With natural gas prices uncertain, there was a “remarkable” step change in deepwater demand and price driving last week’s Gulf of Mexico (GOM) Lease Sale 205, according to Raymond James & Associates.

The lease sale, sponsored by the Minerals Management Service, secured the largest total revenue for lease sales since 1983, capturing nearly $3 billion in high bids, which was more than every single central GOM lease sale this decade combined and the most since 1983 ($3.4 billion), said analysts J. Marshall Adkins and Collin Gerry (see Daily GPI, Oct. 4). Nearly 40% of the bid tracts were located in ultra-deep waters of more than 5,000 feet, and the deepwater leases provided more than half of total revenues.

Deepwater spending was “huge,” led by Shell Offshore Inc. and Chevron Corp., which combined to capture 113 tracts costing a total of more than $800 million (see related story). In the shallower gas-prone waters, the average value for tracts in jackup water depths (0-200 meters) “remains relatively flat with the three-year average, which makes sense given the uncertainty in near-term gas prices. However, for mid- and deepwater leases, the increase in value per tract in this year’s lease sales was significant,” the analysts said.

“Midwater” winning bids jumped an average 86% to $2.3 million, while deepwater bids were up more than 300% at $4.3 million, according to Adkins and Gerry. “Since 2003, we have seen a steady increase in the value paid for deepwater blocks, especially this year when the price tag took off. The primary driver here is the market’s belief in the sustainability of higher oil prices.”

The analysts said another possible reason for the huge growth in deepwater spending may relate to Chevron Corp.’s “well publicized success in the deepwater arena last year through its Jack well discovery,” (see Daily GPI, Sept. 6, 2006). “This event proved that 1) the industry had the technology to go after ultra deepwater fields and 2) the hydrocarbon payout potential exists. As a result, bidding activity on deepwater leases exploded this year.”

The shallow water market in the GOM “has certainly come off of its 2005 and 2006 highs,” noted the analysts. Bid activity in lease sales “has typically been a decent leading indicator for jackup activity, as measured by utilization. With the shelf mainly being a natural gas-driven play, this year’s lease sale would indicate that the market does not anticipate increased spending on the shelf, a viewpoint that is consistent with our recently revised 2008 natural gas price forecast of $7.00/Mcf,” (see Daily GPI, Sept. 18).

Assuming all else is equal, the analysts said it appears that rig utilization levels in the GOM could be headed back to the sub-75% level. However, the continued “rig migration” out of the GOM should help balance the supply/demand for jackups.

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