BP, ConocoPhillips Lead Pack in Lukewarm Offshore Lease Sale

The U.S. government's auction Wednesday of offshore oil and natural gas leases in western Gulf of Mexicowas tepid, at best, and attracted mainly large energy companies interested in snapping up tracts for deepwater drilling. Natural gas, which has seen its price plummet more than two-thirds since last year, got the cold shoulder, as producers avoided shallow water, gas-producing tracts.

Energy giant BPled the pack with the 37 bids for $50.6 million. More than half of that amount -- $28 million -- went towards one deepwater tract in Keathley Canyon. Small producers were largely absent from the auction, which was dominated by U.S. biggies ConocoPhillips, Chevron and ExxonMobil. Brazil's Petrobras also represented, with $10 million in bids.

Source: Mineral Management Services

That's a nearly 50 percent drop in the number of leases bid on last year and a 76 percent drop in the sum of high bids. Last year, energy companies bid $483.9 million for leases to drill in 313 tracts.

The majority of bids -- about 80 percent -- were directed towards deep water tracts, a sign that companies are placing more stock in the pursuit of crude oil, not natural gas. It also shows companies are investing in longer term projects, which are not as closely tied to short-term fluctuations in commodity prices. Deepwater tracts have 10-year leases, while shallow water areas have 5-year leases.

Producers' cool reception to 5-year leases -- which only received 34 high bids --is hardly a surprise, considering the low price and overabundance of natural gas.

Natural gas hit a low of $3.049 today before rising to $3.11 per thousand cubic feet on the New York Mercentile Exchange. Just a year ago, the commodity was trading more than three times that amount.

Weakened demand -- thanks to the recession -- has helped contribute to ballooning natural gas inventories. The natural gas glut also has been aided by companies that have maintained, or even raised, their production levels, in some cases to hold onto costly leases in unconventional shale gas plays.

Offshore natural gas exploration -- at least looking at Wednesday's auction results -- appear to be slowing for now. But that's hardly the case in the unconventional shale gas arena, where advanced drilling techniques have opened up previously unreachable resources in recent years.

Even though some companies have slowed production in shale gas, others, like those developing the Haynesville play in East Texas continue to boost supply.