McMoRan Exploration Co. has provided an operational update for its third quarterly report.
FLATROCK FIELD UPDATE
Since the initial discovery in July 2007 McMoRan has drilled five successful wells at Flatrock on South Marsh Island Block 212 in the OCS 310/Louisiana State Lease 340 area in approximately 10 feet of water. The first three wells are currently producing. Recent activities from the field include the commencement of production at Flatrock No. 3 (location "D") in the Operc section on July 31, 2008, completion of the No. 4 development well (location "C") in the Rob-L section and logged pay in the Rob-L section at the No. 5 development well (location "E"). The No. 6 delineation well is expected to commence drilling in the fourth quarter of 2008. Successful wells can be brought on line quickly using the Tiger Shoal facilities in the immediate area.
McMoRan controls approximately 150,000 gross acres in the Tiger Shoal/Mound Point area (OCS 310/Louisiana State Lease 340) and has multiple additional exploration opportunities with significant potential on this large acreage position. McMoRan has a 25.0 percent working interest and an 18.8 percent net revenue interest in Flatrock. Plains Exploration & Production Company holds a 30.0 percent working interest.
McMoRan's exploration strategy focuses on the "deep gas play," drilling to depths of 15,000 to 25,000 feet in the shallow waters of the Gulf of Mexico and Gulf Coast area to target large structures in the Deep Miocene and on the "ultra-deep gas play" below 25,000 feet. Since 2004, McMoRan has participated in 17 discoveries on 33 deep shelf exploration prospects drilled and evaluated, including the significant Flatrock discovery in the third quarter of 2007. Six additional prospects are either in progress or not fully evaluated.
The South Timbalier Block 168 No. 1 ultra-deep exploratory well (formerly known as Blackbeard West No. 1) has been drilled to 32,997 feet. Previous logs indicated three potential hydrocarbon bearing zones that require further evaluation. The well encountered a fourth potential hydrocarbon bearing zone in October 2008.
The South Timbalier Block 168 well, which is permitted to 35,000 feet, is located on the top of the targeted structure. Seismic data on the prospect indicated the potential for significantly thicker sands on the flanks of the structure as confirmed in recent major deepwater discoveries. Based on information obtained to date in the South Timbalier Block 168 well, McMoRan believes additional drilling on the flanks could result in significant reserve potential. McMoRan operates the well and owns a 32.3 percent working interest. McMoRan’s partners, PXP and Energy XXI, hold a 35 percent working interest and 20 percent working interest, respectively. McMoRan’s investment in South Timbalier Block 168 No. 1 well totaled $23.5 million at September 30, 2008.
The Tom Sauk exploratory well on Louisiana State Lease 340 commenced drilling on August 14, 2008 and is drilling below 12,500 feet towards a proposed total depth of 19,000 feet to evaluate potential Operc and Gyro sands in the middle-Miocene. Tom Sauk, which is located in less than 10 feet of water, is a deep gas prospect that lies below the significant historical shallow production at Mound Point. McMoRan holds an 18.3 percent working interest and a 14.5 percent net revenue interest in the well. PXP holds a 24.4 percent working interest. McMoRan’s investment in Tom Sauk totaled $2.0 million at September 30, 2008.
The Northeast Belle Isle exploratory well in St. Mary Parish, Louisiana commenced drilling on August 24, 2008 and is drilling below 14,000 feet towards a proposed total depth of 18,500 feet to evaluate potential Rob-L sands in the middle-Miocene. McMoRan holds a 35.7 percent working interest and a 24.9 percent net revenue interest in the well. McMoRan's investment in Northeast Belle Isle totaled $3.6 million at September 30, 2008.
The Ammazzo prospect has a proposed total depth of 24,500 feet. The Ammazzo prospect is targeting one of the largest undrilled deep structures below 15,000 feet on the Shelf of the Gulf of Mexico. It is positioned on the southern portion of the structural ridge extending from the Flatrock and JB Mountain discoveries (located approximately 16 and 11 miles north-northwest, respectively), where McMoRan has successfully proven the existence of Rob-L, Operc and Gyro sands in the Middle Miocene.
There are multiple targets at the Ammazzo deep gas prospect in these sections representing significant exploration potential (500 billion cubic feet of natural gas equivalents to greater than 1 trillion cubic feet), similar to Flatrock and potentially larger. McMoRan will operate the well and holds a 25.9 percent working interest and 21.1 percent net revenue interest. McMoRan's partners, PXP and Energy XXI, hold a 28.1 percent working interest and 16.0 percent working interest, respectively.
McMoRan is one of the largest acreage holders on the Shelf of the Gulf of Mexico and onshore in the Gulf Coast area with rights to approximately 1.3 million gross acres including 320,000 gross acres associated with the ultra-deep trend. McMoRan is developing plans to participate in the drilling of additional exploratory wells in 2008, including the Gladstone East prospect on Louisiana State Lease 340, which lies below the significant historical shallow production at Mound Point.
PRODUCTION AND DEVELOPMENT ACTIVITIES
As previously reported, Hurricanes Gustav and Ike impacted Gulf of Mexico operations prior to making landfall on the coasts of Louisiana and Texas on September 1, 2008 and September 13, 2008, respectively.
There was no significant damage to McMoRan's properties resulting from Hurricane Gustav. Assessments following Hurricane Ike identified several platforms, comprising approximately 3 percent of production and 2 percent of reserves, with significant structural damage. Substantially all of McMoRan's remaining production facilities are capable of resuming production pending restoration of downstream pipelines and facilities operated by third parties. Drilling rigs used in McMoRan's exploration and development activities sustained no significant damage in the storms and operations have resumed.
McMoRan has re-established production at a current rate of approximately 140 MMcfe/d, approximately 50 percent of average production rates in July and August of 2008. Based on reports from third party operators of downstream facilities and pipelines, McMoRan expects significant additional production to be restored in the fourth quarter of 2008.
The operator of the Tiger Shoal facility, which processes production from the OCS 310/Louisiana State Lease 340 area including Flatrock, indicated no material damage to the structures and production at Flatrock was re-established on September 22, 2008. The three wells are currently producing at a gross rate of approximately 170 MMcfe/d, 32 MMcfe/d net to McMoRan. Exploration and development activities in this important area are continuing as previously scheduled.
Third-quarter 2008 production averaged 225 MMcfe/d net to McMoRan, compared to 185 MMcfe/d in the third quarter of 2007. Prior to the September hurricane events, McMoRan's quarter-to-date production averaged approximately 296 MMcfe/d. Based on current information from third party operators of downstream facilities, McMoRan currently expects aggregate production to average approximately 180 MMcfe/day for the fourth quarter and reach approximately 280-290 MMcfe/d in the first half of 2009. The timing of restoring production is dependent on downstream pipelines and facilities operated by third parties.
McMoRan's third quarter results include charges of $152.6 million related to Hurricane Ike, including approximately $21.9 million to reduce the net book value of certain properties damaged in the storm, approximately $124.4 million to adjust estimated future abandonment costs associated with damaged structures and well abandonment, and $6.3 million to record costs for assessment and repairs. McMoRan expects to realize a substantial recovery under its insurance program for hurricane related costs, which are expected to be incurred over several years. Insurance recovery will be recorded as income in McMoRan's future financial results as claims are settled with insurers.
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