The Gulf of Mexico is vast, spreading over some 1.55 million square kilometres. It is also prolific, very prolific. The Gulf still produces around 15% of all US crude, despite the seemingly unstoppable rise of onshore sale output in recent years. But for all of its achievements, there is still a portion of it is yet unexplored. Of that (relatively large) portion, a fraction was leased in the recent US Gulf of Mexico Lease Sales 253. Livestreamed from New Orleans, over 151 tracts covering 835,006 acres of federal waters were parcelled out for US$159 million. So, what does this mean for US Gulf offshore production going forward?
Included in the sale were 14,585 unleased blocks covering both shallow and deepwater acreage, located between 3 to 370km offshore in waters to the depth of 3 to 3,4000 metres in the Western, Central and Eastern Planning Areas. The Bureau of Ocean Energy Management (BOEM) called the sale a success, pointing out that the lease round in August and the earlier March round generated the highest total from high bids since 2015.
That’s couched language. It is true that the March sale drew US$244.3 million across 227 tracts, but the August 2019 one is also down from the lease sale in August 2018, which drew US$178.1 million across 144 tracts. The projected total of all lease sales for 2019 is expected to be US$419.2 million. This would be a sizable increase from the preceding years – US$174.5 million in 2016, US$395.9 million 2017 and US$302.8 million in 2018 – but it should be noted that these were the years when oil prices were depressed. The comparison drawn by the BOEM to 2015 is key; that was when oil prices crashed and the upstream activity in the Gulf fell in tandem. Between 2005 and 2015, average annual lease sales for the Gulf of Mexico averaged US$1.6 billion a year. Leased tracts represented just over 1% of available areas, down from historical averages. So while it is indeed true that the latest lease sales have shown growth, the overall figures are still far from the Gulf’s heyday. And those are past figures that may never be reached again.
But what is clear is that interest remains. The list of top high bidders include some of the world’s largest oil companies (although curiously ExxonMobil is missing). Leading the pack is BHP, which delivered the largest bid for the most popular block – Green Canyon 124 – that constituted over more than half of its total high bids in dollar terms. Chevron, BP, Shell and Total were all represented in the sale, where there was equal interest in both shallow and deep water blocks. Anadarko, which will soon become part of Occidental Petroleum, delivered 14 high bids while Norway’s Equinor maintains its presence in Gulf with 23 high bids. The National Ocean Industries Association called the sale ‘reflective of the cautiously optimistic attitude of an offshore industry still in recovery’, noting that competitive prices for upstream operations were balanced by ‘slow-than-desired improvements in (crude) prices.’
So, while the message coming out of the Gulf of Mexico may be mixed-to-positive, it certainly does confirm that the vast area of sea remains an attractive proposition to the energy industry. At least given the current situation. But with the world bordering on a possible recession, there is every chance that this bet may not yield expected returns in the short-to-medium term. The average breakeven cost for the US Gulf of Mexico deepwater is about US$30/b – the product of several years of US operators slashing costs and optimising operations. WTI currently is currently trading above US$50/b, which gives a good margin even if oil prices trend downwards over the next few years. But what if they fall further? What if the flood of US shale continues to boost global supply higher and higher? What if Saudi Arabia and its OPEC+ allies tire of scaling back production and losing market share in favour of propping up prices? The results of the US Gulf of Mexico Lease Sales 253 shows that the industry is cautiously optimistic that this won’t happen. And are more than willing to continue drilling in hope of that.
Main Bids for US Gulf of Mexico Lease Sale 253
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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