Kerr-McGee: The Last Offshore Pioneer

Abstract: Remember the name of the company that drilled the first producing well out of sight of land 56 years ago come November, for who knows how long it can--or wants to--stay off the acquisitions lists.

Analysis: It seems almost cozy in its fittingness that in last week's sale of offshore leases in federal waters of the central Gulf of Mexico (GOM), an independent producing company based "where the wind comes sweepin' down the plain" was high bidder among all who came.

The company is Kerr-McGee Oil & Gas Corp., a unit of Oklahoma City-based Kerr-McGee Corp. With several partners, "Kermac," as it's called by many, was apparent high bidder on 63 blocks--the most high bids made by any company present at OCS Sale No. 185 last Tuesday (March 18) in New Orleans. The company plumped down about $28 million to win those blocks.

But Kermac also submitted bids on the highest number of blocks of any company in the sale--69. It doesn't win anything for doing so, but it sure underscores who had the most interest in a sale that drew some $316 million in apparent high bids from 74 companies. The word "apparent" is used because the bids are subject to approval by the Department of the Interior's Bureau of Land Management, which oversees such things. It's expected in the next few days.

However, Kermac's standout presence in the sale is indeed fitting, because in its salad days some 56 years ago, it drilled the first producing offshore oil well out of sight of land, and ushered the petroleum industry into a whole new water-covered area of exploration and production (E&P)--one from which the industry has found and produced tremendous reserves of both oil and gas, all around the world.

To be exact, Kermac drilled that first producing offshore well in about 20 ft (about 6 m) of water in Ship Shoal Area Block 32, about 10 miles off the coast of Louisiana almost due south of Morgan City. The well yielded first oil on Nov. 14, 1947. Other companies--including Kermac, itself-–had drilled earlier dry holes offshore. But the Block 32 well, drilled with a tender/platform rig, the Kermac 16, was the first such well to bring home the bacon.

So Kermac was the very first pioneer offshore oil producing company in the U.S. Another, perhaps no less important distinction, is that today Kermac is the last such pioneer company whose name has survived.

No heavy plunger in 1947 (money was scarce after the war), Kermac also had a major company partner in that first well--Phillips Petroleum. But Phillips no longer exists today, except for a hyphenated link to another company once based in Oklahoma: Conoco. And Kermac and Phillips' third partner, Stanolind Oil & Gas Co., eventually became Amoco Corp., which went to you know whom, you know when (to BP in the late 1990s). In any case, none of the other major companies had moved offshore at the time. Even Shell, today's last remaining member of the famous "Seven Sisters," of industry fame, didn't find oil in the open GOM until several years after Kermac did.

So, there is something cozy, maybe even nostalgic, about Kermac having been in existence--at least in name--all these years. For an industry that's had more ups and downs than a West Texas pump jack, the "awl bidniss" is the epitome of change. Whether the change has been for better or for worse is everyone's guess.

But there's no doubt that Kerr-McGee has survived it all.

When they drilled that first offshore well, Kermac was a very small company with some onshore oil production and a number of land drilling rigs, as well as a small refinery and some gasoline stations serving the U.S. Mid-Continent market. Though it had gone through a number of permutations--and names--since its founding in 1929, the company became Kerr-McGee Oil Industries in 1946. The "Kerr" was Robert S., who went on to be a Democratic governor and senator from Oklahoma. The "McGee" was Dean A., a geologist who presided over the company's growth before and after Kerr went into politics.

In the ensuing years, Kermac exited the downstream business. The oil company was set up as a separate unit of a parent corporation that pursued other interests, including a fateful sojourn into the nuclear power business and coal mining. Today, the parent describes itself as am "energy and inorganic chemical company with worldwide operations and assets of approximately $10 billion." The chemical business involves paint pigments and accounts for only a small share of the company's net worth.

The oil company, however, has been a big--and consistent--player in the world E&P arena. It has been active overseas, with operations in the North Sea and in the South China Sea, among other areas. It also is active onshore in North America.

