Bidding for oil amid superstition, security

The suspense ends this week for oil companies that want to drill in the gulf off Florida's coast.

By DAVID BALLINGRUD
© St. Petersburg Times,
published December 2, 2001

At 9 a.m. Wednesday, in the burnished luxury of the Versailles Ballroom of the Riverfront Hilton in New Orleans, a few hundred oil men and women will gather to fidget, mop their brows, chew their pencils and generally break down with a bad case of the heebie-jeebies.

An hour or two later, some will leave jubilant, the cheers of colleagues ringing in their ears.

Others will leave bitterly disappointed, their hopes and plans either on hold or down the drain altogether.

Wednesday, the Hilton and the U.S. government host Lease Sale 181 -- the opening of oil company bids for the right to drill for oil and gas on 5,000-acre blocks of sea bottom in the eastern Gulf of Mexico, about 100 miles from the Florida coastline.

The bids, with a check to Uncle Sam attached, are to be submitted in sealed envelopes and in tight security prior to a 10 a.m. Tuesday deadline. The next day, they will be opened in public and read aloud, one after the other.

In a matter of minutes, big winners and big losers find out who is who.

It's a nerve-wracking game, the culmination of months of studies, bluffs and calculations; a game of $100-million bets based on science, superstition and whatever spies can find out at cocktail parties.

But getting an oil man to talk about an approaching sale is a little like getting a poker player to give you a peek at his hand.

Not likely, buddy.

"It's like trying to open an Apalachicola oyster with your teeth," said an industry spokesman.

These winner-take-all dramas have been part of the oil business for many years. Until now, however, they have been of little concern in Florida, where oil exploration and production have always been someone else's business, someone else's worry. The government has not held a lease sale in the eastern Gulf of Mexico since 1988.

Now, though, big oil has a growing interest in the deeper waters of the Gulf of Mexico near Florida's coastline. This interest is being driven by better technology, an unstable world market and by the recent Crazy Horse discovery south of the Florida Panhandle -- a billion-barrel jackpot considered big even by Middle East standards.

Florida's politicians and environmentalists have long publicly opposed drilling near the state's coastlines, but the oil industry has powerful friends, too, and has convinced many of them that the Sunshine State is not doing its part for energy independence.

Last summer U.S. Interior Secretary Gale Norton announced plans to lease 256 blocks, or 1.47-million acres of gulf bottom, about 100 miles from Pensacola and 285 miles from Tampa Bay. The sale had been scheduled to include an additional 4.4-million acres, but when the two most powerful brothers in the world -- President George W. and Gov. Jeb Bush -- found themselves on opposite sides of the issue, a compromise was reached.

While not quite of the Crazy Horse magnitude, the U.S. government calculates that Lease 181 contains significant reserves: roughly enough natural gas to provide for a million families for 15 years and enough oil to fuel the cars of a million families for nearly six.

Now the question is, who gets to find it and profit from it?

Silence is golden

Lease sales are an essential part of the oil industry: No lease, no drill, no oil.

Companies are quiet about their intentions because a display of interest in a particular block could push up its price. The buzz on Sale 181, however, is that industry interest is very high.

Then again, it is a poker game of sorts, and companies keep their cards close to their vests -- saying nothing as a sale date nears, or even disguising their real intentions.

In recent months, for example, a lot of company reps have been attending industry meetings on Sale 181, said David Mica of the Florida Petroleum Council. But that might not mean what it seems.

"Is this to see what competitive edge they may pick up for their 181 bid? Or is it to spread "heifer dust' and maybe confuse a competitor? The answers will be known only when the bids are opened."

The uncertain political climate for drilling closer to Florida's clean and economically vital beaches is one of the huge unknowns about the eastern gulf, said Jay Pepperman, a member of Shell's lease team.

"Everyone is curious just how bullish or bearish the industry is going to be at the sale," he said. "I really don't know. It's anyone's guess."

However active the bidding in Lease Sale 181, most of it is likely to come from the major oil companies, those with the resources to undertake chancey deep-water exploration and recovery.

"The economics in 6,000 feet of water are tough," said William Van Wie, general manager of a division of Devon Energy, a Houston independent. "We're still planning to come, but it's a less attractive sale for the smaller companies now. The shallower water (nearer Florida) was natural-gas prone, and that was more attractive to us."

Van Wie said his company spent "$2-million to $3-million" on research and preparation for the sale, "and there will be no return on that."

Sweeping the room for bugs

During the months of preparation for a lease sale, security within the oil companies is tight. As the day of reckoning approaches it gets tighter, and old superstitions are dusted off, too.

If a company can keep its interest in a particular block secret, the price is more likely to remain low and its bid has a better chance of success.

Security is "a major concern," said Alex van den Berg, manager of gulf exploration for Shell. "It's kept at a very high level before a sale. Rooms (at company headquarters) where sale data are kept are locked and access is limited to a handful of people."

The economic analysis in particular is restricted to a small group. Only a handful of people decide -- always behind closed doors -- what the final bid on a block will be.

