Few locally-owned La. companies benefit from oil lease sales

By Christopher Tidmore
Contributing Writer

A few weeks ago, the Department of the Interior conducted the first sale of oil and gas leases in the Gulf of Mexico since the BP-Horizon oil spill. Ostensibly by the numbers, it would appear a great success, a vindication for President Obama who pledged in May 2011 to expand domestic oil and gas production safely and responsibly. However, it may not have been such a boom for local Louisiana companies.

Interior’s Bureau of Ocean Energy Management announced that its Western Gulf of Mexico Oil and Gas Lease Sale 218, held on December 14 in New Orleans, attracted $337,688,341 in high bids and included 20 companies submitting 241 bids on 191 tracts comprising over a million acres offshore Texas. The sum of all bids received totaled $712,725,998.

In comparison, the previous Western Gulf sale, Sale 210 in August 2009, saw high bids totaling $115 million for 164 tracts.

Louisiana Energy expert and blogger Steve Maley observed, “More money for more tracts: what’s not to like? A detailed look at the leasing history, however, reveals a different story. While deepwater remains active, the shallow water Gulf saw little leasing action. Many of the shallow water bidders from recent sales stayed home for Sale 218.”

Maley noted that administratively, the Gulf of Mexico is carved into thousands of tracts or “blocks.” A typical block is nine square miles. Leases for “open” (unleased) blocks are offered in sealed bid auctions, normally twice a year. The semiannual regularity of the sales was disrupted in 2010 by the Macondo spill.

“But,” as Maley pointed out, “in the shallow waters of the ‘Shelf’ (water less than 500 feet deep), only 12 blocks received bids, down from 34 in 2009 and 67 in 2008.”

A similar trend is evident in the number of companies bidding for operating rights on new leases. As Maley put it, “In the 2008 sale, shallow water tracts drew bids from 32 companies. That number declined to 18 companies as oil and gas prices fell in 2009 from their 2008 peaks. But in 2011, only 8 companies bid for shallow water leases. The number of companies bidding on deepwater leases actually grew to 12.”

“‘Big Oil,’” he continued, “rules the deepwater. Shallow water has become the domain of smaller independent companies, many of them privately held. None of the shallow water operators are household names; nonetheless, their jobs and capital investment supports the economies of several states across the region and contributes to the nation’s domestic energy supply.”

The irony on the drop, which Maley puts the blame at regulation too expensive for local companies to compete, is that the BP Macondo spill was a deepwater event. “Some 40,000 wells have been drilled on the Gulf of Mexico Shelf, and in the last 40 years the total volume spilled from Shelf wells, drilling and producing, is less than the Macondo well was probably spilling per day,” he maintained. “The risk of deepwater operations is several orders of magnitude greater than on the Shelf, yet the regulatory regime is little different.”

“We should not be surprised to find that the burden of increased regulation in the offshore falls disproportionately on smaller operators. As they curtail their activity or focus their attention elsewhere, the shallow water drilling contractors and small service companies who work for the operators will feel the pain.”

If the Obama administration does not push for a separate regulatory regime for the “Shelf,” Maley worries that most of the offshore production that actually employs thousands in South Louisiana (as opposed to personnel often flown in for deepwater activities from elsewhere) could cease to effectively exist. “While it may be mature as an exploration pro­vince, the Gulf of Mexico Shelf remains an important storehouse of resources and a potential source of jobs. Regulatory overkill threatens to finish it off for good,” he concluded.

This article was originally published in the December 26, 2011 print edition of The Louisiana Weekly newspaper