Sometimes You Have to Make Your Own Luck

Abstract: After the sulfur market turned sour in late 2000, Freeport-McMoRan Sulphur Co. was forced to shut down its offshore mine. But the company breathed new life into the mine by proposing to convert it into a deepwater LNG/CNG hub. And it just might come to pass.

Analysis: McMoRan Exploration Co. and its predecessor companies are noted for their ability to wring everything possible from their combined Gulf of Mexico producing properties. In essence, they've managed to get everything from the pig but the squeak. Now, however, they're planning a move that could be the equivalent of getting even that.

New Orleans-based McMoRan plans to take what once was the only offshore sulfur mining operation in the world and turn it into a marine terminal for receiving tanker- and barge-borne volumes of liquefied natural gas (LNG) or compressed natural gas (CNG). There, the LNG/CNG would be regasified, processed for Btu content, then either distributed directly into existing pipelines to shore or stored inside three nearby underground caverns. The caverns, located about 1,500 feet underground, would be leached out from the salt dome over which the former sulfur operation lies. What's more, much of the mine's existing, super-stout offshore platform infrastructure, built only a few years ago, would serve as major components of the imported gas facility. The company estimates the total cost of the conversion at somewhere between $400 million and $600 million.

A wholly owned subsidiary, Freeport-McMoRan Sulphur LLC, will own and operate the terminal, and the company currently is preparing applications to regulators for permits to build and operate what they call the Main Pass Energy Hub™. At the same time, the company is discussing LNG/CNG supply arrangements involving surplus gas production from outside the U.S.

The hub will be capable of handling up to 7 million metric tons of LNG/CNG per year, with average deliverability of 1 billion cubic feet of gas per day (cf/d). With 28 billion cf of storage space in the underground salt caverns and additional surface storage capacity aboard platforms, the Energy Hub will have a throughput of 350 billion cf per year.

Located in deepwater only 5 miles from established shipping lanes along the coast, the facility's main offloading platform will be augmented by two semisubmersible "Soft Berth™" structures that will allow conventional LNG ships to moor alongside without contacting the rigid offloading platform itself. Conventional gas-handling equipment will be used.

The company seized on the LNG/CNG hub idea after it elected to close down the mine in August 2000 due to plummeting market prices for sulfur which, among other things, is a critical constituent of acids used to make fertilizer. The mine was built after the company in 1990 discovered a huge minerals deposit in the cap rock of a 2-mile-diameter underground salt dome centered beneath Main Pass Block 299, which McMoRan had leased two years earlier.

According to Dave Landry, the sulfur unit's vice president and general manager, subsequent coring and well tests revealed that the area in and around the salt dome's thick cap rock contained proved deposits of 100 million tons of sulfur and proved reserves of 100 million barrels of oil.

"It's an incredible wealth of minerals," Landry told RigZone recently, adding that Block 299 is located only about 17 miles east of Venice, LA, and is covered by some 210 feet of water.

McMoRan was no newcomer to sulfur production. A predecessor company, Freeport Sulphur, had mined "the stone that burns" along the Gulf Coast since the early 20th century, and was the first company to extract it from subsea salt domes, having started with an offshore mining operation near Grand Isle, off southwestern Louisiana, in 1958. So, with decades of offshore mining experience, the company went all out to develop the Main Pass sulfur deposit, as well as to tap the oil reserves.

"The minerals were so rich in the deposit that we could afford to build a super platform that would last 30 to 40 years," Landry recalled. "So, we spent about $1 billion for a series of platforms that were designed to produce both sulfur and oil, and withstand a 200-year storm event and a 1,000-year wave event, which was twice that for which most conventional offshore structures were designed.

"And because of the extra subsidence associated with extracting both sulfur and oil together over time, we designed the platforms to be high enough off bottom to withstand up to 60 feet of subsidence."

The facility comprises a series of fixed platforms linked by trestles totaling one mile in length, end to end, he added. Oil production is handled separately by a joint venture company, and does not interfere with the other facilities.

When the sulfur market deteriorated, Landry explained, McMoRan made its decision to stop the hemorrhaging by shutting the mine down altogether. But that left the company with offshore hardware whose cost was greater than that for oil and gas production alone. To abandon it would have added insult to injury.

But, he continued, one of the reasons for the sulfur market crash had been the advent of much higher natural gas prices. That, along with growing indications that domestic gas production would soon fall behind skyrocketing U.S. demand, led McMoRan to consider the new application for the Main Pass facilities. The result was the conceptual plan to convert the mining facilities into the LNG/CNG terminal.

"We began work about a year ago," Landry said. "Since then, we've removed all the nonessential platforms, leaving several others to serve as core platforms for the Energy Hub. Both the Coast Guard, which controls the permitting for deepwater ports, as well as the shipping industry have embraced the conceptual design, and we're now preparing a permit application that should go to the Coast Guard early next year." A one-year review process would follow, he said, which could allow McMoRan to have the facility up and running by 2006.

Landry acknowledged that the recent rush to institute new LNG facilities in the U.S. has led to about 22 separate proposals for various U.S. coastal or offshore locations, about a third of which will actually be built.

However, he said further, the Main Pass Energy Hub is unique in several ways. First, it's currently the only new LNG facility proposed for the eastern Gulf of Mexico area, which would give it ready access to pipeline distribution points taking gas to both Florida and northeastern U.S. markets. Second, he pointed out, while all other proposed LNG terminals will have to be built from scratch, much of the Main Pass Energy Hub already is in place by dint of the converted mining facilities.

Meanwhile, the other McMoRan Exploration unit, Freeport-McMoRan Energy, currently is involved in the search for deep natural gas reserves beneath leases it owns in extremely shallow water--some in 20 ft. or less--on the outer continental shelf. Already, the company has begun developing several of these deep gas (at or below well depths of 15,000 feet) prospects in both federal and state waters, and has identified up to 20 more it says are high-potential, high-risk prospects, most of them targeting deep gas.

The shallow-water, deep gas play is one of the most active offshore exploration arenas in the country just now, due mainly to higher market prices and the perceived shortage in gas supply. What's more, companies involved can earn relief from royalties on the first 20 billion cf of production from such wells.

In addition, McMoRan also has acquired some deepwater leases, and is planning to develop at least one of them as soon as they can find working interest partners. So, on many fronts in the GOM, McMoRan continues to forge ahead and make its own luck.