If the results of last week’s Gulf of Mexico lease sale are any indication, the federal government is now feeling the effects of weak commodity prices and industry consolidation.

Western Gulf of Mexico Lease Sale 174 brought in only about one-sixth the amount of high bids the previous western Gulf sale garnered last year. The steep decline was blamed on several factors, including consolidation of some major players and spending cutbacks. The most recent sale also was the victim of the success of previous sales. Producers in general have built a high inventory of leases and are now focusing on development.

“The sales over the years have brought about a situation where we currently have over 7,000 active leases,” noted Paul Kelly, senior vice president of oil service company Rowan Cos. Kelly represented the National Ocean Industries Association (NOIA) at the sale and also represents the oil services industry on the Minerals Management Service (MMS) Outer Continental Shelf Policy Committee.

“Our observations were the major oil companies did not play that big a role in this sale. Obviously, they’re preoccupied with restructuring and mergers and acquisitions, and they’re focusing on other things.” With majors busy elsewhere, independents had a better shot at acquisitions. Independents have revised their E&P budgets upward based on currently strong prices while the majors have taken a wait-and-see attitude, Kelly said.

“The low-price environment has played a role in what [companies] have budgeted as far as spending. This [sale] was small in comparison to last year’s,” said Laura Smith of NOIA, which represents all segments of the U.S. offshore oil and gas industry. “This year was dominated by independents as last year’s was. That seems to be a trend in lease sales.

“There really weren’t a lot of surprises from our perspective. We don’t take this as a bad sign or a sign of any kind of downturn in the Gulf of Mexico at all. This doesn’t bode poorly for what’s going on in the Gulf of Mexico.”

Bids in Sale 174, held in New Orleans, totaled $104.212 million, and the sum of high bids was $94.649 million from 41 participating companies. There were 3,547 blocks offered and 153 received an average of 1.16 bids, 177 bids in total.

Last year’s Western Gulf Sale 171, held Aug. 26, received 486 bids on 402 blocks (see NGI Aug. 31, 1998). A total of 3,778 blocks were offered, and $553.436 million in high bids was received. That sale was a significant let-down from the record-setting western sale of 1997 when a total of 1,224 bids were made on 804 blocks.

“The results of this sale are about what we expected,” said Minerals Management Service (MMS) Gulf of Mexico Regional Director Chris Oynes. “It is reflective of the large inventory of tracts already under lease. This sale was dominated by the independents, Kerr-McGee Oil & Gas Corp., Coastal Oil & Gas, and Spinnaker Exploration Co. in particular.”

As was the case last year, blocks in depths of 200 meters or less and those in depths of 800 meters or more saw the most activity. In depths of 200 meters or less, 67 blocks received a total of $26.297 million in high bids. In depths of 800 meters or greater, 64 blocks received a total of $61.611 million in high bids. In depths between 200 and 400 meters, nine blocks received a total of $2.267 million in high bids, and in depths between 400 and 800 meters, 13 blocks received a total of $4.475 million in high bids.

“The high bids on tracts were split evenly between on-the-Shelf properties and deepwater properties,” Kelly said. And I would surmise that most of the bidding on the Shelf tracts was natural gas oriented. The deepwater is going to provide additional resources in terms of both oil and gas. Conceptually, I would say [the sale] was significantly gas-driven, but those deepwater tracts have the potential for both oil and gas.”

The deepest block receiving a bid was Keathley Canyon 842 at a depth of 3,049 meters. Royalty relief for producers drilling in deep water is about to come to a close. Two more sales – a central Gulf sale in Spring and another western Gulf sale – will offer deepwater royalty relief. The relief act could be extended by Congress, but Kelly said he thinks the MMS is probably opposed to an extension. At any rate, the MMS will continue to have authority to grant royalty relief on a case-by-case basis, Kelly noted.

Kerr-McGee made the highest bid on a block, $11.283 million for Garden Banks 877. Kerr-McGee also had the greatest total number of high bids, 36, and the greatest sum of high bid amounts, $33.211 million.

“The deepwater Gulf of Mexico is one of Kerr-McGee’s core areas for exploration and production activities as this area offers the potential for large discoveries,” said Kerr-McGee CEO Luke R. Corbett. “The growth of deepwater technology and infrastructure allows for cost effective developments in this province. Kerr-McGee will continue to focus on building its inventory of deepwater blocks to provide additional opportunities for exploration and development.”

Kerr-McGee said it will operate 29 of the 36 high-bid blocks and has an 87% average working interest in the blocks. With the additional blocks, Kerr-McGee will hold interests in more than 500 Gulf blocks, of which more than 275 blocks are in water depths greater than 1,000 feet.

Following Kerr-McGee in total number of high bids were Coastal, 18; Union Oil Co. of California, 15; Spinnaker, 11; Murphy Exploration & Production Co., 7; The Houston Exploration Co., 7; Exxon Corp., 7; Ocean Energy Inc., 7; Samedan Oil Corp., 6; and Amerada Hess Corp., 6.

Joe Fisher, Houston

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