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Davy Jones Discovery May Bring Explorers Back to Shallow Waters

The shallow waters of the Gulf of Mexico (GOM) up until last week had been considered by many to be thoroughly explored. However, the Davy Jones discovery by an unrelenting team of producers suggests that the story of this basin is "far from over," energy analysts said.

New Orleans-based McMoRan Exploration Co., which specializes in drilling in the Outer Continental Shelf (OCS), and its partners last Monday announced what they said could be one of the largest natural gas and oil discoveries in decades that's not in deepwater territory. The Davy Jones well, drilled in South Marsh Island Block 230 in 20 feet of water, reached a measured depth of 28,263 feet -- or about five miles. The well, logged with pipe-conveyed wireline logs to 28,134 feet, found 135 net feet of gas- and oil-soaked sands in four zones in the Wilcox section of the Eocene/Paleocene trend.

All of the zones were said to be "full to base," with two of the zones containing a combined 90 net feet, said officials. The Wilcox sands logged below 27,300 feet "appear to be of exceptional quality," and flow testing will be done to confirm the ultimate hydrocarbon flow rates from the four separate zones. McMoRan plans to drill the well to 29,000 feet to test additional objectives.

"Davy Jones log results confirm our geologic model and indicate that the previously identified sands in the Wilcox section on this large ultra-deep structure encompassing four OCS lease blocks (20,000 acres) provides significant additional development potential which, upon confirmation development drilling, could make Davy Jones one of the largest discoveries on the shelf of the Gulf of Mexico in decades," said McMoRan Co-Chairman James R. Moffett.

"If you think that's a simple feat, consider that ExxonMobil abandoned one of these ultradeep Shelf stunts in 2007, after drilling more than 90% of the way to target depth and having spent around $180 million," said analyst Toby Shute of Motley Fool. "These wells are not for the faint of heart."

Interestingly, the ultradeep shelf five years ago was considered by some analysts to be the wild card that could help to pick up some of the slack in domestic gas supplies (see NGI, April 18, 2005). Domestic gas supplies for now may appear to be solid, but McMoRan and its partners said the Davy Jones discovery ultimately will justify all of their hard work.

The Wilcox sands logged below 27,300 feet "appear to be of exceptional quality," Moffett told investors during a conference call. The well results "are redefining the subsurface geologic landscape below 20,000 feet on the shelf of the Gulf of Mexico," and will be used in company models "as we continue to define the potential of this promising new exploration frontier."

"The Davy Jones discovery verifies the ultra-deep potential of the Gulf of Mexico shelf and opens this horizon as a major exploration frontier," said Energy XXI (Bermuda) Ltd. CEO John Schiller. McMoRan operates the prospect and is funding 25.7% of the exploratory costs and has a 32.7% working interest. Energy XXI holds a 15.8% stake, while Plains Exploration & Production Co. holds a 27.7% interest. Nippon Oil Exploration USA Ltd. has a 12% interest, W.A. "Tex" Moncrief Jr. holds an 8.8% stake, and a private investor has the remaining 3%.

If the Davy Jones well proves to have significant reserves, analyst said it could lead the majors and independents back to shallow waters. For several years now the majors -- and deep-pocketed independents -- have moved farther and deeper into the GOM in a quest for new energy resources. But McMoRan placed its bets on the near-shore area and the work is finally paying off.

"If you were searching for ultra-deep oil and gas deposits in the Gulf of Mexico, which target would you choose to drill: the one about 250 miles offshore in 4,132 feet of water, or the one 10 miles offshore in 20 feet of water?" asked Shute. "BP chose the former, and with the help of firms like Transocean and Halliburton successfully drilled the Tiber prospect last fall" in the deepwater (see NGI, Sept. 7, 2009).

McMoRan "has chosen door No. 2, and also come up with an apparent winner," said Shute. "It turns out that there's no right or wrong answer to our question, but it might surprise you that both drilling operations pushed the industry's technical limits."

The deepwater Tiber well may be larger than BP's 2006 Kaskida discovery, which contains an estimated 3 billion boe in place, a BP spokesman told NGI last year. If Tiber proves its worth, together Tiber and Kaskida alone could increase BP's GOM output by more than 60% to 650,000 boe/d within the next 15 years, he said.

Proving Davy Jones' worth would do much the same for McMoRan and its partners. But proving it will take more money -- and time. What could bring the partners more investors is the location of the Davy Jones well, which was a test of the Wilcox exploration potential, said Gerson Lehman Group's Michael Lynch. The Wilcox trend, he noted, extends across the GOM and is being targeted by several deep-pocketed producers in the Lower Tertiary Trend portion (see NGI, Sept. 11, 2006).

"The reason for this great wealth of hydrocarbons" in the GOM is "a combination of source beds of excellent quality, thick reservoirs with high porosity and permeability, and a series of shales, faults, unconformities and great salt seals and barriers, which provide large and numerous traps," said Lynch. "Davy Jones is a test of Wilcox ultradeep large exploration potential."

McMoRan geologists theorized that they could hit the same structure much closer to shore, and they appear to be correct.

"The entire South Marsh Island area, which is south of New Orleans, is highly prospective," said Lynch. "McMoRan has been operating there for a long time and their geologists have an extremely accurate picture of the subsoil. The company has made discoveries in both Pliocene and Pleistocene (two-10 million years old), as well as the prolific Miocene sands (25 million years old).

"Now the much deeper Eocene/Paleocene sands ( 55-65 million years old) appear to be just as prolific. The Eocene/Paleocene (Wilcox) strike opens up a completely new geologic horizon, which gives McMoRan opportunities to commercialize their large acreage position. The big uncertainty is whether the hydrocarbons are oil or gas. If oil, it means that the shallow water Wilcox may have the same potential as the deep and ultradeep water Wilcox. It is much more exciting to explore with an $80,000/day jackup than a $500,000/day semisubmersible."

In today's market, a major gas find might not appear to be as exciting, but it's still a big deal, said Shute.

"Here's the basic trade-off: McMoRan saves a lot of money on its drilling rig by using a jackup instead of a half-million-dollar-a-day drillship," said Shute. "On the other hand, the company has to drill through several thousand feet more rock than its deepwater counterparts, which invites mechanical issues. Attempts at resolving these matters can get very expensive, or even worse, fail entirely."

Neal Dingmann, an analyst with Wunderlich Securities, wrote that the discovery was "clearly very positive...not just with the stock, not just with the well, but for that entire prospect." The questions now are "what kind of numbers are we talking about with regard to the size of the resource, and we won't know that until they do more drilling."

McMoRan and its partners for now face little competition, but they may need more money to do deep tests, said Dingmann.

"Once development work starts, that's when it gets really expensive," he said. "At that point, they may want to bring on one of the big boys with deep pockets.

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