower Tertiary plays and the entire deepwater phenomenon.
We attribute this consistency to the exploration philosophy of the modern oil and gas industry that companies are in the business of replacing and growing their reserves and production and they must continue to reinvest in the business every year if they expect to remain in business long-term
A measure we follow when attempting to assess the success of a Gulf of Mexico lease sale is the ratio of bids made to tracts bid on. We have examined this ratio going back to the very first Central Gulf sale but more importantly since area-wide lease sales began in 1983. Exhibit 8 shows the tracts bid on, the number of bids made and the ratio of those figures for each Central Gulf sale since 1983. The sale results should be read from right to left, but what they show is how relatively consistent the ratio has been over this 30-year period. With commodity prices rising and falling and the fortunes of the industry ebbing and flowing, one might have expected greater variability in the bids-to-tracts trend. We attribute this consistency to the exploration philosophy of the modern oil and gas industry that companies are in the business of replacing and growing their reserves and production and they must continue to reinvest in the business every year if they expect to remain in business long-term. This investment trend goes counter to the "speculator" view of oil company managements. Under that theory, oilmen would not be bidding during periods when oil prices were high and rising but would only bid when commodity prices were low. Yes, high oil prices, which provide incremental cash flows for the companies, are often the justification for accumulating greater exploration acreage inventory than when industry times are lean. But the stability of the bids-to-tracts ratio suggests greater, and more consistent, financial discipline than the speculator thesis.
The shallow Gulf of Mexico segment may be on the cusp of a revival after having been ‘left for dead’ by the emergence of the shale revolution onshore
The most notable figures to come from the lease sale results were the number of bids in deep and shallow water depths. According to data from BOEM, there were 131 bids for tracts located in water depths of 1,600 meters of water depth or greater but 85 bids for tracts in less than 200 meters of water depth. Those figures suggest to us that the shallow Gulf of Mexico segment may be on the cusp of a revival after having been 'left for dead' by the emergence of the shale revolution onshore. If accurate, it means better times for many of the more traditional domestic suppliers of offshore oilfield services. It has been the absence of activity in shallow water that has retarded the Gulf of Mexico recovery, but that may be about to change.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