Night cleaning crews give these rooms a pass. When the bug man visits, he is not looking for insects. Security contractors routinely sweep for listening devices, especially before meetings with another oil company acting as a partner on a bid.

"This is to assure the partners that the room is safe," said Mike Forest, a former Shell geologist.

During these meetings with partners, even body language must be censored. "You can't wink or nod or shake your body the wrong way," said van den Berg, for fear of appearing to signal someone.

Much more careful study is made of competitors.

"Scouts" work the phones and hit the cocktail party circuit in advance of the lease sale, van den Berg said, learning what they can, gathering impressions and even trading information with scouts for other companies.

"We kind of have an idea what the market price should be (on a particular block), and we study the behavior of our competitors," he said. "And people like to talk."

"We analyze one another's bidding patterns," said Van Wie of Devon Energy. "We look at the numbers historically, how they relate to different types of prospects, even at how they might round their numbers off."

"There is a whole folklore about what numbers are used in the bids," van den Berg said. "I used to have a boss who ended his bids with $787. It got to be kind of a joke. We tried to move him off that, but he wouldn't do it. He finally went to another company, and I still see him ending bids with $787. It's a luck thing for him."

There are lots of other superstitions, too, but oil men don't discuss them for fear of breaking the spell.

Van den Berg revealed one, however.

"Right before the sale begins, the Minerals Management Service puts up this small map of the gulf, just a tiny map but it's always the same, and before the lease starts I have to go and stand in front of the map, in a certain way, or I know the sale won't go well."

The longtime practice of oddball names for lease areas and drilling rigs has its roots in the need for secrecy, too.

Shell has used code names borrowed from celestial bodies -- Mars and Ursa, for example. In another lease sale, cartoon characters provided the Bullwinkle and Popeye platforms. In another, spices inspired Cardamom and Oregano.

"Security is one reason for this," said Shell spokeswoman Mary Dokianos. "It's so a couple of oil men can sit in a Southwest Airlines terminal and talk safely, in a kind of code."

In such a climate of big money, secrecy and superstition, it would seem the potential for shenanigans would be high. Not so, oil men and women say. Cutthroat behavior is rare, they say, in part because a competitor in one sale might be a partner in the next.

"We are a pretty small community at the end of the day," said John Shepard, one of the leaders of Shell's lease team for Sale 181.

"People know each other. You just can't come in and get away with a lot of stuff."

Outfoxing a competitor -- and yourself

Leighton Steward is retired from the oil business now, but he once led the preparation for all Shell's Gulf of Mexico and Atlantic lease sales.

They are hair-raising affairs, he said, in which hundred-million dollar investments sometimes hang by the slimmest thread of fortune.

Shell and Conoco were partners on bid for a very promising tract in the Baltimore Canyon off the East Coast, he recalled.

"It was old rock, compact, dense rock, much older rock than we find in the Gulf of Mexico," he said. "Very promising rock for oil."

Both companies agreed, Steward said, that the tract justified a $100-million bid. But both also agreed that a competitor would probably make a similar estimate of its value. So, what number to write on the bid form before sealing the envelope?

After study, the Shell-Conoco team came up with a safe, winning number: $105-million.

Then the what-if thinking began.

What if another company, having done similar analyses, came up with the same recommended number of $105-million, and then bid $106-million?

"We at Shell liked $107-million because it would nip somebody who bid the 106 to beat the 105," said Steward. "So we recommended a bid of $107-million."

Alas, the representative from Shell's partner, Conoco, had a limit of $105-million on the bid, Steward said, and couldn't get the figure changed. So that's how the Shell-Conoco bid went in: $105-million.

Of course, just as feared, Mobil trumped the $105-million with a $106-million bid.

"We were crestfallen," Steward said.

But lucky, too, as it turns out, because there is something worse than a losing bid. A winning bid on a bad block is the ultimate nightmare. In a business where a single bad decision can destroy a mid-size company, there is a name for this phenomenon.

"Gamblers' ruin," oil men call it.

The $105-million tract was a dry hole.

Getting the bidding right is tricky. The bidding company wants to win, but not to overpay.

"You don't want to be way higher than anyone else," Steward said. "Ideally, you would bid just what it takes to win. But the bids are opened in public, right in front of everybody, and if you bid way more than everybody else -- say, $25-million more -- it means you left $25-million on the table."

On the other hand, he said, second place is as bad as last place.

"It only hurts for a few minutes if you overbid," agreed John Shepard of Shell. "It hurts a lot longer if you are just a little bit under."

"This is the lifeblood of these companies," Steward said. "You have to have leases. You have to recover oil. And so you sit there with goose bumps."

A winning bid gets the celebratory parties started in short order. Losing companies pack up and leave town quickly.

But winning doesn't end the suspense.

"The winners smile, but they're scared to death," Steward said. "They just spent all these millions of dollars, and they're thinking: Now . . . just exactly what did I win?"

-- David Ballingrud covers science. He can be reached at (727) 893-8245 or ballingrud@sptimes.com.

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