Gulf Sale 161 deemed another major success

Richard Wheatley
Associate Managing Editor-News

The record Outer Continental Shelf Lease Sale 161 has doubled the amount of acreage available for drilling in the western Gulf of Mexico.

Sale 161 set a record for the number of bids received in any western gulf sale (OGJ, Sept. 30, p. 26).

A total of 929 bids was received on 617 blocks in the sale compared with 773 bids on 436 blocks in the first western gulf sale, the former record holder, held in 1983.

The oil and gas industry hailed the offering, which marked the first western gulf sale of deepwater leases to be covered by the Deep Water Royalty Relief Act (DWRR), which Congress passed earlier this year.

Acreage available for drilling increased to about 6.5 million acres from about 3 million acres prior to the Sept. 25 sale. It involved 5,168 blocks, covering 28.4 million acres, and included 3,585 blocks in water 200 m and deeper.

In a post-sale report, NatWest Securities Corp., NewYork, said this sale and central Gulf of Mexico Sale 157 in April "represent tremendous confidence on the part of oil and gas companies regarding the drilling potential of the Gulf of Mexico" during the next few years.

NatWest said, "Such aggressive leasing by oil companies likely reflects their significant operating cash flows (up an estimated 25% for oil companies with equally weighted production between oil and gas), as well as their increased confidence in state-of-the-art technologies such as 3D seismic and floating production."

Deepwater incentive

Matthew Simmons, National Ocean Industries Association chairman, said sale results prove that passage of the DWRR was the proper course of action by policymakers.

Simmons, president of Simmons & Co. International, Houston, said, "This was the first sale in the western gulf in which tracts receiving bids in water depths of 200 m or more were eligible for royalty relief. Last year, the U.S. received bids for 146 tracts in water depths of 200 m or more in the western gulf. This year, that number tripled with 433 tracts receiving bids from companies wanting to explore and produce energy in the deep waters of the western gulf.

"When the 321 leases in water depths exceeding 800 m are added to the record-breaking 401 leases at the same water depths in the April central gulf lease sale, this adds over 700 leases in the ultradeepwater to the U.S. inventory of future oil and gas supply," Simmons said.

"The conclusion is inescapable," Simmons said. "Good energy policy works.

"What we are experiencing is what was projected before the DWRR was passed: economic stimulation, a nationwide upswing in employment opportunities, and a world leadership role for the U.S. in the development and application of technology used to find and extract oil and gas."

Sen. Bennett Johnston (D-La.), principal author of the law, said, "When we passed the DWRR last year, we estimated it would generate an average of $100 million/year in additional lease bonus revenues over the next five years.

"This one sale yielded an incremental $208 million over last year's sale, and the highest bid of $13 million was by an independent producer."

Johnston said bonuses in the latest sale were 145% higher than the $144 million raised last year, and the number of leases sold in the deepest waters soared 330%, from 74 last year to 321 in the latest sale.

"Critics said this policy would cost the government, but they were clearly wrong," Johnston said. "This year's sales have already generated $422 million above last year's levels. When we passed this legislation, we were only predicting an additional $485 million over the course of 5 years. This year's results have far surpassed our expectations.''

Top bidder's strategy

Barrett Resources Corp., Denver, submitted the apparent net high bid of $13,006,080 for High Island Area South Addition Block 545A off Texas. The company exposed a total of $35.99 million, and its total net apparent winning bids were $34.76 million.

Barrett, whose historical focus has been the Rocky Mountain and Midcontinent areas until late 1995, took advantage of offshore opportunities and superior prices to venture into Gulf of Mexico leasing, beginning with Sale 157. It had a non-operated working interest in several drilling opportunities in the gulf prior to Sale 157.

Peter Dea, exploration senior vice-president, said Barrett, alone and in combination with another company, was apparently successful on 19 of 22 blocks in Sale 161, 15 of which are 100% Barrett-owned. The remaining four apparently successful bids were submitted by a Barrett-Consolidated Natural Gas Inc. combine on an equal basis.

Water depths range from 33 ft to 315 ft. High Island Block 545A has an average water depth of 245 ft.

Dea said Barrett had been contemplating entry in the Gulf of Mexico for the last several years "with an eye toward getting in there at the appropriate time." He said the company put a plan in place, hired appropriate personnel to carry out its strategy, and moved ahead.

Alone and with partners, it acquired 11 blocks off Louisiana in April's Sale 157. If awarded all of the leases it was apparently successful in bidding on in Sale 161, Barrett's Gulf of Mexico lease inventory will total 30 leases from the two sales.

Virtually all of Barrett's prospects are 3D seismic-controlled and tied to nearby well control.

Dea said Barrett grows through drilling, and the company plans an active 1997 drilling program. "We would like to get after it as soon as we can."

