Chevron Makes Big Discovery In Louisiana - And It's Not Even Done Drilling Yet

02 20, 2013 by Forbes

They haven’t even finished drilling yet, but this morning McMoran Exploration announced a significant oil and gas discovery at the ultradeep Lineham Creek prospect in coastal Louisiana.

McMoRan said in a statement that they’ve found proved, probable and possible reserves equivalent to 547 billion cubic feet of natural gas, with 12.9 bcf of that falling into the proved category.

The statement from McMoRan was unusual for a couple reasons. First of all, McMoRan (with a 36% working interest) is not the operator on the well, Chevron (50%) is. Usually the announcement of a discovery would come from the operator. Second, they haven’t even finished drilling the well yet or reached down deep enough to test their primary objectives.

Chevron began drilling this ultradeep well over a year ago, with the objective of boring down to big sub-salt prospects 29,000 feet beneath the surface. But McMoRan says that these discoveries sit less than 24,000 feet down. The well is currently at 27,600 feet down. Other partners in the well include Energy XXI (Nasdaq:EXXI) and billionaire Tex Moncrief.

So the announced discovery is like icing on a cake they haven’t even baked yet. In his statement McMoRan CEO James Moffett said, “These are the first of what we hope will be sizeable reserves from the sub-salt, ultra deep trend onshore and in the shallow waters of the Gulf of Mexico. Indications of hydrocarbons shallower than 24,000 feet have positive implications for additional targets on trend within our portfolio.”

In its statement McMoRan made a point of noting that the reserves were calculated by engineers “engaged for the sole account of McMoran.” So far Chevron hasn’t confirmed McMoRan’s announcement.

Moffett is in a tougher position than Chevron. He’s been struggling mightily over the past year to complete a production well at his ultradeep Davy Jones discovery in the shallow waters of the Gulf, having spent more than $1 billion on that one well, with nothing yet to show for it.

Moffett has also invested heavily to make several other ultradeep discoveries including Blackbeard. But there’s a limit to how many $200 million wells a small company like McMoRan can drill before it runs up against the limits of its balance sheet.

Investors were getting nervous, and late last year McMoRan shares took a nosedive on continued bad news surrounding Davy Jones. That led Moffett to orchestrate the acquisition of McMoRan Exploration by its far bigger sister company Freeport McMoRan Copper & Gold (of which he is also the chairman).

Announcements like this one today are likely designed to ameliorate concerns by Freeport shareholders that Moffett is taking them on a quixotic and expensive journey of no return.

Lineham Creek is the first ultradeep well that Chevron is drilling in the Gulf. But (as you can read in my new feature on Chevron in the current issue of Forbes Magazine) the company has big hopes for the ultradeep.

Chevron is ideally positioned in the play because it’s the only one of the supermajor oil companies that didn’t sell off all of its shallow gulf acreage when all its peers did 15 years ago. Back then the conventional wisdom was that the shallow waters were played out. Chevron held onto its assets because it liked controlling the hundreds of miles of subsea pipelines that had been lain in the gulf over the years — the better to get its deepwater barrels to shore. And now they’re finding all sorts of ultra deep prospects under these “legacy” assets they’ve held for years.

Last year Chevron and McMoRan teamed up to acquire dozens of additional ultradeep prospects through federal government lease sales.

If the ultra deep shallow fields can be developed safely, the economics should be significantly better than the deepwater fields much further out. And Chevron has been enthusiastically developing those. It discovered the deepwater Jack, St. Malo and Bigfoot fields about eight years ago. It won’t be until 2014, that it will at last be ready to float out into the gulf the two giant production platforms it’s building in Corpus Christi, Tex. Add up the cost of the those platforms, pipelines and wells, and Chevron will be into Jack, St. Malo and Bigfoot for $12 billion before the first oil and gas flows. (Peak output from the three fields is expected to be 100,000 boepd by the end of 2014.)

In contrast, with these ultradeep shallow water wells, Chevron is eyeing prospects that might be nearly as big as those deepwater finds. But being so close to shore it should take less than 18 months to go from discovery to production, with no giant infrastructure requirements.

Even better, Lineham Creek is technically onshore — located in the marshy coastal wetlands of the Rockefeller Preserve, a 76,000-acre wildlife refuge that the Rockefeller Family gave to the state of Louisiana. Tapping into existing pipelines will be a snap.