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Low Commodity Prices Weigh Heavily on Western GOM Lease Sale

Only five producers participated in the federal Gulf of Mexico (GOM) oil and gas auction on Wednesday, the lowest number of bidders since area leasing began in 1983, a top official said.

The Western Area GOM Lease Sale 246, concentrated on the Outer Continental Shelf offshore Texas, drew more than $22.67 million in high bids -- and total bids, as no tracts were contested. Five producers submitted 33 bids on 33 tracks covering about 190,080 acres.

"Low, longer-term oil prices have showed some companies were not interested in bidding in this lease sale," said BOEM's Mike Celata, acting regional director of the GOM. He discussed the results with reporters during a conference call.

The auction was the lowest ever sale for the Western Area GOM in terms of tracts and bids, and total high bids. Except for the Eastern GOM sale held last year, which drew no bidders, the latest sale drew the fewest offers ever in terms of tracts, bids and total high bids for the "traditional" Central and Western area lease sales, Celata said. The Eastern GOM Sale 225 held last year was the first in eight years (see Daily GPIMarch 19, 2014).

"We expected a low turnout," said Celata. Last year's Western GOM sale had drawn only 12 producers, "so we had lower expectations..."

Nearly all of the offers -- 26 -- were by a unit of Australia's BHP Billiton Ltd., which pledged $16.3 million for tracts in Alaminos Canyon and Keathley Canyon (KC), both within the prospective Lower Tertiary Trend. Many of BHP's bids are in partnership with Ecopetrol America Inc. In one separate bid, also the highest, Ecopetrol America offered $2.8 million for a tract in East Breaks.

Three bids totaling $1.2 million for Garden Banks blocks were by a unit of Anadarko Petroleum Corp. BP Exploration & Production Inc. pledged one offer, $878,522, for KC Block 139, which is near one of its prospects. Peregrine Oil & Gas II LLC offered two bids totaling $299,403 for blocks in High Island Area, East Addition, South Extension.

The sale had offered a chance to bid on 4,083 unleased blocks covering about 21.9 million acres, from nine to 250 nautical miles offshore in water depths ranging from 16 feet to more than 10,975 feet (5-3,340 meters).

The lowest Western GOM auction previously was in 1986, when 41 tracts drew 52 bids from 16 producers. BOEM has up to 90 days to review the offers before awarding any blocks.

Although interest was low, Celata pointed to some positives, noting the high bidding by BHP. Its bidding "bodes well for the long term," he said. "It shows the long-term potential" for the GOM, which offers producers "a stable economic environment and consistent economic terms. We definitely have a lot of resources left. This is just a near-term bid process. In the long-term, the Gulf looks very promising."

Celata shot down a suggestion that BOEM might have to consider new or alternative ways to attract more bidders in the future, such as additional royalty relief.

"We haven't discussed additional royalty relief at this time," he said. "We do look at those on a regular basis, but at this point, we don't see anything..."

The National Ocean Industries Association (NOIA), a trade group representing offshore operators, didn't anticipate "jaw-dropping results under current conditions," citing low commodity prices and uncertainty over new regulations, including the proposed blowout preventer/well control rule (see Daily GPIApril 13). NOIA also cited "the trend of increasing litigation over permitting and leases...among the factors converging to discourage operators from vigorous bidding."

The GOM "remains a critical component of our nation’s energy portfolio and holds important energy resources that spur economic opportunities for Gulf producing states, creating jobs and home-grown energy and reducing our dependence on foreign oil,” said BOEM Director Abigail Ross Hopper. "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."

Lease Sale 246 builds on the first seven sales held under the Obama administration's five-year leasing program for 2012-2017. The five-year program makes available all offshore areas with the highest resource potential and includes 75% of the nation's undiscovered, technically recoverable offshore oil and gas resources.

"As one the most productive basins in the world, the Gulf of Mexico continues to be the keystone of the nation's offshore oil and gas resources," Hopper said. "The continuing drop in oil prices and low natural gas prices obviously affect industry’s short-term investment decisions, but the Gulf's long-term value to the nation remains high and the President's energy strategy continues to offer millions of offshore acres for development while protecting the human, marine and coastal environments, and ensuring a fair return to the American people."

BOEM established the terms for the latest sale following extensive environmental analysis, public comment and considering the best scientific information available. The terms included measures to protect the environment, such as stipulations requiring that operators protect biologically sensitive features, as well as providing trained protected species observers.

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