Green Articles
SHALLOW DISCOVERY
A natural gas find in 10 feet of water in the Gulf marks a major success in McMoRan's drilling strategy
By Kimberly Quillen : Times-Picayune : March 2, 2008
A large discovery in the Gulf of Mexico and a newly acquired portfolio of properties has put McMoRan Exploration of New Orleans on a growth track. This year alone, the energy firm's share price has climbed 35 percent.
Last summer McMoRan paid $1.1 billion to acquire more than 1.3 million acres in the Gulf of Mexico from Newfield Exploration. The move more than quadrupled McMoRan's proven reserves, or the amount of oil and gas the company expects it can produce from its properties.
"As we were negotiating that deal, we had the Flatrock discovery," one of the biggest discoveries McMoRan has made in the Gulf of Mexico to date, said co-Chairman Richard Adkerson in a recent discussion about the developments at his company.
Analysts say the Flatrock discovery, which sits in 10 feet of water off the coast of Vermilion Parish and is just beginning production, could contain close to a trillion cubic feet of natural gas reserves.
"That's big by any standard," said Phil Dodge, an energy analyst with The Stanford Group in Boca Raton, Fla. "For McMoRan, it's by far the largest (discovery) that they have made in their deep (drilling program)."
Dodge and other analysts say Flatrock marks an important and successful turn in McMoRan's drilling strategy.
"They had some disappointments earlier in this deep (drilling) program, but Flatrock turns that around dramatically," Dodge said. "They're finally getting confirmation that the theory was good."
"It could be a game-changer for McMoRan if (Flatrock) holds up and everything goes according to plan," said Richard Tullis, an analyst with Capital One Southcoast in New Orleans. "It's safe to say it's one of the largest in the last several years in the shallow waters of the Gulf of Mexico. And it's coming on at a good time when energy prices are high."
Accepting risks
McMoRan was founded in 1969 with the initial purpose of drilling wells onshore in the Gulf of Mexico region. The company later merged with Freeport Sulphur Co. to become Freeport-McMoRan. But in 1994, Freeport spun off its oil and gas assets, making McMoRan Exploration a stand-alone company once again.
The company's formation in the late 1960s shaped its approach to drilling.
"It was before the days of 3-D seismic," a tool that helps energy companies evaluate subsurface structures, Adkerson said.
Today, McMoRan is putting that geological knowledge to work in the shallow waters of the Gulf of Mexico, where it has made a strategy out of drilling deep beneath the ocean floor. Many of the properties McMoRan explores have already undergone initial exploration by other energy players, but McMoRan pushes even deeper than previous drillings, sometimes plunging as much as 25,000 feet below the sea floor.
Seismic data can be less reliable at those depths, so some of the analysis McMoRan conducts on its prospects is done the old-fashioned way.
"We saw a window of opportunity for our company, using traditional structural geological techniques to (pursue) these large potential prospects," Adkerson said.
"Rather than relying on the conventional tool kit that explorationists use, they're going back to their roots and saying 'Remember how we did it before we had all that (seismic equipment)?' " said Eric Smith, clinical professor of finance and associate director of the Entergy-Tulane Energy Institute at Tulane University.
The drilling McMoRan does is expensive, technologically challenging and risky because of the depth to which the company reaches and the difficulty with seismic data. But over the years McMoRan has made a name for itself as one of the only companies focusing exclusively on this type of deep drilling in the shallow waters of the Gulf.
"The wells are horrendously expensive to drill, but Freeport leads the pack in trying to do it," Smith said. "There hasn't been a stampede of people following them to do it because it's really tough to do."
There are advantages to drilling deep in the shallow waters of the Gulf.
Pipelines and infrastructure are already in place at many shallow-water projects, allowing McMoRan to begin producing energy quickly and affordably once a discovery is made, Adkerson said.
Still, McMoRan's shallow-water projects have not always met with success, something Adkerson acknowledges.
"There's one thing that's inherent in doing oil and gas exploration, particularly when you're doing the kind of drilling we're doing," he said. "You're going to drill dry holes."
Since 2004, McMoRan has made 17 discoveries on 32 prospects in the Gulf.
"We drilled some dry holes, but we also had successes," Adkerson said. "It involves risk, there's no question about it. But our company has a tolerance for accepting risk when there are opportunities for potential return."
Shallow strategy
Acquiring the Newfield properties puts McMoRan in a better financial position to withstand the ups and downs of Gulf of Mexico energy exploration, Tullis said.
The deal also gives McMoRan a new selection of drilling opportunities. And that, Adkerson said, was a key factor in the acquisition.
Newfield, like many other Gulf of Mexico operators, had been focusing on drilling shallower wells that penetrated less than 15,000 feet below the ocean floor.
"We could see the opportunity of applying our (deep drilling) strategy to that new set of properties," Adkerson said. In fact, Newfield had originally planned to sell McMoRan only a select package of properties. But "the Newfield acquisition had such a good fit with our other business activities that we moved aggressively to approach Newfield about selling their entire (shallow-water portfolio in the Gulf)," Adkerson said.
Newfield also owned an interest in Blackbeard, an ultra-deep well located in 70 feet of water off the Louisiana coast. Drilling at Blackbeard involves drilling to 30,000 feet beneath the sea floor, even deeper than at Flatrock and at most of McMoRan's other projects. By acquiring Newfield's stake in the project, McMoRan was able to involve itself in the project and plans to begin drilling on the site. ExxonMobil Corp. initially drilled Blackbeard to about 30,000 feet in August 2006, but suspended the effort prior to reaching its goal of 32,000 feet because of higher-than-expected pressure.
Blackbeard, like the rest of the Newfield properties, is in the shallower waters of the Gulf where McMoRan likes to focus.
And Adkerson said he won't veer from that strategy.
"There's great opportunity (farther out) in deep water, but we are optimistic about being able to find big discoveries in the area that we're working in," he said.
New targets
The Newfield acquisition and the Flatrock discovery are so significant for the company that McMoRan has created divisions devoted to each project.
One division is devoted to managing the wells acquired from Newfield and keeping them producing.
The second division is focusing on overseeing Flatrock and bringing it into production.
"This is exactly the type of prospect we've been designing our strategy around," Adkerson said. "It seems to be one where we'll have multiple drilling opportunities."
McMoRan is drilling Flatrock in partnership with Plains Exploration & Production Co. and Chevron. Because McMoRan owns a 25 percent working interest in Flatrock, the discovery may not have an immediate financial impact on the company, Dodge said.
Combined with Newfield, however, the discovery will likely bolster McMoRan's proven reserves and its production volume, which could in term lead to higher profits. But the real significance of Flatrock to McMoRan, Dodge said, is that is may show that the company is finding its footing with its deep drilling strategy.
"They're probably better than anybody in identifying these large targets below existing fields," Dodge said. "Maybe we can be optimistic that with the experience and the learning curve from Flatrock, that (success) could continue."
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Kimberly Quillen can be reached at (504) 826-3416 or at kquillen@timespicayune.com