Gulf of Mexico Lease Sale high bids nearly halved compared with 2019 sale

The US Bureau of Ocean Energy Management (BOEM) announced that region-wide Gulf of Mexico Lease Sale 254 generated $93,083,453 in high bids for 71 tracts covering 397,285 acres in federal waters of the Gulf of Mexico. That amounts to roughly half of the previous lease sale held in August 2019.

“With the recent drop in oil price, it came as no surprise that bidding dollar amount was significantly lower – this is the first time the total high bid amount came in at below $100 million since the region-wide lease sales began in 2017,” Mfon Usoro, Senior Research Analyst with Wood Mackenzie’s Gulf of Mexico upstream team, said.

Although bidding activity was muted, the majors took part, accounting for more than 60% of the high bid amount, confirming their commitment to the region. Competition ensued among Shell, Chevron, BP and Total for blocks that recently expired in Green Canyon and Garden Banks. If the winning bids are not rejected by the BOEM, the winners will acquire the blocks at a fraction of previous lease bonuses paid.

“The development of oil and gas assets in the Gulf of Mexico is a highlight of the Outer Continental Shelf (OCS),” Mike Celata, BOEM’s Gulf of Mexico Office Regional Director, said. “The continued presence of large deposits of hydrocarbons in the region will draw the interest of the industry for decades to come.”

Lease Sale 254 included 14,594 unleased blocks located from 3 to 231 miles offshore, in the Gulf’s Western, Central and Eastern Planning Areas in water depths ranging from 9 to more than 11,115 ft (3 to 3,400 m). The following were excluded from the lease sale:

• Blocks subject to the congressional moratorium established by the Gulf of Mexico Security Act of 2006;
• Blocks that are adjacent to or beyond the US Exclusive Economic Zone in the area known as the northern portion of the Eastern Gap; and
• Whole blocks and partial blocks within the boundaries of the Flower Garden Banks National Marine Sanctuary.

Bidding close to infrastructure continued to be a recurring theme as companies look to weather the storm of another downturn. Infrastructure-rich Mississippi Canyon, Green Canyon and Garden Banks accounted for over half of the bids and were the only areas that received competitive bids. Only Shell and Chevron ventured out to the more remote Atwater Valley.

“While most Independents stayed away from the lease sale amidst budget cuts, BHP bucked the trend and placed the highest bid of US$11 million for the second lease sale in a row,” Ms Usoro said.

“The block (GC 80) is adjacent to GC 124, which BHP snagged with the highest bid of $22 million in last lease sale in August 2019,” Ms Usoro added. “BHP also bid on a cluster of blocks in Alaminos Canyon to bolt onto its existing acreage in the region where it is currently evaluating results of the Ocean Bottom Node seismic.”

“We think more lease sales are still in the cards, but higher oil prices will be required for bid amounts to climb back to historical norms. Otherwise this sale result will continue with even lower bidding activity,” Ms Usoro said.

Revenues received from the OCS leases are directed to the US Treasury, certain Gulf Coast states (Texas, Louisiana, Mississippi and Alabama) and local governments, the Land and Water Conservation Fund, and the Historic Preservation Fund.

Leases resulting from this sale will include stipulations to protect biologically sensitive resources, mitigate potential adverse effects on protected species, and avoid potential conflicts associated with oil and gas development in the region.

In addition, BOEM has included appropriate fiscal terms that take into account market conditions and ensure taxpayers receive fair market value for use of the OCS. In recognition of current hydrocarbon price conditions and the marginal nature of remaining Gulf of Mexico shallow water resources, these terms include a 12.5% royalty rate for leases in less than 200 m of water depth, and a royalty rate of 18.75% for all other leases issued under the sale.

Lease Sale 254 was the sixth offshore sale held under the 2017-2022 National Outer Continental Shelf Oil and Gas Leasing Program. Under this program, 10 region-wide lease sales are scheduled for the Gulf, where resource potential and industry interest are high, and oil and gas infrastructure is well established. Two Gulf lease sales will be held each year and include all available blocks in the combined Western, Central and Eastern Gulf of Mexico Planning Areas.