Gulf of Mexico: Preparing for August Auction

Bottom Line: Tentatively scheduled for 28 August, the US government is auctioning off over 21 million acres on the Outer Continental Shelf in 3,953 blocks in shallow and deep waters. If things go as planned, production on these blocks could see another 200 million barrels of oil and up to 900 bcf of natural gas.

Analysis: This is Lease Sale 233, to be held in New Orleans, and it is the third such under the Obama administration. The blocks up for grabs are in waters in depths of 16 feet to 11,000 feet. As we noted in last week's newsletter, the last auction in March showed revived interest from previous auctions, generating $1.2 billion in bids. Overall, we're looking at 11.5 trillion cubic feet of proven gas resources in the Gulf of Mexico, plus 1.4 billion barrels of proven crude reserves, with new fields coming online and new discoveries increasing in frequency. Deep-water development is picking up, focusing on the Miocene and Tertiary structures, with Lower Tertiary plays sitting beneath a thick layer of salt.

Recommendation: We think it's a good time to get in on the Gulf of Mexico, especially in view of all the activity in Brazil. Further sweetening the deal, Anadarko Petroleum has announced another discovery in the deep waters of the Gulf of Mexico, encountering oil pay during the drilling of its Phobos-1 well, with about 250 net feet of high-quality oil pay in Lower Tertiary reservoirs. The well was drilled to a total depth of 28,675ft in about 8,500ft of water in the Sigsbee Escarpment Block 39. We're particularly eyeing the subsalt potential here, banking on Brazil's success. Development of the Gulf of Mexico's subsalt potential has been slow so far, largely because of the focus on onshore shale in the US, but we think that's about to change. This auction is important because it could be the one that turns the Gulf of Mexico into the most active deep-water play in the world. The US government is playing around with the terms of new agreements, hoping that this time around whoever buys the blocks will actually develop them.