Gulf of Mexico True Believers on Pins and Needles as McMoRan completes Davy Jones

Davy Jones Production Platform

A lot is happening in the Shallow Water Ultra Deep drilling program that McMoran and its astute partners, Energy XXI and Tex Moncrief, have been pursuing for the last few years.  Now that the U.S. space shuttle program has come to an end, the scientific frontier in this country has moved to drilling miles into the earth�s crust instead of launching men to the moon.  Those over 50 are old enough to remember the tension everyone in America felt as the first U.S. spacemen disappeared around the back of the moon and were temporarily out of communication with the Mission Control Center in Houston. Nobody knew if they would continue past the moon and out into space or circle back around into view as planned. 

These days the exploration frontier is 30-35,000 feet below the mudline in the Gulf of Mexico.  Petroleum engineers are designing tools and rigs to control the 400 degree temperatures and 20,000 and more lbs. of pressure being encountered by drill bits and logging tools working 6 miles into the earth.  

On September 2, 2009, BP announced a massive oil discovery at its Tiber well in what was then one of the deepest wells yet drilled to a total vertical depth of 35,055� in 4132 feet of water in the Wilcox and Tuscaloosa formations 250 miles Southeast of Houston.  The discovery was described as having multiple pay zones in the �lower tertiary.�  Kaskida, another BP well was announced as having 800� of hydrocarbon bearing sands about 45 miles SE of Tiber.  Neither of these wells is in production and it is likely to be many years and many billions of dollars spent to build pipelines and solve lifting problems before they are.

In contrast, the Davy Jones 1 well was announced as a discovery by McMoRan and its partners in January 2010, just a few months after the Tiber discovery.  It is about to come online and into production almost any day now.  What�s the difference?  DJ1 is in 20 feet of water just off the coast of Louisiana. Drilling for oil and gas in the Louisiana almost swamp land has been going on for decades.  There are existing pipelines all over the place.  The production platform pictured above is in water that a tall NBA player could almost stand in and wave his arms above the surface.    

So everyone is waiting with great anticipation just as for those astronauts circling the moon for the first time decades ago.  McMoRan, the operator, had long ago announced expected completion of the well in mid-December 2011 with perforation of the well casing and a flow test to follow shortly thereafter before the end of the year.   

Davy Jones and the Ultra Deep wells don�t give up their booty without a fight.  This is no exception.  It is not certain how fast the reaming of the well will proceed. Might be before year end and it might not.  For sure, the goal is to move at the �proper� speed to successfully complete and test the well. No other course would make sense when the well has cost about $170 million so far. Other than satisfying Wall Street, whether the well is completed on December 20th or January 10th is irrelevant. In this case, slow and secure is the way to go. 

The real issue since this play began is that for years many of the other oil and gas exploration companies have disparaged the whole idea that anything worth pursuing would ever be found.  Once it was, the next group of naysayers were convinced that like BP�s Tiber and Kaskida, it would be impossible to produce them.  Earlier this year, in an astounding tip of the hat to a small E&P company like MMR, Chevron complimented MMR�s Jim Bob Moffett and elevated the Gulf of Mexico to its top three exploration zones.  Oil folks in the know are no longer putting down this concept that under the exhausted shallow fields in the Gulf and under the salt weld, more hydrocarbons would or could be found.  Now it is accepted that massive amounts might still be found altering our nation�s energy future.

 The expectation for Davy Jones 1 is that once the inside of the hole is smoothed (reamed)  new production liner will be placed into the hole. Next the well casing will be perforated to allow production to begin.  Gas and hopefully some liquids too, will come surging up the well. There is a range of estimates but some folks believe that as the well is perforated from the bottom up, the initially activated zones will begin producing 20 MMcf per day building to the 50-70 MMcf per day level MMR expects to produce.  Because this well is in a hole originally designed years ago to go to only a 20,000� depth, its small size limits production to a maximum of 75 MMcf per day. Those constraints will not apply to Davy Jones 2, drilled 2.5 miles away which was designed from the outset with much larger pipe and to go to a 30,000� depth. The second  well is due on stream in the second half of 2012, even less time than the two years it has taken to design the equipment needed to bring Davy 1 onstream.

In the world of exploration and production nothing is ever certain. However, MMR expects to have some additional good news to report before year end at either its Lafitte well or at Black Beard East. In all cases, Moffett is looking at both of these wells for the same Wilcox and Tuscaloosa sands such as the Frio which has previously been seen at Blackbeard East and which is a massive producer onshore Louisiana .  This zones have also been seen offshore at BP�s Tiber and Kaskida wells.  Good things are just around the bend but until then, nervous anticipation is the mood of the week.

 Joan E. Lappin CFA              Gramercy Capital Mgt. Corp. 

In these turbulent times, put our decades of experience to work for your portfolio.  Contact us at info@gramercycapital.com

Gramercy Capital, its clients and Mrs. Lappin own shares in McMoRan and Energy XXI.  They do not own shares in BP or Chevron, also mentioned in this article.