Heavy bidding action

Seventy-three companies participated, and 57 submitted bids. Companies submitted 929 bids on 617 tracts. Bids totaled $503.6 million. Apparent net high bids totaled $356,121,922, Minerals Management Service said.

The concentration of bids was on shallow or ultradeepwater acreage.

There were 72 bids on blocks with water depths ranging from 1,312 ft to 2,625 ft and 321 bids on blocks 2,625 ft and deeper, MMS said. Companies bid on 184 tracts with water depths to 656 ft, and there were 40 bids on tracts with water depths ranging from 656 ft to 1,312 ft.

There were 113 bids on blocks with 8 year primary lease terms and 280 bids on blocks with 10 year primary terms. A total of 224 blocks receiving bids have 5 year primary lease terms. Net high bids on blocks with 8 year terms totaled $78.5 million, and net high bids on blocks with 10 year terms totaled $122.9 million.

Majors dominate

Three majors dominated the sale in terms of number of bids.

Shell Offshore Inc. (SOI) had the greatest number of bids at 174, exposing $82.9 million. SOI was apparently successful on 123 blocks. It was followed by Chevron U.S.A. Inc. and Texaco Exploration & Production Inc. Chevron cast 72 bids and Texaco 63. The companies exposed $12.6 million and $12.1 million, respectively.

Shell, Texaco, and Amoco Production Co., each with a one-third interest, partnered on the deepest sale block, Alaminos Canyon 862. Average water depth is 10,000 ft. Location is 156 miles east of Port Isabel, Texas.

Mark Leonard, SOI's manager of prospect development for the West Gulf of Mexico-deepwater, said Shell's bidding was an effort to build upon what the company has learned from deepwater prospect development, especially major projects such as Mars and Auger.

Leonard said Shell's sale strategy centered on building its lease inventory for the future, adding "we look forward to getting 3D over a number of these prospects."

Texaco said sale results underscore that the deepwater is where the action is going to be in the Gulf of Mexico. The company attributed the record-setting sale results to a number of factors, including stronger prices, DWRR, and mounting deepwater successes.

John W. McDonald, Texaco's Gulf of Mexico offshore division manager, said, "What we're looking at is a recognition that technology is beginning to catch up with the water depths."

In central Gulf of Mexico Sale 157, Texaco successfully bid on 125 of 151 tracts, all of which were approved subsequently by the MMS.

Other bidders

Other companies saw encouraging deepwater opportunities in Sale 161, as well.

Anadarko Petroleum Corp., bidding alone or with partners, was apparently successful on 12 of 14 bids, representing an expenditure of $2.35 million net to Anadarko. Water depths over the blocks range from 2,700 ft to 5,700 ft.

"This lease sale marked our entrance into the deepwater play, a frontier area in the Gulf of Mexico," said Robert J. Allison Jr., chairman, president, and chief executive officer. "Without a doubt, the potential for large reserves is there. The deepwater discoveries and flow rates that have been announced by other operators to date are very encouraging." Allison also noted technological advances in drilling and production are helping to make the deepwater Gulf of Mexico more attractive.

Vastar Resources Inc. was apparently successful on 26 of 42 tracts, exposing $18.1 million. If all of the tracts are awarded, it will have purchased 131,000 net acres for about $14 million, the company said.

Sixteen tracts are located in water deeper than 200 m, and the remaining tracts are located on the OCS in the Galveston, High Island, Mustang Island, and High Island South Addition areas.

Dave Johnson, exploration and land senior vice-president, said Vastar was apparent high bidder on all of its top prospects.

"We expect to drill several tracts early next year," Johnson said.

The majority of Vastar's apparent high bids for deepwater acreage in Sale 161 is in the Garden Banks area.

Enron Oil & Gas Co. (EOG) was the apparent successful bidder on 22 of 37 blocks, including seven in water depths between 600 ft and 2,700 ft. EOG exposed $16.1 million, and apparent net high bids totaled $10.8 million.

Forrest E. Hoglund, EOG chairman, president, and chief executive officer, said, "With current technological capabilities, the time has come to exploit the larger reserve potentials in the Garden Banks and East Breaks areas in the Gulf of Mexico. We hope to be drilling the first of the deepwater prospects within 18 months following final bid approval."

EOG's apparent high bids on deepwater acreage included East Breaks Blocks 250 and 251 and Garden Banks Blocks 121, 225, 467, 493, and 500. All are 100% EOG-owned.

Louisiana Land and Exploration Company, with partners, was apparent net high bidder on 15 tracts located in the East Breaks, Garden Banks and Alaminos Canyon areas. The company could drill several of the prospects as early as 1997, LL&E said.