Despite the less than stellar results in a recent Federal Government leasing sale, the oil and gas industry still has its eye on the substantial reserves in the Lower Tertiary in the Gulf of Mexico. Several companies made bids with the goal of exploring this promising area. The industry is excited that the area will be a future source of oil and gas in the Gulf of Mexico.

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What's So Special?

The Tertiary is deeper than the Miocene finds that have been the traditional source of hydrocarbons in the area, and were deposited from 23 to 65 million years ago. Of course this means that the cost and technological challenges of drilling are greater as well.

Some of the drilling has gone as deep as 30,000 feet. Also, the reservoirs tend to be over pressurized.

Chevron (NYSE:CVX) made a significant discovery in the Lower Tertiary back in 2006 with the Jack and Jack 2 discoveries. Due to the complexity, lack of infrastructure and large scale of the exploration and development, the area is still not producing commercially yet. Chevron is currently building the infrastructure to handle up to 150,000 barrels per day from the Jack project and the nearby St. Malo field.

Lease Results
The Minerals Management Service (MMS) held a lease of federal oil and natural gas leases located in the Western Gulf of Mexico. The lease brought in high bids of $115 million. This was generally considered a fairly weak showing for Gulf of Mexico properties, with the previous Western Gulf lease sale bringing in $484 million back in 2008.

Lease Sale 210 involved 162 leases on the Outer Continental Shelf (OCS) properties, with 27 companies submitting bids. The highest bid was $28.1 million submitted by BP Inc. (NYSE:BP) for Block 96 in Keathley Canyon. Other large companies submitting bids were Chevron and Conoco Phillips (NYSE:COP), with 26 and 22 bids respectively.

BP already has a successful find out in the Keathley Canyon, where it discovered oil at the Kaskida prospect along with partners Anadarko Petroleum (NYSE:APC) and Devon Energy (NYSE:DVN).

Anadarko Petroleum has the most recent discovery in the Gulf of Mexico, announced last month in the Mississippi Canyon area. The Vito well hit 250 feet of net pay at a depth of 32,000 feet, and Anadarko partnered with Royal Dutch Shell (NYSE:RDS.A) and StatoilHydro (NYSE:STO) on the well.

The Bottom Line
The exploration and production industry is moving forward into the Lower Tertiary trend in the Gulf of Mexico, despite a weak auction due to what may be the temporary hiccup of much lower commodity prices. (To learn more, see our Oil And Gas Industry Primer.)

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Tickers in this Article: APC, BP, CVX, COP, RDS.A, DVN, STO

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