But Kermac's main claim to fame is having become the largest independent producer and fifth-largest industry leaseholder in the GOM. It tops those same categories in the deepwater portion of the gulf, as well. Prior to the recent sale, the company held interests in 698 total GOM leases, and was operator, either alone or with others, of some 71 percent of those leases with an average working interest of 56 percent. Award to Kermac of the most recent 63 high-bid blocks would increase its total GOM lease holdings more than 3.1 million gross undeveloped acres. And thanks chiefly to its gulf leases held by production, Kermac had proved reserves of about 1 billion barrels of oil equivalent as of year-end 2002.

Kermac apparently has benefited greatly with its current leadership, headed by Luke Corbett, 55, board chairman and CEO, and Kenneth Crouch, 58, senior vice president, oil and gas production. Both are geophysicists by education and early experience. And both, apparently, are visionaries, particularly where the deepwater GOM is concerned.

By deepwater, most authoritative sources list 2,000 to 5,000 ft of water, with anything deeper constituting "ultra" deepwater. Kermac today is highly active in both water depth ranges. Already staffed with offshore E&P specialists, Kermac gained added deepwater expertise via its 1999 acquisition of Dallas-based Oryx Energy, itself formed a few years earlier by ex-major company folks to develop deepwater prospects.

With the Oryx merger, Kermac inherited a large block of deepwater leases. But it also inherited an engineering talent pool that had delved deeply not only into unconventional deepwater exploration techniques, but also ways to produce deepwater reserves.

Chief among these was the production spar, a floating steel column with buoyancy modules, moored to the sea bottom, to which deepwater wells are connected so that production facilities on the above-water portion can be used to route oil and gas production to shore via subsea export lines to established facilities in much shallower water. Oryx had built, and Kermac had inherited, the first classic spar, which had been positioned in 1996 over the GOM Neptune field in 1,950 ft (595 m) of water.

The idea of such floating production facilities was to avoid building fixed, bottom-supported steel platforms, the traditional production facility for reserves beneath the outer continental shelf (to 600-ft water depths and somewhat beyond). Such platforms quickly become impractical once water depths exceeded the 2,000-ft level. Only floating facilities are practical beyond that point.

But the classic production spar is exceptionally heavy, and its all-steel caisson design has less-than-ideal wind and wave force response characteristics, particularly in heavy seas.

By 2001, with the help of outside designers, Kermac elected to build a new variation on the spar design called the "truss" spar, which substitutes a tubular steel truss section for the cylindrical steel mid-section of its forerunner. Eager to cut deepwater costs, Kermac found the truss spar design cheaper to build, and had much better current and heave motion characteristics. Therefore, in 2001 and 2002, identical truss spars were built and installed at Kermac's Nansen and Boomvang fields in about 3,500 ft (1,067 m) of water. Subsequently, the company ordered a third truss spar for its Gunnison field located in about 3,100 ft. (945 m) of water. It will be installed later this year.

But as water depths have increased with each new Kermac discovery, apparently even the truss spar is not without room for improvement. For Kermac's Red Hawk gas field, with recoverable reserves of 250 bcf and located in 5,300 ft (1,615 m) of water, the spar designer rearranged things still again to create the "cell" spar. This version foregoes the steel cylinder altogether, substituting a series of tubes attached together around a central core tube. It can be used for a number of purposes related to both production and drilling systems. It is cheaper than the truss spar, has a much larger main deck area, and even can be used economically in shallow-water applications. The Red Hawk spar is under construction and scheduled for installation in first-quarter 2004.

So, the name Kerr-McGee continues to survive, though Corbett has said he expects some larger company to acquire Kermac one day. The misses are close. Devon Energy of Denver bought Kermac's main development partner, Ocean Energy, recently. And Shell last year scooped up another of its GOM bidding partners, Enterprise Oil.

So, look on the name Kerr-McGee Oil & Gas with fondness, and with appreciation of a legacy begun nearly 60 years ago, because it could eventually--even soon--follow all of its 1940s peer group onto the list of oil company names that no longer exist. It would be a shame, really.