Daily Archives: August 15, 2012
Gulf of Mexico: MMR’S Moffett Keeps His Eyes on the Prize at Davy Jones
Joan Lappin, Contributor
Greetings from Denver and the EnerCOMConference where McMoRan presented on 8/13. It’s interesting to observe that as we really near the end of problem solving at Davy Jones, investors are so shell shocked they can’t believe the flow test might really happen soon. Many cannot see the forest for the trees or the enormity of this Shallow Water Ultra Deep play vs. the limited prospects of the shale plays they love so dearly. Most shale wells are unimaginative step out wells a short distance away from other known discoveries. Many of the public shale players are recent arrivals in those plays and are paying the price for being followers, not leaders. Their potential returns on invested capital are tiny compared to the potential enormity of the Shallow Water Ultra Deep which can totally transform the U.S. energy picture for the future.
Add to that MMR’s Main Pass Energy Hub where it has reapplied for an export permit to use this facility 20 miles offshore to export hydrocarbons to other parts of the world where gas prices are far above the current <$3 in the United States.
Nobody on earth wanted to have flow tested this well prior to this EnerCOM energy gathering more than Moffett so that this might have been the finest champagne party of this century. Instead, after almost a year of delays, Davy Jones is still not giving up its bounty without a final fight. So, the flow test is still to come.
Jim Bob Moffett stood resolutely in the break out session and at the McMoRan dinner last night and patiently answered the same questions again and again. What about your balance sheet? Aren’t you going to run out of money? Do you honestly think you will have a successful flow test? Is there really permeability in these rocks? How big is this play? Really? Ironically, the well wants to flow so much that the latest problems have revolved around containing the flow, not encouraging it.
As future well completions in the Shallow Water Ultra Deep move forward, rest assured there will be a whole series of protocols that will be standard operating procedure. For one thing, wells will never again be designed to have tiny pipe at the bottom of the hole, making all efforts difficult because there is no room to maneuver tools and equipment. Wells surely won’t be using Schlumberger’s remote control small guns to perforate the casing. The folks at BOEMRE won’t be requiring the interruption of a flow test to move the rig back off the well. And wells will have packers routinely placed at the bottom of the production tubing so that no matter what comes flowing up after perforation of the well, it can easily be contained and controlled. Moffett takes responsibility on himself for not foreseeing that the original multiple O ring type assembly currently being pulled out of the hole would have to contain a far larger perforation project than originally conceived for one zone at a time instead of what resulted from perforating all zones at once. These recent completion activities and “redos” at Davy have cost the group another $70 million. You can’t sue the Government but one wonders what culpability might be laid at Schlumberger’s feet when all the dust settles.
Halliburton’s Boots and Coots pressure control experts are finally off the well. So we can presume that the final preparations for the flow test are now underway. If you look at Moffett’s latest presentations, I believe the slides and cartoons are aimed not at the public markets but at the huge investors who will soon be coming out of the woodwork to turn this into a full blown commercial development to rival the biggest and most important energy projects in the history of the U.S. oil and gas industry.
Many of the folks in the room, some of whom control or influence vast pools of money, don’t seem to see the forest for the trees or grasp what is coming about here. At the conference, if you go into the presentation rooms of those producing from shale plays onshore in the various parts of the country, there is standing room only, just as there was last year. Those investors don’t seem too concerned that shale requires $5-7 gas to be profitable in the present $3 world for natural gas prices. They don’t seem afraid of the write downs of reserve values that are coming at the end of the year. They only seem to focus on the $300 million + cost of Davy Jones and are sure that it will never produce economically. They don’t understand that at some point DJ became a science experiment for the entire play and its proof of concept.
A major topic at dinner was about the cost of future wells. Moffett seems particularly happy with future use of expandable liner to limit the starting size of pipe that must be used. He thinks future wells, particularly those on land at Lineham Creek (Chevron is the operator) and at its new huge Highlander prospect onshore where it will be the operator, can be brought in for $75 million per well. Everything on land is much cheaper from land rigs, or even barge rigs in the swamp areas where there is less than 10 feet of water, to not needing support helicopters and delivery boats. Also, onshore with some of the targeted formations closer to the surface, the support costs are much less, too. Even offshore wells will be far cheaper going forward even if more than $100 million.
Energy XXI, MMR’s junior partner, and Tex Moncrief are reportedly on pins and needles with the rest of us but with no wavering in their conviction about the Ultra Deep. Fortunes are made with patience and by leading, not following, the pack. This group fits that description in spades. Moncrief loves to tell the story of getting hooked on the oil patch when out with his Dad as a young boy in a pair of rubber boots watching a well start to gush oil into the air. Davy is trying to gush, too. It shouldn’t be long now until all the believers get their reward, including the public shareholders.
Joan E. Lappin CFA Gramercy Capital Mgt. Corp.