Analysts: Western GOM Sale Surprisingly Unspectacular

The Western Gulf of Mexico lease sale 180 held in August by the Interior Department's Minerals Management Service (MMS) "while not horrible, was not as spectacular as one might have originally thought," according to a Stat of the Week by Raymond James energy analysts. The analysts noted that despite the "record levels of cash flow, pristine balance sheets, and what appears to be a general lack of prospects" for exploration and production companies, the "firecracker lease sales seem to have fizzled out."

The MMS sale received 386 bids totaling $190 million (see NGI, Aug. 27). About $165.6 million in high bids were received. Raymond James analysts noted that "while the turnout certainly wasn't a bust, it was nowhere near the heydays of the 1996-1998 period." J. Marshall Adkins and James M. Rollyson, Raymond James energy analysts, wrote that the spending in the mid '90s was "driven by interests in deepwater blocks," which have eight-to-10 year lease periods, but they noted that the shallow water turnout was flat compared with last year and "well under" the 96-98 average.

"Interestingly enough, this [flat turnout] comes despite record levels of cash flow, what appears to be a general lack of prospects and newly implemented royalty relief incentives for deep gas on the [Outer Continental] Shelf," they wrote. Speculating, they said that "perhaps near-term natural gas prices caused producers to keep the tension on their purse strings or maybe they are just not searching for new prospects."

The research note indicated that the results did not reflect the strength present in the market over the past year and a half. Even though total blocks bid on this year were up 42% over 2000 bids, they were "still well shy of the records set during the last peak." Most of the difference was found in fewer bids on the deepwater blocks, with many still under lease from a prior period. "Even still, there were 53 new blocks added to the available list now that the Western Gap, or 'doughnut hole' disputes have been resolved."

Adkins and Rollyson suggested that the "tempered level of spending" on deepwater blocks was a big part of the reason, but said it was "still surprising that overall spending this year was only up less than 10% over last year." They noted that the Central Gulf of Mexico lease sale last spring saw spending up 68% over 2000.

Producers are not willing to spend as much money per block this year, said the analysts, and noted that the average price per deepwater block was actually down almost 45% from a year earlier. In shallow water bids, pricing was only "slightly better than flat." Overall, average pricing declined 24% from 2000 to about $520,000 per block.

"One argument that seems to be prevalent these days is that E&P companies are simply running out of prospects in the Gulf of Mexico (on the Shelf)," said the note. "That would certainly explain why development drilling activity has far exceeded exploratory activity over the past 18 months. Likewise, it explains why hook-up activity has also been uneventful. Furthermore, it could help explain why producers can't seem to make reasonable returns on the Shelf at $3/MMBtu gas. Maybe it's a lack of seismic data and/or the experienced personnel that turn it into prospects."

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