Return to The Gulf: Oil Companies Scramble for Leases

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December 14, 2011

NEW ORLEANS (Dow Jones)–The U.S. oil-and-gas industry took another step out from the shadows of the Deepwater Horizon disaster on Wednesday when federal officials unsealed the first bids for drilling leases in the Gulf of Mexico since the deadly April 2010 accident.

Some 21 million acres of federal waters–an area roughly the size of South Carolina–stretching hundreds of miles off the Texas coast were up for bid. The auction attracted $337.6 million in winning bids for 191 available blocks that could eventually lead to more than 400 million of barrels of oil production.

Twenty companies placed 241 bids for the right to explore for oil and gas, including a $103.2 million winning bid on a deep-water block by ConocoPhillips Co. that elicited gasps from the more than 200 attendees. Conoco made the most winning bids with 75, while Exxon Mobil Corp. placed 50 winning bids.

BP PLC (BP, BP.LN), which was majority owner of the well the Deepwater Horizon rig was drilling at the time of the accident, successfully bid on leases for 11 blocks, offering $27.4 million in bids. A lease gives companies the right to explore for oil, but they must then submit an application for a permit to drill for each well.

“The Gulf of Mexico is a core business for BP and as stated by our leaders we intend to remain an active investor in the U.S.–including the Gulf of Mexico,” said BP spokesman Daren Beaudo in a statement. “We intend to be active in all facets of the Gulf of Mexico–explorer, developer, operator and interest owner.”

The government said it was pleased with the results. “I’m hoping this is a beginning of a new normal,” said John Rodi, the Bureau of Ocean Energy Management’s Gulf of Mexico regional director.

Environmental groups have challenged the auction in federal court in Washington, contending that the U.S. government didn’t consider the lessons of the 2010 oil spill when calculating the risks of new drilling activity.

But speaking at the auction-opening event in a banquet room at the Superdome, Interior Secretary Kenneth Salazar said, “Offshore drilling will never be risk free. But the world has changed and is very different from what it was like on the morning of April 20, 2010.”

In the wake of the Deepwater Horizon explosion, which killed 11 workers and unleashed the worst offshore oil spill in U.S. history, federal regulators have overhauled requirements for drilling permits. They removed a number of waivers that let drillers bypass some environmental reviews and added additional safety measures, including advance spill-containment equipment.

Drilling activity in the Gulf is creeping closer to pre-accident levels. Last week, 39 rigs were working in the Gulf, 13 fewer than immediately after the Deepwater Horizon accident, according to Baker Hughes Inc.

“The single most important thing this sale represents is a return to some sense of normalcy,” said Jeff Tillery, head of research at Tudor Pickering Holt & Co., a Houston-based investment bank that specializes in energy.

The U.S. has held 110 offshore oil- and gas-drilling lease sales since 1954, most of them in the Gulf of Mexico but some off the California and Alaska shores. There are usually two or three lease sales per year, but the last Gulf sale occurred in March 2010, just before the April 20 Deepwater Horizon accident.

Federal officials imposed a moratorium on deep-water drilling and issuance of new drilling permits on May 30, 2010, in response to the accident. While there was not an official halt to shallow-water permits, the pace of such approvals also slowed.

The deep-water-drilling ban was lifted Oct. 12, 2010, but the pace of permit approvals has lagged behind pre-accident rates.

The Bureau of Safety and Environmental Enforcement, which was split off from the Bureau of Ocean Energy Management, Regulation and Enforcement earlier this year, has approved 266 deep-water drilling permits and 97 shallow-water permits since the accident.

The industry has railed against the slower pace of permitting; according to Greater New Orleans, Inc., an economic-development group, the current pace of deep-water permits issued per month is about 29% below the historical average over the prior three years. Shallow-water permit approvals are about 44% below the historical average.

The government in July 2010 predicted the moratorium could cost up to 12,000 full-time jobs, while an industry study had forecast job losses as high as 21,900. Those dire predictions didn’t pan out, however.

Many workers were kept busy either directly or indirectly supporting the spill clean-up efforts. Companies were also reluctant to lay off workers for what seemed likely to be a temporary lull in the action, said Michel Claudet, president of Terrebonne Parish, La., home to the Port of Houma, where many ships that supply the Gulf rig-and-platform fleet are based.

The industry didn’t want to repeat the mistake it made the 1980s when plummeting oil prices led to layoffs that sent a whole generation of geologists, petroleum engineers and rig workers off to find permanent work in other industries.

By Tom Fowler (c) 2011 Dow Jones & Company, Inc.

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