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Petroleum News: Legal cloud hangs over sale results

Western Gulf Lease Sale 200 generates surprising $340.9M in high bids on 381 tracts after MMS prevails against challenges

By Ray Tyson

The U.S. Minerals Management Service, which prevailed against early legal challenges to Western Gulf of Mexico Lease Sale 200, walked away from the traditional August sale with a surprising $340.9 million in high bids. In fact, it was the best Western Gulf showing in nine years for the number of bids submitted and the best performance in eight years for the amount of money bid.

Still, a cloud of uncertainty will hang over Sale 200 until U.S. District Court Judge Karl Engelhardt rules on the merits of a lawsuit filed by the State of Louisiana alleging the federal government failed to adequately evaluate Louisiana’s coastlines after last year’s devastating hurricanes before proceeding with the sale. The state also wants MMS to guarantee the sale complies with its coastal zone management plans. The judge is expected to hear the case in November.

Chris Oynes, Gulf regional director for MMS, believes it’s unlikely the court will side with Louisiana and invalidate the sale.

“There’s a chance that the bids are put in jeopardy,” Oynes said in a post-sale interview. “But we don’t have any strong indications from the judge that he’s trying to void the leases. Right now we are starting to proceed with processing the bids and do it in the same normal fashion we always do.”

Temporary injunction shot down

A temporary injunction sought by Louisiana to halt Sale 200 just prior to the event was shot down by the court. Also disallowed was a suit filed by the American Petroleum Institute claiming the judge’s ruling based on evidence heard in November could alter the conditions of leases offered in Sale 200. API is not expected to appeal the ruling.
All of the legal uncertainty surrounding Sale 200 evidently had little or no influence on the 62 companies that participated in the sale. Not a single bid was withdrawn prior to the sale, Oynes said. He added: “All the big names were there. So looking at that and the strength of their bids and the number of bids they had, it would be pretty hard to detect anybody holding back.”

Indeed! The $340.9 million high bid total in Sale 200 was 20 percent above the $285.2 million in high bids submitted in the 2005 Western Gulf sale and nearly 100 percent greater than the $171.4 million in high bids placed in the 2004 sale. In total, 541 bids were submitted on 381 blocks in Sale 200. That compares to 346 bids submitted on 422 blocks in last year’s Western Gulf of Mexico Lease Sale 196.

Garden Banks, Keathley Canyon receive more than half bids

Near record commodity prices were no doubt key drivers in Sale 200, particularly in the deep and ultra-deep waters of Garden Banks and Keathley Canyon. These two areas alone received more than half of the bids submitted in the entire sale, and also produced the stiffest competition and highest bids, including BP’s sale-high $21 million for Keathley Canyon Block 58, thought to be part of an immense Lower Tertiary play that already has produced significant discoveries elsewhere in the Gulf.

Unlike some earlier Western Gulf sales that favored E&P independents in shallower waters of the Gulf’s continental shelf, Sale 200 was largely a deepwater spectacle with the majors, foreign companies and large independents dominating. Sixty-seven percent of all tracts receiving bids are in water depths greater than 1,200 feet.

Bidders clearly took advantage of the so-called “newly available leases” initially issued to companies a decade ago during the deepwater boom and then returned to MMS when they expired. Of the 445 newly available leases offered in the Sale 200, 130 received bids. Deepwater Garden Banks and ultra-deepwater Keathley Canyon accounted for 80 of the newly available tracts receiving bids.

The volume and quality of some newly available tracts also were key drivers in the sale, Oynes said, noting that there were roughly twice as many of these tracts available for lease in Sale 200 compared to last year’s Western Gulf offering. “Not all of it is great (but) that’s a lot of new acreage to take a look at,” he added.

Moreover, he said, oil prices were $10 to $12 a barrel higher than at the year-ago sale, plus recent discoveries in Garden Banks and nearby Green Canyon “would drive your thinking about hydrocarbon potential” in the region. Six of the 10 highest bids in Sale 200 were submitted on tracts in Keathley Canyon, a remote region of the Western Gulf that so far has seen little exploration activity and produced no announced discoveries.

Trend could stretch 100 miles

However, geologists believe a large Lower Tertiary trend that has produced significant discoveries in Walker Ridge, such as Jack, St. Malo and Cascade, could stretch more than 100 miles westward into the Keathley Canyon area. In 2004, Unocal sought to test the western extent of the play through the closely watched Sardinia wildcat, which turned out to be a duster as a commercial find. However, drilling encountered more than 1,100 feet of porous sandstones and was said to be an encouraging sign because of its thickness and the fact it contained some hydrocarbons.

BP recently finished drilling its deepwater Kaskida exploratory well, designed to test the Lower Tertiary potential on Keathley Canyon Block 292, located southeast of the company’s sale-high $21-million bid for Keathley Canyon Block 58 in Western Gulf Lease Sale 200. Anadarko Petroleum, a 25 percent stakeholder in Kaskida, said in its second-quarter earnings call that well data from Kaskida would not be released to the public until after the sale.

“To me Keathley Canyon (bidding) was driven by announced discoveries on Walker Ridge in the Central Gulf and Alaminos Canyon in the Western Gulf,” Oynes said, noting that Keathley Canyon is between the two deepwater regions and therefore qualifies as a candidate to further test the Lower Tertiary trend, also known as the Wilcox play.

In addition to BP’s $21 million bid for Keathley Canyon Block 58, other top ten bids in Sale 200 were Petrobras America’s $12.8 million bid for Keathley Canyon Block 59 and $10.8 million bid for Keathley Canyon Block 147, Shell Offshore’s $10 million bid for Keathley Canyon Block 100, Hydro Gulf of Mexico’s $9.2 million bid for Keathley Canyon Block 327, Cobalt International Energy’s $8.3 million bid for Garden Banks Block 959 and $7.3 million bid for Garden Banks 915, Kerr-McGee and Plains E&P’s joint $8 million bid for Garden Banks Block 654, Chevron’s $7.7 million bid for Keathley Canyon Block 370, and Hess and Hydro’s joint $6.2 million bid for Garden Banks Block 611.

Petrobras has most high bids

Brazil’s Petrobras won 34 blocks with total bids of $45.5 million to capture first place based on the total number of high bids submitted in Sale 200. Other top 10 winners in this category are BP with 31 blocks on $37.5 million in bids, Hess with 30 blocks on $16.8 million in bids, Shell with 28 blocks on $35.4 million in bids, Kerr-McGee with 27 blocks on $17.9 million in bids, Nexen Petroleum Offshore with 25 blocks on $7.2 million in bids, Hunt Oil with 25 blocks on $4.8 million in bids, Cobalt with 24 blocks on $33.1 million in bids, Hydro with 23 bids on $25.7 million, and Total E&P with 20 blocks on $11.5 million.
Sale results show that nearly $200 million of the $340.9 in total high bids in Sale 200 were placed on blocks in waters depths roughly between 2,400 and 4,800 feet. Looked at another way, 153 of the 381 tracts receiving bids in the sale are between these depths.

Sale results also show that deepwater tracts between 2,400 and 4,800 feet were the most competitive based on the number of multiple bids placed on individual tracts. In total, 52 tracts between these water depths received more than one bid. Garden Banks Block 654 received a sale-high seven bids and was taken by Kerr-McGee with a bid of $8 million. Keathley Canyon 58, won by BP with its sale-high $21 million, received four bids that in addition to BP included a $9.8 million bid from Petrobras, a $2.4 million joint bid from Chevron and Anadarko, and a $1 million bid from Shell Offshore. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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