It is a typical pattern in the commodities business in the Gulf of Mexico: Just when you think the party’s over, something happens to bring it back to life. Recently, an independent oil company with deep roots in Louisiana gave major oil and gas producers around the globe reason to pause and reconsider the Gulf.
It was a big find by New Orleans-based McMoRan Exploration Co. that provided the spark. McMoRan announced it will soon tap into a mother lode of natural gas in a 20,000-acre offshore field nicknamed Davy Jones. Company co-chairman James R. “Jim Bob” Moffett said he believes the prospect holds at least one trillion cubic feet of gas.
But size alone isn’t what makes this discovery so special. Rather, it’s the location of the find that’s turning heads:
McMoRan found the gas by drilling in water only 20 feet deep.
For decades, producers working in the Gulf of Mexico have been moving farther and farther offshore in search of oil and gas pockets large enough to make their quest worthwhile. Continual advancements in exploration and drilling technology have made gigantic drilling operations possible in water thousands of feet deep.
Producers pursued these expensive techniques because they believed that the shallow waters of the Gulf were tapped out and that significant new discoveries would occur only in very deep water. Exxon Corp., the country’s largest oil company, was among those that once owned rights in some now-promising shallow-water tracts and sold the rights for a song because they deemed the prospects insignificant.
Moffett, who built a reputation and large fortune in the oilfields as one of the industry’s most successful wildcatters, is demonstrating that he hasn’t lost his touch. Confident that the Davy Jones tract held big rewards for the driller willing to punch deeper, he kept going. Using advanced deep-drilling technology, the company hit the new find 28,000 feet beneath the ocean floor. On Jan. 11, 2010, McMoRan released a statement in which Moffett said the find could be “one of the largest discoveries on the Shelf of the Gulf of Mexico in decades.”
Peter Ricchiuti, assistant dean at Tulane University’s A.B. Freeman School of Business, thinks Moffett may be right.
“Most oil companies at this point are cash-rich and prospect-poor, but that’s not the case with McMoRan. They now have enormous potential prospects,” he says.
He believes McMoRan’s discovery could be a game-changer.
“The shallow waters of the Gulf look like a pincushion – they’ve been drilled more than any place in the world – but all of that drilling was in the 10,000 to 12,000-foot range,” he says. Referencing the underground rock formations that hold the raw materials for fossil fuels, he adds: “If there really is a whole other layer of dead dinosaurs between 28,000 and 35,000 feet, people are going to be very excited.”
Not only does it appear that significant reserves of gas could become available at lower costs relative to deep-water drilling, but these reserves could be brought onshore much faster than those that lie far out to sea. Bringing oil or gas in from a well 100 miles or more offshore involves huge transportation costs and generally requires building an expensive pipeline. The first production from such a well might lag a discovery by as much as seven years.
Producing from a shallow-water well, on the other hand, might be only a matter of linking up to an existing pipeline. The Davy Jones well is just 10 miles off the Louisiana coast, so its production could arrive onshore within a very short time.
Pointing out that most of the major oil companies that once populated the Gulf packed up and left during the last decade to pursue bigger prospects in the North Sea or waters off the coast of Africa, Ricchiuti says: “I think the majors are going to have to come back with their tails between their legs.”
The opportunities that McMoRan’s find seems to present have had a big impact on the company’s stock. Within days after word of the drilling results surfaced, the common stock doubled to more than $16 a share, upholding the reputation of commodities companies for volatility.
Ricchiuti believes the stock could have a far greater upside, though he concedes that investing in the company isn’t without risk. The most obvious downside at the moment is the low price of natural gas. Excess supply is the culprit.
Aggravating the condition are some large recent onshore finds – such as the Haynesville Shale prospect in north Louisiana – that promise to keep large quantities of gas flowing for a long time to come.
Still, Ricchiuti thinks that demand surely will climb. “I don’t see how natural gas can’t play a bigger part in the country’s energy independence. It’s clean-burning, there’s so much you can do with it and you can use it as a transportation fuel,” he says.
If the McMoRan find does alter the drilling landscape in the Gulf, it could take a while. Most oil companies already have major investments under way elsewhere, and they can’t – and won’t – sprint back to the Gulf. But even a gradual pick-up in shallow-water activity could have a positive effect on some of the oil service companies that operate in south Louisiana.
Ricchiuti is keeping an eye on McMoRan for signs that a second big announcement is at hand. The company has another shallow-water well off Louisiana’s coast, in Timbalier Bay, and has drilled it to a depth of more than 33,000 feet. If Moffett uncovers another big pocket of natural gas there, champagne corks could start popping again soon.