National News

An auction where you can buy a $1 million oil lease

Marketplace - American Public Media - Thu, 2014-08-28 10:53

It happens twice a year at the New Orleans Mercedes-Benz Superdome, but it has nothing to do with football. We're talking about a much bigger game, one that's only growing: Offshore oil and gas.

Twice a year "landmen" from energy companies file into the Superdome for an auction. They bid for the right to drill for oil and natural gas under the sea. And who's selling that right? You and me, by way of the federal government.

The first thing you see at the Western Planning Area Lease Sale 238 is the map of what's for sale. There's the familiar curve of Texas along the Gulf: Corpus Christi, Galveston.  A grid overlays 21.6 million acres of the waters off the coast.

"These blocks are generally 3-by-3 miles, " says Caryl Fagot, with the Bureau of Ocean Energy Management. "The companies are bidding on the right to drill in that particular block. Actually these are, um—"

We're interrupted by an extensive mike check. This is a public auction, after all. Bids must be heard loud and clear.  The feeling in the room is dry-as-a-bone serious. But there's a sign posted that hints at drama. "No masks, costumes with head coverings, props or posters."

"Well, we have had protesters," Fagot says. "We've had someone in a polar bear costume, we've had people come with dollar bills attached to themselves, they want to bring in large signs, and we're conducting business here, so we really can't allow that type of thing in the bidding room."

This is big government business. There are thousands of these 3-by-3-mile blocks to manage. All blocks look the same on paper, blue squares of water, but names of certain areas hint at what's underneath: Alaminos Canyon, East Breaks.

The so-called landmen here, who are from BP, Shell, Chevron and others, know what's under the sea floor, or they hope they do, at least.

"It's somewhat of a gamble," says Randall Luthi, president of the National Ocean Industries Association. "They do it by looking at seismic data, by looking at other blocks nearby that have been producing, so you use your best expertise to guess which areas might contain important geological formations that might contain oil and gas, and then you take a guess at how much that might be worth."

This year marks the return of BP to this auction. The Environmental Protection Agency banned the company from bidding on new blocks as part of the fallout of the 2010 oil spill. BP had been the biggest producer in the Gulf, so there's some suspense around its plans, which aren't known until the auction starts.

"The bids are sealed until they're opened up later today, so it's a little like the Academy Awards," Luthi says. "You open the envelope and see who's bid and how much."

Now, without further ado… "Welcome, and I thank you for attending today's sale…"  No long acceptance speeches. Auctioneer John Rodi with the Bureau of Ocean Energy Management moves pretty quick.

"Alaminos Canyon block … a bid by BHP Billiton…3,106,250…a bid by BP Exploration and Production Inc…$2,327,027…"

The oil company landmen are tight-lipped. Most hold up a hand when they see a reporter's microphone, indicating no interviews. But they carefully mark down each bid, and whisper to each other as the prices go public. Each bid is whisked off in a briefcase.

The relatively small sale is all over in half an hour.

The government's own geologists and other experts will make sure the company has paid a fair price for what they think is under the water. If not, the bid gets rejected. Tallied up, this sale brought in about $110 million.

Ben Waring sells data systems to oil companies for offshore exploration. He points to the map and says the sale held surprises. "BP bought everything that wasn't nailed down in this area right here…"

It's an area called Port Isabel. If there's oil worth tapping, it'll take years of development and many millions of investment to get it out. The auction bids are a drop in the bucket of the lucrative universe that is Gulf of Mexico deepwater drilling.

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