-- JB Mountain No. 3 development well currently drilling below 14,600 feet.
-- Mound Point Offset No. 2 development well currently drilling below 16,300 feet.
-- First quarter 2004 production from three wells currently on-line (JB Mountain No. 1, JB Mountain No. 2, and Mound Point Offset) averaged an aggregate gross rate of approximately 78 million cubic feet of natural gas equivalent per day (Mmcfe/d).
-- Submitted a license application with the U.S. Coast Guard for the Main Pass Energy Hub(TM) (MPEH(TM)) to develop a liquefied natural gas (LNG) receiving terminal offshore in the Gulf of Mexico at Main Pass Block 299.
In January 2004, McMoRan announced an agreement with a new exploration partner which enables it to conduct significantly expanded exploratory drilling activities outside the JB Mountain/Mound Point area. Under this multi-year exploration venture, a private exploration and production company has committed to spend a minimum of $200 million for its share of the venture's exploration costs. The private company will participate for a minimum of 40 percent of McMoRan's interests in prospects drilled during this period. In the initial year, McMoRan and its partner plan to participate in the drilling of at least 10 exploratory wells. McMoRan and its partner are currently participating in the Dawson Deep prospect at Garden Banks Block 625, the Minuteman (previously referred to as Phoenix) prospect at Eugene Island Block 213 and the Lombardi Deep prospect at Vermilion Block 208, and will participate in the Deep Tern Miocene prospect at Eugene Island Block 193 that is expected to spud in May 2004.
As previously announced, the Dawson Deep No. 2 Side Track No. 1 appraisal well was drilled to a total measured depth of 27,953 feet. The initial well encountered hydrocarbons in several sand intervals. The appraisal well was targeted to intercept those intervals in a down dip position. A zone indicated to be oil bearing at 22,568 feet in the original hole was intercepted in the appraisal well which is located 2,250 feet to the northeast and 600 feet low to the original hole and by wireline log analysis and tests, indicates a 120 foot single sand interval with 90 feet of true vertical depth of oil indicating a potential commercial reservoir. The original and appraisal wells have been temporarily abandoned while well data is analyzed and integrated with newly processed seismic data that is expected in May 2004 by Kerr-McGee Oil & Gas Corporation, a wholly owned affiliate of Kerr McGee Corporation (NYSE: KMG). Kerr McGee is evaluating opportunities to develop Dawson Deep as a subsea tieback to its adjacent and recently commissioned Gunnison spar facility, which achieved its initial production in December 2003.
The venture owns a 50 percent working interest in the well (30 percent working interest; 24 percent net revenue net to McMoRan). Kerr-McGee operates Dawson Deep with a 25 percent working interest, Nexen Inc. (NYSE: NXY) owns a 15 percent working interest and CalDive International (NASDAQ: CDIS) has the remaining 10 percent working interest. The Dawson Deep prospect is located on a 5,760 acre block located approximately 150 miles offshore Texas in over 2,900 feet of water.
The Minuteman No. 1 exploratory well commenced drilling on March 22, 2004 and is currently drilling below 13,700 feet, has a proposed total depth of 22,000 feet. The venture has a 66.7 percent working interest (33.3 percent working interest; 24.3 percent net revenue interest net to McMoRan) in the prospect. Spinnaker Exploration Company operates Minuteman with a 33.3 percent working interest. McMoRan controls approximately 9,600 acres in the immediate area surrounding the Minuteman prospect, which is located approximately 40 miles offshore Louisiana in 100 feet of water.
The Lombardi Deep No. 1 exploratory well commenced drilling on March 25, 2004 and is currently drilling below 11,300 feet towards a proposed total depth of 19,500 feet. The venture has a 100 percent working interest in the well, 50.0 percent working interest and 39.5 percent net revenue interest net to McMoRan. McMoRan is the operator of the Lombardi Deep prospect, which is located approximately 50 miles offshore Louisiana in 115 feet of water. McMoRan controls 10,000 acres in the area and was high bidder on the 5,000-acre Vermilion Block 216 at the recent Central Gulf of Mexico Sale No. 190.
