Oil demand, price uncertainty make upcoming US Gulf sale hard to predict

 In In the News

Observers reluctant to hazard guesses on sale’s outcome

August 2019 auction brought in $159 million in high bids

May be a buying opportunity for some E&Ps: Platts Analytics

Houston —
As demand for oil slows, producers slash upstream spending and the price of crude is at levels not seen since 2016, offshore experts say it’s anyone’s guess what upcoming US Gulf of Mexico Lease Sale 254 will look like.

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The long-term nature of offshore sales, and the fact that production from blocks won in Sale 254 won’t be seen for several months to several years, may suggest bidding volume may not change much from the 161 bids placed on 151 blocks in last August’s auction, Mike Celata, US Gulf regional director for sale sponsor US Bureau of Ocean Energy Management, said.

That sale also brought in $159 million in high bids from 27 operators, BOEM records show.

In any case, “it’s a difficult question to answer, especially because of timing,” Celata said in a Friday interview when asked to gauge the sale’s relative success.

“The drop to $30/b oil … happened pretty recently and close to the sale [date], so a lot of companies have probably made some of their investment choices” which will likely not be altered, he said.

On the other hand, various operators are “reconsidering” some current investment even though they know their offshore portfolios must continually be replenished to keep production steady or grow it, he added.

Moreover, it could be a buying opportunity for some operators, analyst Sami Yahya, of S&P Global Platts Analytics, said.


“If anything, I would expect to see a greater push from the usual [Gulf operators] to pick up blocks near existing assets for tieback potential down the road,” Yahya said, referring to fields which can be quickly and cheaply hooked up to existing infrastructure nearby.

Uncertainty over near-term oil demand and the fate of crude prices that plummeted to the low $30s/b last week and on Monday dropped into the high $20s/b have caused swift, domino-like reactions from upstream operators that are shearing their 2020 capital spending to bare-bones levels.

On Monday, NYMEX front-month crude futures settled at $29.19/b, down $2.54/b.

Erik Milito, president of the National Ocean Industries Association, said the crash in oil prices will likely impact interest in the lease sale.

“It’s a tough one,” Milito said. “I think what’s happening is that things have changed so quickly over the course of just a week that people are still trying to figure out what makes the most sense to ensure continued investments in the Gulf of Mexico and also to make sure the government gets fair market value when it leases these properties.”

After the sale, apparent high bidders will not be awarded their leases for another few months, since BOEM has 90 days to review bids and assure the bonuses that operators offered are adequate for the amount of estimated oil and gas they are likely to recover.

Earlier this year as oil prices had remained stable in the mid-to-high $50s/b and US Gulf drilling had picked up, it appeared the sale, scheduled for Wednesday, might drum up some spirited bidding as E&P companies sought to replenish their portfolios with exploration opportunities.


With oil at current levels, and reduced funding levels, E&P operators have tended to focus more on projects with shorter-term paybacks such as tiebacks. That was the case during an industry downturn that began after the November 2014 price plunge when OPEC refused to cut production to prop up crude prices.

Much the same thing happened to oil prices earlier this month after Russia would not participate in additional production cuts proposed by some OPEC members.

With so much uncertainty at hand, including the fate of a hoped-for OPEC-plus agreement that would have likely stabilized oil prices had it occurred, both smaller and even larger players could take a pass on Sale 254, Terry Childs, head of RigLogix for Westwood Global Energy Group, said.

“Acquiring leases is really not very expensive … at least for the big [operators],” Childs said. “But unless there is a block or blocks they really want, they may simply choose to sit this one out.”

Last Wednesday, the US Energy Information Administration lowered its US Gulf oil production forecast for 2020 to 1.96 million b/d, down 40,000 b/d from the agency’s forecast a month earlier. EIA forecasts Gulf oil output to average 1.99 million b/d in 2021, down 10,000 b/d from its February forecast.

EIA forecasts US Gulf crude oil output to average a record 2.02 million b/d in March, up 130,000 b/d from February. EIA forecasts Gulf oil production to climb to nearly 2.17 million b/d by December 2021.

S&P Global Platts Analytics forecasts Gulf oil output to average just below 1.95 million b/d this year and then falling below 1.91 million b/d in 2021 and below 1.85 million b/d in 2022.

Platts Analytics forecasts US Gulf breakeven prices at $49/b WTI to develop new projects.

“It varies from project to project with large ones having smaller breakevens, while small ones need a higher price for development,” said Rene Santos, an analyst with Platts Analytics.

Recent US Gulf of Mexico Lease Sales







Total sum of high bids ($ millions)







Blocks receiving bids







Total number of bids







SOURCE: US Bureau of Ocean Energy Management

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