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With Its Hands No Longer Tied, BP Is Back Bidding on the Gulf

By Matthew DiLallo – Mar 20, 2014 at 3:00PM

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With its suspension lifted, BP is back to winning bids for leasing to drill in the Gulf of Mexico.

Source: BP.  

One of the after-effects of the Deepwater Horizon disaster of April 2010 was that BP (BP 0.69%) was banned from bidding on new federal contracts. That meant the company was unable to bid at federal lease auctions in the Gulf of Mexico. Earlier this month, that ban was lifted as part of an agreement between BP and the EPA. The lifting of its suspension came just in time for the latest lease auction by the Interior Department.

Let the bidding begin
With its hands no longer tied, BP was able to bid on new drilling rights in the Gulf. The oil giant was very active in this latest round and it won 24 of the 31 bids it placed for new drilling leases. BP won those rights by placing $41.6 million in winning bids. Most of the leases the company bid on were in the central Gulf of Mexico, including drilling rights near the failed Macondo well that Deepwater Horizon was drilling.

What was really interesting about this latest round of lease auctions was that the government's haul was much lower than previous rounds, despite BP now being able to bid. The past two auctions generated $1.7 billion and $1.2 billion, respectively, while this round netted the government just $872.1 million in winning bids. The reason for the low bids was the fact that for the most part Big Oil was largely absent from this round of bidding.

ExxonMobil (XOM 1.72%), for example, spent $220.3 million in the last auction to win the bidding on seven leases. This time around, the company only bid $55.4 million on three tracts and ExxonMobil won just one tract for $4.6 million. Likewise, Royal Dutch Shell (RDS.A) (RDS.B) was a heavy bidder last time out. Shell bid $166.3 million on leases, winning $139.8 in drilling rights. This time around, it capped its bidding at just $100 million. Finally, BHP Billiton (BHP 1.93%), which bid $198.5 million last year offered up just $2.4 million in bids this year. With these big bidders largely absent, BP was able to scoop up most of the leases it was looking to acquire.

Photo credit: BP p.l.c. 

BP remains a big spender in the Gulf
BP has big plans for its operations in the Gulf of Mexico. Late last year, it said that it was adding two drilling rigs to the Gulf to boost its fleet to nine rigs. The company now has the largest fleet of drilling rigs in its history as it works to grow its production in the region, and its bold plan calls for spending of about $4 billion each year on its deepwater fields in the Gulf.

BP has come a long way in the Gulf since the Macondo disaster in 2010. Earlier this year, the company announced the start-up of phase 3 of its Na Kika project in the Gulf, which is a 50% joint venture with Shell. In addition to that, it announced a significant discovery in the Gulf of Mexico late last year at its Gila prospect. The combination of near-term production growth coming online as well as new discoveries waiting in the wings will enable BP to see a solid return on its $4 billion in annual capital spending in the Gulf of Mexico.

Investor takeaway
BP is basically back to business as usual in the Gulf, with the one caveat that its business will now be run much more carefully than ever before. That said, the company can now freely bid on new Gulf properties that hopefully someday will turn into new discoveries like Gila and then eventually begin producing like Na Kika. That path to success is a key to earning its investors a solid long-term return on their investment.

Matt DiLallo owns shares of BHP Billiton Limited (ADR). The Motley Fool has no position in any of the stocks mentioned. We Fools may not 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.

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