‘King of the Deep Shelf’ puts bigger companies to shame

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Ray Tyson - Offshore Source
The Davy Jones story is as much about operator McMoRan Exploration Co. as it is about the significance of the discovery itself, which not only could prove to be world-class in size and productivity, but appears to validate a huge and far more reaching play on the U.S. Gulf of Mexico shelf, one industry folks have been dreaming and talking about for years.
 In fact, the “ultra-deep” Wilcox sands, as deep and deeper below the ocean floor as Mount Everest is tall, could be just the cure that helps reverse overall natural gas production decline on the shelf, along with other already successful McMoRan exploration and development efforts.
Details and perspective on the Davy Jones discovery and what it could mean to industry is this month’s page one lead story, entitled: “Jackpot! Davy Jones strike points to bonanza on U.S. Gulf shelf.” But more needs to be said about McMoRan the company, a relatively small independent producer that somehow, when it comes to finding resource way down the pipe, has managed to outwit some of the world’s largest and well-financed oil and gas companies, to become a dominant leaseholder in the region and arguably the undisputed “King of the Deep Shelf.”
The Blackbeard well, once among the most observed exploration wells on the globe due to its extreme target depth down to 38,000 feet, is a good example. Under a previous owner, operator ExxonMobil was forced to quit drilling at around 30,000 feet because of high temperatures and pressures. McMoRan not only deepened the well, but is now preparing to drill below 34,000 feet to reach the same Wilcox sands encountered by Davy Jones. It’s worth noting that the enterprise value of the mighty ExxonMobil is nearly $320 billion, compared to McMoRan’s $1.8 billion. Talk about getting the biggest bang for your buck.
 
McMoRan Exploration’s rise to offshore stardom began to blossom following a major reorganizational effort in the late 1990s involving predecessor McMoRan Oil & Gas and former parent Freeport-McMoRan Sulphur Inc. The move gave McMoRan Exploration independence as a publicly traded company and cash flow from Freeport-Sulphur to expand its exploration and development program.
The new company had in mind early on to go deep, not just because of the hope of untapped resources, but because of major cost-savings by using existing facilities that produce from shallower intervals. Aside from its considerable ultra-deep acreage position, McMoRan has participated in important deep discoveries between 17,000 and 25,000 feet on other shelf properties it controls in federal and state waters, including Flatrock, Hurricane, Hurricane Deep, JB Mountain and Mound Point. Flatrock is currently the biggest gas producer on the shelf, with output of around 300,000 million cubic feet per day. 
McMoRan is by no means a rich company, reporting 2009 fourth quarter revenues of $131.9 million, which isn’t a lot when you consider a single ultra-deep well on the shelf costs about $100 million. So how does a small independent producer with limited financial resources pay for such an aggressive exploration and development program? The answer: reliable and experienced partners and some “creative” financing, as McMoRan Co-Chairman Jim Bob Moffett explained in a recent conference call with financial analysts. Partners serve to diversify financial risk and to better manage costs.
However, partnering up is only part of the McMoRan success story when it comes to finding oil and gas in deep horizons of the U.S. Gulf continental shelf. Technology has a lot to do with it. For one, the company has accumulated 3D seismic on substantially all of its acreage, and employs geophysicists, geologists, petroleum engineers, production and reservoir engineers and technical professionals who have extensive experience in these technical fields. Moreover, the company prides itself on its expertise in various exploration technologies, including incorporating 3D seismic interpretation capabilities with traditional structural geological techniques, deep offshore drilling and horizontal drilling.
“We believe our extensive use of these technologies reduces the cost of our drilling program and increases the likelihood of its success,” the company says.