U.S. BOEM Announces Second Offshore Wind Auction in the Gulf of Mexico

On March 21, 2024, the United States Bureau of Ocean Energy Management (BOEM) published a Proposed Sale Notice (PSN) in the Federal Register to auction off four lease areas offshore Louisiana and Texas, totaling approximately 410,060 acres on the Outer Continental Shelf (OCS). This auction will be the second offshore wind lease auction held in the Gulf of Mexico (GOM-2 Lease Sale). The first offshore wind lease auction in the Gulf of Mexico (GOM-1 Lease Sale) was held on August 29, 2023, with only two participants bidding for a single lease area over two rounds and BOEM awarding only one of the three lease areas.¹ Many of the same economic conditions that challenged developers in the GOM-1 Lease Sale may continue to persist for potential bidders in the GOM-2 Lease Sale.

Lease Area Details 

The four lease areas proposed in the PSN total approximately 410,060 acres: 

1. OCS-G 37962 with a total of approximately 102,500 acres;
2. OCS-G 37963 with a total of approximately 96,786 acres;
3. OCS-G 37964 with a total of approximately 108,230 acres; and 
4. OCS-G 37965 with a total of approximately 102,544 acres. 

Notably, two of the lease areas (OCS-G 37964 and OCS-G 37965) are located in new Wind Energy Areas (WEAs) that BOEM finalized in October 2023 and two of the lease areas (OCS-G 37962 and OCS-G 37963) are located in WEA block I, which was included in GOM-1 Lease Sale but received no bids.²

Unlike the GOM-1 Lease Sale, BOEM proposes this time to allow each qualified bidder to bid on, and potentially acquire, as many lease areas as are offered in the GOM-2 Lease Sale, since allowing lessees to win multiple lease areas may provide for economies of scale and more efficient development. In previous lease auctions in the Atlantic and Pacific regions, BOEM limited the sale of lease areas in a given auction to one lease area per qualified bidder to allow multiple lessees to compete for state offtake agreements. However, BOEM has noted that states adjacent to the Gulf of Mexico lease areas do not have statutory or enforceable offshore wind targets and that offshore wind energy generated in the Gulf of Mexico is more likely to be sold directly to large industrial customers or to serve as the electricity source for hydrogen. BOEM is seeking stakeholder feedback on the unlimited eligibility on, and the potential acquisition of, all four of the Lease Areas offered in the GOM-2 Lease Sale, as well as revisions that it has made to the lease to include the production of hydrogen or other energy products using wind turbine generators on the lease.

BOEM is also soliciting stakeholder feedback on various other aspects of the proposed lease areas, including the proposed number, size, orientation and location of the lease areas, as well as which lease areas, if any, should be prioritized for inclusion, or exclusion, from the GOM-2 Lease Sale.

Overview of the PSN and Forthcoming Final Sale Notice

The PSN’s publication in the Federal Register initiated a 60-day public review and comment period, which ends on May 20, 2024. The PSN contains detailed information pertaining to the proposed areas available for leasing, certain lease provisions and conditions, auction details, criteria for evaluating competing bids, and procedures for lease award, appeals and execution. The PSN also includes potential future restrictions to ensure navigational safety for vessel transit corridors, and to mitigate potential conflicts with Department of Defense activities. 

The development of the Final Sale Notice (FSN) will be informed by the environmental assessment, which was already completed for the entire Gulf of Mexico Call Area, related consultations, and comments received during the PSN comment period. The FSN will be published in the Federal Register at least 30 calendar days before the GOM-2 Lease Sale is conducted and will provide final auction details, including the date and time of the auction, the lease areas to be auctioned, auction mechanics, lease stipulations, and a list of bidders qualified to participate in the auction.

Entities who would wish to participate in the GOM-2 Lease Sale must submit the required qualification materials to BOEM by the end of the PSN 60-day comment period. In the GOM-1 Lease Sale, there were 15 qualified bidders, but only two participated in the auction. 

Bidders must also submit an original Bidder’s Financial Form (BFF) in connection with the GOM-2 Lease Sale by the date listed in the FSN, listing any affiliates participating in the same auction, among other disclosures. Affiliated entities are not permitted to compete against each other, and, where two or more affiliated entities have qualified for an auction, they must decide which one will participate.

Multi-Factor Bidding System

Similar to the system used in the GOM-1 Lease Sale, BOEM proposes a multi-factor bidding system involving a monetary factor and non-monetary factors. The bid made by a particular bidder in each round would represent the sum of the monetary factor (cash bid) and the value of any non-monetary factors in the form of bidding credits. 

As part of the monetary factor, the minimum bids for the lease areas are as follows:

In terms of non-monetary factors, bidders can earn bidding credits by: (1) supporting the offshore wind energy industry, either through workforce training programs, the development of a domestic supply chain, or a combination of both; and (2) establishing and contributing to a fisheries compensatory mitigation fund, or contributing to a similar existing fund, to mitigate the potential adverse effects for commercial and for-hire recreational fisheries resulting from offshore development in the Gulf of Mexico. 

