Natural Gas Find May Spur Interest in Shallow Gulf Waters

Mostly left for dead years ago by Big Oil and scoured by smaller firms since, the shallow waters of the Gulf of Mexico are likely to get a second look by companies of all sizes after word Monday of what may be one of the largest discoveries in the area in decades.

A group led by New Orleans' McMoRan Exploration Co. said it found significant quantities of natural gas in a 5-mile-deep well it drilled in about 20 feet of water at McMoRan's Davy Jones prospect just 10 miles off the Louisiana coast.

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. But the companies said they will have to do further drilling to confirm the resource potential.

The discovery heralds the potential for yet another frontier for oil and gas development in an area of the Gulf of Mexico called the Outer Continental Shelf that has been drilled extensively for nearly a century.

And it suggests the same rock and sand layers that in recent years yielded major oil and gas discoveries several hundred miles out in the Gulf may be equally rich with oil and gas in shallow water areas, where exploration and production is much easier and cheaper.

"It's definitely going to bring a number of players back into this area," said Neal Dingmann, industry analyst with Memphis-based brokerage firm Wunderlich Securities. "This is more than just a one-well discovery."

Even so, current drilling and production technology will be tested by extreme temperatures and pressures found in miles-deep wells required to reach the resources, and development costs could be high.

Investors like it

It will take at least 10 wells at a cost of $150 million to $175 million each to bring the field into production, McMoRan Co-Chairman James R. Moffett said in a conference call Monday. The field covers 20,000 acres.

Still, if development drilling confirms what the first well has shown, "this is going to be a huge reserve," he said.

Energy XXI Chairman and CEO John Schiller said the discovery "verifies the ultra-deep potential of the Gulf of Mexico shelf and opens this horizon as a major exploration frontier."

He said his company has a stake in 12 prospects in the area, and the big score on the first one bodes well for the other 11.

Investors responded Monday by driving up the stock prices of McMoRan by more than 50 percent and Energy XXI nearly 40 percent.

"Success at Davy Jones could be a transformative event for (the companies)," said Jefferies Research, in a note to investors, noting the prospect could boost McMoRan's year-end proved reserve base by 150 percent and Energy XXI's by 60 percent.

McMoRan is the lead operator of Davy Jones, with nearly 33 percent working interest and Energy XXI has a 16 percent stake.

Other partners include Houston's Plains Exploration and Production Co., with 28 percent; Japan's Nippon Oil Exploration USA Limited, with 12 percent; and W.A. "Tex" Moncrief, Jr. with 9 percent.

The U.S. Minerals Management Service, which oversees offshore oil and gas production in federal waters, describes "deep water" as any oil and gas development in depths of 1,000 feet or more. The Shelf comprises shallow water closer to shore.

Major oil companies like Royal Dutch Shell have left the Gulf of Mexico Shelf in recent decades, lured by much larger and more profitable fields in the deep water, as well as federal royalty relief programs meant to spur development farther offshore. They sold offshore leases on the Shelf to smaller firms with lower operating costs that could still turn profits on the smaller fields.

Billions of barrels?

McMoRan is now one of the largest acreage holders on the Shelf. Among its other shallow-water discoveries is a well called South Timbalier 168, formerly known as Blackbeard, that the company said may contain billions of barrels of oil.

The industry has been waiting to see how much natural gas also might lie in wells deep beneath the sea floor in shallow Gulf waters, said Tyler Priest, director of Global Studies in the Bauer College of Business at the University of Houston, who has written about the history of offshore oil and gas development in the Gulf of Mexico.

"This is a real breakthrough," he said.

What's more, it once again challenges the conventional wisdom that the Gulf of Mexico's best day are behind it.

"It's the goose that keeps on giving, apparently," Priest said.

Copyright (c) 2010, Houston Chronicle. Distributed by McClatchy-Tribune Information Services.