Weekly Offshore Rig Review: Lease Is More

This week, worldwide offshore rig utilization moved up as a net total of 2 idle rigs went on contract, bringing utilization to 83.3%. This uptick in utilization was the result of 4 jackups going to work, 3 of them in the GOM. The Pride Oklahoma, ENSCO 86, and Hercules 21 all came out of the shipyard after spending several months there. At the same time, 2 rigs came off contract to head into port for maintenance and modifications, but both rigs already have contracts lined up after the completion of their shipyard stays.

Besides this group of jackup rigs returning to action, the Gulf of Mexico saw some more activity this week with the Central GOM Lease Sale 198 occuring on Wednesday in New Orleans.

Bids Received
At this year's Central GOM Lease Sale, a total of 82 companies placed 707 bids on 405 blocks. This marks a 9% increase over the total number of bids received at last year's Central GOM Lease Sale. But, it was still a significantly lower number of total bids than in 2001, 2003, and 2004, and only just slightly higher than 2002.

This year's Central GOM lease sale also saw the smallest number of blocks being bid on since the down years of 1999 and 2000. With only 405 blocks receiving bids, this year saw a 12% decline in the number of blocks being bid on compared with last year. And it was an even further departure from the average of 543 blocks receiving bids in 2001 - 2004, representing a 25% decrease in the number of blocks receiving bids when compared with those 4 years.

Most Competitive Central GOM Sale in 10 Years
However, the fact that fewer blocks received bids this year did greatly increase the competitiveness of this year's Lease Sale. In fact, when measured by the average number of bids per block receiving bids, this was the most competitive Central GOM Lease Sale in more than 10 years (see the graph to the right, showing average number of bids per block). With 707 bids being placed on 405 blocks, each block received an average of 1.75 bids. This was the first time since 1997 that the average number of bids per block exceeded 1.5 bids. And it represents a nearly 25% increase in the number of bids per block over the last 9 years.

Most certainly, the declining number of bids can be attributed to the ever-shrinking population of quality prospects left in the Central GOM. And that smaller pool of prospects drives the greater level of competition and the greater number of bids on each available block.

Higher Average Bids
As the law of supply and demand states: more competition for fewer resources leads to higher prices. And that law was abundantly clear at this year's Central GOM Lease Sale. With a greater number of bids per block than at any time in the last 10 years, the average high bid per block also rose substantially to $1.45 million per block. That represents an 88% increase in the average high bid over the $772,926 average at the 2005 sale. This was the first time that the average high bid per block exceeded $1 million since 1998 (for the comparison of average high bids over the last 10 years, see the graph at the right).

In addition, this year saw a total of $978 million in bids, the highest bidding level since 1998 when total bids reached $1.35 billion, and an 81% increase over last year's $540 million. Correspondingly, the total for all high bids this year was $588, a 66% increase over last year's $354 million.

Back to the Depths
Another interesting trend to note was the return to deeper water depth dominating the lease sale. This year was the first time since 1998 that deepwater blocks (200m+ WD) received more bids than shelf blocks (<200m WD), with 52% of the blocks that received bids being in 200+ meters of water. This year also saw 101 ultra-deepwater blocks (1,600m+ WD) receive bids, the greatest number since the MMS began tracking this group separately in 2001.

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