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BP Excluded From Sale of New U.S. Leases for Gulf Oil and Gas

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Rigs drill a relief well in the Gulf of Mexico July 31, 2010, over the Deepwater Horizon well 40 miles from the southern coast of Louisiana. (Photograph courtesy U.S. Department of Defense)

Just hours before bidding opened on leases for new oil and gas development on 20 million acres of the western Gulf of Mexico this morning, U.S. environmental officials announced that BP would be temporarily suspended from contracts with the government, effectively barring BP from being awarded any leases in the sale.

But by the time the gavel came down on what turned out to be an auction that garnered relatively modest interest, it was clear the suspension would have little practical immediate impact on BP’s ambitions in the Gulf of Mexico. While the company has agreed to pay the highest criminal penalty in U.S. history, $4 billion, to settle charges related to the disastrous 2010 Deepwater Horizon spill, BP plans to invest 10 times that sum over the next decade in drilling in the Gulf of Mexico.

BP was not among the 13 companies that bid on leases in today’s sale, which brought in just $133.8 million in high bids. In contrast, the U.S. government drew $1.7 billion in winning bids in a lease sale in June in the central Gulf of Mexico, the region where BP drilled its ill-fated Macondo well. Industry trade press said the western Gulf was considered a less prospective area. BP earlier this fall made clear its intention to focus its Gulf of Mexico business on a fewer number of large high-performing assets. BP, in fact, sold off $5.5 billion in what it termed “non-strategic” assets in September to Plains Exploration and Production Company of Houston. Plains was one of the bidders in today’s lease sale.

The decision to suspend BP marks a reversal for the Obama administration, which allowed BP to bid on new leases in the two previous sales held for Gulf of Mexico acreage since the company’s disastrous 2010 Deepwater Horizon oil spill. BP, in fact, acquired 43 new deepwater leases in the June 2012 lease sale, and the company remains the largest holder of acreage in the Gulf.

But suspension from future government contracts is a standard practice “when a responsibility question is raised in a criminal action,” the U.S. Environmental Protection Agency (EPA) said in announcing the decision. The suspension process, in effect, was triggered earlier this month when BP agreed to settlement of the criminal charges surrounding the April 2010 well blowout and explosion that killed 11 workers and set off the largest oil spill in U.S. history. (See related photos: “Ten New Studies Show Gulf Oil Spill Impact“)

The suspension action, however, does not affect BP’s existing contracts with the government–noted by both the EPA and BP in prepared statements. BP has a large store of existing leases in the Gulf—700 in all. It was not immediately clear if BP planned to participate in this morning’s auction. The company plans to invest $4 billion annually in the Gulf of Mexico over the next decade.

BP said in a prepared statement that an agreement between the oil company and the EPA was in the works that would “effectively resolve and lift this temporary suspension.”

“As BP’s submissions to the EPA have made clear, the company has made significant enhancements since the accident,” including leadership changes, reorganization of its upstream business, and creation of a centralized safety and risk department, the company said. BP said it had adopted voluntary deepwater drilling standards that exceed current regulatory requirements.

This morning’s auction, conducted at the Superdome in New Orleans, marks the sale of all remaining available acreage for oil and natural gas exploration in the U.S. western Gulf of Mexico, and is the first sale under the Obama administration’s new five-year offshore drilling plan.

U.S. officials characterized the sale as exemplifying the administration’s policy to expand energy development safely. The administration is “committed to promoting the safe development of the Nation’s critical offshore oil and gas resources while taking steps to safeguard the marine and coastal communities,”  said Tommy Beaudreau, director of the U.S. Department of Interior’s Bureau of Offshore Energy Management, in a statement announcing the lease sale. “This sale represents a key component of the President’s comprehensive, all-of-the-above energy strategy and the regionally tailored and responsible approach.”

Said Interior Secretary Ken Salazar, “Developing public energy resources in the Gulf of Mexico continues to generate much needed revenue for local communities while helping to power our nation and fuel our economy.”

The EPA’s brief announcement said that BP would be suspended from new government contracts or other transactions “until the company can provide sufficient evidence to EPA demonstrating that it meets Federal business standards.” The EPA said suspension actions are designed “to ensure the integrity of Federal programs by conducting business only with responsible individuals or companies.”

In a news conference this morning, Beaudreau said that he believed that BP had been genuine and sincere in its efforts at reform. But he said the suspension process required that the company address EPA’s concerns before the bar on new government contracts would be lifted.

Only 116 of the 3,878 tracts offered in today’s lease sale received bids, covering an area of 652,500 acres. The highest bid for a single tract was $17.2 million by Chevron, which also  submitted the highest total amount in bonus bids, $56 million on 28 tracts.

The government’s estimate was that the acreage covered by the entire lease sale could result in the production of 116 to 200 million barrels of oil and 538 to 938 billion cubic feet of natural gas.

National Ocean Industries Association President Randall Luthi said in a statement that the level of activity in today’s lease sale would be a good indicator of the industry’s confidence both in the remaining resources in the western Gulf of Mexico, and in the administration’s new offshore drilling policy. “This will be an interesting sale to watch,” he said.

 Updated at 12:47 p.m. EST with BP comments, further comments from Beaudreau.

Updated at 2:00 p.m. EST with lease sale results.