What fueled the bidding in record OCS Sale 157

A. D. Koen
Senior Editor-News

Better economics fueled record bidding at the most recent U.S. offshore lease sale in the Central Gulf of Mexico and heightened competition for deepwater acreage.

Expectations were high in the weeks leading up to Minerals Management Service Sale 157, conducted Apr. 24 in New Orleans, that the auction would attract more interest than past central gulf sales. Most of the hopes flowed from deepwater royalty relief approved in late 1995 by the U.S. government (OGJ, Nov. 20, 1995, p. 41).

As expected, Sale 157 set records for the number of bids offered and the number of tracts receiving bids, 1,381 and 924, respectively. In all, 78 companies offered bonuses totaling $716.1 million at Sale 157. Apparent high bids totaled $520.9 million (OGJ, Apr. 29, Newsletter).

Also as expected, deepwater bidding played a big role in Sale 157. Among the 924 tracts receiving bids, 442 were in more than 400 m of water, compared with 178 deepwater tracts that received bids in MMS Sale 152 in April 1995.

Bidding strategies

Summaries after Sale 157 made it clear that the new deepwater incentive alone could not account for all the record bidding.

For one thing, the trend toward more deepwater bidding appears to have begun last year. Companies in Sale 152 offered bids for more than three times as many deepwater tracts as companies participating in Sale 147 in April 1994.

Another indicator: 453 of the 924 tracts that received bids in Sale 157 are in less than 200 m of water, where operators receive no break on royalty payments.

Companies that participated in Sale 157 said a combination of factors contributed to bidding strategies.

Better technological capabilities all across the gulf, especially 3D seismic data, prompted Sale 157 bidders to seek smaller prospects in shallow water that can be developed quickly and at relative low costs.

Similarly, improved technology is leading exploration for and development of prospects in extremely deep water. That effectively is widening the range of available prospects that operators in the gulf can produce at a profit.

In addition, recently higher oil and gas wellhead prices have helped gulf producers make the most of their lower cost structures that yield short term cash flow to fund offshore exploration and development.

Royalty relief

Despite the diversity of prospects sought in Sale 157, deepwater royalty relief clearly was a big factor for many companies.

Operators offered 139 bids for 88 tracts in the Mississippi Canyon planning area and 251 bids for 176 tracts in Green Canyon.

In addition, companies for the first time bid in large numbers for tracts in the central gulf's ultradeepwater frontier, including 95 offers for 84 tracts in Atwater Valley and 119 offers for 91 tracts in Walker Ridge.

The heavy deepwater action prompted observers to proclaim Sale 157 a watershed event for the country, as well as for U.S. offshore oil and gas producers.

Sen. Bennett Johnston (D-La.), author of the deepwater royalty relief bill, said the sum of apparent high bids and increased deepwater competition show the incentive is achieving the results intended.

When the law was passed last year, Johnston said, "We estimated it would generate an average of $100 million/ year in additional lease bonus revenues over the next 5 years."

Apparent high bids in Sale 157 exceeded those of Sale 152 in May 1995 by $214 million.

Johnston said the Bureau of Labor Statistics estimates each $1 million invested in the oil and gas extraction industry creates 20 jobs in all sectors of the economy.

"Production resulting from this one sale will increase jobs not just in the gulf but throughout the country," Johnston said. "Critics said (deepwater royalty relief) wouldn't generate new oil and gas exploration or new jobs, but this sale proves the critics wrong."

Energy Sec. Hazel O'Leary said the deepwater royalty relief will reduce U.S. dependence on crude oil imports by helping unlock billions of barrels of oil and gas in the Gulf of Mexico.

"It also will generate nearly $10 billion of new investment in the U.S. energy sector, supporting thousands of American jobs while contributing an additional $200 million in bonus and royalty payments to the U.S. Treasury," O'Leary said.

Matthew Simmons, chairman of the National Ocean Industries Association, said record activity at the landmark sale shows that "good energy policy works."

Simmons said, "While the U.S. oil and gas industry leads the world in development and application of technology to find and extract oil and gas, domestic technical expertise has been shifting overseas to more business friendly environments. The royalty relief incentives have provided an anchor for the U.S. to maintain its leadership role in development of deepwater technologies and placed the Gulf of Mexico on par with other world class oil and gas provinces."

Texaco the pacesetter

Texaco U.S.A. paced bidding in Sale 157, with gross exposure of more than $60.3 million in 125 apparent high bids out of 151 offers.

Among the top 10 bidders at the sale, only Zilkha Energy Co., Houston, focused mainly on shallow water tracts on the gulf's Outer Continental Shelf.

Among its 125 apparent winning bids, Texaco made top offers on 20 tracts in less than 1,300 ft of water, 59 on tracts in 1,300-5,000 ft of water, and 46 on tracts in more than 5,000 ft of water. Most of the latter tracts are in the gulf's Walker Ridge and Atwater Valley planning areas.

