McMoRan Sells Main Pass 299 Sulphur Facilities
McMoRan Exploration Co. announced that its wholly-owned subsidiary, Freeport-McMoRan Sulphur LLC (FSC) engaged in sulphur transportation, terminaling and marketing activities and in oil production, has entered into a letter of intent to sell its sulphur and salt lease and related facilities located at Main Pass Block 299 to Trinity Storage Services, L.P. (Trinity). Under the proposed transaction, FSC would remain responsible for reclamation and abandonment obligations in excess of $12.4 million. In addition, Trinity would provide a surety bond meeting the requirements of the Minerals Management Service (MMS) for $12.4 million of the Main Pass future reclamation and abandonment obligations.
FSC would retain exclusive rights to mine and produce sulphur from the lease but would commit not to interfere with non-sulphur operations undertaken by Trinity. As previously announced, FSC signed an agreement with Trinity Storage and Schlumberger M-1 to establish a business enterprise engaged in commercial brine production and the storage of non-hazardous oilfield waste at Main Pass 299. Commercial brine production has commenced. The use of Main Pass for storage of non-hazardous oilfield waste is awaiting final MMS approval. Trinity anticipates pursuing other commercial uses of the facilities to support the petroleum industry. FSC and Trinity have been engaged in discussions with offshore oil and gas producers, gas storage and transportation companies, oil and gas service companies and other energy related companies. Projects under discussion include the use of Main Pass 299 for logistical support for oil and gas drilling, oil and gas storage in the Main Pass 299 salt dome and the possible use of Main Pass 299 as an offshore LNG facility. The letter of intent provides that FSC would receive 9 percent of future revenues from the future commercial activities through December 31, 2021.
The Main Pass 299 facility, one of the largest platform configurations in the Gulf of Mexico with 18 platforms in total, 14 of which are connected by bridges and extend approximately 1.5 miles, is located 16 miles east of the mouth of the Mississippi River in 210 feet of water. If permitted and fully operating, the commercial activities are expected to generate royalties of at least $3 to $5 million annually to FSC. The proposed sale is subject to definitive agreements, boards of directors and certain other approvals.
MMR also announced that the MMS has determined that, under MMS's applicable financial criteria, McMoRan Oil & Gas LLC (MOXY), MMR's wholly owned subsidiary engaged in oil and gas exploration and production activities, qualifies for a waiver from the MMS' requirements for posting supplemental bonds relating to the abandonment obligations for the federal offshore oil and gas leases owned by MOXY.
MMR further announced that FSC has reached agreement with MMS to provide, by February 3, 2002, financial assurances meeting MMS' requirements with respect to FSC's future reclamation obligations for its Main Pass 299 sulphur and oil facilities, which are currently estimated to aggregate approximately $35 million. Financial assurances can be in the form of surety bonds, affiliate or third-party guarantees, or letters of credit. MMR and FSC have entered into a trust agreement with MMS which imposes certain obligations if neither MMR nor FSC meet MMS' financial wherewithal requirements which are based on historical financial statements, by February 3, 2002. The obligations under the trust agreement would require that non-cash financial assurances be provided for $10 million of FSC's reclamation obligations by February 3, 2002. In addition, the trust agreement would require FSC to provide additional financial assurances of $24.8 million, which FSC expects to fulfill with Trinity's $12.4 million surety bond discussed above, plus FSC's commitment for quarterly deposits aggregating up to $12.4 million over a five-year period, to the extent the quarterly deposit amounts are not covered by other non-cash financial assurances.
FSC continues to produce crude oil at Main Pass, currently at a gross rate of approximately 4,000 barrels per day, which, at current production rates and oil prices, generates approximately $5 million annually to FSC's interest. FSC would retain ownership of the oil and gas lease and related facilities at Main Pass. MMR anticipates that future proceeds generated from its retained royalty interest involving the Main Pass sulphur facilities and ongoing oil production will be sufficient to meet FSC's Main Pass abandonment obligations. Approximately 60 million tons of unrecovered sulphur remain at Main Pass. Potential future production of this resource, which would require significant improvements in the current economics for mining sulphur, justifies in FSC's opinion, FSC's retaining the right to mine and produce sulphur under the Main Pass 299 lease. Because of all these factors, MMR does not expect the Main Pass facilities to be dismantled for many years.