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Oil and gas leases in Gulf of Mexico bring in relatively tepid bids

Construction cranes used in the offshore petroleum industry stand in Louisiana.
Construction cranes used in the offshore petroleum industry stand in Louisiana. (Luke Sharrett/Bloomberg News)

Energy companies paid $124.8 million on Wednesday for oil and gas prospects in the largest Gulf of Mexico lease sale ever, but the winning bids fell well short of past sales.

The totals also appeared modest compared with the expectations raised by President Trump in his “America-First Offshore Energy Strategy” that was aimed at substantially enhancing the nation’s “energy dominance.”

Oil companies bid on 148 blocks, just 1 percent of the blocks put up for sale despite royalty breaks the administration provided for some of the shallower areas. The Interior Department’s Bureau of Ocean Energy Management had put 77.3 million acres up for auction.

“The results look especially poor largely because of the exaggerated rhetoric — the ‘energy dominance’ rhetoric — that is the calling card of this administration’s energy policy,” said Michael Bromwich, a lawyer who was the first director of the Bureau of Ocean Energy Management under the Obama administration. “If they hadn’t unrealistically hyped expectations, the results would be less disappointing.”

Bromwich said the lease sale was based on President Barack Obama’s five-year plan for offshore development, which is still in force.

The American Petroleum Institute said that leases in the western and central gulf regions were the “backbone” of U.S. energy production. The Gulf of Mexico produced more than 1.6 million barrels a day in 2017, about 17 percent of total U.S. crude oil output.

But environmental groups opposed the sale, both for the risks drilling poses to offshore areas and because the size of the sale was bigger than the companies’ pocketbooks. By receiving relatively modest bids, the Interior Department failed to maximize payments for the country’s natural resources, critics said.

Interior Secretary “Ryan Zinke has been falling all over himself to recklessly give our public lands and waters away to corporate polluters,” Athan Manuel, director of the Sierra Club’s lands protection program, said in a statement. “The lack of interest at today’s lease sale should make it clear to Zinke that he must scrap his ill-advised offshore drilling plan and protect America’s public lands and waters.”

A similar sale in August also drew relatively tepid winning bids totaling $121 million, about 40 percent less than the Interior Department had hoped.

This sale drew 159 bids from 33 companies, as the biggest firms have trimmed their capital spending budgets from the towering levels a few years ago, when crude prices were higher.

The biggest spenders were the oil giants that already produce lots of oil and gas in the gulf. Chevron made winning bids of $29.4 million on 24 leases, BP bid $20 million for 27 leases, Shell paid $22.9 million for 16 leases, and Total paid $15.1 million for nine leases.

In addition, many big oil companies have moved their sights to sections of the gulf controlled by Mexico, which after years of protecting its state-owned oil company has opened up leases to foreign companies.

“Lease bids are driven by the market rather than rhetoric,” Bromwich said in an email, “and so the tepid level of interest is the product of low oil prices, the choices that companies have to make with their capital expenditures given the competing business opportunities, which now include shale when that was not the case a decade ago, and the fact that companies have become more focused and less profligate about their offshore investments.”