High bids by major oil producers in a recent Gulf of Mexico offshore auction point toward a resurgence of interest in deepwater exploration. This year’s bids totaled $121 million—nearly a seven-fold increase over the bids on the Outer Continental Shelf auctioned last summer by the Bureau of Ocean Energy Management (BOEM).
This year’s $121 million figure is tempered somewhat by the fact that the auction covered Western, Central and Eastern areas of the Gulf, whereas last year’s was for the Western Region alone. Still, the jump is significant. Nearly 76 million acres of land off the coastlines of Texas, Louisiana, Mississippi, Alabama, and Florida were up for sale. Main bidders included:
- Royal Dutch Shell – 19 high bids totaling $25.1 million
- Chevron Corp – 15 high bids valued at 27.9 million
- Anadarko Petroleum Corp – 10 bids valued at a combined 10.6 million
- Exxon Mobil Corp – seven bids valued at 20.4 million
It’s no secret that deepwater exploration has taken a backseat in recent years. So, the question naturally arises, “What’s behind these bids? What’s the reason for the renewed interest?” After all, offshore drilling is a hugely expensive and time-consuming venture. For producers to reach a break-even point, oil prices need to be high – as high as $65 per barrel, according to some estimates. Currently, the price per barrel languishes around $50. The rationale behind the new investment in deepwater exploration is worth a closer look.
Short-cycle vs. long-cycle investments
In recent years, short-cycle investment has gained favor among producers. Short-cycle supply comes from wells—like those in shale fields—that can be drilled for only a few million dollars and brought on stream quickly. The downside, however, is the fact that production from such wells can just as quickly taper off. With its low-risk and quick ROI, the shale industry has played a key role in the low ceiling on oil prices. But in order to be sustained, short-cycle oil needs a constant input of cash.
Long-cycle oil, on the other hand, consists mainly of large oil fields, many in deepwater, that were developed years ago, often via wildcat drilling. These continue to pump oil long after the initial big-ticket investment, and without the ongoing need for constant re-investment. Though deepwater projects are typically riskier and much more expensive to develop, they offer producers the potential for greater rewards long term.
New oil discoveries in the Gulf
According to an article in Bloomberg, Mexico announced a new billion-barrel find in the Gulf in early July of this year, a discovery that highlights the potential value of exploration in the region. On the same day, Italian producer, Eni Spa, reported a similar find in Mexico’s offshore waters.
Juan Carlos Zepeda Molina, head of the National Hydrocarbons Commission in Mexico, summed up the optimism for long-cycle investment inherent in such discoveries: "There was already interest to come, explore, and work in the Gulf of Mexico before these finds, but now to have discoveries in such a short time, interest of international entrants to have activity in Mexico has renewed."
Echoing that optimism, William Turner, a senior analyst at consultancy Wood Mackenzie, called the recent high bids in the Bureau of Ocean Energy Management's offshore auction “a vote of confidence” in the profit-potential of new deepwater drilling in the Gulf. The BOEM sale was the first of 10 planned as part of the new Outer Continental Shelf Oil and Gas Leasing Program for 2017 to 2022. While the outlook for production is promising, the long-range impact on supply, demand, and prices remains to be seen.
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