A glitch interrupted the first-ever U.S. livestream of an oil lease sale on Wednesday, and although it didn't affect the bidding, this epic fail provided just the right metaphor to describe the flop of the latest auction in the Gulf of Mexico, which saw a record low number of companies offering record-low money for leases in the western parts of the Gulf.
Upon announcing in July the first-ever federal livestream of a lease sale, the U.S. Bureau of Ocean Energy Management (BOEM) had said that the 23.8-million-acre area offshore Texas was estimated to have economically recoverable hydrocarbons of between 116 million and 200 million barrels of oil and between 538 billion and 938 billion cubic feet of natural gas.
So far, so good. This week's lease sale, however, showed the dismal stark reality: just three companies bid for 24 tracts covering 138,240 acres, with all bids totaling just US$18 million. All three bidders were units of three of the majors, BP (NYSE:BP), Exxon Mobil (NYSE:XOM), and mining giant heavily-invested in oil exploration, BHP Billiton (NYSE:BHP).
To put the numbers into context and perspective, the previous lease sale in the Western Gulf of Mexico from last year attracted bids from five companies for tracts covering some 190,080 acres (out of 21.9 million acres up for grabs), with all bids worth a total of US$22.7 million.
Now, last year's lease sale was surely not a good example of high turnout and bidding, but this year's auction managed to squeak underneath that paltry figure, and only managed to set negative records.
Those two latest auctions show that companies are not willing to spend insane amounts of money on new tracts in the Gulf of Mexico at these low oil prices. Instead, oil groups have adopted a cautious and conservative approach to new investments and are slashing capex and costs en masse in order to at least partially offset the negative impact of the depressed crude price. Related: China's Oil Majors Are Burning Through Oil Reserves
In comparison, a Western Gulf of Mexico lease sale in April of 2012 resulted in the BOEM accepting high bids worth a total of US$325 million, including the auction's highest single accepted bid of US$103.2 million from ConocoPhillips (NYSE:COP), which was the second-biggest bid since area-wide leasing was launched in 1984.
However, oil prices then were above the US$100 mark, and it would be another two years and a couple of months until crude prices started crashing. These days - with oil at just-below US$50 - the US$100 crude is as long a shot as the Gulf of Mexico is far from Alaska.
Commenting on the latest failed lease sale in the U.S. Gulf, Stewart Glickman, an analyst at S&P Global Market Intelligence, told the AP: "Everything about this sale screams wariness."
The analyst then went on to explain that operating a rig offshore may cost eight times as much as leasing an onshore drilling rig, which costs around US$20,000 per day. Related: The Best Way To Unlock Canada's Crude Exports
Wary as they are for the U.S. Gulf lease sales, majors are bidding in Mexico's first-ever deepwater oil and gas tender in the Gulf of Mexico, which is expected to reap US$44 billion in proceeds. The tender, slated to take place on December 5, is for ten deepwater blocks in an area that holds what's estimated to be 76 percent of Mexico's prospective crude reserves.
Mexico only allowed foreign oil companies to explore and exploit its crude reserves two years ago, forced by an 11-year decline in production.
And this past Wednesday, while the U.S. lease sale auction was dismally failing, Mexico's National Hydrocarbons Commission, CNH, announced the names of the 26 companies short-listed to participate in its deepwater tender, including 16 firms that have been approved as operators and ten as potential partners in consortiums.
It's no surprise that the list contains all the usual suspects. The question is, how long the companies will have to keep pushing off investments in new projects until oil prices recover to a level high enough to justify a renewed splurge on drilling costs in the Gulf of Mexico.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More