McMoRan Updates GoM & Main Pass Energy Hub Activities

McMoRan Exploration provides second quarter 2004 and six-month highlights:
  • Second-quarter 2004 net loss of $11.2 million, $0.65 per share, compared with second-quarter 2003 net loss of $11.3 million, $0.68 per share.
  • Active exploration activities ongoing in Gulf of Mexico:
  • Minuteman prospect, at Eugene Island Blocks 212/213, has been drilled to 19,820 feet. After encountering hydrocarbons, the well had an underground gas flow. The well has been stabilized and a by-pass well will be drilled to 22,000 feet in the third quarter of 2004 to evaluate the deep objectives.
  • Deep Tern prospect, at Eugene Island Block 193, commenced drilling on July 13, 2004 and is currently drilling below 4,500 feet.
  • Dawson Deep "take point" well, at Garden Banks Block 625, is expected to commence in the third quarter of 2004.
  • Additional exploratory wells are expected to be drilled during the second half of 2004.
  • Three wells in the JB Mountain/Mound Point area are currently producing at an aggregate gross rate of approximately 75 million cubic feet of natural gas equivalent per day (Mmcfe/d).
  • Main Pass Energy Hub(TM) (MPEH(TM)) license application for offshore LNG terminal at Main Pass Block 299 deemed complete by the U.S. Coast Guard (Coast Guard). Final Coast Guard decision on license application is expected in the second quarter of 2005.
  • Active discussions continue with a number of producers of LNG in the Atlantic Basin regarding commercial arrangements for our proposed MPEH(TM) facility.

  • McMoRan Exploration reported a net loss of $11.2 million, $0.65 per share, for the second quarter of 2004 and $24.5 million, $1.43 per share for the six months ended June 30, 2004 compared with a net loss of $11.3 million, $0.68 per share, for the second quarter of 2003 and net income of $7.2 million, $0.44 per share, for the six months ended June 30, 2003. McMoRan's net loss from continuing operations for the second quarter of 2004 totaled $9.1 million, which includes $7.4 million of exploration expense and $1.7 million of start-up costs associated with the MPEH(TM). The six-month 2003 period included a gain of $22.2 million, $1.35 per share, reflecting the cumulative effect of a change in accounting principle upon adoption of Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" effective January 1, 2003.

    James R. Moffett and Richard C. Adkerson, Co-Chairmen of McMoRan, said, "McMoRan is continuing to aggressively pursue its high impact deep targets on the Shelf of the Gulf of Mexico. We expect to have four prospects drilling in the third quarter and to commence drilling of three exploratory prospects during the fourth quarter. We are active in evaluating additional exploratory prospects to add to our existing inventory. We are also making excellent progress in the establishment of our Main Pass Energy Hub(TM) project. Both opportunities have the potential to add meaningful values for the benefit of our shareholders."


    In January 2004, McMoRan announced an agreement with a new exploration partner which enabled McMoRan to significantly expand its exploration drilling activities. 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. During the second quarter of 2004, McMoRan and its exploration venture partner amended their original agreement to provide for a $12 million management fee to McMoRan for 2004. During the second quarter of 2004, McMoRan recognized $6.0 million of the fee in income ($3.3 million and $2.7 million reduction in general and administrative expense and exploration expense, respectively) and expects to recognize the balance in the second half of 2004. The partner has the right to participate for 50 percent of McMoRan's interest in prospects and will fund 50 percent of the costs. Since inception, McMoRan and its partner have participated in the Dawson Deep, Minuteman, Lombardi Deep and Deep Tern exploratory wells.

    In the second half of 2004, McMoRan and its venture partner expect to participate in the following exploratory wells:

                             MMR      MMR Net           Proposed
                           Working    Revenue   Water    Total    Proposed
                           Interest Interest(1) Depth    Depth   Spud Date
    Eugene Island Blocks
     212/213                                                     March 22,
    "Minuteman"               33.3%       24.3%   100'  22,000'     2004
    Eugene Island Block 193                                      July 13,
    "Deep Tern Pliocene"(2)   26.7%       20.6%    90'  17,000'     2004
    Scheduled for 2004
    Eugene Island Block 193                                       After
    "Deep Tern Miocene"       48.6%       37.2%    90'  20,350'   Pliocene
    Garden Banks Block 625
    "Dawson Deep Take                                             August
     Point"                   30.0%       24.0% 2,900'  23,674'    2004
    High Island Block 131
    "King of the Hill"        25.0%       19.6%    40'  17,300'   3Q 2004
    South Marsh Island
     Block 224
    "JB Mountain Deep"        27.5%       19.4%    10'  23,000'   4Q 2004
    South Marsh Island
     Block 217 "Hurricane
     Upthrown"                27.5%       19.4%    10'  19,500'   4Q 2004
    Vermilion Blocks
     227/228 "Caracara"       25.0%       20.8%   115'  18,500'   4Q 2004
    East Cameron Block 342                                         Half
    "Falcon"                  25.0%       18.8%   260'  18,500'    2005
    NOTE: Interest currently held may change as a result of partner
    elections or future drilling arrangements.
    (1) McMoRan, where applicable, is seeking royalty relief which could
    result in increased net revenue interest on early production.
    (2) Development well.

    The Minuteman well at Eugene Island Block 213 has been drilled to a total measured depth of 19,820 feet. Log-while-drilling (LWD) tools indicated approximately 50 gross feet of potential hydrocarbon pay, when an underground gas flow occurred in the well. Efforts to stabilize the well were successful and McMoRan and its partners are planning to drill a by-pass well from the original wellbore. McMoRan believes that its "well control" insurance will provide reimbursement of McMoRan's share of the costs incurred to stabilize the well and drilling costs associated with the by-pass hole to the original depth drilled. Drilling of the by-pass hole is expected to commence promptly and will be drilled to a proposed depth of 22,000 feet. McMoRan's facilities at Eugene Island Block 215, approximately 7 miles from Minuteman, are capable of processing over 100 Mmcfe/d. If successful, the well could be tied in to these facilities and be producing by year-end 2004. Spinnaker Exploration Company (NYSE: SKE) 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.

