By all accounts, the most recent lease sale in the Gulf of Mexico was a disappointment. The latest auction by the Bureau of Ocean Energy Management attracted the second-lowest amount of bids in 30 years. However, for ConocoPhillips (NYSE:COP) the latest auction saw the company wade even deeper into the Gulf as it came up as the high bidder after offering $30.58 million for a tract 200 miles off the coast of Galveston, Texas.
ConocoPhillips is a relative newcomer to the Gulf. It's currently not producing any oil from the region, but instead it has been building up its position in the deepwater region. Since 2011 the company has more than doubled its position from about a million net acres to well over two. The question some might be asking is why Conoco is making a bid on the Gulf when 60% of its production growth through 2017 is being fueled by its involvement in U.S. onshore shale plays.
The answer is simple, Conoco is looking for the best spot for future oil production growth, and that just happens to be in the Gulf of Mexico. The company got a real taste about what its future in the Gulf holds after Conoco and its partners announced two major deepwater discoveries earlier this year. Now that the Gulf has fully recovered from the BP (NYSE:BP) disaster of 2010, it's poised to reverse its declining oil production and should reach new heights by the end of the decade. Oil production from the Gulf could grow to as much as 2.5 million barrels per day, which is a significant jump from the current rate of 1.3 million barrels per day.
What's drawing producers like ConocoPhillips to the region is the potential oil production boom that's likely to happen as vast amounts of oil is discovered. According to midstream operator Enterprise Products Partners (NYSE:EPD), there is currently a large inventory of discoveries still in the appraisal state. However, the top 30 discoveries are believed to contain 5 billion barrels of recoverable oil equivalent, with about 80% of that amount being oil. Because oil prices are well over $100 per barrel, with no signs that the price will abate, the Gulf really should prove to be a very profitable location over the next decade. This future growth is one reason both Enterprise and Conoco are positioning ever deeper in the Gulf.
Another reason Conoco is stepping up is that one of the Gulf's top operators isn't allowed to bid. Because of Macando, BP -- the largest leaseholder and second largest producer in the region -- is currently banned from obtaining new leases to drill in the Gulf. This situation has enabled rivals such as Conoco and Royal Dutch Shell (NYSE:RDS-A), which is the Gulf's largest producer, to continue to add acreage in the Gulf without having to compete against the deep pocketed BP. In fact, like Conoco, Shell did just that in the latest round, spending $4.2 million to bolster its position.
The bottom line here is that despite the most recent disappointing auction, the Gulf continues to be a place of high interest for oil producers. ConocoPhillips in particular is poised to really make a big splash in the Gulf as it continues to drill on its large inventory of prospects. That should serve its investors well over the long term as it provides the company a nice growth platform while it heads into the back half of this decade.
Fool contributor Matt DiLallo owns shares of Enterprise Products Partners and ConocoPhillips. The Motley Fool recommends Enterprise Products Partners Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.