A bidder may elect to qualify for one or both bidding credits. Bidders can receive a 17% credit for workforce training, supply chain development, or a combination of both, and an 8% credit for establishing a fisheries compensatory mitigation fund. The credits are additive, so a bidder who qualifies for both credits would receive 25% of the cash bid in bidding credits. BOEM seeks stakeholder comments on whether there are additional activities that should qualify for the bidding credit or whether there are other changes to the structure of the credit that will best aid in developing a sustained and robust US offshore wind workforce and/or energy supply chain.

To qualify for either credit, a bidder must commit to the bidding credit requirements on the BFF and submit a conceptual strategy as described in the BFF Addendum. The deadlines for the BFF and conceptual strategy will be announced in the FSN. BOEM will notify a bidder if it qualifies for credits, and each particular bid will represent the sum of the monetary (cash) amount and the non-monetary factors (bidding credit(s)).

Changes to Auction Rules and Lease Stipulations 

There are a number of additional differences between the GOM-1 Lease Sale and GOM-2 Lease Sale processes, including changes to the auction rules and additional lease stipulations. 

For the GOM-2 Lease Sale, BOEM plans to employ new auction software. The auction format will remain an ascending clock auction, utilizing the monetary and non-monetary factors described above. However, the following primary changes will be made to the auction rules:

1. Bidders may place concurrent bids on, and acquire, multiple lease areas, giving a bidder the option to switch to another lease area during the auction process in case the price of the first lease area exceeds the specified bid price.
2. Provisional winners will be determined in a single stage, whereby the bidder who remains on a lease area after the final round will become the provisional winner without subsequent procedures.
3. The auction will operate on a “second price” rule, with the highest bid submitted for a lease area determining the winning bidder for that area. The payment made by the winner will be equivalent to the highest contested bid amount (i.e., the “second price”).
4. Any bid for the multiple lease areas will be treated as an independent bid for those lease areas, instead of as a combined bid for all areas.
5. Each bidder’s bidding credit will be expressed as a percentage of the final price for the lease.

BOEM also proposes new lease stipulations as noted below for the leases awarded under the GOM-2 Lease Sale, as noted below:

1. Enhance the Fisheries Communication Plan by: (1) introducing measures to minimize spatial conflicts and protect species; (2) addressing congestion and entanglement risks; and (3) incorporating climate change adaptation strategies for fisheries.
2. Revise the Native American Tribes Communication Plan (NATCP) by requiring the lessee to engage with tribes tied to the lease areas in NATCP development and set protocols for unanticipated archaeological discoveries.
3. Strengthen protected species measures by mandating lessee coordination with agencies prior to surveying activities and requiring compliance with the Marine Mammal Protection Act, including the sharing of documents authorizing such activities.
4. Update site characterization requirements by: (1) making pre-survey meetings with BOEM optional; and (2) removing the requirement for pre-meetings with BOEM before tribal engagements.
5. Clarify siting conditions by defining specific circumstances where lessees are restricted from building surface facilities.
6. Assert research access rights by explicitly reserving BOEM’s access to lease areas for future research.
7. Promote labor and supply chain development by: (1) requiring lessees to make every reasonable effort to enter into Project Labor Agreements covering the construction phases; and (2) obligating lessees to establish and update goals for supporting a domestic supply chain, with progress to be made public.
8. Require lessees to include engagement summaries that describe stakeholder and ocean user engagement in order to minimize any conflict between the existing users and the lessee.
9. Implement Munitions of Explosive Concern (MEC) / Unexploded Ordnance (UXO) Notification Protocols by requiring lessees to inform BOEM and other relevant bodies upon the confirmed discovery of MEC/UXO.

Will the GOM-2 Lease Sale be a repeat of the GOM-1 Lease Sale?

For the GOM-1 Lease Sale, 15 entities were qualified to bid in the auction, but only two entities participated. As compared to previous BOEM offshore wind auctions that lasted for days and went through tens of rounds, the GOM-1 Lease Sale was much shorter and finished within a day, lasting only two rounds. The bidders bid exclusively on the Louisiana lease area, with the two Texas lease areas receiving no bids during the auction. RWE was announced as the provisional winner of the Lake Charles, Louisiana lease area. However, the winning bid of $5.6 million (approximately $54 per acre) was extremely low compared to the $157.7 million that RWE paid for a 63,338-acre lease area (approximately $2,490 per acre) in the California auction in December 2022. 

There are numerous global and regional factors that may have impacted the participation and outcome of the GOM-1 Lease Sale, such as global supply chain disruptions, ongoing re-negotiation of current US offshore wind project offtake and offshore wind renewable energy certificate agreements, lack of a state mandate for renewable energy procurement and proposed anti-renewable legislation. Many of these factors will remain in play for the GOM-2 Lease Sale and may impact both the overall interest in the lease areas and the ultimate winning price.

¹ For more information on the  GOM-1 Lease Sale, see our client alert at US BOEM Announces First Offshore Wind Auction in the Gulf of Mexico | Linklaters.

² For more information on the additional WEAs that BOEM designated in October 2023, see our client alert at US BOEM Announces First Offshore Wind Auction in the Gulf of Mexico | Linklaters.