The Eugene Island Block 193 No. C-2 (Deep Tern Miocene) well is expected to commence drilling in May 2004 and has a proposed total depth of 20,350 feet. The venture will have a 97.2 percent working interest (58.3 percent working interest net to McMoRan) in the deep objectives of the prospect. ChevronTexaco will pay and participate for a 43.7 percent working interest to test the Basal Pliocene section in the well. McMoRan will operate the Deep Tern Miocene well, which is located approximately 50 miles offshore Louisiana in 90 feet of water. McMoRan controls 10,000 acres in the area and was high bidder on the adjacent 5,000-acre Eugene Island Block 207 at the recent Central Gulf of Mexico Sale No. 190.
McMoRan continues to identify prospects to be drilled on its lease acreage position which currently consists of approximately 200,000 gross acres. McMoRan is also actively pursuing opportunities to acquire additional acreage and prospects through farm-in or other arrangements and recently has augmented its prospect portfolio. Plans are being made to spud exploratory wells at the Hurricane Upthrown prospect at South Marsh Island Block 217, and the recently acquired JB Mountain Deep prospect at South Marsh Island Block 224 (east and adjacent to the original JB Mountain discovery at South Marsh Island Block 223). Other exploratory wells may be drilled as prospects are developed and ownership arrangements are negotiated.
OCS LEASE SALE No. 190
McMoRan was the high bidder at the March 2004 OCS Central Gulf of Mexico Lease Sale No. 190 on two leases comprising 10,000 acres on the continental shelf for a total of $0.5 million. The leases, which are both adjacent to blocks currently controlled by McMoRan, are Eugene Island Block 207 and Vermilion Block 216. Vermilion Block 216 is south of McMoRan's Lombardi Deep prospect at Vermilion Block 207. Eugene Island Block 207 is southwest of McMoRan's Deep Tern Miocene prospect at Eugene Island Block 193 and north of and adjacent to Eugene Island Block 216, which McMoRan acquired at an earlier lease sale.
JB MOUNTAIN/MOUND POINT AREA DEVELOPMENT ACTIVITIES
McMoRan is a participant in an exploration program which includes the JB Mountain and Mound Point Offset discoveries. The program currently holds a 55 percent working interest and a 38.8 percent net revenue interest in the JB Mountain prospect and a 30.4 percent working interest and a 21.6 percent net revenue interest in the Mound Point Offset prospect. Under terms of the program, the operator is funding all of the costs attributable to McMoRan's interests in the JB Mountain and Mound Point Offset prospects, and will own all of the program's interests until the program's aggregate production totals 100 billion cubic feet of gas equivalent (Bcfe) attributable to the program's net revenue interest, at which point 50 percent of the program's interests would revert to McMoRan. Under the terms of this program, all exploration and development costs associated with the program's interest in any future wells in these areas will be funded by the exploration partner during the period prior to when McMoRan's potential reversion occurs.
Currently, two development wells are drilling at the JB Mountain and Mound Point properties and McMoRan expects continued aggressive development activities on these projects. The Louisiana State Lease 340 well (Mound Point Offset No. 2) commenced drilling on January 30, 2004. The well is currently drilling below 16,300 feet toward a total depth of 18,500 feet. The Mound Point Offset No. 2 well is located approximately 7,000 feet south-southeast from the Mound Point Offset discovery well, which was drilled to a total depth of 19,000 feet.
The South Marsh Island Block 223 No. 221 (JB Mountain No. 3) well commenced drilling on December 15, 2003. As previously reported the well encountered mechanical difficulties and was sidetracked. The operator was successful in sidetracking the well, which is currently drilling below 14,600 feet proceeding toward a proposed total depth of 21,000 feet. The JB Mountain No. 3 is located approximately one mile south of the JB Mountain No. 1 discovery well.