    McMoRan plans to participate in a 'take point' well at the Dawson Deep well at Garden Banks Block 625 in an effort to maximize the hydrocarbon production indicated in the original and sidetrack wells that were drilled earlier in 2004. Drilling is expected to commence in the third quarter of 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. Kerr-McGee Oil & Gas Corporation, a wholly owned affiliate of Kerr-McGee Corporation (NYSE: KMG), operates Dawson Deep with a 25 percent working interest. The Dawson Deep prospect is located on a 5,760 acre block located approximately 150 miles offshore Texas and is adjacent to Kerr-McGee's recently commissioned Gunnison spar facility, which achieved initial production in December 2003.

    The Eugene Island Block 193 No. C-2 (Deep Tern) well commenced on July 13, 2004 and is currently drilling below 4,500 feet towards a proposed total depth of 20,350 feet. McMoRan will operate the well which will test both Pliocene sands (development objective) and Miocene sands (exploration objective). ChevronTexaco will participate with a 43.7 percent working interest in the well through the Pliocene objective. McMoRan controls 17,500 acres in the area which is located approximately 50 miles offshore Louisiana in 90 feet of water.

    The Lombardi Deep No. 1 exploratory well at Vermilion Block 208 commenced drilling on March 25, 2004 and was drilled to a total depth of 19,697 feet. Evaluation of the drilling results determined that the well did not contain commercial quantities of hydrocarbons and the well has been plugged and abandoned. McMoRan charged $6.8 million to exploration expense during the second quarter of 2004 for its 50 percent share of drilling and related costs in the Lombardi Deep well.

    McMoRan currently has rights to approximately 215,000 gross acres and continues to identify prospects to be drilled on its lease acreage position. McMoRan is also actively pursuing opportunities to acquire additional acreage and prospects through farm-in or other arrangements and recently has augmented its portfolio with additional prospects. Other exploratory wells may be drilled as prospects are developed and ownership arrangements are negotiated.


    McMoRan is a participant in an exploration program that began in 2002 and includes the JB Mountain and Mound Point Offset discoveries in the OCS 310 and Louisiana State Lease 340 areas, respectively. 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 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. 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.

    Gross production from the three producing wells in the JB Mountain/Mound Point area averaged 43 Mmcfe/d in the second quarter of 2004 as the operator worked to address mechanical issues during the quarter. The three wells in the program are currently producing at rates approximating 75 Mmcfe/d. Remedial activities were successfully completed in late June on the South Marsh Island Block 223 No. 219 (JB Mountain No. 2) well (currently producing approximately 55 Mmcfe/d) and additional remedial work is planned on the South Marsh Island Block 223 No. 218 (JB Mountain No. 1) well in the third quarter of 2004. 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.

    Significant further exploration and development opportunities exist at both the JB Mountain and Mound Point prospects. As previously reported, the South Marsh Island Block 223 No. 221 (JB Mountain No. 3) well commenced drilling on December 15, 2003 and was drilled to 14,688 feet. Prior to reaching the target objective, the well was temporarily abandoned following mechanical difficulties. The operator is evaluating the well which could result in sidetracking to a proposed total depth of 22,000 feet. The Louisiana State Lease 340 well (Mound Point Offset No. 2) commenced drilling on January 30, 2004 and was drilled to 18,724 feet. After logging the well, which indicated the presence of both hydrocarbon-bearing and wet sands, the well was temporarily abandoned. The operator is considering a potential deepening of the well.


    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 McMoRan's interests in Ship Shoal Block 296 (Raptor). One of the two wells comprising the Shiner prospect commenced production in June 2004, and the second is expected to commence production in the second half of 2004. There are four wells currently producing on these properties at an average rate of 14 Mmcfe/d, net to the third party's interests. At June 30, 2004, the remaining amount of net proceeds required to reach payout approximated $20 million, a reduction of approximately $15 million from the December 31, 2003 balance. The payout balance will be increased by additional costs expected to be required to establish production from the remaining Shiner well. Based on the estimated future production from these properties and current natural gas and oil price projections, McMoRan estimates payout for these properties could occur by early 2005. The timing of the reversion will depend upon many factors including oil and gas prices, flow rates, expenditures and timing of the commencement of production from the second Shiner well.


    On June 9, 2004, notice of acceptance of our license application as complete was published in the Federal Register. The application was filed under the U.S. Deepwater Port Act, which established a one-year timeframe for a decision on the application. Pursuant to federal law, the Coast Guard has a specified 330-day period (ending May 5, 2005 for MPEH(TM)) from the date the application is deemed complete either to issue the license or deny the application.

    As previously announced, McMoRan is engaged in active discussions with potential LNG suppliers in the Atlantic Basin and natural gas consumers in the United States regarding commercial arrangements for the facilities. There is significant interest in the proposed project and McMoRan is advancing its commercial discussions in parallel with the permitting process.

    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 massive 2-mile diameter salt dome located at the site would provide significant storage capacity for natural gas. 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.

    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 plans to use the substantial existing platforms and infrastructure at the site for the LNG vaporization and surface storage facilities, providing significant construction timing advantages and cost savings. The facilities could be operational by early 2008, which would make MPEH(TM) one of the first U.S. offshore LNG terminals. Safety and security aspects of the facility are enhanced by its offshore location.

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