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Flurry of M&A Activity in the Gulf of Mexico

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While much of the mainstream media fixated on the slowdown in natural gas-focused shale plays and the risks of hydraulic fracturing, the upsurge of drilling activity and M&A in the Gulf of Mexico has received significantly less attention.

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While much of the mainstream media fixated on the slowdown in natural gas-focused shale plays and the environmental risks of hydraulic fracturing, the upsurge of drilling activity and mergers and acquisitions in the deepwater Gulf of Mexico has received significantly less attention.

The change to the domestic energy picture wrought by the shale oil and gas revolution shouldn't be understated. Robust drilling in these prolific unconventional fields enabled the US to overtake Russia as the world's leading producer of natural gas and grow its oil output for the first time in decades–all while the moratorium on deepwater drilling in the wake of the Macondo blowout dramatically reduced activity in the Gulf of Mexico.

Nevertheless, despite the boom in onshore drilling, the US Energy Information Administration estimates that even with a 15 percent decline in output from the Gulf of Mexico, the prolific federal offshore region still accounted for roughly 23 percent of domestic oil production in 2011.

Although drilling in the Gulf of Mexico Outer Continental Shelf resumed when the government lifted the drilling ban in October 2010, the permitting process slowed to a crawl. The moratorium and subsequent permitting delays have continued to weigh on oil production in the Gulf of Mexico: In the first half of 2012, overall output had declined by 3.2 percent from year-ago levels.

Thus far in 2012, permitting has returned to seasonal norms. Through the end of August, the Bureau of Safety and Environmental Enforcement (BSEE) has issued 105 deepwater permits, compared to the 112 applications approved by its predecessor, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), over the same period in 2008. In 2011 BOEMRE and the BSEE issued a mere 36 deepwater permits.

The normalization of permitting volumes should accelerate drilling activity in the US Gulf of Mexico.

Moreover, the Bureau of Ocean Energy Management's (BOEM) first Central Gulf of Mexico lease sale since March 2010 attracted a huge crowd of international and independent oil and gas companies. The auction resulted in 593 bids on the 454 blocks available and netted total proceeds of about $1.7 billion, with tracts located in waters depths of at least 800 meters accounting for $1.5 million in winning offers. All of the 10 largest bids were on acreage located in deep water.

Statoil (NYSE:STO), Norway's partially state-owned oil company, took the honors for the highest single bid, offering USD157 million for Mississippi Canyon block 718. However, Royal Dutch Shell (NYSE:RDS.A) was the top bidder in aggregate, sinking $406.6 million into 24 blocks.

In recent years, much of the mergers and acquisitions activity in North America's energy patch has focused on onshore shale basins. However, deal flow has accelerated in the Gulf of Mexico, with a flurry of transactions being announced in recent weeks.
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