ANALYSIS-Oil giants stay in their own backyards in U.S. auction

By Jessica Resnick-Ault

NEW YORK, April 4 (Reuters) - The Trump administrationheralded the government's sale last month of U.S. drillingleases in the Gulf of Mexico as a bellwether.

If that is the case, a Reuters analysis of the sale'sresults shows reason to worry about demand in future offshoreauctions.

The sale brought in $124.8 million, as just 1 percent of the77 million acres (31.2 million hectares) offered found bidders.Reuters examined the acreage offered and leased, and nearly allthe purchases show big drillers stuck closest to existinginfrastructure, shunning the most far-flung areas.

While U.S. crude oil production reached a record last yearat more than 10 million barrels a day, most new development isin onshore shale regions. The U.S. Interior Department has saidit wants to open all U.S. coasts for drilling, including theAtlantic and Pacific. But the Gulf result indicates limitedinterest even in already-developed areas, never mind unexploredcoasts.

The March auction included 9,088 deepwater blocks, eachcomprising roughly nine square miles. Only 105 of these blocksreceived bids and all but three of these were close to existinginfrastructure and leases.

"It kind of looks like they're just shoring up theirexisting prospects right now," said John Filostrat, a spokesmanfor the U.S. Bureau of Ocean Energy Management, the division ofInterior that manages the auctions. Filostrat said theadministration is still optimistic about future auctions andbelieves more auctions are needed to show the current trends.

However, money for exploration is increasingly flocking toother regions, particularly Latin America, where energy reformshave attracted billions of dollars in investment from companieshistorically known as Gulf heavyweights. A January auction byMexico brought in more than four times the bids as the U.S.sale.

Of the 105 new U.S. leases in water depths of more than 656feet (200 meters), 85 were immediately contiguous with existingleased acreage or production platforms, and another 17 werewithin about two miles of existing leases or infrastructure,according to the Reuters analysis.

Among the areas where companies submitted bids wereMississippi Canyon and Green Canyon, two of the most denselyleased plays in the Gulf, about 100 miles (160 km) off theLouisiana coast. Royal Dutch Shell Plc was the highbidder on two Mississippi Canyon blocks. Overall, Shell pickedup 16 Gulf blocks including 6 adjacent to its deepwaterdevelopments known as Kakias and Stones, and 10 clustered aroundother actively leased areas. It told Reuters that it wanted to"acquire blocks that could potentially support futuredevelopment using our existing hubs."

BP Plc's most notable bids were 19 blocks in DeSotoCanyon, contiguous to a known gas field, about 100 miles fromthe Louisiana coast. "BP is strategic with its bids, and we usethe opportunity to expand and strengthen our plays," a companyspokesman told Reuters.

Only three blocks leased were more than a few miles fromexisting acreage. Those blocks were snapped up by Chevron, whichdeclined comment.

Bidding on parcels close to known assets increases thelikelihood of finds that can be produced affordably, cuttinginfrastructure and supply costs.

"There's still interest, but it is in areas where there wasalready existing knowledge of the resource base, or existingdevelopment activity or existing production," said MichaelCohen, director of commodity research at Barclays.

"Spending a lot of money to prospect is probably not goingto be looked upon with favor by investors," he said.

HESITATION AMONG BIG BUYERS

Major oil companies remain lukewarm about pushing theboundaries of available frontiers, desiring longer leases andlower royalty rates.

Deepwater offshore blocks currently require an 18.75 percentpayment to the U.S. government, compared with 12.5 percent forshallower areas and onshore drilling. An Interior Departmentpanel in February recommended lowering those rates.

"It is something to look for in the August sale, possibly,"said BOEM's Filostrat.

Companies have also expressed a desire for longer leases tomore effectively drill in unexplored areas further from thecoasts. Six deepwater regions more than 200 miles off theLouisiana coast received no bids at all. The water here isgenerally about two miles deep. The locale makes both drillingand transporting oil to shore especially costly.

The high cost of building underwater pipelines is anotherdeterrent. Deepwater projects like Chevron's Jack and St. Malofields, more than 200 miles from the coast, required a pipelineconnecting them to existing Gulf infrastructure closer to shore,approved in 2010, during a boom when U.S. crude traded at about$90 a barrel.

Oil prices have rebounded from 2016's lows at less than $30a barrel, but the industry is still "in a bit of a wait and seemode," said William Turner, a senior research analyst in Houstonfor Wood Mackenzie.

(Reporting By Jessica Resnick-Ault, additional reporting fromAyenat Mersie; editing by David Gregorio)