Shell Leads US Gulf Faithful In Oil, Gas Lease Sale

Early on in the March 20 lease sale for blocks in the U.S. Gulf of Mexico (GoM), it was apparent that Royal Dutch Shell Plc would be among the most dominant players vying to land winning bids on some of the more than 14,600 blocks offered.

The Netherlands-headquartered company placed multiple bids, mostly unchallenged, in the East Breaks, Garden Banks, Alaminos Canyon, Mississippi Canyon, De Soto Canyon, Green Canyon, Atwater Valley and Lloyd Ridge. Subsidiary Shell Offshore Inc. ended up placing the most bids of the sale, pledging to pay more than any of the other 29 companies that participated. The company’s 87 apparent high bids totaling $84.8 million made up just over a third of the sale’s overall $244.3 million in high bids, preliminary sale statistics show.

“These newly acquired blocks are located near existing hubs, within new exploration areas and near existing discoveries. Shell bid on a total of 88 lease blocks for this lease sale,” Shell spokesman Curtis Smith told Hart Energy in a statement. “Deep water is a growth area, and soon to be a cash engine for Shell, and the acquisition of new acreage creates an opportunity to enhance an already advantaged position in the Gulf of Mexico.”

Already one of the largest deepwater leaseholders offshore the U.S., Shell is among the companies that have stuck with offshore oil and gas development bringing down costs using technology, existing infrastructure and phased developments, despite market conditions that prompted others to shift to more agile plays onshore—particularly the Permian.

William Turner, senior research analyst at Wood Mackenzie, pointed out that the number of companies participating has “thinned out” and that the higher spend was “outpaced by the increase in acreage leading to lower amount per acre, furthering our hypothesis that it is a buyer’s market in the Gulf of Mexico.” Noticeably absent from the sale was Exxon Mobil Corp., which is on a mission to increase Permian Basin production while leading exploration and development efforts offshore Guyana.

Thirty companies participated in the March 20 sale. That’s about the same as the last sale, which was held in August 2018.

“It seems those left in the Gulf of Mexico are committed to the region and taking this opportunity to quietly strengthen their prospect inventory,” Turner said in a statement following the sale. “One of the most interesting details of the sale were unique partnerships between majors and smaller players like Kosmos with Equinor, Fieldwood with Chevron, LLOG with BP and Talos with EcoPetrol. This demonstrates a shrinking pool of partners, but also an increased willingness of the majors to partner with these more nimble players.”

Shell, however, made solo moves.

The biggest move of the sale was perhaps made by Equinor ASA, an energy company that is no longer focused solely on oil and gas.

The Norwegian player was part of a four-way battle for Mississippi Canyon Block 801 with Talos Energy Inc., Shell and a consortium comprised on Beacon Offshore Energy Exploration and Houston Energy. Equinor came out on top with its bid of about $24.5 million for the block. Shell’s bid was the second highest of the bunch at about $9.6 million.

The block is near the Shell-operated Vito development, which Equinor is a partner. Mississippi Canyon is also home to the Titan production platform, which is 100% owned and operated by Equinor.

“The U.S. GoM is a prolific basin with remaining potential for high value creation. We are very pleased with the results,” Erik Haaland, a spokesman for Equinor, told Hart Energy in an emailed statement. “These leases add acreage with significant potential to our existing portfolio of high-quality prospects in this basin. Equinor is one of the largest producers in the US GoM.”

The company produces more than 110,000 barrels of oil equivalent per day in the U.S. GoM and has ownership shares in nine producing fields (one operated), one field in development and one project in definition phase, he added.

Preliminary statistics from the U.S. Bureau of Ocean Energy Management (BOEM) show about $283.8 million in bids were submitted in all, which is about $81 million more than the last lease sale. The sale offered acreage offshore Texas, Louisiana, Mississippi, Alabama and Florida in both shallow water and deep water. Nearly 180 of the 227 blocks receiving bids were in water depths of at least 800 m.

The August 2018 lease sale brought in about $178 million in high bids compared to the more than $244.3 million in high bids pledged by oil and gas companies today. About the same number of companies participated.

Over the last three years, the number of tracts bid on and the number of bids received have increased, Mike Celata, regional director for BOEM’s GoM region, said on a media call following the sale. The improved activity comes as the offshore industry continues to recover from the most recent market downturn.

“Oil prices have been somewhat stabilized and our system allows for predictability so that people can plan ahead,” Celata said. “There are a lot of good opportunities out there for people. If you look at the tracks bid on, 213 of the 227 had been previously released.”

That likely indicates companies are looking at previously identified prospects and opting to add acreage to their portfolios, he added.

But some could also be chasing potential new plays, particularly in the De Soto Canyon and Lloyd Ridge areas.

“I think it’s a very positive sign that the Gulf of Mexico will be strong in terms of bidding for the long term,” he said of the results.

Randall Luthi, president of the National Ocean Industries Association, said the results reflect stable oil prices and industry’s cost-cutting by the industry.

“Much of the cost cutting has drastically affected service companies, as their profit margin remains thin or non-existent,” Luthi said in a statement. “However, the trajectory of this and the past few sales shows stability and helps establish a new normal for the U.S. offshore industry.”

Yet he noted the need to open more areas offshore the U.S. to oil and gas development.

“As the global offshore energy recovery heats up, the U.S. must recognize that we are not the only player at the offshore table,” he said. “Other basins in the Western Hemisphere, including Guyana, Brazil and Mexico [not to mention onshore U.S. production] have become magnets for investment dollars.”

The next lease sale, which will be the fifth offshore sale under the current five-year Outer Continental Shelf oil and gas leasing program, is scheduled for August. BOEM estimates the GoM Outer Continental Shelf contains about 48 billion barrels and 141 trillion cubic feet of undiscovered technically recoverable oil and gas resources.

Velda Addison can be reached at vaddison@hartenergy.com.