McMoran Exploration: Hype and Hope of Davy Jones Discovery

Last Updated Jan 31, 2010 10:01 PM EST

McMoRan Exploration announced a potentially major natural gas discovery in its operated Davy Jones ultra-deep prospect drilled in the shallow waters of the Gulf of Mexico (commonly referred to as the "shelf"), just 10 miles off the Louisiana coast. Although the find could significantly add to the company's reserves, the structural complexity of the site and the sophisticated imaging requirements required for such an ultra-deepwater, subsalt target (with total drilling depths exceeding 25,000 feet) involves a high degree of exploratory risks.

Positive drilling results could be a huge boom for the company. McMoran Exploration (NYSE:MMR) had proved oil and gas reserves at year-end 2009 totaling 271.9 Bcfe (billion cubic feet of natural gas equivalents), compared with 344.8 Bcfe in 2008. The reserve depletion primarily reflected delays in bringing shut-ins (as a result of the September 2008 hurricanes in the Gulf) back into production. Estimates of the size of the discovery range from 2 trillion to 6 trillion cubic feet of natural gas, rivaling the largest gas finds ever made in the Gulf.

To date, pipe-conveyed wireline logs to depths of 28,603 feet show a total of 200 net feet of gas pay (the vertical thickness of reservoir rock estimated to contain hydrocarbons and be capable of contributing to producing rates) in these sedimentary sands deposited during the late Paleocene-Eocene era. The well has a proposed total depth of 29,000 feet. As current logging tools cannot directly sense hydrocarbons alone, the next step in this reservoir description is to be porosity modeling, which will help provide additional support of gas in place and recovery cost factors.

Industry pundits and investors (close to a 90% spike in share price since first of January) are heralding the Davy Jones news as a transformational event for both exploration activity in the shallow waters of the Gulf and for McMoran Exploration. Co-chairman James R. Moffett said on the fourth-quarter 2009 earnings call that "seismic data seems to indicate" that the big picture was uncomplicated. Nonetheless, it is worth reminding folks that assumptions to date have been based on sketchy data from well logs. In addition to appraising the actual hydrocarbons in place, the company still hasn't defined the extent of the reservoir field or the recoverability of the reserves in the tapped reservoir -- its flow rates.

In a recent article in the trade publication The Oil Drum Geologist, geological consultant Art Berman cautioned that the movability of the hydrocarbons in the (Wilcox) reservoir could be affected by the extreme depth (more than 5 miles), pressure, and temperature in the well:

Bottom-hole pressures may be as high as 25,000 pounds per square inch, by far the highest pressures known in Gulf of Mexico wells, and almost 10 times the rocket engine chamber pressure required for spacecraft liftoff. While not specifically mentioned, reservoir temperature is probably considerably more than 400 degrees Fahrenheit. Gas has never been produced at these temperatures and pressures, and may present engineering obstacles. In addition, gas reserve volumes will shrink at surface conditions. There is also a possibility that the gas will contain carbon dioxide, which will reduce the volume of commercial gas and present a disposal problem.
Aside from one or two issues, like a sub-surface safety valve (acts as a failsafe to prevent the uncontrolled release of reservoir fluids), said co-chairman Moffett, most of the equipment -- assuming operation in the 20,000 pound pressure area (what if higher?) -- the well could be completed and flow tested later this year. Wall Street, of course, is already speculating that a producing well(s) could come online by 2013. Lest we forget, however, "Davy Jones' Locker" is the final resting place for many a sailor at the bottom of the sea:
He came, said he, in a storm, and he went in a storm; he came in the night, and he went in the night; he came nobody knows whence, and he has gone nobody knows where. For aught I know he has gone to sea once more on his chest, and may land to bother some people on the other side of the world; though it is a thousand pities, added he, if he has gone to Davy Jones' locker. ~ Washington Irving (Adventures of the Black Fisherman)
Will the drilling side of the equation turn out to be harder than the production side? Until completion of the appraisel well and flow rate results are reported, none will truly know whether this venture will sail on to victory or sink its bones to Davey Jones.
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.