Record-size US Offshore Oil Lease Sale Draws Modest Bidding

March 21, 2018

World Energy Reports LLC.
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Oil and gas drillers bid modestly on Gulf of Mexico acreage in the largest lease sale in American history on Wednesday, dealing a setback to the Trump administration's efforts to rapidly pump up investment in the region.

The Interior Department had offered up a record 77 million acres (31.2 million hectares) for development in the Gulf with discounted royalty rates on the shallower tracts as part of a broader effort by President Donald Trump's administration to ramp up U.S. fossil fuels output.
But companies bid on just 1 percent of that acreage, and won those tracts with bids averaging $153 an acre - 35 percent below levels last year, and a fraction of those in the region in 2013 when oil prices were higher, according to the data.
In all, the auction yielded $124.76 million in winning bids.
The Interior Department's Bureau of Ocean Energy Management, which administered the auction, characterized the results as robust: "I think we’re seeing continued consistent investment in the Gulf of Mexico," BOEM spokesman Mike Celata said in a conference call with reporters, adding he forecast increasing oil and gas production from the region for years.
He said 33 companies, including majors Royal Dutch Shell Plc , BP Plc, Chevron Corp, and Total SA , had placed 159 bids on 148 blocks.
But critics of the administration called the unusually large lease sale ill-timed. U.S. crude oil and natural gas output is already smashing records thanks to improved drilling technology that has opened up cheaper onshore reservoirs, and Brazil and Mexico are also competing for drilling investment in their own deepwater acreage.
"Offering a nearly unrestricted supply in a low demand market with a cut rate royalty and almost no competition is bad policy and an inexcusable waste of taxpayer resources," the Center for American Progress, a left-leaning policy think tank, said in a statement.
It called the sale an "embarrassing flop".
Interior Secretary Ryan Zinke had said ahead of the sale that the record-sized offering would be a "bellwether" of industry demand in the region, and billed the effort as a way to help the United States become more "energy dominant."
"All-time Lows"?
The U.S. government offers Gulf of Mexico leases annually, but usually in smaller regional batches. An auction in March 2017, for example, offered up 48 million acres in the Central Gulf of Mexico planning region.
Consultancy Wood Mackenzie had expected demand for the acreage to get a boost from higher oil prices and lower corporate taxes, but pointed out interest could be hurt by competition from Latin America and concerns over the impact that U.S. tariffs on steel imports could have on costs.
William Turner, senior research analyst at Wood Mackenzie, said the sales statistics were "on par with the all-time lows that we saw last year," referring to a lease sale in 2017 that had yielded $121 million in winning bids.
The National Ocean Industries Association, which represents offshore drillers, said it was "encouraged" by the results, but also added a note of caution.
"The United States must continue to evaluate how to keep the Gulf of Mexico and other parts of the U.S. outer continental shelf attractive in light of competition from Brazil and Mexico," it said in an emailed statement.
In an effort to pump up interest, the Interior Department had cut the royalty rate companies must pay in shallow offshore waters by a third to 12.5 percent, and is considering cutting the rate for deeper waters too.
The administration is eyeing further vast lease sales offshore in the future, having proposed opening up parts of the Arctic, Atlantic and Pacific - an idea that has faced pushback from several governors in U.S. coastal states.

(Additional reporting by Valerie Volcovici and Gary McWilliams; Writing by Richard Valdmanis; Editing by Marguerita Choy and Paul Simao)


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