First Gulf of Mexico oil and gas lease under Trump set for auction

Offshore trade group doubts there will be strong interest because of weak market conditions.
By Daniel J. Graeber  |  Aug. 16, 2017 at 5:44 AM
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Aug. 16 (UPI) -- An offshore trade group said the lower-for-longer climate for oil prices may keep bidders at bay for a lease Wednesday for the Gulf of Mexico.

U.S. Interior Secretary Ryan Zinke unveiled plans in July for an auction for 75.9 million acres off the southern coast for oil and gas exploration and development. Wednesday's auction is the first time that all territorial waters in the region are on the auction block. The lease includes a reduced royalty rate offered to attract bidders to shallow-water areas.

All told, the administration estimates the entire region holds about 550 million barrels of oil and 1.25 trillion cubic feet of natural gas. The lease is the first for President Donald Trump's administration and an adviser to Zinke said last month the lease would ensure U.S. energy dominance.

The U.S. Energy Information Administration estimates total average oil production for the year at 9.3 million barrels per day, making it one of the world's largest oil producers. The U.S. Gulf of Mexico accounts for about 20 percent of that total. Offshore oil production is on pace to increase nearly 9 percent next year to about 1.85 million bpd.

Randall Luthi, the head of the National Ocean Industries Association, said the lease is welcome, but bidders may stay away from the shallow water opportunities because of relatively low oil prices.

"Despite the new 12.5 percent shallow water royalty rate offered as a much-needed financial incentive, extended low commodity prices may dampen bidding on the shelf," he said in a statement. "Given current economic conditions and regulatory environment, offshore operators may choose to focus their capital on acquiring leases for longer range deepwater projects."

In a pre-bidding notification, the Interior Department said it's received 90 bids for the 14,177 blocks on the auction block. In terms of acreage, less than 1 percent of the total has drawn interest.

Crude oil prices have come under pressure in the second half of the year from strong U.S. oil and production, as well as doubts about whether the Organization of Petroleum Exporting Countries can balance the market through coordinated declines.

West Texas Intermediate, the U.S. benchmark for the price of oil, was trading near $48 per barrel early Wednesday, about $2 per barrel higher than when the lease was announced. Three years ago, WTI was around $98 per barrel, but has remained in the $40 range more or less since.

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