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Oil Companies Sit on Hands at Auction for Leases

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Screen Shot 2015-08-04 at 22.49.59HOUSTON — With oil prices collapsing and companies in retrenchment, a federal auction in the Gulf of Mexico on Wednesday attracted the lowest interest from producers since 1986.

It was the clearest sign yet that the fortunes of oil companies are skidding so fast that they now need to cut back on plans for production well into the future.

The auction, for drilling leases, attracted a scant $22.7 million in sales from five companies, but energy analysts said that came as no surprise on a day when the American oil benchmark price plummeted by more than 4 percent. For the first time since the recession, it is approaching the symbolic $40-a-barrel level. Last summer, it was above $100 a barrel.

A glut on American and world markets is to blame for the depressed prices, but the unusually large daily decline occurred after the Energy Department, in a report, lowered its oil price projections and showed a considerable increase in inventories.

Until now, most companies have insisted that they would not sacrifice production in future years when they said oil prices were sure to rebound strongly. But in recent weeks, executives have expressed concern that the oil price collapse could last through 2016 and even 2017, and it is important that they tighten their belts even more.

“The financial squeeze is tighter than people thought, so tight that the companies can’t even bargain-hunt for leases for future production,” said Michael C. Lynch, president of Strategic Energy and Economic Research, a consultancy. “It’s the long-term production profile that is suffering now, and they will pay for it later.”

The auction on Wednesday was more notable for the companies that were absent than for those that participated.

BHP Billiton dominated the bidding, and Anadarko Petroleum and BP picked up a few blocks. But ExxonMobil, Shell Oil and Chevron — giants that lead in the region — did not bother to participate at a time when they are focusing on cutting costs and are struggling to save cash to protect their dividends.

“This sale reflects today’s market conditions,” said Abigail Ross Hopper, director of the Department of Interior’s Bureau of Ocean Energy Management. “The continuing drop in oil prices and low natural gas prices obviously affect industry’s short-term investment decisions, but the gulf’s long-term value to the nation remains high.”

Offshore drilling, particularly in deep waters, is some of the most expensive exploration done by oil companies around the world. Nevertheless, since the 2010 BP Deepwater Horizon disaster that left 11 workers dead and soiled hundreds of miles of beaches, and the one-year drilling moratorium that followed, production in the gulf has flourished.

The Energy Department on Wednesday noted that with a total of 13 production projects coming on line this year and next, output in the gulf would increase from an average of 1.4 million barrels a day in the fourth quarter of 2014 to 1.6 million barrels a day in late 2016. That surge will partly offset an expected decline in onshore production because oil companies have reduced their rig count on land by more than 60 percent since last year.

The Energy Department, in its short-term energy outlook, projected a domestic production increase from an average of 8.7 million barrels a day last year to 9.4 million barrels a day in 2015 before overall output declines to nine million barrels next year. The resilient production in the United States, with rising production from Iraq and Saudi Arabia, has produced a surplus of oil around the globe of an estimated two million barrels a day.

One outgrowth of that surplus is the challenge of where to put all the oil.

Domestic storage alone rose 2.6 million barrels in mid-August, the report noted, because of an unexpected surge in imports and a drop in refinery processing after a breakdown in the BP refinery in Whiting, Ind.

Current crude stockpiles of 456 million barrels in the United States are at levels rarely if ever seen at this time of year since World War II. Once the summer driving season ends and other regional refineries begin their seasonal retooling, the domestic glut of crude is likely to grow even larger and the price of oil and gasoline will fall further, analysts said.

The Energy Department forecast that the American benchmark oil price would average $49 a barrel this year, $6 lower than it estimated last month. It forecast a price of $54 in 2016, $8 lower than it projected last month.

“Concerns over the pace of economic growth in emerging markets, continuing (albeit slowing) supply growth, increases in global liquids inventories, and the possibility of increasing volumes of Iranian crude entering the market contributed to the changed forecast,” the department report said.

Offshore drilling has suffered from the overall oil market downdraft. Hercules Offshore, a leading shallow-water gulf driller, filed for bankruptcy this month and Fitch Ratings has suggested that more bankruptcies among offshore drillers may be coming soon.

An oversupply of rigs is developing as contracts expire. Fitch recently estimated in a report that day rates for ultra-deepwater rigs, which have generally run between $400,00 to $600,000 in recent years, will come down to $325,000.

“The market remains challenging, and we are in the midst of a significant downturn in offshore drilling,” Anthony Kandylidis, executive vice president of Ocean Rig, a leading drilling contractor, told analysts this month as he announced the suspension of the company’s dividend. “The recent volatility in the price of oil and increased availability of drilling units do not allow for a short-term market improvement.”

Only five companies submitted 33 bids for 33 blocks spanning 190,000 acres of gulf waters in Wednesday’s auction, representing a sharp decline that reflects a growing consensus in the industry that the oil price is not going to recover anytime soon.

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