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.
McMoRan Exploration Co. announced yesterday continuing progress to flow test the Davy Jones No. 1 well on South Marsh Island Block 230. As previously reported, McMoRan saw positive pressure response from the Wilcox “D” sand which was perforated on March 24, 2012.
On March 26, 2012, McMoRan attempted to perforate the Wilcox “C” sand. As the perforating gun was being removed from the hole, the well began to flow. When the gun was brought to the surface, it was determined that the gun did not fire in the Wilcox “C” sand from what appears to be a simple disconnection of the detonator cord. McMoRan plans to use a new perforating gun to complete the testing of the Wilcox “C” sand.
Currently, the test is ongoing from only the Wilcox “D” sand, which resulted in the flare. The flow from the “D” sand is being affected by considerable debris in the 5 inch liner, from what McMoRan believes to be residual drilling fluid from drilling of the well. Results of a clean flow test, as opposed to the current test hampered by debris, will be announced as further progress is achieved and flow rates are measurable. McMoRan will provide updates as completion operations progress.
Davy Jones involves a large ultra-deep structure encompassing four OCS lease blocks (20,000 acres). McMoRan is the operator and holds a 63.4 percent working interest and a 50.2 percent net revenue interest in Davy Jones. Other working interest owners in Davy Jones include: Energy XXI (15.8%), JX Nippon Oil Exploration (Gulf) Limited (12%) and Moncrief Offshore LLC (8.8%).
McMoRan Exploration Co. is an independent public company engaged in the exploration, development and production of natural gas and oil in the shallow waters of the GOM Shelf and onshore in the Gulf Coast area.
- A Little Bit Louder Now, Chevron Starts To Shout About Davy Jones And The Ultra Deep (mb50.wordpress.com)
Joan Lappin, Contributor
I can’t stop hearing that famous Isley Brothers song Shout in my head as I write this post: “A little bit louder now, a little bit LOUDER now, A LITTLE BIT LOUDER NOW.” About a year ago, speaking at a popular oil and gas conference Chevron tipped its hat to McMoRan’s Jim Bob Moffett and his work in the Gulf of Mexico Shallow Water Ultra Deep (SWUD) play that has been ongoing for more than five years. That event was truly noteworthy because major oil companies rarely, if ever, acknowledge a little player like MMR as being out front and leading the wave on any important new geological play. Chevron has recently promoted the Shallow Water Gulf of Mexico to one of its top three areas of geologic focus around the world. And it is becoming more vocal about its involvement.
Chevron is no longer whispering. In fact, there is a crescendo building in what CVX is saying about the Gulf of Mexico and what it is doing itself and with partners, both onshore and offshore. Many MMR watchers know that at 2011 year’s end, Chevron spud a well onshore in Cameron Parish, LA called Lineham Creek. It has a proposed total depth of 29,000 feet targeting the Eocene and Paleocene objectives below the salt weld. This is Chevron’s well in the Rockefeller Preserve, land that was donated to the State of Louisiana years ago. However, the royalty rights on the land were retained and passed to Chevron.
In recent months, Chevron invited MMR to participate in the Lineham well and Moffett agreed as long as his Ultra Deep partners were also included in the project. What’s significant is that giant Chevron wanted MMR to join it in this project as an equal partner. After Moffett made sure his partners were along for the ride: MMR is participating for 36%, EXXI for 9%, and W.A. “Tex” Moncrief for 5%. Why? Because MMR now knows more about the SWUD than any other company. For sure, the view is that perhaps geologically this play extends onshore and not just in the shallow water. This well will explore that concept and is located halfway between (on an east/west axis) Davy Jones and Chevron’s Bear Hump well which has been completed and is now being evaluated. What MMR has mastered over these last few years at Blackbeard West, Blackbeard East, Lafitte, and its Davy Jones’ discoveries is now critical for anyone who is also pursuing bounty in the general area and at the depths below 20,000 feet that have become the new exploration frontier.
During February, Bobby Ryan, Chevron’s VP of Global Exploration, spoke at another oil and gas conference about their enthusiasm for the SWUD and the work they are doing with MMR. On page 15 of its presentation, it describes the UltraDeep Gas Play as new play in a mature basin. Chevron can easily be a player because it already controls major acreage from wells drilled long, long ago and that are still producing to retain the leases. On that same slide, Davy Jones is listed as an exploration discovery. Who knew CVX was a player in DJ?
The transcript contains the following information:
“All eyes are focused on Davy Jones, that McMoRan-operated well, which we’re into a royalty position, is preparing for a test soon, 25,000 pound test equipment. This is a significant environment in the sense of geologically from what we’re typically used to. So we’ll be watching the results of that well. Meanwhile, we’re drilling and just spudded on December 31st, the Lineham Creek well you see onshore Louisiana there. In fact, Bear’s Hump was actually onshore as well.”
If you have ever wondered why the DJ participation percentages never quite added up to 100%, now we know. Chevron does not have a working interest but it does have a royalty interest in DJ. In probing, we also learn that somehow in the negotiations that have gone on this year between CVX and MMR, Chevron has also obtained access to the DJ logs and geological evaluations and interpretations which would not normally be available to a royalty interest holder.
Moffett has told us in no uncertain terms that he intends to bring in a partner with very deep pockets to help develop the Ultra Deep play. He has also told us he plans to follow the model he used for the development of the Grasberg Mine at Freeport Copper and Gold (FCX) years ago. In that case, Rio Tinto came along for the ride after paying FCX $1.5 billion for which it received ZERO participation in anything that had already been discovered up to that point. It then paid up for a half participation of what came after. Perhaps we are in the very early stages in the mating dance between MMR and Chevron. Don’t expect a rush on that. For sure, Jim Bob won’t do anything until he has proved up exactly what he has so the reserve engineers are happy and he is fully paid for all the hard pioneering work of the last several years.
We know that for a long time, the SWUD detractors have said there is nothing to be found in the Ultra Deep. So much has now been found that viewpoint has become ridiculous. Of course, flowing these wells is still to come. Another key in the shallow water is that offshore LA there are existing pipelines to carry these new discoveries to market right away. Billions will not have to be spent over future years to accomplish that part of the equation from the deepwater discoveries. As our country shifts, ever so slowly, away from coal and nuclear power and toward Natural Gas, nearby infrastructure is a very good thing.
The detractors have also said repeatedly, if this is such a great play, then why aren’t any majors involved? Well, clearly now there are! They aren’t just talking about it in whispers any longer. Chevron is starting to SHOUT about it. It’s about time. Or as Jim Bob said on a conference call last year: “Hallelujah, Hallelujah!”
- Gulf of Mexico True Believers on Pins and Needles as McMoRan completes Davy Jones (mb50.wordpress.com)
- Chevron Throws the Brakes on Current and Future Drilling Offshore Brazil (mb50.wordpress.com)
- Australia: Exmouth Plateau Brings Joy to Chevron (mb50.wordpress.com)
- Important McMoRan News Greeted With A Big Yawn (forbes.com)