Gross production from the three producing wells in the JB Mountain/Mound Point area averaged 78 Mmcfe/d in the first quarter of 2004. The wells were shut-in late in the quarter for construction activities and were brought back on-line in April. The operator is currently addressing mechanical issues on the wells to restore production levels, which are currently producing at a gross rate of approximately 50 Mmcfe/day. Enhancements to the production facilities, which would increase the production capacity of the facility jointly handling the JB Mountain and Mound Point wells, are expected to be installed during the third quarter of 2004.
REVERSIONARY INTEREST STATUS
In February 2002, McMoRan sold three oil and gas properties for $60.0 million and retained a reversionary interest in the three properties equal to 75 percent of the transferred interests following payout of $60 million plus a specified annual rate of return. The properties sold were Vermilion Block 196 (Lombardi), Main Pass Blocks 86/97 (Shiner), and 80 percent of our interests in Ship Shoal Block 296 (Raptor). There are three wells currently producing on these properties at an average rate approximating 12 Mmcfe/d, net to the third party's interests. Two additional wells located at the Shiner prospect are expected to commence production during 2004. At March 31, 2004, the remaining amount of net proceeds required to reach payout approximated $26 million, a reduction of approximately $9 million from the December 31, 2003 balance. Based on the estimated future production from these properties and current natural gas and oil price projections, McMoRan believes that payout for these properties could occur by early 2005. The actual timing of the reversion will depend upon many factors including oil and gas prices, production rates, operating costs and capital expenditures from the properties and timing of the commencement of production from the Shiner wells.
MAIN PASS ENERGY HUB(TM) UPDATE
On February 27, 2004, McMoRan's wholly owned subsidiary Freeport-McMoRan Energy LLC submitted its license application, which is pending acceptance by the U. S. Coast Guard (USCG), to develop a LNG receiving terminal located at its Main Pass Energy Hub(TM), offshore in the Gulf of Mexico 37 miles east of Venice, Louisiana. The proposed terminal would be capable of receiving and conditioning 1 Billion cubic feet (Bcf) per day of LNG and is being designed to accommodate potential future expansions. The capital cost for the terminal facilities is estimated at $440 million and McMoRan is also planning additional investments to develop significant cavern storage for natural gas and pipeline interconnects to the U.S. pipeline distribution system. This would allow significant storage capacity of natural gas using the massive 2-mile diameter salt dome located at the site and would provide suppliers with access to premium natural gas markets in the U.S. Current plans for the MPEH(TM) include 28 Bcf of initial cavern storage availability and aggregate peak deliverability from the proposed terminal, including deliveries from storage, of 2.5 Bcf per day.
The application has been filed under the U.S. Deepwater Port Act, which was amended in 2002 to include deepwater gas ports such as MPEH(TM). The license process is under the administration of the USCG and MARAD (Maritime Administration). McMoRan is currently in the process of developing its responses to comments on the application and anticipates its application will be accepted as complete by the USCG and MARAD during the second quarter of 2004. Acceptance of the application as complete by the USCG and MARAD will be followed by a 330 day review period for final determination of issuance of the license.
MPEH(TM) is located at Main Pass Block 299 in 210 feet of water which allows deepwater access for large LNG tankers and is in close proximity to shipping channels. McMoRan will utilize the substantial existing platforms and infrastructure as a site for the LNG vaporization and surface storage facilities, providing significant construction timing advantages and cost savings. The facilities could be operational by late-2007, which would make MPEH(TM) one of the first U.S. offshore LNG facilities. Safety and security aspects of the facility are enhanced by its offshore location.
McMoRan is engaged in active discussions with potential LNG suppliers and natural gas consumers regarding commercial arrangements for the facilities. There is significant interest in the project and McMoRan is advancing these discussions in parallel with the permitting process.
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