U.S. INDUSTRY OFFERS ADVICE ON OFFSHORE LEASING

Oil companies are warning the U. S. Minerals Management Service against drastic changes in Gulf of Mexico leasing methods.

In the Dec. 7 Federal Register, MMS had asked industry for comments on possible changes (OGJ, Dec. 13, 1993, p. 64). It is concerned the government may not be getting a fair return at Outer Continental Shelf lease sales.

MMS Director Tom Fry has observed gulf tracts are drawing fewer and smaller bids, and MMS might want to hold more frequent, smaller sales. He said MMS is pressed to review bids in the 90 days allowed and might ask companies to designate tracts that MMS could evaluate before the sale.

INDUSTRY RESPONSE

Forty oil companies and associations responded to the MMS request for comments.

Most offered to give MMS an additional 30 days to review bids but opposed nominating tracts beforehand. They recommended retaining yearly sales in the central and western gulf, which offer all available acreage.

Most recommended either royalty holidays for new production or royalty and tax incentives for deepwater (400 m or deeper) production. And then, said the current minimum bid of $25/acre should not be increased.

Several companies said when MMS rejects high bids on tracts it should reoffer those tracts at the next gulf sale to help speed exploration. Several said MMS should refer to the sales as "basin-wide" and not "area-wide."

The American Petroleum Institute said, "Industry must have the flexibility and predictability that the existing leasing system provides to warrant continue investment and permit production plans and development."

It noted gulf royalty payments have not dropped, only lease bonus payments. It explained that is because oil and gas prices have declined since 1987, and new gulf fields increasingly are either shallow water prospects with small reserves or costly deepwater prospects.

API said, "The future focus in OCS leases should be on encouraging and fostering new discoveries, not on maximizing individual lease bonuses. The current area-wide leasing system provides this focus."

The Domestic Petroleum Council said the MMS request for comments appeared to be based on the belief that offering less acreage for lease or restricting the number of tracts sold will increase competition among bidders and thus increase revenues. "This is a fallacious premise," it said.

BIDDING STRATEGIES

The National Ocean Industries Association (NOIA) noted more companies are bidding on gulf leases than ever before, and the increasing diversity of ideas has led to a broader range of bidding strategies.

Regarding the time MMS needs to review bids, NOIA said, "It was our understanding that the recent increase in lease rentals to $5 from $3/acre was intended to provide funds for the system that would enhance MMS' ability to analyze lease sale results."

Pogo Producing Co. said, "The MMS has been down this road before. Fair market value has been tested in the past with high minimum bids, royalty bids, and net profits leasing systems. Pogo believes the current system should be retained intact."

It added, "The Gulf of Mexico has become a mature producing province (excluding the deep water). It would appear this is having a dampening effect on lease sales."

Anadarko Petroleum Co. said, "Tinkering with the mechanics of the system only serves to add uncertainty to the OCS exploration and production business, which is already fraught with considerable geological, technological, financial, and political risks."

Anadarko said MMS should be careful with royalty holidays and reductions because the market is the best arbiter of decisions regarding which projects are truly worthwhile.

Newfield Exploration Co., which operates several net profits share leases, warned against such alterative methods. "The administrative burden is much more severe than that of a conventional fixed royalty lease,' it said. "Simpler is better."

Newfield said lease turnover would be faster if MMS leased tracts for 3 years rather than 5. At the end of 3 years, lessees would have the option to renew the lease for 2 years by paying a fee equal to the original bonus.

Hunt Oil Co. suggested MMS sell leases in four block units to the highest bidder, even if another company submitted a higher bid for one of the four blocks. It said that would encourage leasing based on a prospect or concept basis, rather than encourage trend leasing, and allow maximum use of new exploration technology such as 3D seismic.

LARGE COMPANIES

Chevron U.S.A. Production Co. said MMS should not restrict the largest oil companies from bidding as partners on deepwater leases. It cited high risks and capital requirements in deep water.

Exxon Exploration Co. argued that some sort of royalty relief is warranted for deepwater reserves. "Due to the lack of infrastructure, high costs, and other economic risks, less than half of the 4 billion bbl of oil equivalent discovered in the deepwater gulf has been committed for development."

Marathon Oil Co. said, "MMS should not automatically assume that a single bid block was evaluated only by the company who submitted the bid. In our experience, the majority of these tracts were evaluated by other companies who assigned no value to the tract."