Record-size U.S. offshore oil lease sale draws modest bidding

By Richard Valdmanis

(Reuters) - The largest lease sale in American history in the offshore Gulf of Mexico yielded $124.76 million dollars in winning bids from drillers on Wednesday, a modest response to the Trump administration's effort to pump up investment in the region.

The Interior Department had offered up a record 77 million acres (31.2 million hectares) for development with discounted royalty rates on the shallower tracts, as part of a broader effort by President Donald Trump's administration to ramp up U.S. fossil fuels output.

But companies bid on just 1 percent of that acreage, and won those tracts with bids averaging $153 an acre - 35 percent below levels at a similar auction last year, and a fraction of those in the region in 2013 when oil prices were much higher, according to a Reuters review of the data.

The Interior Department's Bureau of Ocean Energy Management, which administered the auction, characterized the results as robust: "I think we're seeing continued consistent investment in the Gulf of Mexico," BOEM spokesman Mike Celata said in a conference call with reporters, adding he forecast increasing oil and gas production from the region for years.

He said 33 companies, including majors Royal Dutch Shell Plc, BP Plc, Chevron Corp , and Total SA, had placed 159 bids on 148 blocks.

But critics of the administration called the unusually large lease sale ill-timed. U.S. crude oil and natural gas output is already smashing records thanks to improved drilling technology that has opened up cheaper onshore reservoirs, and Brazil and Mexico are also competing for drilling investment in their own deepwater acreage.

"Offering a nearly unrestricted supply in a low demand market with a cut rate royalty and almost no competition is bad policy and an inexcusable waste of taxpayer resources," the Center for American Progress, a left-leaning policy think tank, said in a statement.

It called the sale an "embarrassing flop".

Interior Secretary Ryan Zinke had said ahead of the sale that the record-sized offering would be a "bellwether" of industry demand in the region, and billed the effort as a way to help the United States become more "energy dominant."

PUMPING UP INTEREST

The U.S. government offers Gulf of Mexico leases annually, but usually in smaller regional batches. An auction in March 2017, for example, offered up 48 million acres in the Central Gulf of Mexico planning region.

Wood Mackenzie energy analyst Mfon Usoro said she had expected demand for the acreage to get a boost from higher oil prices and lower corporate taxes. But she noted interest could be hurt by competition from Latin America and concerns over the impact that U.S. tariffs on steel imports could have on costs. A spokeswoman for the American Petroleum Institute, which represents U.S. oil and gas companies, did not comment on industry demand in the Gulf, but said the administration's commitment to providing the industry broad access to the region was important.

"Without this key access to new U.S. energy resources, we could see millions in investments, significant government revenues and thousands of jobs shift to other parts of the world," spokeswoman Cornelia Horner said.

In an effort to pump up interest, the Interior Department had cut the royalty rate companies must pay in shallow offshore waters by a third to 12.5 percent, and is considering cutting the rate for deeper waters too.

The administration is eyeing further vast lease sales offshore in the future, having proposed opening up parts of the Arctic, Atlantic and Pacific - an idea that has faced pushback from several governors in U.S. coastal states.

(Writing by Richard Valdmanis; Editing by Marguerita Choy and Paul Simao)