Shell Offshore Inc. spent two years preparing for the Minerals Management Service’s Central Gulf of Mexico (GOM) Lease Sale 205 earlier this month, and the planning paid off: the company won 69 leases of the 94 bids it submitted. Cobalt International Energy LP had yet to launch two years ago, but the upstart independent submitted more bids than any other producer, and it captured 53 deepwater leaseholds.
Cobalt may not be as well known as some of the other competitors in the offshore — in fact, it has yet to drill a well — but give it time. It certainly has the money: the Houston-based company was launched in December 2005, backed with $500 million in private equity from Carlyle/Riverstone and Goldman Sachs Capital Partners (see NGI, Dec. 5, 2005). Since then Cobalt has gained additional funding from KERN Energy Partners, a Calgary-based independent private equity fund that makes investments in early stage and emerging energy companies.
What gives the upstart explorer a little extra panache is where it ranked in terms of success in the latest lease sale (see NGI, Oct. 8). Cobalt vaulted to third top bidder with its 53 winning bids behind only Shell, with 69 winning bids, and BP Exploration & Production Inc., with 83. Cobalt’s net exposure in the sale totaled $211.3 million; it spent an average of $692/acre. Cobalt also outbid nine other producers to obtain the fifth most expensive block — deepwater Green Canyon Block 817 — with a $55.3 million bid ($9,598/acre).
“I think we made a statement, bidding on the most leases of anybody who was in the lease sale,” Cobalt CFO Jim Ivey told NGI. “In terms of proving that a small start-up can bid and bid successfully, if you look at the bidding, it’s pretty clear that we bid on things that other companies coveted.”
Cobalt will add the new leases to the 24 it obtained last November in the Western GOM Lease Sale 200, in which it spent $33.125 million (see NGI, Nov. 21, 2006). Ivey said Cobalt also has acquired additional deepwater leases in some unannounced trades.
“Up to now, we have been looking to build an inventory of leases,” said Ivey. “Now we are beginning to shift from acquiring leaseholds to doing something with it.” Ivey said “what’s next for us is to round out our hand in leases, and then transition from a start-up company to a company with a program.”
Cobalt, named for the deep-blue hue of the deepwater, has less than 40 full-time employees, but the management team is deep in oil and gas experience. CEO Joseph Bryant is the former president and COO of Unocal Corp.; Vice Chairman Samuel H. Gillespie is former general counsel of Mobil Corp. and Unocal; the executive vice president of exploration, James H. Painter, is the former senior vice president of exploration at Unocal and Ocean Energy; and James Farnsworth, president and COO, was the vice president for worldwide exploration and technology at BP. Ivey had been CFO for midstream operator MarkWest Hydrocarbon Inc., and he was treasurer of Williams for nine years.
“We are a small organization, but we are long on experience as an organization,” said Ivey. “If you have one or two people in every discipline, people with a proven track record, then you have the ability to manage however the company chooses to go at it. Our strategy was to have a couple of people in every discipline that are good at getting these sorts of projects done, using contractors to round it out.
“For me personally, I made a choice like most of the guys in the company. I had had a very successful career, but I was looking to do something different and get in on the ground floor level of something special.”
Cobalt is “very small, very focused…there are no layers,” said Ivey. It’s basically a niche oil and gas company whose focus — for now anyway — will be on the deepwater GOM. “It’s a relatively recent phenomenon to be able to do that. But with the caliber of the contractors out there today, we can compete with the majors in terms of exploring. We’re continuing to look elsewhere and to match up skill sets with geology.” But, he said, “our first focus will be in the deepwater Gulf.”
Cobalt likely won’t begin a drilling program until sometime in 2008. Until then, the company will be testing targets in “a little bit shallower water…slightly less than what they’ve looked for in Jack and St. Malo” to prepare for what it hopes will be a successful exploration and production program.
Chevron Corp., Devon Energy Corp. and Statoil ASA last year completed the deepest extended drill stem test in history, with a successful production test on the deepwater Jack No. 2 well at Walker Ridge Block 758 in the Lower Tertiary trend (see NGI, Sept. 11, 2006). The St. Malo prospect, discovered in 2003, also is located in the Lower Tertiary. Testing is ongoing now, but one well drilled there four years ago was to a depth of 29,066 feet (8,859 meters), and it hit more than 450 feet of oil-bearing rock over a 1,400-foot interval.
Primarily, Cobalt will be targeting Miocene-type formations, said Ivey. “We’ll be looking at areas that traditionally it’s been difficult to image in salt. The technology is such that we are starting to be able to see images, and be able to drill with some confidence.” He said some of the deepwater structures are “excruciating” to image, but technology has made many of the heretofore unknown rocks “simply and easy to see.”
In the deepwater, 99% of the discoveries have been in Neogene age and younger reservoirs, including Pleistocene, Pliocene and Miocene. In the eastern GOM, at least six large discoveries have encountered Miocene-age reservoirs, and 10 are in water depths of more than 7,800 feet. The Mississippi Fan foldbelt trend saw three Lower Miocene oil discoveries in 2005, including two in the Green Canyon: Knotty Head, Block 512; and Genghis Khan, Block 652.
Cobalt’s “keys to success are pretty straightforward,” he said. “The leases we have now acquired have to be made drill-ready. Some will be drilled, some won’t. Once we get to the point with drill-ready prospects, it will be a process of acquiring access to a rig with a capable crew and a good well design program. It all really comes down to being drill-ready.”
Cobalt’s business plan most likely could not have been written five years ago, said Ivey.
“In my mind, the tools to do this are just starting to be available,” he said. “Five years ago, a start-up trying to do what we’re doing, I think would have been unthinkable. Private equity was not as well developed, technology was not as readily available. The opportunities of lease acquisitions happens on a regular cycle, lease sale to lease sale…
“The timing of us coming together is not coincidental,” said Ivey. He noted that Shell engineers said they considered the latest lease sale to be one of the best ever, and they spent two years meticulously studying the deepwater and readying their bids. “We absolutely agree [with Shell] that this is probably the most prospective lease sale in a long, long time.” He added, “Whoever wants to do this, if they didn’t do it now, they just missed the greatest lease sale in a decade…Timing is not the only thing, but it’s certainly an important thing…”
Cobalt plans to become a “significant player in the Gulf of Mexico,” he said. “If we can have success in the next five to 10 years, that’s really our goal. We can find the opportunities, explore, and put ourselves in as one of the larger independents in the Gulf.” Ivey explained that the company is “built for the deepwater Gulf of Mexico or areas of the world that present similar geology challenges.” Its focus is offshore, or “where we an find reservoirs and formations onshore where the geology is similar…But for now we intend to stick to our knitting, and that’s offshore.”
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