Sale 169 and the long view

Auctions of federal oil and gas leases in the Gulf of Mexico lately have been more interesting after the fact than before. Outer Continental Shelf Sale 169, scheduled Mar. 18 for the gulf's central area, is an exception.

March 9, 1998

4 min read

In the wake of last year's deepwater leasing spree, expectations are high. A year ago, Sale 166 of leases in the central area drew successful high bids totaling $812 million and set OCS-wide records for the number of bids (1,790) and number of tracts receiving bids (1,032). More than half the tracts receiving bids are in 400 m or more of water, 535 of them in water deeper than 800 m. Last Aug. 7, Sale 168 of western area blocks netted $600 million in successful bids and set area records for bids (1,224) and tracts receiving bids (804). In that sale, 603 of the tracts receiving bids have water depths exceeding 800 m.

After blockbusters like those, why would anyone worry about fading interest? Two reasons: oil prices and drilling rigs.

Prices and spending

The oil price slump will take its toll on spending by operators for as long as it lasts. It might not affect spending in OCS sales, however. Leases outlive price cycles. The early signs are that oil prices won't seriously discourage Sale 169 bidding (see article, p. 36).

A limited supply of rigs may pose longer-lasting challenges than the price slump does. But it, too, may not be a reason to expect leasing to subside.

There aren't enough mobile rigs capable of drilling in water deeper than 3,000 ft. Although the fleet has begun to grow, current and planned additions seem unlikely to satisfy the demand for drilling indicated by recent deepwater leasing.

But companies have ingenious ways of making the most out of what's available. Some of them have been drilling and suspending holes part-way to total depth in order to spud on as many leases as they can while they hold rigs under contract. They'll re-enter and finish drilling the most-promising holes later. They also are forming alliances and swapping rig commitments to ensure timely access to drilling service.

Furthermore, the service and supply industries have historically responded in unexpected ways to the need for new capacity to perform the industry's work. Five years ago, who would have predicted that shipyards would now be fabricating deepwater drillships for the oil and gas industry?

It all costs money, though. Day rates for deepwater drilling rigs are reported to have tripled in the last 2 years and quadrupled or more in the last 4-5 years. That, plus long-term commitments by operators, is what it took to revive construction of deepwater drilling units. The day-rate rise and other structural cost hikes won't yield easily to pressure from a cyclical change in oil prices.

As always, the ultimate question about OCS Sale 169, three-fourths of the tracts in which are in 200 m or more of water, is what an offshore lease is worth. And the answer has to be that on Mar. 18, thanks to falling oil prices and rising costs, a lease will be worth less than it was, say, a year earlier. Over a longer period, though, that answer need not mean very much.

The test

The most interesting part of Sale 169 is that it will test the extent to which operators take the longer view. In that regard, companies have help that wasn't available before the gulf OCS sales of 1996, in which deepwater leasing began to rise. In November 1995, President Clinton signed legislation that extended lease terms and created royalty holidays for new production from leases in 200 m or more of water. The measure has been central to the surge of activity in the gulf's deep waters and to a needed lift in OCS leasing and drilling.

If bidders in Sale 169 show little sign of panic over a cost-price squeeze that won't last forever, federal royalty relief will be important to the explanation. It has certainly been important to federal revenues, the oil and gas industry, U.S. energy supply, and the economies of states that allow OCS leasing off their shores.