Company officials said Texaco tried to acquire the ultradeepwater frontier tracts to build a portfolio of prospects to explore during the rest of the 1990s and early in the 21st century.

Bruce Appelbaum, who is leaving his job as manager of Texaco's offshore division to become president of his company's international exploration, said offshore technology exists to develop prospects in more than 6,000 ft of water. With expansions under way in the gulf of key deepwater gathering and transportation facilities, Texaco expects to be able to develop the ultradeepwater prospects on which it was high bidder within the 10 year lease terms.

Texaco Land Manager Harold Cargol said the company bid on the frontier tracts because many deepwater prospects being developed today in the gulf were acquired at MMS lease sales in the late 1980s.

"The companies that got out there and made the effort to acquire significant inventory positions and portfolios had the opportunities to make significant deepwater discoveries," Cargol said.

Bobby Ryan, soon to replace Appelbaum as head of Texaco's offshore division, said the ability to identify such prospects early is the key to being at the forefront of evolving offshore technology.

Texaco placed Sale 157's second largest apparent winning bid with a solo offer of $8,787,785 for West Delta Block 108. The company also had four multimillion dollar joint bids with Chevron U.S.A. Inc. for deepwater tracts in the Mississippi Canyon planning area and a solo offer of $3,187,785 that apparently won South Marsh Island, South Addition Block 180.

Vastar Resources Inc., Houston, had Sale 157's highest apparent winning bid, a solo offer of $11,151,000 for Mississippi Canyon Block 941.

Vastar in all at Sale 157 offered 42 apparent winning bids with combined bonuses amounting to more than $33.8 million.

Competition for acreage

Competition was strong in Sale 157 for acreage all across the gulf-but especially for deepwater tracts.

The most sought after tract at Sale 157 was South Marsh Island, North Addition Block 261. A combine of Murphy Exploration & Production Co. and Callon Petroleum Co., Natchez, Miss., topped nine other bidders on the tract with a joint offer of $3,187,600.

In bidding for other hotly contested tracts:

Basin Exploration Inc., Denver, topped seven other offers on Eugene Island Block 65 with a solo bid of $6,376,400.
CNG Producing Co., New Orleans, bested seven other offers for Main Pass, South and East Addition Block 280 with an apparent winning offer of $2,252,800.
McMoRan Oil & Gas Co., New Orleans, beat six other offers for West Cameron, South Addition Block 492 with an apparent high bid of $2,167,726.

Mississippi Canyon blocks 728 and 772 were the two most sought after deepwater tracts in Sale 157. Texaco and Chevron won the tracts-in about 4,000 ft of water-with a pair of 50-50 bids, topping five other offers. The companies' two $4,102,272 apparent winning offers for the prospects were among Sale 157's top 10 bids.

"Clearly, industry recognized them as quality prospects," Texaco's Ryan said.

BP Exploration and BHP Petroleum offered the apparent winning bids for three contiguous tracts in about 4,000 ft of water in the Green Canyon area. BP-BHP jointly bid $3,330,547 for Green Canyon Block 872, $2,150,035 for Green Canyon Block 873, and $1,743,034 for Green Canyon Block 871. BP holds a 56% interest in each bid, BHP 44%.

Shell Offshore Inc., Texaco, Amoco, and Conoco Inc. offered solo bids for each tract.

General bidding trends

The most active companies at Sale 157 spread their bids among tracts on the shelf and in deep water.

On the shelf, they tended to go after step-outs and extensions, as well as stand-alone prospects near production facilities. In deep water, the focus was more on frontier acreage, where exploration and development would test the limits of offshore technology. In addition, subsalt prospects played sizable roles in many companies' bidding strategies.

Susan Cunningham, Amoco's manager of gulf deepwater exploration, said prospects available on the shelf are declining in size because of the region's developmental maturity.

"The only place to go after large discoveries is in ever deeper water," she said. "We're in the same boat as most of the other majors that are really stepping out into frontier areas."

Amoco in Sale 157 had 51 apparent high bids out of 73 offers. Among its bid portfolio were 52 prospects in deep water.

Zilkha Pres. and Chief Executive Officer Jack Holmes said most of his company's bidding was concentrated in West Cameron federal planning area, as in past years. The company amassed a gross exposure of $18,928,526 in 115 apparent winning bids.

Echoing viewpoints of other companies active in the gulf, Holmes said overall bidding was up at Sale 157 because of a confluence of events.

"The deepwater royalty relief is significant," he said. "The technology-especially 3D seismic-is making a big difference, and prices make a big difference.

"I think anybody in the U.S. that's going to have an aggressive exploration program has to consider the gulf one of the better areas in which to look."

Ron Keisler, vice-president of world exploration for Marathon Oil, said he believes the new era of oil and gas development in the Gulf of Mexico predicted by many observers has begun: "The level of competition evident at this sale says we're there."