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Energy companies sparse at offshore auction

Alan Sayre
AP Business Writer

New Orleans — A huge glut of natural gas, a recession and an uncertain economic picture led to a largely quiet auction for government offshore leases on Wednesday.

Energy companies bid $115 million for 162 separate tracts in the western Gulf of Mexico, about half of the leases bid on last year for $483.9 million.

Gas is now trading for a meager $3.11 per thousand cubic feet on the New York Mercantile Exchange — compared with $9.50 a year ago. About 80 percent of the winning bids on Wednesday were for tracts in deep water, where crude can also be found.

The largest single winning bid — $28.1 million issued for a deepwater tract by BP PLC — accounted for 24 percent of all sales.

Since the recession hit hard last year, U.S. natural gas backlogs have grown to an estimated to 3.152 trillion cubic feet, 23.1 percent above year-ago levels and 19.6 percent higher than the five-year average, according to the Energy Information Administration.

Producers are also exploiting huge reserves on land, which have only recently been made available through advanced drilling techniques.

As recently as four years ago, 20 percent of all natural gas in the U.S. was pulled from the Gulf. That number has since fallen to about 12 percent, according to the EIA.

Producers only have five years on the shelf to begin either producing or turning the leases back to the government. Deepwater leases carry 10-year terms and energy companies, facing development costs in the hundreds of millions of dollars for each project, look at their projections of long-term commodity prices.

“Price is probably the thing that motivates many companies,” said Tom Fry, president of the National Ocean Industries Association. “But these companies (in deepwater) have different views. Some have longer horizons they work with.”

Wednesday’s sale closely mirrored — in terms of money — the much-larger and oil-oriented central Gulf sale in March that attracted $703 million, compared with $3.67 billion in 2008 when oil prices were pushing $100 per barrel.

For the short term, at least, energy companies showed reluctance to dig deeper into the shallow shelf, putting up only $10.1 million in high bids for gas-related tracts.

Over the past two years, several major shale gas finds on land have added trillions of cubic feet in potential reserves to future production. Although inland producers may have a cost advantage to bringing future gas to market, MMS regional director Lars Hebert said that an economic recovery could quickly hoist the demand for more Gulf gas as backlogs are burned off.

“When the economic situation turns around, all the natural gas resources will come into play,” he said.

Hebert said many small producers that concentrate on gas near shore were absent Wednesday, while such players as BP, Chevron, ConocoPhillips and Exxon Mobil dominated the sale with deepwater bids.

The MMS will check the bids for fair market value before formally awarding the leases.

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